Questions and Answers about the ‘Panama-Papers’

Since last night, the term ‘Panama-Papers’ is buzzing around the globe.

The massive security breach of an obscure law firm called ‘Mossack Fonseca’ based in Panama City with more than 11 million documents shows how a global industry sells financial secrecy and anonymity to powerful people from celebrities and sports stars like Lionel Messi to ordinary billionaires, prime-ministers, fraudsters and drug traffickers.

At the helm of ‘Mossack Fonseca’ sits German-born lawyer Jürgen Mossack and Panamanian lawyer Ramon Fonseca. The modus operandi consists basically the establishment of complex ‘shell company’ – structures and trust accounts in ‘tax havens’ to allow its clients to operate behind a wall of secrecy.

What is a ‘shell-company’? 

Unlike ‘real’ companies they have no office, no employees and no use other than to hold an asset or a bank account but with the big advantage of anonymity. Mossack Fonseca registers these shell-companies on an industrial scale – the last count was over 200’000. Clients can pay extra to provide front people known as ‘nominees’ so they can act as shareholders, directors or even as the owners of companies. The costs for setting up a shell company are remarkably low, from around 200 to 2’000 USD reflecting the important fact, that the use of shell companies in a tax haven is still legal.

What is a ‘tax haven’?

This is usually an offshore-jurisdictions which offer tax free conditions, low public disclosure requirements for identifying shareholders, directors and most importantly have lax disclosure requirements for indentifying the real owner of the company, known as the ‘beneficial owner’. ‘Tax havens’ like the British Virgin Islands, the Seychelles, the Bahamas, Panama or Samoa are firmly entrenched in the global financial system. According to the Tax Justice Network, they account for 50% of all world trade and about 30’000 billion USD (that’s about the combined GDP of the US and China) of individual private financial wealth is ‘parked’ in offshore – meaning outside the country where the real owner is living and would be subject to local taxes.

While ‘shell companies’ can have a perfectly legal purpose, they are in most cases used in the ‘grey’ area – to hide assets from the spouse in case of a divorce for instance – and in the ‘black’ area to disguise billions of dollars taken offshore by criminals or corrupt officials from all over the world with russian and chinese politicians as ‘top’-clients. More than 2 billion USD in money has been extracted from Russian banks and stored in offshore accounts with a paper trail leading directly to Vladimir Putin’s closest associates.

With all the buzz about ‘Panama’, it’s wrong to just put the finger at the panamanian law firm, because much of the firm’s work is perfectly legal and behind the ‘success’ of aquiring wealthy clients from all over the world is a global network of accountants and prestigious banks who are really the big drivers behind the creation of hard-to-trace companies in tax havens.

And here we see for instance german Commerzbank, british HSBC and french Societe Generale that hire the law firm in Panama to manage the finances of their private-banking-clients via a ‘shell company’ in a ‘tax haven’.

 

Tax haven: the British Virgin Islands is a British overseas territory, located in the Carribbean to the east of Puerto Rico.

british virgin islands

The real-driver behind the ‘Panama-Papers’ are big banks who hire law firms to establish ‘hard-to-trace’ shell-companies in tax havens for their wealthy clients.

hsbc

societe generale

commerzbank

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