What you need to know about the Panama Papers

What you need to know about the Panama Papers


Before I explain what the Panama Papers are, there is one critical thing you have to understand: offshoring.

Simply put, offshoring, in this context, means owning a shell company (a non-trading company used as a financial vehicle) that, legally, is based in a foreign country. There are many legitimate reasons for doing this. For example:

  • Some countries allow land to be owned only by citizens or locally registered companies. Creating a local shell company enables the purchase of such land (often for retirement or vacation purposes).
  • When creating a joint venture in a weak legal environment, it may be advantagous to do this via an shell company in a stronger legal environment.
  • Offshore companies can sometimes be used for inheritance or estate planning purposes.
  • Business people in countries such as Russia and Ukraine sometimes place their assets in offshore shell companies to protect them from criminal raids.

There are other more than acceptable business reasons for creating offshore shell companies. However, offshore shell companies can also be used for arguably immoral and borderline/actually illegal reasons.

If you create an offshore shell company in a tax haven, a country with very low or effectively non-existent taxes like the British Virgin Islands (BVI) or Panama, you can use complex legal structures to evade taxes in your home country by manoeuvring earnings through the offshore shell company. One advantage of such structures in tax havens like the BVI is secrecy. Many tax havens do not require companies keep publicly available ownership registers, meaning the Ultimate Beneficial Owner (the UBO is essentially the ultimate owner of a company) becomes relatively easy to obscure.

This form is tax evasion is almost universally illegal. In Australia, such practices are pursued by Project Wickenby, an Australian Taxation Office (ATO) taskforce set up in 2006 to target tax evasion.

The Panama Papers

What are they?

The Panama Papers are the largest ever leak, comprising 11.5 million files from the database of the world’s fourth largest offshore law firm, Mossack Fonseca. To put the size of the leak in context:

Graph Leon

As is clear, the Panama Papers are so much larger than the WikiLeaks files (1.7GB) and the HSBC files (3.3GB) that those two leaks barely even appear on the same scale.

The records were obtained from an anonymous source by the German newspaper Süddeutsche Zeitung, which then shared them with the International Consortium of Investigative Journalists (ICIJ). The ICIJ has since shared them with major news organisations like the Guardian and the BBC. Over 370 journalists from more than 100 media organisations have spent a year analysing and verifying the Papers.

Mossack Fonseca is a Panama-based law firm whose primary service is incorporating companies in many common offshore jurisdictions, including the BVI and Panama. It then ‘administers’ these offshore companies for a yearly fee.

What do they contain?

To be precise, the data is still being analysed by investigative journalists and tax agencies around the world. The Guardian’s short version is as follows:

  • 143 politicians, including 12 national leaders, their families and close associates are documented using offshore tax havens. This include Nawaz Sharif, Pakistan’s prime minister; Petro Poroshenko, president of Ukraine; Alaa Mubarak, son of Egypt’s former president; and now ex-prime minister of Iceland, Sigmundur Davíð Gunnlaugsson.
  • A $2bn trail leading to Russian president Vladimir Putin, via his best friend, a cellist named Sergei Roldugin.
  • Six members of the UK House of Lords.
  • The families of at least eight current and former members of China’s politburo.
  • 23 individuals who have had sanctions imposed on them for supporting regimes such as those in North Korea, Zimbabwe, Russia, Iran and Syria are Mossack Fonseca clients.
  • A key member of Fifa’s ethics committee, supposedly spearheading reform at the scandal-ridden sporting agency, acted as a lawyer for individuals and companies recently charged with bribery and corruption.

A quaint internal memo from a Mossack Fonseca partner that was also leaked reads: “Ninety-five per cent of our work coincidentally consists in selling vehicles to avoid taxes.” (own emphasis).

In the Australian context, the ATO, via Project Wickenby, is investigating 800 Australians named in the leak. Colossal companies including Rio Tinto have been implicated. The Panama Papers have also revealed that two billionaire brothers, Thomas and Raymond Kwok, who were recently arrested in Hong Kong as part of a shocking government official bribery case, were offshore directors of a company called Wilson Offshore Group Holdings (BVI) Limited. What does this have to do with Australia? Wilson Offshore ultimately controls Wilson Security, one of Australia’s largest security companies, and the recipient of roughly $500m in Australian Government contracts.

Immediate Consequences

In less than one month since media organisations went live with the Panama Papers, they have already claimed one substantial scalp: the now ex-prime minister of Iceland Sigmundur Davíð Gunnlaugsson.

During the GFC, Iceland’s banks famously had a spectacular collapse, concealed in the run up in part because of the use of offshore companies by bankers. The Panama Papers revealed that Gunnlaugsson and his wife, Anna Sigurlaug Pálsdóttir, co-owned an offshore shell company called Wintris Inc, set up in 2007. Initially, the ownership structure was an even half split, before Gunnlaugsson sold his 50% stake to Pálsdóttir for $1. Although there is no evidence of tax avoidance, evasion or dishonest financial gain, Gunnlaugsson never declared Wintris on the parliamentary register of interests because Wintris was a holding company, not a “commercial company”. After mass demonstrations, Gunnlaugsson resigned.

In the UK, revelations have put David Cameron under intense and sustained pressure. David Cameron’s later father, Ian Cameron, established (in 1982) and ran a fund called Blairmore Holdings Inc. Blairmore avoided ever having to pay tax in Britain by essentially legally existing in the Bahamas, despite most likely being operated from the UK. After days of stonewalling, David Cameron admitted that he owned shares in Blairmore, which he sold for £31,500 (a £19,000 profit) in 2010, just before becoming prime minister.

He has since released the previous four years of his tax returns, with other senior UK politicians including London mayor Boris Johnson, chancellor George Osbourne and Labour leader Jeremy Corbyn releasing a shorter history of their own tax returns. In a perhaps unsurprising turn of events, that publication has resulted in fresh questions regarding £200,000 worth of transfers from David Cameron’s mother to his accounts in 2011, which could have allowed the family to avoid a potential £80,000 worth of inheritance tax.

A host of other prominent figures have come under substantial scrutiny, including current Fifa president Gianni Infantino, who must answer questions regarding his role in deals concluded by Uefa (the European football association) while he was its director of legal services. Pop culture figures like Jackie Chan have also been shown to have substantial offshore companies (though there are no allegations of dishonest financial gain).

What’s coming?

The scale of this leak is unprecedented. We could go on and on exploring all the famous figures implicated, assessing for each one whether there is dishonest financial gain (e.g. tax avoidance) or a legitimate reason for their offshore holdings.

There are three key questions:

  • Do we as a society judge the ability of the wealthy to use services like offshoring to hide the true nature of their finances (even for currently legal reasons) as immoral, given those services are not accessible to the less well off?
  • Is it possible to ensure that offshore shell companies in secretive tax havens aren’t used for tax evasion, money laundering and other illegalities?
  • If yes, how?

Those questions were the same three key questions in this discussion before the Panama Papers. Their effect has not been to change the discussion, but to ratchet up its prominence to never before seen levels.

In Western industrialised economies, the GFC has resulted in a prolonged period of slow growth, high unemployment and real wage stagnation. The gap between the rich and the poor is becoming wider. Austerity bites at many nations. Little tidbits of news (a new inequality stat, Thomas Piketty) drop as if pebbles falling in a lake, causing slight ripples. The Panama Papers stand to be the boulder the comes crashing in, throwing up many little pebbles as it does so, with us observing as they too fall.

In a context of high deficits and increasingly lower revenues, governments have an easy target: the tax evading wealthy. When Bill Shorten’s Labor party argues that we should tax the wealthy more, they will have an easy example of exorbitant wealth entrenching itself by means the less well-off cannot access. Around the world, that argument has not resonated as strongly since the GFC exposed so many to such ruin as it now does.

Slowly but surely, the march of the information age is exposing more and more the face of wealth inequality, of what the wealthy can do that the poor cannot. The Panama Papers are one example. If this is not enough to shake the system out of its stupor, what will come next?