In case you’ve been ignoring it (and I’m not sure how – BBC has a “live feed” for the reaction), the Panama Papers scandal is all the literal rage.
Panama Papers: a massive document leak reveals a global web of corruption and tax avoidance
Mossack Fonseca is not a household name, but the Panamanian law firm has long been well known to the global financial and political elite, and thanks to a massive 2.6 terabyte leak of its confidential papers to the International Consortium of Investigative Journalists it’s about to become much better known. A huge team of hundreds of journalists is pouring over the documents they are calling the Panama Papers.
The firm’s operations are diverse and international in scope, but they originate in a single specialty — helping foreigners set up Panamanian shell companies to hold financial assets while obscuring the identities of their real owners. Since its founding in 1977, it’s expanded its interests outside of Panama to include over 40 offices worldwide, helping a global client base to work with shell companies not just in Panama but also the Bahamas, the British Virgin Islands, and other notorious tax havens around the world.
The documents provide details on some shocking acts of corruption in Russia, hint at scandalous goings-on in a range of developing nations, and may prompt a political crisis in Iceland.
But they also offer the most granular look ever at a banal reality that’s long been hiding in plain sight. Even as the world’s wealthiest and most powerful nations have engaged in increasingly complex and intensive efforts at international cooperation to smooth the wheels of global commerce, they have willfully chosen to allow the wealthiest members of Western society to shield their financial assets from taxation (and in many cases divorce or bankruptcy settlement) by taking advantage of shell companies and tax havens.
If you want to go and see some of these scandalous papers, there’s an online repository here. It mostly contains letters of confirmation of registered addresses, director resolutions to publish financial statements, share certificates, notices of share transfers, due diligence questionnaires, and copies of passports. When VOX uses the adjective “banal”, they really mean it.
It feels a bit like this is a scandal because we keep repeating the word “scandal” in size 36 font and italics and boldface and red and some highlighting.
The thing is: we’ve all already been down this road. Enron was this road. The financial crisis in 2008 was this road. Many of these documents are dated to this era. Sure, there are politicians and celebrities and prominent business people involved in offshore tax structures – but this has not been “hiding in plain sight”. It’s not been hiding at all! And we didn’t need 2.6 terrabytes of pdf scans to tell us that these things existed. Offshore tax structures are simply standard business practice.
And as for crackdowns – let’s not pretend that the crackdowns are not already in full swing. After 2008, most developed world governments have been targeting offshore tax havens in force:
- FATCA (the Foreign Account Tax Compliance Act) was enacted by the 111th US Congress in March 2010. The law requires “all non-U.S. (foreign) financial institutions (FFI’s) to search their records for indicia indicating U.S. person-status and to report the assets and identities of such persons to the U.S. Department of the Treasury.” To be clear, that’s a law imposed by US Congress on non-US firms. And since then, most non-US financial institutions have banned the opening of American bank accounts. In fact, if you’ve ever opened an American bank account at some point in time, you’ll find it hard to find a non-US bank that’ll have you.
- The OECD’s “Standard for Automatic Exchange of Financial Account Information” (also known as “Common Reporting Standards“) comes into effect for most signatory countries in 2017. Under this agreement, the signatory states will automatically send financial account information for any individual or beneficial owner to their resident country. For the list of the countries included, check it out here. But so you know, it includes all of the OECD countries, most of the “tax havens” (like Mauritius, Hong Kong, Singapore, the Caribbean countries, Cyprus and yes, Panama). It also includes the BRICS countries. One notable (although unsurprising) exception: the United States. Mostly because the US is already getting the information it wants – so why should it commit to sending any information along? The tax haven of Delaware would appear to alive and untouched.
And as for the non-participating states, here’s another list. Almost none of them attractive places to keep one’s money.
All I’m saying is: this particular state of affairs, where people live in one country but pay their tax obligations in another, well that’s already in endgame.
But there will always be tax avoidance. It’ll just be different.
For older posts on this:
Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.