The Panama Papers scandal

published 14 April 2016

What’s happened?

The Pandora papers are a vast trove of leaked information about the hidden assets and covert offshore financial dealings of some of the world’s richest people – and specifically those in positions of political power. The papers were published on Sunday by the International Consortium of Investigative Journalists (ICIJ), a group of more than 600 journalists in 117 countries. It is the biggest leak yet of documents relating to tax havens. The cache of 11.9 million files includes 6.4 million documents, three million images, over a million emails, and almost half a million spreadsheets – more than contained in the 2016 Panama papers leak or the 2017 Paradise papers.

The papers relate to offshore financial schemes in tax havens such as the British Virgin Islands, the Cayman Islands, Switzerland, Dubai, Panama and Monaco. In all, financial transactions relating to 35 heads of state and government are covered, plus those of 300 other politicians and officials across 90 countries. Highlights include the revelations that Ilham Aliyev, the Azerbaijan president, has traded nearly £400m of UK property via offshore vehicles (selling one property to the Crown Estate for £67m); that King Abdullah II of Jordan has traded $100m of property in London, Washington, and Malibu; and that the Czech PM, Andrej Babiš, used a secret offshore vehicle to buy a $22m French chateau. Here, disclosures include the news that Tony and Cherie Blair saved £312,000 in stamp duty for a £6.5m townhouse office building (owned via a company), and that numerous big Tory donors (and the Conservative co-chairman Ben Elliott) use shell companies based in tax havens.

It’s hardly a revelation that very rich and powerful people own lots of assets and use complex offshore structures to minimise tax liabilities. Nor is it necessarily illegal. Whether or not any of these people have illegally evaded tax – rather than legally avoided it – depends on whether they complied with disclosure and tax laws in their home countries. But the contents are shocking nonetheless, says The Times. They “reveal the inner workings of a shadow economy in which wealthy autocrats, sometimes using money of unknown origin, can buy power and influence in the West”. This process “strikes at the heart of democracy and should shake up the British establishment, which has made itself complicit” in turning London into a giant “laundromat” for dirty money, much of it from Russia and central Asia.

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That “the mother of democracy has given birth to a system that aids kleptocrats and thieves”, says Ian Birrell on UnHerd. British Overseas Territories are at the “epicentre” of the latest disclosures and London hosts the network of bankers, advisers and lawyers who make it all possible. Our government is at best complacent and at worst implicated in the sleaze. Meanwhile, the National Crime Agency’s international corruption unit has an annual budget of around £4m. That’s a fraction of what some of the people mentioned in the papers spend in Harrods on jewellery and clothes.

One person’s shady tax haven is another person’s perfectly legitimate offshore financial centre, helping oil the wheels of global capitalism and making us all richer in the long run. There are plenty of good and respectable reasons for using offshore companies or bank accounts. For example, two businesses setting up a cross-border venture might want to incorporate it on neutral ground. Alternatively, going offshore might provide a stable legal framework for an investment into an unstable country. Or people who live in unstable countries, doing business and contributing to the economy, might need places where they can keep their money securely. Sadly, they also make life much easier for the world’s terrorists, money-launderers, tax-evaders and kleptocrats.

The nature of tax havens – the whole point is secrecy – means we can only guess. But most estimates put the amount of tax lost annually at about half a trillion dollars, or more. Two academic studies cited by Nicholas Shaxson, the British author of Treasure Islands (a landmark study of the subject), found that tax havens collectively cost governments $500bn-$600bn a year in lost corporate tax revenue, whether via legal or illegal means (those studies dated from 2015 and 2018). Two separate academic studies (from 2016 and 2017) put global individual income-tax losses at around $200bn a year. Of that lost revenue, low-income economies account for some $200bn. That’s a bigger slice of GDP lost than in advanced economies and more than the $150bn or so they get each year in foreign development assistance. A study by the Tax Justice Network last year came up with a smaller overall total of $427bn.

The world began to clamp down in the wake of the financial crisis and initiatives from the OECD group of rich countries have had some effect – its Common Reporting Standard regime has helped tax authorities in 110 countries (though not the US) track the offshore holdings of their taxpayers since 2014. Another OECD deal closed some of the more egregious loopholes. And this summer, 130 nations agreed a new global minimum corporate tax rate of 15%, plus further measures on profit-shifting. Life is set to get much harder for zero-tax territories, such as Bermuda, the British Virgin Islands and the Cayman Islands. But there is little political impetus for the kind of radical reforms on transparency demanded by “tax justice” campaigners – such as outlawing shell companies and the anonymous ownership of companies and property in general. Without them, it seems unlikely that the Pandora leak will be the last of its kind.

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Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.