What The Panama Papers Mean For Transparency And ‘Dark Money’ by [email protected]

Philip Nichols and Liz Confalone on the ‘Panama Papers’

Last Sunday, the Washington, D.C.-based International Consortium of Investigative Journalists (ICIJ) published a massive leak of some 11.5 million documents covering nearly four decades that showed how world leaders, politicians and businesses hide and launder their money, evade taxes and finance arms and drug deals. The source of the leak is a little-known but powerful law firm in Panama called Mossack Fonseca, which the ICIJ describes as one of the top creators of shell companies and corporate structures that can be used to hide ownership of assets.

The “Panama Papers,” as the leaked documents are called, offer a rare opportunity to regulators in the U.K., the U.S. and other countries to bring about greater transparency in the ownership of the firms they incorporate, according to experts at Wharton and Global Financial Integrity, a Washington, D.C.-based research and advisory services nonprofit that works to curtail illicit financial flows.

[drizzle]According to Wharton professor of legal studies and business ethics Philip Nichols, the U.K. is in the spotlight because a large number of the incorporations cited in the Panama Papers covered firms in British dependencies. He also faulted U.S. states like Delaware, Wyoming and Nevada for allowing firms to be incorporated without sufficient transparency on their ownership information.

In the data released thus far, only a few cases in the ICIJ leak involve U.S. citizens or entities, but there is the incentive for businesses to head for offshore tax havens, Nichols said. “The fact that the U.S. has a higher tax [incidence] relative to other [countries] pushes people to go offshore,” he noted, adding that he does not condone such conduct.

The Panama Papers provide the opportunity for countries across the world to tighten their regulations to prevent abuse by the companies they incorporate, according to Liz Confalone, legal counsel at Global Financial Integrity. “The larger countries need to set a good example and take a leadership role for the smaller countries to follow,” she said.

“When we talk of beneficial ownership, we are talking about the real, living people who are the owners or controllers of these companies.” –Liz Confalone

Confalone said the U.S. is a laggard in bringing transparency in the “beneficial ownership” of the firms it incorporates, but added that a bill now before the U.S. Congress seeks to correct that. The latest action on the bill — the Incorporation Transparency and Law Enforcement Assistance Act — was in February, when it was referred to the House Committee on Financial Services.

Nichols and Confalone discussed the takeaways from the Panama Papers episode for lawmakers worldwide on the [email protected] show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Panama Papers – The Reach of the Expose

The leak is just one part and the beginning of a wider scandal, according to Confalone. “Anonymous companies have been a known problem for many years, but this investigation is unprecedented in size and scope,” she said. “It exposes just one firm — admittedly a large firm — in a larger industry. The trouble is it is legal to set these anonymous companies up in various jurisdictions around the world. You are getting a few more details that you wouldn’t ordinarily see but for a leak.”

The ICIJ published the Panama Papers after a yearlong investigation along with German newspaper Süddeutsche Zeitung and more than 100 other news organizations. Its highlights are stunning. The leaks reveal the offshore holdings of 140 politicians and public officials around the world, including a dozen current and former world leaders such as the prime ministers of Iceland and Pakistan, the president of Ukraine and the king of Saudi Arabia, according to the ICIJ.

The leaked data covers nearly 40 years, from 1977 through 2015. “[They provide] a day-to-day, decade-by-decade look at how dark money flows through the global financial system, breeding crime and stripping national treasuries of tax revenues,” the ICIJ said on its website. They cover 214,488 offshore entities connected with people in more than 200 countries. They also include at least 33 people and companies blacklisted by the U.S. government because of evidence that they had been involved in wrongdoing, such as doing business with Mexican drug lords, terrorist organizations like Hezbollah or rogue nations like North Korea and Iran.

Heads have already begun to roll in the wake of the scandal. Iceland’s Prime Minister Sigmundur David Gunnlaugsson resigned Tuesday following uproar over reports that he and his wife owned an offshore company in the British Virgin Islands. When he came to power in 2013, he failed to disclose that he had owned millions of dollars worth of bonds in collapsed banks as half-owner of an offshore company called Wintris Inc., the ICIJ said in a report.

The leak also reveals how associates of Russian president Vladimir Putin secretly shuffled $2 billion through banks and shadow companies, the ICIJ said. Also named are British Prime Minister David Cameron’s later father Ian Cameron, who was a stockbroker, six members of the U.K.’s House of Lords and three ex-Tory members of Parliament.

Global Effect

Confalone said the problem of anonymous companies afflicts not just Panama or tax havens, but all countries that have created such companies. “[It includes] countries that have been made victims of [anonymous companies] and their citizens being scammed through Ponzi schemes using anonymous companies to cover their tracks,” she added. Such anonymous companies have any number of illicit uses, such as for circumventing sanctions or for drug traffickers to launder money, she explained.

“I talk to people all over the world who have engaged in misconduct. They love Delaware.” –Philip Nichols

Nichols noted that while only a few U.S. citizens and businesses are now linked to the Panama Papers, the Department of Justice is looking into anonymous companies. “The integrity of the U.S. system has been called into question,” he said. “Remember, we have states like Delaware or Wyoming or Nevada in which such things occur. Maybe while the Department of Justice is looking abroad, this will prompt investigation and scrutiny of similar occurrences within U.S. shores.”

Confalone agreed with Nichols. “These anonymous companies after being set up have a license to open bank accounts in any country,” she said. “You are tapped into the global financial infrastructure and you can engage in all sorts of transactions which will frequently touch the U.S. or involve U.S. citizens.”

Time for Action

Confalone said much of the efforts to stymie tax evasion will depend on getting information on beneficial ownership from companies and the banks that set up accounts for these companies. “If you exchange information on bank accounts that will be relevant to tax authorities, you have to know who is behind the bank accounts and who is behind these companies,” she added. “When we talk of beneficial ownership, we are talking about the real, living people who are the owners or controllers of these companies. There needs to be significant work in this area.”

About $1.1 trillion left developing countries in illegal financial flows in 2013, according to a recent report by Global Financial Integrity. About 80% of that is from a practice called trade mis-invoicing, where

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