The recent discovery of the Panama Papers has put offshore companies and tax havens into the limelight. The leak of 11.5 million documents from law firm Mossack Fonseca, has unearthed a tangled web of finances that links a list of high profile politicians and celebrities to offshore shell companies in the tax haven of Panama. Those embroiled in the scandal include close associates of Russian President Vladimir Putin, relatives of Chinese leader Xi Jinping, Iceland’s Prime Minister Sigmundur David Gunnlaugsson, the father of British Prime Minister David Cameron and children of the Prime Minster of Pakistan Nawaz Sharif.
While offshore financial activities are technically not illegal, they are associated with a host of questionable practices that range from laundering financial gains acquired through criminal means to hiding assets from tax authorities and concealing misappropriated or politically inconvenient wealth.
Given the concentration of wealth among the elite and the rising inequality between high-net-worth individuals and the rest of the world, it comes as no surprise that the Panama Papers have triggered intense public opprobrium. Even if the activities were legal, the opaque nature and poor reputation of offshore companies have invited public scrutiny.
A Watershed Moment
Could this then be a breakthrough in the much-needed reform for offshore financial transactions? Yesterday’s headlines on tax avoidance were focused on the strategies adopted by corporate giants such as Apple, Microsoft and Google. By locating as much income as possible in low tax jurisdictions and assigning expenses to high-tax territories such as the U.S, these multinationals were able to minimise their worldwide tax liability. While one may overlook these strategies on account of commercial interest, it is hard to overlook the significant financial dealings of groups linked to leaders holding high public offices.
Public pressure as a result of the Panama Papers may further galvanise efforts by authorities to implement offshore reform policies. Current policy proposals have been mixed; Professor Gabriel Zucman, author of The Hidden Wealth of Nations: The Scourge of Tax Haven has commented that proposals for the reform of corporate taxation by the OECD (Organisation for Economic Co-operation and Development) are “unlikely to enable much progress”, while the Foreign Account Tax Compliance Act in the US is “very promising”. Anything short of well-defined sanctions and a world financial registry as suggested by Professor Zucman would fail to tackle the root cause of offshore finances.
While the case for landmark reform seems possible, significant headwinds remain. First, most of the leaders linked to the Panama Papers are figures that had embraced anti-corruption measures. Chinese leader Xi Jinping vowed to fight “armies of corruption”, while Ukrainian President Petro Poroshenko positioned himself as a reformer. The revelations from the Panama Papers intimate that what happens behind closed doors and away from the public eye belies public speeches and official policies.
Second, big banks are a key force driving the creation of companies that specialise in harbouring assets in the British Virgin Islands, Panama and other offshore havens. These relationships with big financial players increase friction for reform.
Third, criminal or questionable behaviour is usually nested and concealed beneath layers of secrecy, and the only means of discovery is through whistle-blowers and leaks of offshore documents such as the Panama Papers. This makes it difficult for authorities to adopt preventive measures.
The complex connections that encircle offshore havens increase the difficulty of reform. But by shining a light on the murky corners of the world of power and wealth, the direction and pace for progress becomes less encumbered.