The Panama Papers / Mossack Fonseca / Pants Yanked Down To Knees

[TaintedAndDelish]

So this is supposed to be the biggest leak in history and exposes lots of really wealthy and well connected folks. Before saying too much, I'll just say that I don't fully get the impact of all this and so far there doesn't seem to be a lot of detailed news about this given the vast amount of data that was harvested and the fact that the press sat and chewed on it for a whole year.

A few things stick out for me:

A. The use of shell companies are legal in many cases, so the fact that one is using a shell company does not necessarily mean that they are doing something wrong. It does however provide the opportunity to do something wrong but there are legitimate uses.

B. I find it hard to believe that the press quietly sat on this information for over a year without leaking any of it. I would expect more loose lips over a year's time.

C. The news is that friends and relatives of some very rich folks seem to be involved - suggesting that they are transferring money to one another without having to pay tax, but this does not seem to be that huge of a deal to me. Maybe I'm not quite getting the full impact of it.

For those not familiar the story, a shell company is basically a business entity that is hosted in another country ( or state ) that has more liberal laws and lower tax rates. It enables the owner to conduct business, store and exchange money anonymously and in some cases without having to pay taxes. On the nasty side, such entities could be used to smuggle money to terrorists, traffickers or drug dealers or to manipulate the stock markets. The news is that a major law firm (Mossack Fonseca) that was heavily involved in setting up these shell companies got hacked and their confidential data was leaked to the press. There's all sorts of speculation about who hacked them and why.

A few random sources for starters:

http://www.bbc.com/news/world-europe-35983450
http://www.theguardian.com/news/2016/apr/06/panama-papers-reveal-offshore-secrets-china-red-nobility-big-business
https://en.wikipedia.org/wiki/Panama_Papers

[Oniya]

I saw a video that gave a pretty clear explanation of why it is a big deal, done in 'terms that your five year old can understand'. 

Let's say you have a piggy bank, and every so often, Mom and Dad look in your piggy bank to see what's in there.
You're tired of Mom and Dad snooping in your stuff, so you set up another piggy bank over at Charlie's house.
Charlie's parents aren't as nosy, and don't poke around in his stuff, so they don't notice.
Soon, other kids in the neighborhood are doing the same thing, and Charlie has a shelf of piggy banks in his room from other kids.
One day, Charlie's uncle comes over, sees all the piggy banks and blows the lid off the whole thing.  All the parents find out.

Now, you just had your piggy bank over there because you wanted a little privacy.
Freddie was beating up kids for their lunch money and keeping the extra money there.
Velma was running a lucrative 'homework writing service'.
Daphne was shoplifting makeup and selling it in the lunch room.
And we all know what Shaggy had going.  (This was where he stored his profits so he could buy all that pizza without his parents finding out.)

As for the time delay -  I'm not even sure that the entire leak has been analyzed at present - as an example of scale, the Wikileaks leak was a little under 2 Gigabytes.  The Panama Papers is 2.6 Terabytes:  11.5 million emails, PDFs, photo files, invoices and bank records.  That's a lot to go through, even assuming that it doesn't require decrypting.

[Cassandra LeMay]

C. The news is that friends and relatives of some very rich folks seem to be involved - suggesting that they are transferring money to one another without having to pay tax, but this does not seem to be that huge of a deal to me. Maybe I'm not quite getting the full impact of it.

It's not just friends and family of rich people, it's also friends and family of politicians. If a close personal associate of a politician has a whole lot of money in an overseas account held by a shell company, the question is, does that person really make all that money, or are they just holding it for their friend/relative, the high-placed politician, i.e. is the one holding the shell company a "shell" too? And politicians trying to hide money from view could be taken as a sign of possible corruption. Where there's smoke...

Then there is the sheer size of it all. Mossack Fonseca has created close to 240,000 of these shell companies over the last fourty years. I don't know how much money these companies hold on average, but some definitely hold several million dollars, and you don't go through the trouble of setting up a company like this and a bank account in the Bahamas or some other island paradise for just a few thousand dollars.
But lets assume every company has assets, on average, of 250,000 dollars. That's a total of 60 billion dollars handled through those companies over the years. If each company has 1 million we are talking about 240 billion dollars that may have been shifted outside the reach of any taxman over the years. The potential for abuse is gigantic - and Mossack Fonseca may be one of the biggest players in this business, but it is by no means the only one. Shell companies could have helped avoid taxes on several trillion dollars over the last few decades. That's what I would call a pretty big deal, even if we leave out questions of criminal sources of that money, because every dollar not paid in taxes is a dollar government can't spend on necessary programs - or will have to raise from the average taxpayer, i.e. people like you and me, to make up the shortfall.

[Oniya]

Remember - not paying his taxes landed Al Capone in Alcatraz when nothing else could.

[Kythia]

I've been kind of struggling with the ramifications as well, tbh.

I have a type of savings account called an ISA.  I don't pay savings taxes on money saved in it.  My boyfriend runs a business and claims back various business expenditure to minimise his tax.  Neither of us are doing anything wrong or illegal, we're using entirely legal routes to minimise the tax we pay.  my boyfriend's accountant who advises him what to claim back isn't, either.

In Oniya's example, it's difficult to see that Charlie himself has done anything wrong.  Even if he charges piggy bank storage fees.  Daphne and the rest have, sure.  But not him or the "you" of her example.  Why is Charlie being criticised and more importantly why are we objecting to people, the "you" of the example, using an entirely legal means to minimise their tax bill?  I do it on the scale of hundreds of pounds, I don't see why it becomes morally objectionable when rich uncle moneybags does it to the scale of millions.  Any guilt that exists here surely belongs to national governments for making such tax laws?

[Oniya]

That's one of the things that does complicate things - Having the bank accounts isn't the issue (as per the example 'you').  The lack of oversight is an issue (Charlie's parents, aka the Panamanian financial oversight laws).  The purposes of the bank accounts is another issue (Freddie and the gang, aka the people who use the accounts to get around legal issues).  In the case of your accountant-supervised ISA, there is reporting being done - the accountant has told you what to report.  You probably also get some kind of statement for your annual tax report.

[Kythia]

Well, the UK tax system is different, but sure - your assumptions hold given some modifications. 

But anyway.  First I don't see an issue with Panama here?  These companies are legal, I could set up a shell company in the UK if I wanted, why should it be different in Panama?  In terms of your example, I could hide my piggy bank in my house if I wanted, it's just that Charlie's parents don't mind him storing all those piggy banks.  Again, I see the issue as one of the main country's legal system for allowing money to be moved abroad in this way ("your" parents for not searching you as you left?  I dunno, the analogy may be breaking down a little).

More importantly though, and a point I clearly didn't make well, I don't see how this leak isn't a colossal and illegal invasion of privacy for a law firm that has, in this case at least, done nothing wrong?

I felt the same about the Ashley Madison hack.  Some people want to cheat on their spouses.  Adultery isn't illegal.  Why are Ashley Madison being penalised for facilitating it?

[gaggedLouise]

The root issue is probably moral (about business and societal ethics) as much as it is simply technically legal. Do we want a worldwide jungle economy, do most of us want people like Bernie Madoff, Conrad Black or typical banana republic oligarchs to run things the way they'd like to? Corporations and companies don't exist in isolation from society, many of them need an effective, reliable judicial system, trained people they can recruit and good communcations to be able to operate properly. If established corporations or even financial firms are constantly whisking off their transaction to tax havens to achieve minimal taxes or no tax at all, and if companies are regularly getting drained on money and assets by financial scammers, then much of the economy in a country is bogged down in the end.

Tax havens do create opportunities for financial and corporate fraudsters, for companies whose business idea is to scam people almost with impunity (because it can cost a fortune to attempt to bring a bogus company to justice, and most people, even small companies, don't have those financial muscles) and for people who deal in human trafficking, the financing of terrorism, smuggling and so on. Even if the preparatory business maneuvers themselves might not be illegal they are often closely linked to those kinds of criminal enterprises, and that's where the big money enters. Only this afternoon I heard about one guy here from Sweden who had been spotted in the Panama papers; he has long been known to have been involved in one of the biggest and most infamous financial scams in Swedish history, the so-called Trustor affair about two decades ago. Essentially he and some business associates in Sweden and the UK (including one Lord Moyne, member of the Guinness family) set up an operation where the financial holdings company was bought by these outsiders with covert use of its own money to pay for the takeover, equal to about a hundred million bucks at the time (this was achieved by some quick to-and-fro'ing between various accounts in various banks, making it look as if Moyne personally had the money). After the deal had gone through, much of that capital disappeared, most likely to various tax havens, anonymized companies and secret bank accounts abroad. Most of the key people involved in this scenario were never convicted, many of them pleaded that they had not understood anything to be strange about what they were "being asked to do" or had no criminal intent, and some of the courts went with that.

Anyway, today the newspapers are reporting that one guy in that affair who actually had been convicted (though with a relatively brief sentence) had been in touch with these Panamanian guys a few months before the scam went ahead, asking them if they could help him "take care of" dozens of millions of pounds. They had accepted, but eventually they dropped him as a customer, saying he seemed to be a liability. That was most likely because by then the scandal had erupted in the news media in Sweden and in the UK. So they didn't hide the money siphoned off, but most likely other companies managing these letterbox companies, and other tax havens, helped out with the same purpose. It's known that some of the Trustor money siphoned off by our man landed in Liechtenstein, a stamp-sized country in the Alps that's also a famous tax haven.

If the basic idea is that a company should pay a big part of its taxes where its work is actually performed and where it has employees and makes its profits, then siphoning off all the funds to places like the Cayman islands, Anguilla or Monaco seems seriously unethical and destructive, even if it's not illegal. Of course that's not how most billionaires would put it, but so what...

When it comes to why this isn't getting discussed more loudly in the political arena, could it have something to do with big companies and their lobbyists having been able to tilt the playing-field and some of the tax and corporate legislation to their advantage? Some big corporations today have more funds, more revenue and more legal experts than many mid-sized countries - and far less obligations than a state would have. They're definitely able to wrestle down some states and their politicians, taxmen, courts and so on.

[Cassandra LeMay]

Again, I see the issue as one of the main country's legal system for allowing money to be moved abroad in this way ("your" parents for not searching you as you left?  I dunno, the analogy may be breaking down a little).

That rests on the assumption that moving the money abroad was allowed by a country's legal system. That may be true for the UK (I am not sure), but I don't think any one of us could tell for certain if that's the case in all of the many countries involved. And even if it were legal to move the money through a letterbox company in Panama (which might well be legal in Panama) to a bank account in a third country (which may be perfectly legal there), the question remains where the money came from in the first place. If the proceeds of illegal activity are shifted around all the individual steps undertaken may, in themself, be legal, but the whole process would still amount to money laundring. (Which I suspect is illegal in the UK and many other jurisdictions.)

[TaintedAndDelish]

I think this boils back down to privacy. How can a country give people or companies privacy without creating a vulnerability. Right now the three letter orgs don'twant us to have strong encryption because they want to be able to sneak in the front door Stasi style without a warrant.  In this case, the mechanism for privacy is the use of these offshore companies.

[gaggedLouise]

I think this boils back down to privacy. How can a country give people or companies privacy without creating a vulnerability. Right now the three letter orgs don'twant us to have strong encryption because they want to be able to sneak in the front door Stasi style without a warrant.  In this case, the mechanism for privacy is the use of these offshore companies.

Yes, I agree there is sometimes a conflict of interest: some states would resort to unfair methods, extortionate measures or miscarriage of fair procedure to get their way and pull in the maximum steep aomunt of taxes from anyone who's living there or who has any kind of business there. On the other hand I don't think the (justifiable) legal interests of most citizens are necessarily the same as those of some corporate tycoon or shyster who just wants to evade taxes or have the maxium free space to set up bogey companies and Ponzi schemes.