The Panama Papers

It is no great secret that the rich and powerful have ways of hiding their money. Politicians for decades now have been talking about "closing tax loopholes used by the rich." Everyone knows that those in power have options and ways of avoiding taxes that would get a poorer person a personal visit from the IRS. The only thing the public hasn’t known is just how they do it. "Offshore bank accounts" and "putting money in the Cayman Islands" has been a movie trope for years now, but recently, the truth has come to light. 

On April 3rd, the ICIJ, or International Consortium of Investigative Journalists, leaked more than eleven million documents allegedly revealing a clandestine network used by everyone from politicians to bankers to kings as a way to squirrel their money away. So far, 12 current or former world leaders have been named in the scandal as well as 128 public officials and other politicians. Notable on these lists are the Prime Minister of Iceland, the King of Saudi Arabia, and the Presidents of both the United Arab Emirate and the Ukraine. Also included is an investment firm run by UK Prime Minister David Cameron’s father Ian Cameron. This has sparked outrage in the UK as opponents call Cameron a hypocrite for ordering all parliamentary candidates to reveal their personal tax information in the name of transparency. These papers, obtained by the ICIJ when an anonymous source gave the documents to a German newspaper called the Suddeutsche Zeitung, detailed the way in which money is sequested by the rich and powerful to avoid paying taxes.

Everything in the leaked documents, including the reason that they are called the Panama Papers, wraps back around to the law firm Mossack Fonseca. The Panama-based firm has been named in the leaks as the company most responsible for setting up the shell companies used by the rich to hide their money. Since the revelation of the leak, the company has fiercely and repeatedly denied any and all wrong-doing, claiming in a statement:

"Our industry is not particularly well-understood by the public, and unfortunately this series of articles will only serve to deepen that confusion. The facts are these: while we may have been the victim of a data breach, nothing we've seen in this illegally obtained cache of documents suggests we've done anything illegal, and that's very much in keeping with the global reputation we've built over the past 40 years of doing business the right way, right here in Panama."

But what exactly did they do? There has been much talk about the people named in the leaks and what the money might have been used for, but not much about what it is that the politicians and business owners were actually doing. Here is a quick breakdown of what was going on. Note: this is very complicated and layers of complexity will be skipped over just for the sake of providing a basic understanding.

Imagine, for a second, that you are a business owner and one year your company brings in one million dollars in profit. Normally, you would have to pay taxes on that million dollars the same as anyone else. But, because you are the owner of that business, you could, in theory, take half of that money, $500,000, and invest it in a new company or new technology. Because the government views investing in new technologies or companies as a good thing, that half a million is tax exempt. 

Here is where Mossack Fonseca comes in. The firm would allegedly set up fake shell company that, you, the business owner would "invest" in. You would send your half a million dollars to Mossack Fonseca, who would have established a shell company, to have them "invest" the money for you. Then, at a later date, the money would be returned to you, the original business owner. What this would do is allow a business to only pay taxes on small amounts of their profits while keeping the majority "safe" in offshore accounts. Keep in mind the numbers in play here usually were in the millions to tens of millions inside of a "mere" $500,000.

One notable thing about this leak is the lack of American names mentioned. The United States has a huge class of millionaires and billionaires who would be interested in protecting their assets. While a few names have been revealed, it’s not the shocking blow that much of Europe, the Middle East, and Asia have been dealt. No Clintons or Bushs have been named, neither have executives of Amazon, Microsoft, Apple, or Google. For once, Americans are notable in their absence.

The answer might be easier than first thought: there are simply easier ways for the American elite to hide their money away than going to Panama, a country known for tax fraud and loose banking laws. Multiple states in the US, including Wyoming, Delaware, and Nevada, all have laws that allow for the creation of shell companies, and investing domestically is going to draw a lot less attention then a sudden multi-million dollar investment in Panama. The other reason is that Mossack Fonseca doesn’t like to have American clients. No particular reason was given, but one of the firm’s founder is quoted as saying "as a policy we prefer not to have American clients."

Journalists have just begun to scratch the surface of what might come of these papers. 11.5 million tax documents is a lot to go through, but, as more names come to light, it is important to remember that there are some good reasons why a company may choose to hide profit. It’s very easy to see a name on a list and condemn them as a fraud, but valid reasons still exist for moving funds off shore, including protecting trade secrets. To protect their intellectual property, a company may hide the plans for manufacturing in a shell company. Off-shore accounts keep things anonymous and fair. And lastly, to keep people safe. If a company is trying to get money to translators or diplomats in an unstable, potentially hostile area, having that money be untraceable is a good thing.

There’s a lot the public doesn’t know about the Panama papers, and there are names that haven’t been revealed yet. There’s a lot of speculation about who might be named and what impact that may have, but for now, all we can do is watch and wait.