Will Panama Papers Give Governments New Backbone for Transparency?

by Kieran Beer

The Panama Papers are justifiably grabbing headlines based on the number of “A-list” politicians and celebrities, as well as the handful of notorious criminals, that they name. And their sheer volume—11.5 million documents—represents an unparalleled look at the machinations involved in the use and abuse of shell companies, in this case those created by Panama-based law firm Mossack Fonseca. But it’s important to step back and have a little perspective: the use of shell companies for tax evasion, the proceeds of corruption and other crimes detailed in the papers are outrageous, but sadly nothing new.

The release of the papers by the International Consortium of Investigative Journalists (ICIJ) is merely the latest journalistic act of kicking over a rock, albeit a big one, that has sent a lot of creatures sensitive to sunlight scurrying for new rocks. A little over a year ago, ICIJ reported that HSBC’s affiliate in Switzerland knowingly held over $100 billion in undeclared accounts for roughly 106,000 clients, including customers that bank employees suspected or knew were evading taxes or associating with suspected terrorists and drug traffickers. ICIJ also gave Luxembourg similar treatment to Panama, detailing how it functioned as a secrecy haven in 2014.

Last year, The New York Times did a series of stories on the use of more than 200 shell companies to purchase luxury condos in the Time Warner Center in Manhattan. Speaking at an ACAMS conference in New York in January, NYT reporter Louise Story described the mountains of documents she and colleagues searched to identify 16 foreign owners of condos who were the subject of international government inquiries.

British media outlets over the past year separately outlined alleged abuses of London’s luxury housing market by offshore companies controlled by current and former world leaders whose source of funds are, at best, dubious. Each of these revelatory stories has led to public outcry and promises by politicians to tackle hidden corporate ownership, but actual change has been slow and, arguably, the efforts have not addressed the worst abuses.

For example, the United Kingdom and other European Union member-nations have committed to launching centralised registers of beneficial owners of companies. But U.K. Prime Minister David Cameron has been asking the crown’s overseas territories to do more on corporate transparency, with little success.  This resistance of the overseas territories, particularly BVI, has caused the press and public to question Cameron’s resolve since the Panama Papers reports reveal him to be a beneficiary of a BVI trust set up by his late father. With regard to his inheritance, Cameron has said, justifiably, that he has done nothing illegal.

Little political consensus

As plenty of newspaper articles have pointed out in the wake of the release of the Panama Papers, the United States is arguably the biggest tax secrecy haven in the world and there is little political consensus on how to change that.  Since corporate formation is done at the state level, states have an incentive to collect fees from formation agents and compete with one another as to which is the least transparent and therefore most attractive to intermediaries. Delaware, Nevada, South Dakota and Wyoming operate with disclosure requirements akin to Panama’s. This competition needs to be ended by Congress with the creation of federal standards on corporate transparency. While there is a new push to achieve that in the wake of the NYT stories, it isn’t clear it will get much further than past efforts over the last decade.

The U.S. Financial Crimes Enforcement Network, for its part, has issued a due diligence proposal that would require banks to obtain beneficial ownership data from corporate accountholders as part of each financial institution’s customer due diligence process. The proposal threatens to place new burdens and penalties on banks but not to achieve what Congress could do by requiring a national standard at the corporate formation level. (In the vacuum created by Congressional in action, law enforcement officials have generally and understandably backed the FinCEN proposal. It is better than nothing.)

The seriousness of politicians in both the U.S. and the U.K. in taking on tax evaders is further belied by the fact both Congress and Parliament seem determined to underfund the IRS’s criminal investigation arm and Her Majesty’s Revenue and Customs, trends that ACAMS moneylaundering.com has covered extensively.

All of this is occurring as private wealth flowing out of countries and into offshore centers grew seven percent to $11 trillion in 2014, according to a Boston Consulting Group study cited by The Wall Street Journal. The flow looks unlikely to abate any time soon.  “We are responsible members of the global financial and business community” offering incorporation services that are provided by law firms and financial institutions throughout the world, Mossack Fonseca said in a statement issued Monday.

Ramon Fonseca, the firm’s co-founder, told the Financial Times that the media attention is a witch hunt and that he expected that no charges of wrongdoing would stand against Mossack Fonseca when the dust settled.  If it is difficult to prove that Mossack Fonseca actually broke laws, that could reflect the poverty of corporate transparency legislation generally. Why shouldn’t law firms, in transactional matters, have an obligation to know their customers and, as is the case with financial institutions, also make a good faith effort to know their customers’ customers?

Responsibility

Attorneys and others in the U.K. and Europe do have that responsibility, but there is a lot of successful resistance to it in many countries, most notably the United States.  If Mossack Fonseca broke no laws, the users of a number of the shell companies the law firm created clearly did. Tax evasion and hiding the proceeds of crime, also known as money laundering, are clearly violations of the law. Proceeds from the £30 million Brink’s-Mat robbery in 1983 and insurance payments for a company that didn’t pay claims in 2005, also ended up in Mossack Fonseca shell companies.

Banks that behaved the way Mossack Fonseca did would, at the very least, be penalised for ineffective anti-money laundering policies and procedures in most countries in the world. Indeed, to the degree that banks are found to have been careless in dealing with criminals or sanctioned entities that used Mossack Fonseca shell companies, they will undoubtedly be penalised. Bank regulators throughout the world are already requiring the banks they oversee to search their records for transactions involving Mossack Fonseca.

That something needs to change is reflected in the fact that Mossack Fonseca is right in asserting that, despite the fact they’ve created about 250,000 shell companies over the past 40 years, they are not alone. It isn’t even clear that they are the biggest creator of shell companies given how murky the world of corporate formation is. What is clear is that shell companies are a favoured tool of financial criminals, including kleptocrats with little regard for the welfare of the nations they rule. The U.S., the U.K and every nation with an interest in good government and financial integrity must do more to make them transparent and ethical.

The author, Kieran Beer is Chief Analyst at ACAMS the Association for Certified Anti Money Laundering Specialists and tweets via @KieranBeer.