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THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 1
A seminar report on
THE PANAMA PAPERS LEAK
-THE BIGGEST FINANCIAL
LEAK IN HISTORY
A project submitted in the partial
fulfilment of requirement for the honours
degree of BACHELOR OF COMMERCE.
PRESENTED BY –
PRIYA AGARWAL
B.COM 2nd
YEAR
ROLL NO – 31
ACKNOWLEDGEMENT
THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 2
As the old salutation goes, I would like to express my whole hearted
gratitude to every individual who helped me in different ways to make
this project a success especially J.D Birla Institute for giving the
opportunity to do this project under the guidance of their faculty.
I would like to thank Dr. Deepali Singhee, Principal of J.D Birla Institute
for always being there for helpful suggestions and viewpoints for
presenting a better work.
Finally, no words of gratitude can express my indebtedness to my parents
and friends for encouraging me throughout the report.
CONTENTS
THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 3
OBJECTIVES
Sl. No. TOPIC Pg. No.
1. OBJECTIVES 4-6
2. EXECUTIVE SUMMARY 7-8
3. LITERATITE REVIEW 9-11
4. INTRODUCTION 12-14
5. IMPLICATIONS OF PANAMA PAPERS 15-19
6. CONCLUSION 20-21
7. REFERENCES 22
THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 4
THE OBJECTIVE OF THE REPORT IS TO HIGHLIGHT THE FACTS OF THE
CASE AND GENERATE AWARENESS ON THE SAME.
Here are a few things all organizations, and perhaps law firms in particular, should keep in
mind.
1. Know what information is most valuable -- to you, to your customers, to the public, and
to attackers -- and protect it accordingly. "Valuable" is in the eye of the beholder, and the
definition won't always be the same. Identify what sort of information that would cause
critical damage to your business if it fell into the wrong hands (causing legal liability, IP
theft, lost customers). Then secure it in any format in which it might exist, whether that be a
spreadsheet or a conversation.
"In the case of Mossack Fonseca, a key business asset would be the case files and private
details of their clients," says Senior Security Consultant Zak Maples of MWR Info Security.
"This would be mapped to numerous key IT assets, one of which would be the E-mail server
due to the large number of e-mails containing this sensitive data."
2. Monitor outgoing traffic. "Whilst there is no silver bullet in security," says Maples, "in
this specific case it has been reported that 2.6TB of data was exfiltrated from the
organization. Detective controls that look for large spikes in data being transferred out of the
organization and other Data Loss Prevention (DLP) controls could have helped to prevent the
data being exfiltrated or being widely disseminated."
Details about how the leak occurred at Mossack Fonseca remain unclear, so it is impossible
to say whether this data was exfiltrated all at once in a 2.6-terabyte package that would surely
raise alarms, or if it was snuck out piece by piece in small batches over a long period of time.
Nevertheless, strange exfiltrations of data -- "strange" because of the size, time, number, age,
or confidentiality of those data -- are something every organization should always be
watching for.
3. Don't put all your eggs in one basket. A lot of secrets can be sunk into 2.6 terabytes of e-
mail. Depending on the nature of your business, you might need to retain deep files on all
customers and detailed records on all of your employees' conversations. So simply reducing
your risk footprint by deleting the data isn't an option. However, segmenting the data, and
THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 5
applying different layers of security and access control to each segment could limit the
damage when an attacker cracks into one asset, or a privileged insider decides to leak what
they have.
Tom Patterson, chief trust officer for Unisys, says many organizations leave themselves open
to similar attacks "by relying on old style networks and defenses to defend new style
enterprises and attacks. Addressing the technical debt of infrastructure and security
countermeasures with modern approaches like cloud, mobile, and micro segmentation are
cheaper and more risk effective than dragging forward solutions from another era. It just
takes strong leadership.”
4. E-discovery technology can be used to divine your darkest secrets. The ICIJ and
journalists from 100 media organizations dug through and researched the data in the 11.5 TB
data dump for a year before publishing their report. Their analysis was aided by the same e-
discovery technology often used to gather information subpoenaed for court purposes.
According to Eddie Sheehy, CEO of Nuix, and the e-discovery product, used by ICIJ: “This
is a huge trove of data by investigative journalism standards—around 10 time the data
volume and five times the number of documents of ICIJ’s Offshore Leaks investigation in
2013. At the same time, this is only a medium-sized document set in the worlds of
eDiscovery or regulatory investigations—some of our customers handle similar volumes of
data every day."
5. Your data breach can have immediate, devastating effects on customers. Today,
Sigmundur David Gunnlaugsson, Prime Minister of Iceland, stepped down from his office
"for an unspecified amount of time" after he was named among Mossack Fonseca's customers
following dubious practices and found to have, as Prime Minister, brokered deals between
banks and claimants after the financial crisis of 2008 despite having undisclosed conflicts of
interest.
The Panama Papers have unearthed information related to many political leaders and their
family members -- including in Ukraine, the United Kingdom, China, and Russia -- and have
caused the topic of financial regulation to be brought up again in the United States because of
its more conspicuous absence of significant players on the list. As one economist told the
THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 6
New York Times, American companies "really don't need to go to Panama" because "we
have an onshore haven industry in the U.S. that is just as secretive as any."
6. Your breach could embroil you in more international privacy complications. After the
brother-in-law of China's President Xi Jinping and other members of the Chinese elite were
discovered among Mossack Fonseca's customer list, the Great Firewall of China apparently
set to work trying to contain the public relations damage. Posts on social networks WeChat
and Sina Weibo about the topic have begun to be deleted. Most organizations' end users and
customer base will not be able to squash their exposed secrets with such powerful tools at
their disposal. However, they may at least have privacy laws on their side that you may have
fallen afoul of.
7. If you're going to destroy evidence, don't forget to destroy the evidence of you
destroying that evidence. According to the ICIJ, Mossack Fonseca actively destroyed
information that would implicate it in a U.S. Justice Department investigation of its Nevada
office. However, some of its plans to destroy the information survived in email exchanges,
which were subsequently leaked. ICIJ writes:
One email from 2014, for instance, instructs that any link between Mossack Fonseca’s central
computing system in Panama and the Nevada office “has to be obscure to the investigators.”
Other emails report that IT operatives working via remote control from Panama “tried to
clean the logs of the PC’s in the Nevada office” and planned to run a “remote session to
eliminate the traces of direct access to our CIS” — the firm’s computer information system.
THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 7
EXECUTIVE SUMMARY
The media has been overflowing with the news of a huge leak of data from the fourth biggest
offshore law firm Mossack Fonseca in Panama. 11.5 million Files, which include the details
of 214,000 entities including companies, trusts and foundations, expose how the wealthy and
powerful use tax havens to launder money, dodge sanctions, and avoid tax. The Panama
Papers include links to 12 current or former heads of state and government and more than 60
relatives and associates of heads of state and politicians.
Mossack Fonseca’s response to the leak states that the law firm has operated beyond reproach
for 40 years without having been accused of criminal wrong-doing. The Panama-based
company runs worldwide operations with franchises around the world, employing 600 people
working in 42 countries. The firm has acted for more than 300,000 companies, more than half
of which are registered in the UK and in British-administered tax havens such as Guernsey,
Jersey, and the Isle of Man among others. More than 100,000 of the secret firms have been
registered in the British Virgin Islands. Other tax havens where Mossack Fonseca operates
include Switzerland and Cyprus.
The information presented in the files spans a period of time between 1977 and December
last year. After obtaining the leaked documents, the German newspaper Süddeutsche Zeitung
shared them with the International Consortium of Investigative Journalism (ICIJ), which
worked alongside journalists from 107 media organisations across the globe to analyse the
information.
Among the people involved are Ukrainian President Petro Poroshenko, Argentinian President
Mauricio Macri, the brother-in-law of Chinese President Xi Jinping and three of the children
of Pakistani Prime Minister Nawaz Sharif.
Iceland’s Prime Minister, Sigmundur Gunnlaugsson, was revealed to have been hiding
millions in offshore accounts, having bought a British Virgin Islands-based offshore company
with his wife, Anna Sigulaug Pálsdóttir. The key purpose of the company, Wintris Inc., has
been investing Mrs. Pálsdóttir’s share of the very substantial proceeds from the sale of her
THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 8
father’s business. Following a mass protest in Reykjavik on Tuesday evening, Mr.
Gunnlaugsson has now resigned.
The documents also show a billion-dollar money laundering ring between close associates of
Russia’s President, Vladimir Putin. Dmitry Peskov, the spokesman for Mr. Putin commented
that the reports were down to “journalists and members of other organisations actively trying
to discredit Putin and this country’s leadership”, adding that publications of the leaks may be
down to “former employees of the State Department, the CIA, other security services.”
The scandal also touches on UK Prime Minister David Cameron and his late father Ian
Cameron, who according to the leaked documents set up an offshore fund which avoided ever
paying British tax. Mr. Cameron has so far failed to provide a clear account about the
company set up by his father in 1982 and run from the Bahamas and although he claims that
he “own(s) no shares, no offshore trusts, no offshore funds, nothing like that.” It is still
debatable whether his family stands to gain in the future from Blairmore Holdings. In another
attempt to satisfy the public, Downing Street clarified that there were “no offshore trusts or
funds” that the PM and his wife and children would benefit from “in the future”. However,
many questions still remain open while the Labour Leader, Jeremy Corbyn calls for
investigation into Mr. Cameron’s tax returns. In addition, he demands for the government to
consider the imposition of ‘direct rule’ on British overseas territories and crown dependencies
in the cases of them not complying with UK tax law. A meeting of G7 countries to discuss
the issues has already been arranged and will be held on 12 May in London.
The leaked files also suggest that Uruguayan lawyer Juan Pedro Damiani has assisted Fifa’s
vice-presided who was arrested in May 2015 as part of the US inquiry into football
corruption. Mr Damiani is believed to have provided legal advice to the ex-vice-president on
at least seven offshore companies. Although Mr Damiani has told Reuters that he broke off
relations with Fifa’s key member when he was accused of corruption, the football’s world
governing body said that the lawyer is now being investigated.
Juan Carlos Varela, the President of Panama has expressed that the Panamanian Government
has “zero tolerance” for such illicit financial activities and guarantees co-operation with any
judicial investigations across the globe.
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LITERATURE REVIEW
KIRKUS REVIEW
Hiding money in offshore accounts to keep it from the publicans is an old trick—but it is now
so prevalent that, far from being “a minor part of our economic system,” it is the system.
The saga of the so-called Panama Papers, so much in the recent news, begins with the
anonymous leaking of secret documents to Süddeutsche Zeitung journalist Obermayer. The
leak became a flood that, writes Luke Harding, of Edward Snowden fame, in his foreword,
“eventually amounted to 11.5 million documents, delivered in real-time instalments,” a trove
far larger than the Snowden files. These records pertained to 214,000 offshore shell
companies whose businesses were filtered through a Panamanian law firm, but that the flood
came pouring down on German journalists spoke to the fact that the principal was a German
émigré who may now be on the hook for violations of European Union regulations as a
German citizen. (The legal case has only begun to unfold.) Yet Mossack Fonseca’s clients,
the beneficiaries of various schemes to keep taxable income under wraps, are breathtakingly
international: they include the father of Britain’s prime minister, much of Iceland’s
government, Nicaragua’s president, and even the “best footballer in the world,” to say
nothing of “trails leading to FIFA and its president…various mafia organizations, Hezbollah,
Al-Qaeda…and to Vladimir Putin.” Throw in numerous multinational corporations “like
Amazon, Starbucks, and Apple,” and you have splendid testimony to Karl Marx’s
observation that capital has no country and that capitalists are loyal only unto themselves and
their shareholders. In surveying these many trails, the authors expose a shockingly corrupt
system but not without offering twofold remedies, one of which is to mandate “an effective
system for the automatic global exchange of information about bank accounts.”
A maddening, important indictment of the shadow economy that flourishes even as the
legitimate economy suffers and just the thing to tip a person debating whether to join the
Occupy movement or vote for Bernie Sanders over the edge.
THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 10
THE HINDU
THE PANAMA PAPER TRIAL
As the ramifications of the leak of about 11 million secret documents from the Panama-based
law firm, Mossack Fonseca, play themselves out, a clear articulation of what the “Panama
Papers” hold for the state of global finance today came from U.S. President Barack Obama.
Following the joint investigation by the International Consortium of Investigative Journalists
and the German newspaper Süddeutsche Zeitung into the leaked papers, Mr. Obama
described global tax avoidance as a huge problem. Today, it is perfectly legal in many
countries to park money in various kinds of shadowy companies in tax havens. This holds
true in India as well, where a lack of clarity persists about the legality of buying offshore
companies, a service that is expressly provided by Mossack Fonseca. The lack of
clarity exists despite the Reserve Bank of India’s evolving guidelines on offshore remittances
and investments since 2004. While the guidelines, such as those of the Liberalised
Remittance Scheme, are specific to remittances utilised by residents to service various
overseas requirements such as medical treatment and education, they have been modified
over time to permit the setting up of 100 per cent subsidiaries and joint ventures within the
limit of $250,000 a year. One of the few stipulations is that money cannot be sent to countries
identified as “non-cooperative” by the global Financial Action Task Force. (The FATF
identified Panama as having taken significant steps to comply with standards related to anti-
money laundering and combating the financing of terrorism, in February 2016.) The RBI
guidelines have largely been a reactive measure to address flows to tax havens. The
investigation into the Panama Papers and the scrutiny of the accounts of Indians named in
them should pave the way for yet another tightening of the norms.
The global investigation has revealed large-scale possible tax avoidance and parking of
income in shell companies, possibly earned through graft and cronyism by powerful political
and governmental actors. The fallout has already begun, with the resignation of one Prime
Minister (of Iceland), and a shadow of doubt on the political leadership in countries such as
Russia and China. This could be the tip of the iceberg; the leaks relate to just one offshore
law firm, even if it is the fourth largest in the world. A global tax avoidance problem requires
a coordinated response, and the papers point to the urgent need for much more transparency
in the movement of global finance capital. The NDA government has passed the Undisclosed
THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 11
Foreign Income and Assets (Imposition of Tax) Act, 2015 and provided a one-time
compliance window to declare foreign assets and income. So far, these steps have yielded
little by way of repatriation of transferred assets. The problem of black money stashed
overseas has to be dealt with both at the multilateral level, through tightened capital flow
norms, and domestically, through a zero tolerance approach to illegal transfers.
THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 12
INTRODUCTION
The Panama Papers are an unprecedented leak of 11.5m files from the database of the world’s
fourth biggest offshore law firm, Mossack Fonseca. The records were obtained from an
anonymous source by the German newspaper Süddeutsche Zeitung, which shared them
with the International Consortium of Investigative Journalists (ICIJ). The ICIJ then shared
them with a large network of international partners, including the Guardian and the BBC.
WHAT DO THEY REVEAL?
The documents show the myriad ways in which the rich can exploit secretive offshore tax
regimes. Twelve national leaders are among 143 politicians, their families and close
associates from around the world known to have been using offshore tax havens.
A $2bn trail leads all the way to Vladimir Putin. The Russian president’s best friend – a
cellist called Sergei Roldugin – is at the centre of a scheme in which money from Russian
state banks is hidden offshore. Some of it ends up in a ski resort where in 2013 Putin’s
daughter Katerina got married.
Among national leaders with offshore wealth are Nawaz Sharif, Pakistan’s prime minister;
Ayad Allawi, ex-interim prime minister and former vice-president of Iraq; Petro Poroshenko,
president of Ukraine; Alaa Mubarak, son of Egypt’s former president; and the prime minister
of Iceland, Sigmundur Davíð Gunnlaugsson.
An offshore investment fund run by the father of British Prime Minister David
Cameron avoided ever having to pay tax in Britain by hiring a small army of Bahamas
residents to sign its paperwork. The fund has been registered with HM Revenue and Customs
since its inception and has filed detailed tax returns every year.
A lengthier overview of the revelations can be found here.
WHAT IS MOSSACKFONSECA?
It is a Panama-based law firm whose services include incorporating companies in offshore
jurisdictions such as the British Virgin Islands. It administers offshore firms for a yearly fee.
Other services include wealth management.
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WHERE IS IT BASED?
The firm is Panamanian but runs a worldwide operation. Its website boasts of a global
network with 600 people working in 42 countries. It has franchises around the world, where
separately owned affiliates sign up new customers and have exclusive rights to use its brand.
Mossack Fonseca operates in tax havens including Switzerland, Cyprus and the British Virgin
Islands, and in the British crown dependencies Guernsey, Jersey and the Isle of Man.
HOW BIG IS IT?
Mossack Fonseca is the world’s fourth biggest provider of offshore services. It has acted for
more than 300,000 companies. There is a strong UK connection. More than half of the
companies are registered in British-administered tax havens, as well as in the UK itself.
HOW MUCH DATA HAS BEEN LEAKED?
A lot. The leak is one of the biggest ever – larger than the US diplomatic cables released by
Wiki Leaks in 2010, and the secret intelligence documents given to journalists by Edward
Snowden in 2013. There are 11.5m documents and 2.6 terabytes of information drawn from
Mossack Fonseca’s internal database.
ARE ALL PEOPLE WHO USE OFFSHORE STRUCTURES CROOKS?
No. Using offshore structures is entirely legal. There are many legitimate reasons for doing
so. Business people in countries such as Russia and Ukraine typically put their assets offshore
to defend them from “raids” by criminals, and to get around hard currency restrictions. Others
use offshore for reasons of inheritance and estate planning.
ARE SOME PEOPLE WHO USE OFFSHORE STRUCTURES
CROOKS?
Yes. In a speech last year in Singapore, David Cameron said “the corrupt, criminals and
money launderers” take advantage of anonymous company structures. The government is
trying to do something about this. It wants to set up a central register that will reveal
the beneficial owners of offshore companies. From June, UK companies will have to reveal
their “significant” owners for the first time.
THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 14
WHAT DOES MOSSACKFONSECASAY ABOUT THE LEAK?
The firm won’t discuss specific cases of alleged wrongdoing, citing client confidentiality. But
it robustly defends its conduct. Mossack Fonseca says it complies with anti-money-
laundering laws and carries out thorough due diligence on all its clients. It says it regrets any
misuse of its services and tries actively to prevent it. The firm says it cannot be blamed for
failings by intermediaries, who include banks, law firms and accountants.
THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 15
THE IMPLICATIONS OF THE PANAMA
PAPERS
SOME NUMBERS REGARDING OFF-SHORE TAX HAVENS
 Mossack Fonseca, the law firm whose documents were leaked, worked with more
than 14,000 banks, law firms, company incorporators and other middlemen to set up
companies, foundations and trusts for customers.
 Gabriel Zucman estimated in his paper ‘The Missing Wealth of Nations’ (2013) that
8% of the global financial wealth of households is held in tax havens, three-quarters
of which goes unreported in official statistics.
 In an interview, Zucman states that 8% is a global average which conceals significant
heterogeneity: the U.S. has around 4% of its financial wealth offshore, Europe around
10%, but in Latin America this number is closer to 20%, in Africa to 30%, and in
Russia the percentage is around 50%.
 Zucman’s paper states that about 40% of the world’s foreign direct investments are
routed through tax havens. In 2008, foreigners held foreign securities worth $2 trillion
through Switzerland bank deposits and portfolios: this is equal to China’s foreign
exchange reserves. In 2008, only one-third of all foreign securities in Swiss banks
belonged to Swiss savers – two-thirds belonged to foreigners.
 According to the U.S. Council of Economic Advisers, via the NYT, American-
controlled corporations domiciled in places like the Cayman Islands or the British
Virgin Islands often earn profits that are greater than the gross domestic products of
these island nations: 1578% of GDP in Bermuda, 1430% in Cayman Islands, 1009%
in British Virgin Islands.
 Gabriel Zucman compares the statutory tax rate with what actually gets paid in the
U.S. The nominal corporate tax rate has been 35% since 1993, but the proportion of
U.S. corporate profits actually collected by the Internal Revenue Service (the effective
tax rate) has never reached even 30% in the years since that change and in 2013 stood
at around 16%. Zucman estimates that offshore tax schemes are responsible for about
two-thirds of the decline in the effective tax rate since 1998, representing a loss of
over $100 billion for the U.S. treasury in 2013.
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 Tax avoidance costs EU countries €50-70 billion a year in lost tax revenues according
to the European Commission.
THE MECHANICS BEHIND TAX HAVENS
In his 2013 paper, Zucman also explains the mechanics of tax avoidance through offshore
banking and shell companies. The function of offshore financial centres is to help foreigners
invest outside of these centres, the banks acting only as conduits: using Swiss data, he shows
that on their Swiss accounts, foreigners do own some U.S. equities, but they mostly own
Luxembourg and Irish fund shares (the funds, in turn, invest all around the world).
Investing in a Luxembourg fund through a Swiss account makes perfect sense for a French
tax evader: Luxembourg does not tax cross-border payments, so the tax evader receives the
full dividend paid by the fund on his or her account, and French personal income tax can be
evaded, since there is no automatic exchange of information between Swiss banks and the
French tax authority.
Swiss banks provide a unique kind of deposit owned by households only, in the form of what
are known as fiduciary deposits. Fiduciary deposits cannot be used as a medium of exchange:
they are useless for corporations. Swiss banks invest the funds placed in fiduciary deposits in
foreign money markets on behalf of their clients. Legally speaking, all interest is considered
to be paid by foreigners to the depositors, with the Swiss banks acting merely as
“fiduciaries.” Thus, fiduciary deposits are not subject to the 35% Swiss advance tax.
He shows that most Swiss fiduciary deposits held by foreigners are actually held in the name
of sham corporations set up in tax havens such as Panama, Liechtenstein and the British
Virgin Islands. He concludes that once you understand the purposes that sham corporations
serve, it becomes clear that most fiduciary deposits assigned to tax havens by the Swiss
National Bank belong to residents of rich countries, in particular to Europeans.
CORPORATE TAX REPATRIATION
Gillian Tett states that there are not many questions on which a man such as Tim Cook, chief
executive officer of Apple, would agree with Donald Trump. Corporate tax is one (a
Bloomberg article reports that the overseas cash piles of American companies amount to $2.1
THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 17
trillion). Trump’s tax plan would enable the repatriation at a lower rate of tax of profits
earned around the world and held overseas, as long this cash is “put to work in America”.
Leaving aside populist arguments, she argues that the once-geeky debate over repatriation
could end up part of the mainstream debate in the next year. In an ideal world, corporation
tax should be lowered to a more competitive level while removing loopholes: this would
remove the rationale for overseas hoarding. But in the real world introducing repatriation
deal, even at 10%, would be better than a world of ever-growing offshore cash piles,
transatlantic tax battles and lousy infrastructure.
In 2003, the European Union adopted the Savings Directive in a move to curb tax evasion:
since then, Swiss and other offshore banks have had to withhold a tax on interest earned by
European Union residents. In his paper, Zucman points out that the directive only applies to
accounts opened by European households in their own name; sham corporations are a
straightforward way of eschewing it. He shows that there is a clear negative correlation
between the share of fiduciary deposits held by Europeans and the share of fiduciary deposits
assigned to tax havens. European depositors reacted particularly strongly to the introduction
of the EU Savings Directive: between December 2004 and December 2005, when the
directive became applicable, Europe’s share of Swiss fiduciary deposits declined by 10
percentage points, while tax havens gained 8 percentage points.
LESSONS TO BE LEARNED
Daniel Hough states that the panama papers are a chance to fix a long broken system. UK
Prime Minister David Cameron will host an international anti-corruption summit in London
in May. Hough notes that this could end up as nothing more than a talking shop. But it might
also be the perfect forum to push for an international agreement on stricter rules concerning
beneficial owners. It is also a moment to get commitments to actually implement such
legislation. The Panama Papers should serve as a wakeup call to finally change the long
outdated rules and regulations that shape international financial transactions.
Gabriel Zucman adds that the main way to fight the abusive use of shell companies would be
to find who owns this wealth, by creating comprehensive registries which record the
beneficial owners of U.S. real estate and financial securities. This would be a powerful way
to promote financial transparency, fight money laundering, the financing of terrorism and tax
THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 18
evasion. There are already registries for real estate and land: these should also be expanded to
cover financial assets – equities, bonds, mutual fund shares and derivatives. The Economist is
also in favour of central registers on beneficial ownership that are open to tax officials, law-
enforcers, and the public. Law firms and other intermediaries that set-up and husband
offshore companies and trusts should also be regulated. They are supposed to know their
clients, weeding out the dodgy ones. Governments should start by making it a criminal
offence to enable tax evasion by others.
On 12 April, the European Commission proposed public tax transparency rules for
multinationals, which build on other proposals to introduce sharing of information between
tax authorities. The new rules would require multinationals operating in the EU with global
revenues exceeding EUR 750 million a year to publish key information on where they make
their profits and where they pay their tax in the EU on a country-by-country basis. The same
rules would apply to non-European multinationals doing business in Europe. In addition,
companies would have to publish an aggregate figure for total taxes paid outside the EU.
Germany and France have also released separate plans to accelerate the fight against tax
evasion and tax fraud. The Financial Times reports that Finance ministers Wolfgang
Schäuble and Michel Sapin, who led the way on previous global financial transparency
projects, such as the automatic exchange of information between banks, want to seize the
opportunity created by the Panama leak to force through further reforms.
Tim Harford says that there is something disheartening about the name-and-shame, patch-
and-mend turn the conversation has taken. Many people who dodge tax have never used an
offshore financial centre. Tax systems in many developed economies are riddled with holes
— the euphemism is “deductions” — created to win support from domestic interest groups.
Other loopholes exist because national authorities cannot get their act together to standardise
their systems. Neither leaks from Panama nor the ad hoc manoeuvres of the US Treasury fix
this. Harford argues that this week’s tantrums over taxation have served a useful purpose.
Now we need to take a deep breath and do the hard work of broadening, simplifying and
harmonising our systems. But here is the problem: if politicians succeed, everyone will find
something to dislike about the results.
Richard Ray argues that many of those who benefit from offshore centres — including
millions receiving workplace pensions — are not aware of the key role they play in their
THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 19
financial affairs. Such financial centres facilitate trade, investment, economic growth, create
jobs and increase the rate of return for savings. On transparency, he cites peer reviews
conducted by the Financial Action Task Force and the OECD, which show that British
offshore centres have robust transparency standards. According to Ray, the true appeal of the
UK offshore centres lies in their widely trusted British-inspired laws, courts, and
professionals. The predictability and security offered by British institutions make such
jurisdictions magnets for investors seeking reliable structures for international investment. A
2013 study conducted by Capital Economics found that Jersey supports more than 140,000
British jobs and generates £2.5bn a year in tax for the exchequer, as much as the UK loses
through all tax avoidance, onshore and offshore, combined.
Conversely, Zucman argued in a 2014 paper that not only do offshore machinations reduce
government revenues that could offset other taxes and fund public services, but they also
induce a wasteful response by corporations that has its own non-negligible cost. There are
thousands, perhaps even millions of people around the world, who spend their working
lives devising tax-reduction schemes, fielding phone calls or handling paperwork to establish
offshore accounts, or preparing the complicated tax returns required to sustain these schemes.
Even for those who believe corporate taxes are too high; allowing offshore tax havens to
effectively reduce corporate tax bills is far less efficient than actually reducing the statutory
rate.
THE PANAMA PAPERS AND THE ART MARKET
As pointed out by the New York Times, the Panama papers also reveal just how critical a role
secrecy plays in the art market today. Nouriel Roubini argued in 2015 that regulation is
needed in the art market, because of its vulnerability to routine trading on inside information,
price manipulation through guarantees offered by dealers on auctioned work, and tax
avoidance by the transfer of paintings within families. He pointed out that one reason why the
art market was so strong in the US was favourable tax treatment. Inside information is also
considered standard, whereas in other markets it is thought of as being illegal. He added that
the art market was prone to “fads, passions, manias, booms and busts,” because art works
have no clear financial value and the market is opaque.
THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 20
CONCLUSION
Reserve Bank, which is looking into Panama Papers leaks among other agencies, said no
conclusion can be drawn yet whether the offshore entities of Indians in Panama are illegal.
RBI Deputy Governor S Mundra, however, said that some "unverified assumptions" from
government indicate that entities of most of the Indians associated with the leaks were opened
in Panama under RBI's Liberalised Remittance Scheme (LRS) as per norms.
"It will be premature to arrive at any conclusion on the Panama Papers issue at this stage. At
this moment, it will be wrong to think that all entities of Indians opened in Panama are illegal
or none of these entities is not illegal," Mundra said.
He said the probe into the Panama Paper leaks concerning Indian nationals has just begun.
"The team will gather documents and investigate how black money was sent out of the
country, if it is so, to set up entities in Panama," the Deputy Governor said.
He was speaking on the sidelines of an event organised by Axis Bank.
"The prima facie unverified assumptions from government suggest that offshore entities of
most of the Indians associated with the Panama Papers leaks were opened under RBI's
Liberalised Remittance Scheme as per norms.
"However, these assumptions are yet to be verified and probed with documents. Any
conclusion can be drawn only after that," he said.
Mundra said RBI is of the view that "transmission of the recent cut of 25 basis points in Repo
Rate will take place effectively in banking sector".
Axis Bank unveiled its computer tablet-based app for its 'Joint Liability Group Lending
Programme'.
The government had announced setting up of the special multi-agency group to look into all
cases of Indians setting up offshore entities in tax havens after The Indian Express published
the first set of names as part of its ongoing investigation in The Panama Papers.
Released by the International Consortium of Investigative Journalists (ICIJ) early this month,
the Panama Papers contained names of nearly 500 Indians, including celebrities and
industrialists, who allegedly had set up offshore entities in various tax havens.
THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 21
The probe group comprises officials from RBI, I-T Department, Financial Intelligence Unit
and Foreign Tax and Tax Research. It has been set up to determine the legality of the
transactions following the leaked documents of Panamanian law firm Mossack Fonseca.
THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 22
REFERENCES
1. panamapapers.icij.org
2. www.theguardian.com/news/2016/apr/03/what-you-need-to-know-about-
the-panama-papers
3. www.occrp.org/en/panamapapers/
4. www.slideshare.net/stinsondesign/panama-papers-the-biggest-financial-
leak-in-history
5. indianexpress.com/article/india/india-news-india/panama-papers-
explained-list-offshore-accounts
6. www.youtube.com

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Panama papers

  • 1. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 1 A seminar report on THE PANAMA PAPERS LEAK -THE BIGGEST FINANCIAL LEAK IN HISTORY A project submitted in the partial fulfilment of requirement for the honours degree of BACHELOR OF COMMERCE. PRESENTED BY – PRIYA AGARWAL B.COM 2nd YEAR ROLL NO – 31 ACKNOWLEDGEMENT
  • 2. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 2 As the old salutation goes, I would like to express my whole hearted gratitude to every individual who helped me in different ways to make this project a success especially J.D Birla Institute for giving the opportunity to do this project under the guidance of their faculty. I would like to thank Dr. Deepali Singhee, Principal of J.D Birla Institute for always being there for helpful suggestions and viewpoints for presenting a better work. Finally, no words of gratitude can express my indebtedness to my parents and friends for encouraging me throughout the report. CONTENTS
  • 3. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 3 OBJECTIVES Sl. No. TOPIC Pg. No. 1. OBJECTIVES 4-6 2. EXECUTIVE SUMMARY 7-8 3. LITERATITE REVIEW 9-11 4. INTRODUCTION 12-14 5. IMPLICATIONS OF PANAMA PAPERS 15-19 6. CONCLUSION 20-21 7. REFERENCES 22
  • 4. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 4 THE OBJECTIVE OF THE REPORT IS TO HIGHLIGHT THE FACTS OF THE CASE AND GENERATE AWARENESS ON THE SAME. Here are a few things all organizations, and perhaps law firms in particular, should keep in mind. 1. Know what information is most valuable -- to you, to your customers, to the public, and to attackers -- and protect it accordingly. "Valuable" is in the eye of the beholder, and the definition won't always be the same. Identify what sort of information that would cause critical damage to your business if it fell into the wrong hands (causing legal liability, IP theft, lost customers). Then secure it in any format in which it might exist, whether that be a spreadsheet or a conversation. "In the case of Mossack Fonseca, a key business asset would be the case files and private details of their clients," says Senior Security Consultant Zak Maples of MWR Info Security. "This would be mapped to numerous key IT assets, one of which would be the E-mail server due to the large number of e-mails containing this sensitive data." 2. Monitor outgoing traffic. "Whilst there is no silver bullet in security," says Maples, "in this specific case it has been reported that 2.6TB of data was exfiltrated from the organization. Detective controls that look for large spikes in data being transferred out of the organization and other Data Loss Prevention (DLP) controls could have helped to prevent the data being exfiltrated or being widely disseminated." Details about how the leak occurred at Mossack Fonseca remain unclear, so it is impossible to say whether this data was exfiltrated all at once in a 2.6-terabyte package that would surely raise alarms, or if it was snuck out piece by piece in small batches over a long period of time. Nevertheless, strange exfiltrations of data -- "strange" because of the size, time, number, age, or confidentiality of those data -- are something every organization should always be watching for. 3. Don't put all your eggs in one basket. A lot of secrets can be sunk into 2.6 terabytes of e- mail. Depending on the nature of your business, you might need to retain deep files on all customers and detailed records on all of your employees' conversations. So simply reducing your risk footprint by deleting the data isn't an option. However, segmenting the data, and
  • 5. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 5 applying different layers of security and access control to each segment could limit the damage when an attacker cracks into one asset, or a privileged insider decides to leak what they have. Tom Patterson, chief trust officer for Unisys, says many organizations leave themselves open to similar attacks "by relying on old style networks and defenses to defend new style enterprises and attacks. Addressing the technical debt of infrastructure and security countermeasures with modern approaches like cloud, mobile, and micro segmentation are cheaper and more risk effective than dragging forward solutions from another era. It just takes strong leadership.” 4. E-discovery technology can be used to divine your darkest secrets. The ICIJ and journalists from 100 media organizations dug through and researched the data in the 11.5 TB data dump for a year before publishing their report. Their analysis was aided by the same e- discovery technology often used to gather information subpoenaed for court purposes. According to Eddie Sheehy, CEO of Nuix, and the e-discovery product, used by ICIJ: “This is a huge trove of data by investigative journalism standards—around 10 time the data volume and five times the number of documents of ICIJ’s Offshore Leaks investigation in 2013. At the same time, this is only a medium-sized document set in the worlds of eDiscovery or regulatory investigations—some of our customers handle similar volumes of data every day." 5. Your data breach can have immediate, devastating effects on customers. Today, Sigmundur David Gunnlaugsson, Prime Minister of Iceland, stepped down from his office "for an unspecified amount of time" after he was named among Mossack Fonseca's customers following dubious practices and found to have, as Prime Minister, brokered deals between banks and claimants after the financial crisis of 2008 despite having undisclosed conflicts of interest. The Panama Papers have unearthed information related to many political leaders and their family members -- including in Ukraine, the United Kingdom, China, and Russia -- and have caused the topic of financial regulation to be brought up again in the United States because of its more conspicuous absence of significant players on the list. As one economist told the
  • 6. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 6 New York Times, American companies "really don't need to go to Panama" because "we have an onshore haven industry in the U.S. that is just as secretive as any." 6. Your breach could embroil you in more international privacy complications. After the brother-in-law of China's President Xi Jinping and other members of the Chinese elite were discovered among Mossack Fonseca's customer list, the Great Firewall of China apparently set to work trying to contain the public relations damage. Posts on social networks WeChat and Sina Weibo about the topic have begun to be deleted. Most organizations' end users and customer base will not be able to squash their exposed secrets with such powerful tools at their disposal. However, they may at least have privacy laws on their side that you may have fallen afoul of. 7. If you're going to destroy evidence, don't forget to destroy the evidence of you destroying that evidence. According to the ICIJ, Mossack Fonseca actively destroyed information that would implicate it in a U.S. Justice Department investigation of its Nevada office. However, some of its plans to destroy the information survived in email exchanges, which were subsequently leaked. ICIJ writes: One email from 2014, for instance, instructs that any link between Mossack Fonseca’s central computing system in Panama and the Nevada office “has to be obscure to the investigators.” Other emails report that IT operatives working via remote control from Panama “tried to clean the logs of the PC’s in the Nevada office” and planned to run a “remote session to eliminate the traces of direct access to our CIS” — the firm’s computer information system.
  • 7. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 7 EXECUTIVE SUMMARY The media has been overflowing with the news of a huge leak of data from the fourth biggest offshore law firm Mossack Fonseca in Panama. 11.5 million Files, which include the details of 214,000 entities including companies, trusts and foundations, expose how the wealthy and powerful use tax havens to launder money, dodge sanctions, and avoid tax. The Panama Papers include links to 12 current or former heads of state and government and more than 60 relatives and associates of heads of state and politicians. Mossack Fonseca’s response to the leak states that the law firm has operated beyond reproach for 40 years without having been accused of criminal wrong-doing. The Panama-based company runs worldwide operations with franchises around the world, employing 600 people working in 42 countries. The firm has acted for more than 300,000 companies, more than half of which are registered in the UK and in British-administered tax havens such as Guernsey, Jersey, and the Isle of Man among others. More than 100,000 of the secret firms have been registered in the British Virgin Islands. Other tax havens where Mossack Fonseca operates include Switzerland and Cyprus. The information presented in the files spans a period of time between 1977 and December last year. After obtaining the leaked documents, the German newspaper Süddeutsche Zeitung shared them with the International Consortium of Investigative Journalism (ICIJ), which worked alongside journalists from 107 media organisations across the globe to analyse the information. Among the people involved are Ukrainian President Petro Poroshenko, Argentinian President Mauricio Macri, the brother-in-law of Chinese President Xi Jinping and three of the children of Pakistani Prime Minister Nawaz Sharif. Iceland’s Prime Minister, Sigmundur Gunnlaugsson, was revealed to have been hiding millions in offshore accounts, having bought a British Virgin Islands-based offshore company with his wife, Anna Sigulaug Pálsdóttir. The key purpose of the company, Wintris Inc., has been investing Mrs. Pálsdóttir’s share of the very substantial proceeds from the sale of her
  • 8. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 8 father’s business. Following a mass protest in Reykjavik on Tuesday evening, Mr. Gunnlaugsson has now resigned. The documents also show a billion-dollar money laundering ring between close associates of Russia’s President, Vladimir Putin. Dmitry Peskov, the spokesman for Mr. Putin commented that the reports were down to “journalists and members of other organisations actively trying to discredit Putin and this country’s leadership”, adding that publications of the leaks may be down to “former employees of the State Department, the CIA, other security services.” The scandal also touches on UK Prime Minister David Cameron and his late father Ian Cameron, who according to the leaked documents set up an offshore fund which avoided ever paying British tax. Mr. Cameron has so far failed to provide a clear account about the company set up by his father in 1982 and run from the Bahamas and although he claims that he “own(s) no shares, no offshore trusts, no offshore funds, nothing like that.” It is still debatable whether his family stands to gain in the future from Blairmore Holdings. In another attempt to satisfy the public, Downing Street clarified that there were “no offshore trusts or funds” that the PM and his wife and children would benefit from “in the future”. However, many questions still remain open while the Labour Leader, Jeremy Corbyn calls for investigation into Mr. Cameron’s tax returns. In addition, he demands for the government to consider the imposition of ‘direct rule’ on British overseas territories and crown dependencies in the cases of them not complying with UK tax law. A meeting of G7 countries to discuss the issues has already been arranged and will be held on 12 May in London. The leaked files also suggest that Uruguayan lawyer Juan Pedro Damiani has assisted Fifa’s vice-presided who was arrested in May 2015 as part of the US inquiry into football corruption. Mr Damiani is believed to have provided legal advice to the ex-vice-president on at least seven offshore companies. Although Mr Damiani has told Reuters that he broke off relations with Fifa’s key member when he was accused of corruption, the football’s world governing body said that the lawyer is now being investigated. Juan Carlos Varela, the President of Panama has expressed that the Panamanian Government has “zero tolerance” for such illicit financial activities and guarantees co-operation with any judicial investigations across the globe.
  • 9. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 9 LITERATURE REVIEW KIRKUS REVIEW Hiding money in offshore accounts to keep it from the publicans is an old trick—but it is now so prevalent that, far from being “a minor part of our economic system,” it is the system. The saga of the so-called Panama Papers, so much in the recent news, begins with the anonymous leaking of secret documents to Süddeutsche Zeitung journalist Obermayer. The leak became a flood that, writes Luke Harding, of Edward Snowden fame, in his foreword, “eventually amounted to 11.5 million documents, delivered in real-time instalments,” a trove far larger than the Snowden files. These records pertained to 214,000 offshore shell companies whose businesses were filtered through a Panamanian law firm, but that the flood came pouring down on German journalists spoke to the fact that the principal was a German émigré who may now be on the hook for violations of European Union regulations as a German citizen. (The legal case has only begun to unfold.) Yet Mossack Fonseca’s clients, the beneficiaries of various schemes to keep taxable income under wraps, are breathtakingly international: they include the father of Britain’s prime minister, much of Iceland’s government, Nicaragua’s president, and even the “best footballer in the world,” to say nothing of “trails leading to FIFA and its president…various mafia organizations, Hezbollah, Al-Qaeda…and to Vladimir Putin.” Throw in numerous multinational corporations “like Amazon, Starbucks, and Apple,” and you have splendid testimony to Karl Marx’s observation that capital has no country and that capitalists are loyal only unto themselves and their shareholders. In surveying these many trails, the authors expose a shockingly corrupt system but not without offering twofold remedies, one of which is to mandate “an effective system for the automatic global exchange of information about bank accounts.” A maddening, important indictment of the shadow economy that flourishes even as the legitimate economy suffers and just the thing to tip a person debating whether to join the Occupy movement or vote for Bernie Sanders over the edge.
  • 10. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 10 THE HINDU THE PANAMA PAPER TRIAL As the ramifications of the leak of about 11 million secret documents from the Panama-based law firm, Mossack Fonseca, play themselves out, a clear articulation of what the “Panama Papers” hold for the state of global finance today came from U.S. President Barack Obama. Following the joint investigation by the International Consortium of Investigative Journalists and the German newspaper Süddeutsche Zeitung into the leaked papers, Mr. Obama described global tax avoidance as a huge problem. Today, it is perfectly legal in many countries to park money in various kinds of shadowy companies in tax havens. This holds true in India as well, where a lack of clarity persists about the legality of buying offshore companies, a service that is expressly provided by Mossack Fonseca. The lack of clarity exists despite the Reserve Bank of India’s evolving guidelines on offshore remittances and investments since 2004. While the guidelines, such as those of the Liberalised Remittance Scheme, are specific to remittances utilised by residents to service various overseas requirements such as medical treatment and education, they have been modified over time to permit the setting up of 100 per cent subsidiaries and joint ventures within the limit of $250,000 a year. One of the few stipulations is that money cannot be sent to countries identified as “non-cooperative” by the global Financial Action Task Force. (The FATF identified Panama as having taken significant steps to comply with standards related to anti- money laundering and combating the financing of terrorism, in February 2016.) The RBI guidelines have largely been a reactive measure to address flows to tax havens. The investigation into the Panama Papers and the scrutiny of the accounts of Indians named in them should pave the way for yet another tightening of the norms. The global investigation has revealed large-scale possible tax avoidance and parking of income in shell companies, possibly earned through graft and cronyism by powerful political and governmental actors. The fallout has already begun, with the resignation of one Prime Minister (of Iceland), and a shadow of doubt on the political leadership in countries such as Russia and China. This could be the tip of the iceberg; the leaks relate to just one offshore law firm, even if it is the fourth largest in the world. A global tax avoidance problem requires a coordinated response, and the papers point to the urgent need for much more transparency in the movement of global finance capital. The NDA government has passed the Undisclosed
  • 11. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 11 Foreign Income and Assets (Imposition of Tax) Act, 2015 and provided a one-time compliance window to declare foreign assets and income. So far, these steps have yielded little by way of repatriation of transferred assets. The problem of black money stashed overseas has to be dealt with both at the multilateral level, through tightened capital flow norms, and domestically, through a zero tolerance approach to illegal transfers.
  • 12. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 12 INTRODUCTION The Panama Papers are an unprecedented leak of 11.5m files from the database of the world’s fourth biggest offshore law firm, Mossack Fonseca. The records were obtained from an anonymous source by the German newspaper Süddeutsche Zeitung, which shared them with the International Consortium of Investigative Journalists (ICIJ). The ICIJ then shared them with a large network of international partners, including the Guardian and the BBC. WHAT DO THEY REVEAL? The documents show the myriad ways in which the rich can exploit secretive offshore tax regimes. Twelve national leaders are among 143 politicians, their families and close associates from around the world known to have been using offshore tax havens. A $2bn trail leads all the way to Vladimir Putin. The Russian president’s best friend – a cellist called Sergei Roldugin – is at the centre of a scheme in which money from Russian state banks is hidden offshore. Some of it ends up in a ski resort where in 2013 Putin’s daughter Katerina got married. Among national leaders with offshore wealth are Nawaz Sharif, Pakistan’s prime minister; Ayad Allawi, ex-interim prime minister and former vice-president of Iraq; Petro Poroshenko, president of Ukraine; Alaa Mubarak, son of Egypt’s former president; and the prime minister of Iceland, Sigmundur Davíð Gunnlaugsson. An offshore investment fund run by the father of British Prime Minister David Cameron avoided ever having to pay tax in Britain by hiring a small army of Bahamas residents to sign its paperwork. The fund has been registered with HM Revenue and Customs since its inception and has filed detailed tax returns every year. A lengthier overview of the revelations can be found here. WHAT IS MOSSACKFONSECA? It is a Panama-based law firm whose services include incorporating companies in offshore jurisdictions such as the British Virgin Islands. It administers offshore firms for a yearly fee. Other services include wealth management.
  • 13. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 13 WHERE IS IT BASED? The firm is Panamanian but runs a worldwide operation. Its website boasts of a global network with 600 people working in 42 countries. It has franchises around the world, where separately owned affiliates sign up new customers and have exclusive rights to use its brand. Mossack Fonseca operates in tax havens including Switzerland, Cyprus and the British Virgin Islands, and in the British crown dependencies Guernsey, Jersey and the Isle of Man. HOW BIG IS IT? Mossack Fonseca is the world’s fourth biggest provider of offshore services. It has acted for more than 300,000 companies. There is a strong UK connection. More than half of the companies are registered in British-administered tax havens, as well as in the UK itself. HOW MUCH DATA HAS BEEN LEAKED? A lot. The leak is one of the biggest ever – larger than the US diplomatic cables released by Wiki Leaks in 2010, and the secret intelligence documents given to journalists by Edward Snowden in 2013. There are 11.5m documents and 2.6 terabytes of information drawn from Mossack Fonseca’s internal database. ARE ALL PEOPLE WHO USE OFFSHORE STRUCTURES CROOKS? No. Using offshore structures is entirely legal. There are many legitimate reasons for doing so. Business people in countries such as Russia and Ukraine typically put their assets offshore to defend them from “raids” by criminals, and to get around hard currency restrictions. Others use offshore for reasons of inheritance and estate planning. ARE SOME PEOPLE WHO USE OFFSHORE STRUCTURES CROOKS? Yes. In a speech last year in Singapore, David Cameron said “the corrupt, criminals and money launderers” take advantage of anonymous company structures. The government is trying to do something about this. It wants to set up a central register that will reveal the beneficial owners of offshore companies. From June, UK companies will have to reveal their “significant” owners for the first time.
  • 14. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 14 WHAT DOES MOSSACKFONSECASAY ABOUT THE LEAK? The firm won’t discuss specific cases of alleged wrongdoing, citing client confidentiality. But it robustly defends its conduct. Mossack Fonseca says it complies with anti-money- laundering laws and carries out thorough due diligence on all its clients. It says it regrets any misuse of its services and tries actively to prevent it. The firm says it cannot be blamed for failings by intermediaries, who include banks, law firms and accountants.
  • 15. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 15 THE IMPLICATIONS OF THE PANAMA PAPERS SOME NUMBERS REGARDING OFF-SHORE TAX HAVENS  Mossack Fonseca, the law firm whose documents were leaked, worked with more than 14,000 banks, law firms, company incorporators and other middlemen to set up companies, foundations and trusts for customers.  Gabriel Zucman estimated in his paper ‘The Missing Wealth of Nations’ (2013) that 8% of the global financial wealth of households is held in tax havens, three-quarters of which goes unreported in official statistics.  In an interview, Zucman states that 8% is a global average which conceals significant heterogeneity: the U.S. has around 4% of its financial wealth offshore, Europe around 10%, but in Latin America this number is closer to 20%, in Africa to 30%, and in Russia the percentage is around 50%.  Zucman’s paper states that about 40% of the world’s foreign direct investments are routed through tax havens. In 2008, foreigners held foreign securities worth $2 trillion through Switzerland bank deposits and portfolios: this is equal to China’s foreign exchange reserves. In 2008, only one-third of all foreign securities in Swiss banks belonged to Swiss savers – two-thirds belonged to foreigners.  According to the U.S. Council of Economic Advisers, via the NYT, American- controlled corporations domiciled in places like the Cayman Islands or the British Virgin Islands often earn profits that are greater than the gross domestic products of these island nations: 1578% of GDP in Bermuda, 1430% in Cayman Islands, 1009% in British Virgin Islands.  Gabriel Zucman compares the statutory tax rate with what actually gets paid in the U.S. The nominal corporate tax rate has been 35% since 1993, but the proportion of U.S. corporate profits actually collected by the Internal Revenue Service (the effective tax rate) has never reached even 30% in the years since that change and in 2013 stood at around 16%. Zucman estimates that offshore tax schemes are responsible for about two-thirds of the decline in the effective tax rate since 1998, representing a loss of over $100 billion for the U.S. treasury in 2013.
  • 16. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 16  Tax avoidance costs EU countries €50-70 billion a year in lost tax revenues according to the European Commission. THE MECHANICS BEHIND TAX HAVENS In his 2013 paper, Zucman also explains the mechanics of tax avoidance through offshore banking and shell companies. The function of offshore financial centres is to help foreigners invest outside of these centres, the banks acting only as conduits: using Swiss data, he shows that on their Swiss accounts, foreigners do own some U.S. equities, but they mostly own Luxembourg and Irish fund shares (the funds, in turn, invest all around the world). Investing in a Luxembourg fund through a Swiss account makes perfect sense for a French tax evader: Luxembourg does not tax cross-border payments, so the tax evader receives the full dividend paid by the fund on his or her account, and French personal income tax can be evaded, since there is no automatic exchange of information between Swiss banks and the French tax authority. Swiss banks provide a unique kind of deposit owned by households only, in the form of what are known as fiduciary deposits. Fiduciary deposits cannot be used as a medium of exchange: they are useless for corporations. Swiss banks invest the funds placed in fiduciary deposits in foreign money markets on behalf of their clients. Legally speaking, all interest is considered to be paid by foreigners to the depositors, with the Swiss banks acting merely as “fiduciaries.” Thus, fiduciary deposits are not subject to the 35% Swiss advance tax. He shows that most Swiss fiduciary deposits held by foreigners are actually held in the name of sham corporations set up in tax havens such as Panama, Liechtenstein and the British Virgin Islands. He concludes that once you understand the purposes that sham corporations serve, it becomes clear that most fiduciary deposits assigned to tax havens by the Swiss National Bank belong to residents of rich countries, in particular to Europeans. CORPORATE TAX REPATRIATION Gillian Tett states that there are not many questions on which a man such as Tim Cook, chief executive officer of Apple, would agree with Donald Trump. Corporate tax is one (a Bloomberg article reports that the overseas cash piles of American companies amount to $2.1
  • 17. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 17 trillion). Trump’s tax plan would enable the repatriation at a lower rate of tax of profits earned around the world and held overseas, as long this cash is “put to work in America”. Leaving aside populist arguments, she argues that the once-geeky debate over repatriation could end up part of the mainstream debate in the next year. In an ideal world, corporation tax should be lowered to a more competitive level while removing loopholes: this would remove the rationale for overseas hoarding. But in the real world introducing repatriation deal, even at 10%, would be better than a world of ever-growing offshore cash piles, transatlantic tax battles and lousy infrastructure. In 2003, the European Union adopted the Savings Directive in a move to curb tax evasion: since then, Swiss and other offshore banks have had to withhold a tax on interest earned by European Union residents. In his paper, Zucman points out that the directive only applies to accounts opened by European households in their own name; sham corporations are a straightforward way of eschewing it. He shows that there is a clear negative correlation between the share of fiduciary deposits held by Europeans and the share of fiduciary deposits assigned to tax havens. European depositors reacted particularly strongly to the introduction of the EU Savings Directive: between December 2004 and December 2005, when the directive became applicable, Europe’s share of Swiss fiduciary deposits declined by 10 percentage points, while tax havens gained 8 percentage points. LESSONS TO BE LEARNED Daniel Hough states that the panama papers are a chance to fix a long broken system. UK Prime Minister David Cameron will host an international anti-corruption summit in London in May. Hough notes that this could end up as nothing more than a talking shop. But it might also be the perfect forum to push for an international agreement on stricter rules concerning beneficial owners. It is also a moment to get commitments to actually implement such legislation. The Panama Papers should serve as a wakeup call to finally change the long outdated rules and regulations that shape international financial transactions. Gabriel Zucman adds that the main way to fight the abusive use of shell companies would be to find who owns this wealth, by creating comprehensive registries which record the beneficial owners of U.S. real estate and financial securities. This would be a powerful way to promote financial transparency, fight money laundering, the financing of terrorism and tax
  • 18. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 18 evasion. There are already registries for real estate and land: these should also be expanded to cover financial assets – equities, bonds, mutual fund shares and derivatives. The Economist is also in favour of central registers on beneficial ownership that are open to tax officials, law- enforcers, and the public. Law firms and other intermediaries that set-up and husband offshore companies and trusts should also be regulated. They are supposed to know their clients, weeding out the dodgy ones. Governments should start by making it a criminal offence to enable tax evasion by others. On 12 April, the European Commission proposed public tax transparency rules for multinationals, which build on other proposals to introduce sharing of information between tax authorities. The new rules would require multinationals operating in the EU with global revenues exceeding EUR 750 million a year to publish key information on where they make their profits and where they pay their tax in the EU on a country-by-country basis. The same rules would apply to non-European multinationals doing business in Europe. In addition, companies would have to publish an aggregate figure for total taxes paid outside the EU. Germany and France have also released separate plans to accelerate the fight against tax evasion and tax fraud. The Financial Times reports that Finance ministers Wolfgang Schäuble and Michel Sapin, who led the way on previous global financial transparency projects, such as the automatic exchange of information between banks, want to seize the opportunity created by the Panama leak to force through further reforms. Tim Harford says that there is something disheartening about the name-and-shame, patch- and-mend turn the conversation has taken. Many people who dodge tax have never used an offshore financial centre. Tax systems in many developed economies are riddled with holes — the euphemism is “deductions” — created to win support from domestic interest groups. Other loopholes exist because national authorities cannot get their act together to standardise their systems. Neither leaks from Panama nor the ad hoc manoeuvres of the US Treasury fix this. Harford argues that this week’s tantrums over taxation have served a useful purpose. Now we need to take a deep breath and do the hard work of broadening, simplifying and harmonising our systems. But here is the problem: if politicians succeed, everyone will find something to dislike about the results. Richard Ray argues that many of those who benefit from offshore centres — including millions receiving workplace pensions — are not aware of the key role they play in their
  • 19. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 19 financial affairs. Such financial centres facilitate trade, investment, economic growth, create jobs and increase the rate of return for savings. On transparency, he cites peer reviews conducted by the Financial Action Task Force and the OECD, which show that British offshore centres have robust transparency standards. According to Ray, the true appeal of the UK offshore centres lies in their widely trusted British-inspired laws, courts, and professionals. The predictability and security offered by British institutions make such jurisdictions magnets for investors seeking reliable structures for international investment. A 2013 study conducted by Capital Economics found that Jersey supports more than 140,000 British jobs and generates £2.5bn a year in tax for the exchequer, as much as the UK loses through all tax avoidance, onshore and offshore, combined. Conversely, Zucman argued in a 2014 paper that not only do offshore machinations reduce government revenues that could offset other taxes and fund public services, but they also induce a wasteful response by corporations that has its own non-negligible cost. There are thousands, perhaps even millions of people around the world, who spend their working lives devising tax-reduction schemes, fielding phone calls or handling paperwork to establish offshore accounts, or preparing the complicated tax returns required to sustain these schemes. Even for those who believe corporate taxes are too high; allowing offshore tax havens to effectively reduce corporate tax bills is far less efficient than actually reducing the statutory rate. THE PANAMA PAPERS AND THE ART MARKET As pointed out by the New York Times, the Panama papers also reveal just how critical a role secrecy plays in the art market today. Nouriel Roubini argued in 2015 that regulation is needed in the art market, because of its vulnerability to routine trading on inside information, price manipulation through guarantees offered by dealers on auctioned work, and tax avoidance by the transfer of paintings within families. He pointed out that one reason why the art market was so strong in the US was favourable tax treatment. Inside information is also considered standard, whereas in other markets it is thought of as being illegal. He added that the art market was prone to “fads, passions, manias, booms and busts,” because art works have no clear financial value and the market is opaque.
  • 20. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 20 CONCLUSION Reserve Bank, which is looking into Panama Papers leaks among other agencies, said no conclusion can be drawn yet whether the offshore entities of Indians in Panama are illegal. RBI Deputy Governor S Mundra, however, said that some "unverified assumptions" from government indicate that entities of most of the Indians associated with the leaks were opened in Panama under RBI's Liberalised Remittance Scheme (LRS) as per norms. "It will be premature to arrive at any conclusion on the Panama Papers issue at this stage. At this moment, it will be wrong to think that all entities of Indians opened in Panama are illegal or none of these entities is not illegal," Mundra said. He said the probe into the Panama Paper leaks concerning Indian nationals has just begun. "The team will gather documents and investigate how black money was sent out of the country, if it is so, to set up entities in Panama," the Deputy Governor said. He was speaking on the sidelines of an event organised by Axis Bank. "The prima facie unverified assumptions from government suggest that offshore entities of most of the Indians associated with the Panama Papers leaks were opened under RBI's Liberalised Remittance Scheme as per norms. "However, these assumptions are yet to be verified and probed with documents. Any conclusion can be drawn only after that," he said. Mundra said RBI is of the view that "transmission of the recent cut of 25 basis points in Repo Rate will take place effectively in banking sector". Axis Bank unveiled its computer tablet-based app for its 'Joint Liability Group Lending Programme'. The government had announced setting up of the special multi-agency group to look into all cases of Indians setting up offshore entities in tax havens after The Indian Express published the first set of names as part of its ongoing investigation in The Panama Papers. Released by the International Consortium of Investigative Journalists (ICIJ) early this month, the Panama Papers contained names of nearly 500 Indians, including celebrities and industrialists, who allegedly had set up offshore entities in various tax havens.
  • 21. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 21 The probe group comprises officials from RBI, I-T Department, Financial Intelligence Unit and Foreign Tax and Tax Research. It has been set up to determine the legality of the transactions following the leaked documents of Panamanian law firm Mossack Fonseca.
  • 22. THE PANAMA PAPERS – THE BIGGEST FINANCIAL LEAK IN HISTORY Page 22 REFERENCES 1. panamapapers.icij.org 2. www.theguardian.com/news/2016/apr/03/what-you-need-to-know-about- the-panama-papers 3. www.occrp.org/en/panamapapers/ 4. www.slideshare.net/stinsondesign/panama-papers-the-biggest-financial- leak-in-history 5. indianexpress.com/article/india/india-news-india/panama-papers- explained-list-offshore-accounts 6. www.youtube.com