The Panama Papers

Over a year ago, an anonymous source who identified himself as John Doe, offered a German Newspaper over two and a half terabytes of documents from Panamanian law firm Mossack Fonseca. It was to become the global scandal of 2016 writes Sam Green, Advisor at Options Educator, TradersCircle.

The documents contained information on hundreds of thousands of offshore shell companies, which are not inherently illegal, but are sometimes used to obscure illicit behaviour. The offshore structures are often used to hide details of certain transactions and ownership structures, as well as to record financial activity in a manner that is beneficial from a taxation perspective.

In fact, preliminary investigations of the documents have led to allegations of fraud, bribery, tax evasion and other illegal activity. A leaked memorandum from a Mossack Fonseca even went as far as stating “Ninety-five per cent of our work coincidentally consists in selling vehicles to avoid taxes.”

It is important to note that tax avoidance, or organising your financial affairs in order to pay as little tax as possible, is legal. In fact, the US Internal Revenue Service states on their website “Tax avoidance is perfectly legal and encouraged by the IRS”.

However, they go on to state that “tax evasion is against the law”. The distinction is that tax evasion usually involves the deliberate misrepresentation of the true state of your financial affairs.

Whether the offshore structures were intended for tax avoidance or tax evasion is heavily debatable, and the reality is probably a mix of the two. What isn’t disputable is the sheer scale of the offshore cash. US economist Gabriel Zucman estimates that $US7.6 trillion is stashed in tax havens; around 8% of the world’s wealth. Mr Zucman, who is an Assistant Professor of economics at UC Berkeley, estimates that this causes a loss in global tax revenues of $US200 billion a year.

Despite the potential loss to public revenues, there are ethical dilemmas regarding the publication of private information, especially where no crimes have been proven, and especially when a lot of the activity was likely perfectly legal. Perhaps the information should have been leaked to regulatory and enforcement agencies, rather than journalists.

That said, the documents do shed a light on the financial affairs of the rich and famous, and they have started a debate on the fairness of the current tax mix, as well as on more stringent tax evasion legislation.

In Australia, the ATO has announced it is investigating 800 individual Australian Tax Payers listed in the Panama Papers, stating that some of the cases may be referred to the Serious Financial Crimes Task Force. The ATO has published a response to the Panama Papers on their website, stating, “We have been analysing the latest data against information these taxpayers had reported to the ATO and against the information we already have.”

New Zealand has also been caught up in the revelations exposed by the scandal, due to the nature of their trust laws. New Zealand’s offshore trusts pay no tax on foreign earnings and their beneficiaries are not registered with any public body. These New Zealand based trusts were often set up in conjunction with the registration of offshore companies in Central America and the Caribbean; helping beneficiaries to set up bank accounts and to obscure ownership and transactions.

For their part, Mossack Fonseca have denied any wrong doing. They state that the establishment of offshore companies is common practice and perfectly legal. They also deny that the leak came from an employee concerned with unethical behaviour, stating that the leak resulted from “an unauthorised breach of our mail server”.

Whilst many public personalities have been “exposed” so far in the leaks, I suspect the most damning evidence of wrongdoing is still to come. There are an incredibly large number of documents to analyse, with only a small fraction reviewed so far. If I had an offshore company organised through Mossack Fonseca or one of their subsidiaries, I would be feeling awfully anxious right now.