When the Panama Papers were first revealed last month, the country of Panama found itself at the center of a world-wide storm of financial disclosures. Now the world is being rocked again, absorbing the second round of data released on Monday May 9. The largest data leak in history, the Panama Papers encompass 11.5 million documents from a Panamanian law firm covering the financial dealings of the firm’s clients, along with client information for over 214,000 offshore companies.
The data uncovered by the Panama Papers effectively pulled back the curtain on arcane issues such as the use of tax havens and shell corporations designed to hide beneficial owners. Formerly the purview of international financial-policy wonks, today, these issues are front page news. In only a month, information derived from the Panama Papers has created scandals for public officials and leading business people all over the globe, including in countries that have more stringent reporting policies and a general ethos of transparency, such as the U.K and Iceland.
While Panama has been criticized by the international community in relation to the Panama Papers, it is important to understand the context for the leak; the fallout and the potential implications extend well-beyond Panama and a single law firm. As the world becomes engrossed in the new data, a number of key points follow.
Panama was moving towards transparency long before the data leak. Among other things, the President of Panama has stated that at the time of the leak, the country was in the process of negotiating with the Organization for Economic Co-operation and Development (OECD) on joining the Common Reporting Standard. The Common Reporting Standard is intended to develop a new single standard for the automatic exchange of information in order to better fight tax evasion and ensure tax compliance.
Panama has said that it will commit to some version of the framework by 2018. Additionally, Panama has tightened restrictions on corporate ownership structures and the use of bearer shares, a common means of disguising ownership. Under the new rules, the authorized custodian (often a law firm) is required to keep records of the actual share owners. This is significant because bearer shares are traditionally owned by the bearer of the physical share certificates and the entity issuing the shares traditionally does not register the share owners or track transfers of ownership.
Overall Panama was well situated to take action on the information from the leak. The climate for reform in Panama is the most favorable it has been in recent years. Panama has had the flexibility to respond to the data leak, sending recently formed prosecution units on organized crime, money laundering and terrorist financing investigations on a well-publicized raid of Mossack Fonseca, collecting information for further investigations into possible criminal activity on the part of the firm. Additionally, Panama implemented new Know Your Customer (KYC) standards not just for financial institutions, but for law firms, professional services firms and companies in a host of other industries including construction/contracting, real estate, free zone companies and casinos, among others. In addition, the government formed a new department in the Ministry of Economy and Finance prior to the leaks, which is tasked with overseeing regulation and enforcement of the new measures for non-financial institutions.
Tax havens are not limited to developing countries and can be found everywhere, including in the U.S. According to the Tax Justice Network, the U.S. ranks third in terms of the size of its offshoring industry. States such as Nevada, Delaware, Montana, South Dakota, Wyoming and New York, make it relatively easy to establish shell companies, and this has attracted business from all over the world. States have the same motivation as traditional offshore jurisdictions; they receive economic benefits from having entities register in their states, including registration fees. While the U.S. Treasury Department has stated that it will propose regulations to ensure that companies registered in the U.S. must disclose the identities of their ultimate beneficial owners, this has yet to happen.
Issues around tax havens may be reaching a tipping point. Organizations such as Global Witness have been working to raise awareness of the problems of tax havens - and their relationship to corruption and crime - for 20 years. With the release of the Panama Papers, these issues have been thrust into the mainstream and may increase pressure on prosecutors around the world to investigate and prosecute associated criminal activity. The Panamanian government’s recent raids on Mossack Fonseca mean that it now has substantially the same information that was provided to the ICIJ, which could provide an avenue for prosecutors in other countries to obtain such information while obviating any admissibility issues from using ICIJ data which was, arguably, illegally obtained. That said, although prosecutors may be able to get the data from the Panama public ministry through mutual legal treaty requests, it remains unclear whether the same information will be available to private litigants, their counsel or their investigators.
In conclusion, as the largest data leak in history continues to be mined for information, and more findings are presented to the public, there will be a greater awareness of how these opaque corporate structures are used for tax evasion or to create havens for hiding the proceeds of government corruption or other criminal activities. This will likely create more pressure for transparency in jurisdictions – not just Panama– that are providing secrecy for financial dealings. Of course, jurisdictions are well aware that there is competition in this space and if they are unable to provide a level of confidentiality, the incorporations and banking business will shift elsewhere. With that in mind, regulators and pressure groups will need to focus on the global problem as the reform of any one jurisdiction will simply create a larger market for another. Reforms in Panama are clearly a step in the right direction but without universal application of transparency reforms, it will be business as usual for those choosing to operate in the shadows.