The Panama Papers scandal

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The leak of millions of documents from a Panama law firm has propelled the world of offshore investments into the headlines. What’s the fuss about? Simon Wilson reports.

What are the Panama Papers?

They are leaked documents covering the workings of a Panama law firm, Mossack Fonseca, which specialises in setting up offshore companies on behalf of the rich and powerful. The leaker, who has not been identified, provided the International Consortium of Investigative Journalists, an organisation with members in 78 countries, with 11.5 million files covering 40 years of the law firm’s dealings. No one has yet alleged criminality against the law firm itself.

However, the leak has led to the launch of criminal investigations in several countries against some of those mentioned in the papers. For example, the papers show how money was moved around and hidden by at least 33 people and companies blacklisted by America for doing business with rogue states, terrorists or drug barons. And many of the schemes described in the documents involve anonymous shell companies whose true owners hide behind “nominees” – the kind of vehicles favoured by tax dodgers, money-launderers, sanction-busters and kleptocratic public servants.

Are offshore companies illegal?

Not at all. An “offshore” company is simply a company that you set up in a jurisdiction other than your own, although the phrase is mostly used to refer to those set up in tax havens such as Panama, the British Virgin Islands, or the Channel Islands. Many people in business and the investment worlds argue that offshoring is a perfectly reputable and necessary part of globalised capitalism, which ultimately makes international business more efficient and is therefore good for everyone, not just the rich. There are lots of good reasons for using offshore companies or bank accounts.

Two firms setting up a cross-border venture may well wish to incorporate it on neutral ground. People who live in unstable countries need places where they can keep their money safely. Going offshore can secure a stable legal framework for an investment into an unstable country. All this is true. Yet the relative lack of transparency – and the opportunities to conceal the true ownership of assets – means that offshore companies are attractive to the definitely dodgy, as well as to the impeccably honest.

What do the Papers reveal?

It is scarcely a surprise to find that the superwealthy keep money in offshore havens. But what is really striking about the Panama Papers is the number of politicians and world leaders who do – no fewer than 140 politicians and government officials including 12 current and former presidents, monarchs and prime ministers. One of those prime ministers lost his job within 48 hours of the Panama Papers being published: Iceland’s Sigmundur Gunnlaugsson reluctantly bowed to people power when it emerged he had sold his half stake in an offshore firm for $1 to his wife before taking office.

The firm held millions of dollars’ worth of bonds in three collapsed Icelandic banks, which critics said created a clear conflict of interest. Other names to feature include the brother-in-law of China’s president, the children of Pakistan’s prime minister, cousins of Bashar al-Assad, close friends of Vladimir Putin (who have been involved in $2bn of transactions through a series of banks and offshore firms detailed in the papers). And, of course, David Cameron’s late father.

What is David Cameron accused of?

Not much, other than holding an entirely above-board investment for a period of 13 years. No doubt Cameron could have handled the affair better politically. But Blairmore, the modest fund co-founded by his father in Panama and the Bahamas, was not a vehicle that let UK investors duck tax: while no taxes were paid on investment returns while money was held within the fund, the investors would still have to pay tax on any profits they made.

If you don’t pay that tax, then you are committing the crime of tax evasion, but there has been no suggestion of that in the Blairmore “revelations”. The structure may once have offered some overall tax savings to investors (by potentially allowing them to roll up income and treat it as a capital gain), but if this was the intention, changes to UK tax rules in 1984 would have eliminated this. So Cameron’s fund was a fairly straightforward vehicle of a kind held by many investors.

Do many people hold offshore funds?

Yes – millions do without knowing. Anyone who has bought an exchange-traded fund (ETF) is all but certain to have offshore interests. Of the top 100 ETFs bought by UK investors, about two-thirds are based in Dublin (also the current domicile of Blairmore), a fifth in Jersey and a tenth in Luxembourg. It’s the same with many actively managed mutual funds. According to data provider Morningstar, more than two-thirds of the biggest 100 funds are domiciled offshore (mostly in Ireland and Luxembourg). Doing this offers greater regulatory, operational and tax simplicity for both fund managers and investors – but has nothing to do with evading tax, as much discussion of offshore investments automatically assumes.

What now for tax havens?

Much of the reaction to the Panama Papers has focused on the idea that if secrecy is dead, the wealthy will be motivated to become self-policing because the reputational risk of being exposed as a tax dodger will discourage the use of complex offshore arrangements. Hence tax havens may become less attractive, even as jurisdictions continue to compete on tax rates.

Meanwhile, says The Economist, the key moves governments could take to tackle criminal abuses are to create compulsory central registers of beneficial ownership of companies, and make it a crime for law firms and other intermediaries to enable tax evasion. Some of this will be discussed at the global anti-corruption summit David Cameron will host next month in London.