What are Mossack Fonseca & the Panama Papers?
Mossack Fonseca is the fourth biggest offshore law firm headquartered in Panama. Operating at an international level, the firm helps foreigners set up Panamanian ‘shell companies’ (companies which don’t hold any significant assets but serve as a vehicle for business transactions) to park their financial assets without revealing their identities. It was founded in 1977 & has more than 40 offices worldwide helping its global clientele to work with other tax havens like the British Virgin Islands, Seychelles, Bahamas etc.
The Panama Papers are an unprecedented leak of more than 11.5 million files from the secret database of Mossack Fonseca, making it the biggest leak in whistleblower history. The information was leaked by an anonymous source to Bastian Obermayer – a reporter with the Munich-based newspaper ‘Suddeutsche Zeitung’. This was then shared with the Washington-based International Consortium of Investigative Journalists (ICIJ) which assembled a team of 370 journalists from about 100 media organizations spread over 70 countries. This effort was internally (& aptly!) called ‘Project Prometheus’. The Indian Express signed an agreement with ICIJ for being its Indian partner. This is their third consecutive collaborative project; the previous ones being the “Swiss Leaks” in 2015 & the “Offshore Leaks” in 2013.
Offshore Accounts & Legality
Holding money in an offshore company is generally not illegal by itself & there are many valid reasons for wealthy individuals or multinational corporations to set up and use such companies (for example, to gain access to stronger courts & financial laws if a joint venture involves a country with a weak legal system, or a foreigner wishing to buy real estate in country which allows only locally registered companies or citizens to do so, or celebrity not wanting his address to show up in papers, etc.), but more often than not, it is done to hide criminality from the government / governmental agencies by facilitating tax evasion or money laundering. For example, ‘dirty money’ can be converted into bearer bonds (bonds with no records of the owner or the transactions involving ownership) owned by a shell company and can be used without arousing suspicion.
Legality of such accounts / shell companies is also country-specific. Taking the example of India, no Indian citizen could float an overseas entity before 2003 as per the RBI norms. In 2004, for the first time, individuals were allowed to remit funds of up to $25,000 a year under the Liberalised Remittance Scheme (LRS). This limit stands at $250,000 a year as of now. The RBI clarified in September 2010 that though it let individuals buy shares under LRS, it never allowed them to set up offshore companies abroad. Only in August 2013 were the individuals allowed to set up subsidiaries or invest in joint ventures under the Overseas Direct Investment window.
The Panama Papers Leak : Is it a US Conspiracy?
The following points are noteworthy –
1. Though the leaks mention the likes of Ehud Olmert, Petro Poroshenko, David Cameron’s father, etc., the hullabaloo created over Vladimir Putin (it is his associates & not he who are *allegedly* guilty) & the name of Rami Makhlouf, the maternal cousin of President Bashar al-Assad, being revealed despite a 2008 US sanction which the UK-based HSBC bank did not seem to honour, seem to raise a few eyebrows & point to a political angle behind the leaks.
2. The ICIJ is funded by the Ford Foundation, the Kellogg Foundation, the Carnegie Endowment & the Rockfeller Family Fund. No surprises then that not a single person from the US has been named in the Panama Papers! Besides, one also wonders why there are no Cayman Island Papers or BVI Papers especially since a January, 2016 Bloomberg article mentions the US as the world’s favourite new tax haven!
3. Panama being a de facto US vassal (this write-up carries an interesting account of how that came to be), nothing can really happen there without the US’s tacit support &/or knowledge.
4. To quote The Guardian, a UK based newspaper & an international partner of the ICIJ – “While much of the leaked material will remain private, there are compelling reasons for publishing some of the data.” Why such selective publication of facts? Who are being protected?
Though such points give credence to the conspiracy theory, nothing can be said with certainty.
The Fallout –
The Panama Papers have exposed over 2,14,000 offshore companies used to evade taxation connected to people in over 200 countries including 140 politicians and public officials (people associated with Russian President Vladimir Putin, children of Pakistani PM Nawaz Sharif, the King of Saudi Arabia, etc., to name a few). The Iceland PM became the first casualty of the leak & stepped aside from his office.
Over 500 Indians figure on the firm’s list of offshore companies including the likes of Aishwarya Rai (Former Miss World & Bollywood celebrity), Amitabh Bachchan (Bollywood celebrity), Sameer Gehlaut ( IndiaBulls owner), & K P Singh (DLF promoter). It must be reiterated that just holding an offshore account &/or company doesn’t establish guilt.
The country-by-country account of the fallout of the leak can be accessed here.
The third such leak in a series of sensational disclosures, the Panama Papers has made the public in all affected countries seek strict action against defaulters & strict implementation of financial laws. But as far as financial irregularities are concerned, Mossack Fonseca is just one of the many law firms floating shell companies & Panama is one of the 80+ tax havens. Such ‘bank-law firm-tax haven’ nexus has created a shadow economy (A 2010 report by the UK based Tax Justice Network estimates the amount of undisclosed money stashed in tax havens was somewhere between $21 trillion & $32 trillion. The Gross World Product that year was $62.2 trillion!) by flight of capital which plays a major role in weakening the economy &, as in the case of India, increasing real estate prices.
While the financial system can be regulated with laws & more robust implementing mechanisms, the business-politics nexus is something we can’t wish away but hopefully, such leaks & exemplary punishment will serve as a deterrent.
(Image Courtesy: Flickr)