Six things a tax haven expert learnt from the Panama Papers
By Professor Ronen Palan, Department of International Politics
The Panama Papers is a treasure trove of information on the activities and clientele of a large, but not atypical law firm operating in an offshore financial centre. In this case, it is a firm called Mossack Fonseca, based in Panama. It follows a series of spectacular leaks by the International Consortium of Investigative Journalists, including the HSBC files and the Luxembourg leaks. Here are six things that stand out from the latest revelations.
1. Same old techniques
Although it is still early days and it will take some time for the 11.5m files that were leaked from the Panama-based law firm Mossack Fonseca to be analysed, I have not come across any information on any new or unfamiliar techniques of tax avoidance. Everything that has been revealed so far: the use of offshore entities, nominee directors, accounting firms, legal firms and the like, is depressingly familiar.
2. Part of modern business
I am least surprised to learn about the profile of the typical Mossack Fonseca client. They are members of the globe-trotting elite: politicians, top echelon lawyers and accountants from a vast number of countries, some businessmen, many more in the business of finance.
In a book written by Richard Murphy, Christian Chavagneux and me on tax havens, we use the sub-title: How Globalization Really Works. We argue that tax havens are now a central component of the way international business is conducted. The Panama Papers leak is just further evidence that tax havens are an integral component of modern business.
3. A lot of it is legal
The law firm Mossack Fonseca is probably not any worse or better than your typical law firm specialising in offshore activities. If we have learnt anything from the various leaks about what takes place in the offshore economy, then it is that the accountancy and legal firms are key players in making them function.
Will this law firm be subject to penalties or taken to court? Very, very unlikely. In response to the leak, Mossack Fonseca have stressed the legality of their activities:
Our firm, like many firms, provides worldwide registered agent services for our professional clients (e.g., lawyers, banks, and trusts) who are intermediaries …
Finally, it is well established that many countries (e.g. UK, USA) have trust laws that permit a person or enterprise to represent a third party in a fiduciary capacity, which is 100% legal and serves an important purpose in global commerce.
It is up to the Panamanian government to take the firm to court to establish whether it broke the laws on compliance, due diligence and money laundering standards. Only then will we know if all their actions were legal, despite what the Panama Papers show.
What is worrying, though, is that when it comes to fighting tax avoidance (and evasion), it is highly likely that governments around the world will turn yet again to these large accounting firms and top law firms. The problem here is that these advisers then have the power to sell their expertise in tax planning to wealthy clients – after all, they know the law best, as they more or less wrote it.
4. Watch out for the whistleblower
The person who is likely to suffer most from the leak is its originator: the whistleblower. Their life – if they are identified – will be hell. Members of our globe-trotting elites will make sure of that. They are as likely to suffer from Putin’s henchman as from the courts of a leading and supposedly fair nation such as Sweden or the UK where they could be sued for the theft of the data.
The whistleblower who exposed wrongdoing at HSBC’s Swiss bank, Hervé Falciani, was sentenced to five years in prison by a Swiss court for industrial espionage, data theft and violation of commercial and banking secrecy. He has managed to escape imprisonment by living in exile in France, but it goes to show that whistleblowers do not necessarily have the law on their side. Edward Snowden who released the Wikileaks files remains in Russia, hiding from US prosecutors.
5. There’s a long way to go
The OECD may claim that there are no longer any unco-operative tax havens in the world; UK prime minister, David Cameron, may say that Britain is taking a lead in the fight against tax abuse. The reality is that there are a number of tax havens facilitating these secretive deals and Britain is connected to a lot of them. More than 100,000 companies in the leak are based in the British Virgin Islands, a British overseas territory.
The Panama Papers, which revealed the activity of only one legal firm operating largely in one of the less glamorous tax havens, Panama, is another reminder that we face a very long fight against tax abuse in the offshore economy, and anyone professing to have conquered that world is either wilfully misleading us or blissfully ignorant.
6. Public outcry is needed
To end on a positive note, the Panama Papers when added to previous leaks will have a cumulative effect on the public that cannot easily be predicted. It may fuel a complete and utter disgust with the establishment, and the further rise of either right-wing populist politicians such as Donald Trump in the US, or a left-wing social democratic response such as that espoused by Bernie Sanders in the US or Jeremy Corbyn in the UK. The perpetrators may get off lightly, as has been the experience so far with the other leaks, but the impact on society may yet be far reaching.