Los Angeles, CA (TFC) – The release of the Panama Papers on 3 April 2016 represents one of the largest and most important leaks in history. The Panama Papers were documents that were leaked from the Panamanian law firm, Mossack Fonseca. These leaked documents exposed many people who use shell corporations to hide their money and assets offshore to presumably avoid paying taxes or to hide illicit activities. The Panama Papers have also revealed that numerous politicians are connected with these shell corporations. These revelations have already led to the downfall of high profile people including the prime minister of Iceland and the head of the Chilean branch of Transparency International, which is a corruption watchdog. However, while these revelations from the Panama Papers are shocking, they are just the tip of the iceberg.
The Panama Papers documented the interactions that Mossack Fonseca had with some of their clients, many of whom are prominent people and politicians around the world. These leaks revealed that Mossack Fonseca helped many of their clients to establish or buy shell corporations. This has raised eyebrows because shell companies can be used to hide money and conduct financial transactions that are difficult to trace, which can help to facilitate tax evasion, corruption, and money laundering. These activities have highly adverse impacts on society. The ability to commit tax evasion violates the rule of law and increases economic inequality by allowing some people to pay a lower income tax rate than others. These activities also harm nations as they deprive countries of funding that could be used to help the public and they can have national security implications as it makes it easier for criminals and terrorists to hide their financial activities.
Most of those named in the Papers have denied wrongdoing and in their defense, it should be noted that there are legitimate reasons for owning a shell corporation. However, many of those who were implicated in the Panama Papers are politicians who are suspected of corruption or who wield power in countries where corruption is rampant. As a result, it is entirely reasonable to question the legitimacy of their stake in shell corporations. Mossack Fonseca has defended their practices by claiming that the documents were taken out of context. In addition, they have struck back by filing a complaint with Panamanian prosecutors stating that they were hacked and that the documents that comprise the Panama Papers were obtained illegally. In doing so, Mossack Fonseca has attempted to portray itself as a victim and to use the force of the law to punish those responsible for exposing their wrongdoing.
This public relations campaign has failed, however, and Mossack Fonseca has found itself as the subject of unwanted attention. As a result of the Panama Paper leaks, numerous countries have begun investigations into possible cases of tax evasion. In addition, the leaks have prompted the Panamanian government to review their financial laws. However, it is unclear whether this will result in actual reform. Lastly, the leaks have prompted other governments to crack down on Mossack Fonseca. Over the weekend, El Salvador police raided the offices of Mossack Fonseca, seizing documents and computers. As a result, it would appear that Mossack Fonseca’s future will be difficult.
Despite the fact that the Panama Papers and Mossack Fonseca have stolen the spotlight, these leaks are only the tip of the iceberg. In the aftermath of the leaks, the financial services industry attempted to rehabilitate its image by claiming that the activities uncovered by the Panama Papers are not representative of the industry as a whole. However, there is strong evidence to the contrary. The sad truth is that the practices that are documented by these leaks are widespread and probably represent the norm, rather than the exception. An undercover investigation by Global Witness (see video below), which is a nonprofit organization that investigates corruption, reveals that many prominent American law firms were potentially involved in similar practices. As a result, there is strong evidence that there are many other law firms who engage in the same practices as Mossack Fonseca. This means that many people, who have yet to be implicated, are also involved in these shady financial practices.
This entire saga demonstrates the need for increasing transparency in the financial world and ending tax havens. I would ordinarily say that people should support the advocacy efforts of organizations like Oxfam and Global Financial Integrity, both of whom campaign against illicit financial flows. However, reforming this system will require much more than advocacy efforts from civil society organizations. The problem is economic in nature and is caused by the fact that all of the tax haven countries are competing for their share of these shadowy financial activities. As a result, there is a “race to the bottom” in terms of financial regulation to maximize their share of this market. This reduces their incentives to clamp down on these activities.
However, I believe that as governments and the public realize how much tax revenue they are losing as a result of these activities, they will come under increasing pressure to clamp down on tax haven countries. France has already designated Panama as a tax haven, which allows it to apply stringent tax measures on transactions with that country, and I suspect that other countries will quickly follow suit. It is this type of political pressure that will help to deter tax havens and illicit financial activities. However, this pressure must be applied to all tax havens, or else the illicit financial transactions will simply migrate to a country that isn’t under as much political pressure. As a result, if we want to end these shady financial practices, we need to make sure that governments around the world make a concerted effort to crackdown on tax haven countries around the world.