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The data dump dubbed the Panama Papers — some 11.5 million records from Panamanian law firm Mossack Fonseca that were leaked to the media — pulls back the curtain on an Oz-like sector of the finance world that tends to be as little-known as it is confusing.
The data is being sifted through by the International Consortium of Investigative Journalists and its more than 100 media partners in an international joint effort of investigative journalism, and reveals some four decades of financial activity executed by or at the behest of some of the world’s most powerful people.
Why is this important?
“This leak shines a light on a global epidemic, which is the abuse of anonymous shell companies,” said Clark Gascoigne, interim director of the FACT (Financial Accountability and Corporate Transparency) Coalition, a watchdog group that is pushing for laws requiring more transparency around the corporate registration process.
Corporate registration regulations might not sound especially cloak-and-dagger, but Gascoigne said as much as $21 trillion in wealth is stashed away behind largely untraceable shell companies. Those funds can come from illicit sources like human trafficking or the illegal weapons trade, and can go on to fund terrorism and other crimes.
“This is a leak from one law firm in Panama,” he said. “This is a global problem, and we’re just seeing one minute piece of how big this is.”
Are there legitimate reasons why someone would set up an offshore shell company?
Sure. These kinds of tactics can shield assets or business interests from creditors or lawsuits, or be used for estate-planning purposes.
“If I have 10 different real estate holdings, I might keep them in separate companies, so if one gets sued it doesn’t expose all the assets,” said Gideon Rothschild, a partner at the law firm of Moses & Singer.
“You can isolate a risk from a particular activity or enterprise,” said Steve Rosenthal, senior fellow at the Tax Policy Center of the Urban Institute and Brookings Institution. “You can divide financial interests.”
In a word, taxes. While groups like the FACT Coalition say offshore shell companies are used for everything from laundering drug money to financing terror, just keeping assets out of the hands of the tax man is enough motivation for many.
In some cases, people use overseas corporate structures to exploit the loopholes between different countries’ tax codes. It won’t win the taxpayer any good-neighbor awards, but it’s not a crime.
Others are trying to dodge the IRS.
“People do it to hide money for tax reasons,” said Scott Michel, a partner at the law firm of Caplin & Drysdale. By creating, say, a shell company based in Panama, with a subsidiary in the Bahamas or Cayman Islands, and a bank account in yet another country, a person could be attempting to fly under the radar of investigators by making it difficult to figure out who actually owns those assets.
“It adds a layer of concealment to the owner,” Michel said.
“Whoever’s trying to find out is going to need to go to multiple government agencies,” Rothschild pointed out. Hitting the wall at any point could mean the end of the investigation.
What about American billionaires?
The ICIJ hasn’t tied any of the people or places listed to politicians or other boldface names in the U.S. If they do, the result could be a major scandal, not to mention the legal ramifications.
“From an American perspective, it would be a real problem for any American who was found to have owned or controlled foreign accounts ... that have not been disclosed to the U.S. government,” Rosenthal said.
With the passage of the Foreign Account Tax Compliance Act or FACTA, tax regulators have gotten more aggressive, Michel said.
“The broader question of why it matters in general is that you’ve seen, over the past eight or so years, a tremendous enforcement effort by the U.S. and other tax authorities aimed at ferreting out individuals who have unreported offshore bank accounts and other assets,” Michel said.
“It’s a big issue for any American who’s caught up in it,” Rosenthal said.