The Panama Papers leak is massive news for global business. Africa loses at least $50 billion (R747bn) each year in illicit financial flows – about double its foreign aid inflow. This would be impossible without the structures and the people revealed in the Panama leak.
What happened?
German newspaper Suddeutsche Zeitang obtained 11.5 million internal documents belonging to offshore law firm, Mossack Fonseca, and handed them over to the International Consortium of Investigative Journalists (ICIJ). The leak covers data from 1977 to 2015 and implicates 214 488 shell companies linked to politicians and businesspeople in 202 countries.
Mossack Fonseca is a Panama-based law firm that helps individuals register shell companies in countries that charge little to no tax and do not need to know who benefits from the company. It is the fourth largest offshore law firm in the world.
Shell companies create nothing and sell nothing – they simply hold assets and don’t reveal who owns them.
There are a number of reasons to set up a shell company and I’ll leave it to you to put them in order of declining morality.
There are strategic reasons to hiding identity. A large, recognised car company may want to invest in space travel without revealing its new direction. A gas guzzling 4x4 brand may want to launch a line of electric cars but not appear hypocritical in its branding.
A wealthy businessperson may want to conceal their wealth behind a shell company to protect their family from kidnappings or criminal threat.
Tax evasion
Shell companies can be used to pay bribes and not have these tracked back to who benefited, or help politicians go on lavish shopping sprees without the record of purchase being linked to them.
Shell companies are also used to divide wealth records. Someone may want to conceal their assets from their spouse in case of a divorce or hide them from creditors in case they want to file for bankruptcy.
Tax evasion is one of the most common uses of shell companies. If the holding company of a large multinational is actually a shell company in a low tax district, they can pay less taxes than are owed in the country of operation.
And then there are the harder elements of crime. Shell companies are used to channel revenue from drugs, weapons and human trafficking and hide expense bills for terror attacks and warfare.
Should shell companies exist?
Mossack Fonseca is putting their hands in the air and saying that they are not responsible for the actions of their customers – the existence and administration of shell companies is not illegal, so they are not to blame.
It’s easy to scoff them off and want them to stand accountable for fuelling an industry that is so intrinsically linked to the evasion of the law. But holding them accountable for tax evasion or child pornography is like holding handgun manufacturers accountable for murder. Personally, I think both should be held accountable.
It’s fantastic that this has come to light. But behind the excited anticipation for justice there are still some uncomfortable elements to the Panama story.
Why do we throw our arms up in protest when governments try to hack into our cellphones, but we cheer when a media company publishes hacked data into the public domain without any transition through the legal system?
The files contain information on nearly a quarter million shell companies connected to people in almost every country, yet the full list will only be released in May. Who has chosen which names get dragged through the dirt now and by what criteria?
What now?
Prior to this leak, the UK introduced a law – effective from June – requiring all UK companies to reveal their significant owners. There is no incentive for smaller tax havens to follow suit unless members of the UN or World Trade Organisation place sufficient pressure on them to do so.
Will this scandal create the political will that has been missing?
Mossack Fonseca is only the fourth largest offshore law firm in the world. Who hides behind the rest and will their privacy remain in tact?
* Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision Making course. Follow him on Twitter @PierreHeistein.
** The views expressed here do not necessarily reflect those of Independent Media.
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