Panama Papers: Just the latest lift of the bank-secrecy veil
Since kings and councils first squeezed successful citizens to pay armies and administrators, the rich have hidden fortunes from tax collectors.
Since kings and councils first squeezed successful citizens to pay armies and administrators, the rich have hidden fortunes from tax collectors.
A global industry of specialty lawyers, bankers, and agreeable local officials has spread through poor and island nations, British colonies, fee-hungry U.S. states, and other business-friendly outposts. They sell secrecy so corporations, criminals, and public officials can avoid much larger tax payments, sometimes legally.
The Panama Papers, millions of stolen digital documents leaked to a German newspaper, Süddeutsche Zeitung, and shared through the donor-funded International Consortium of Investigative Journalists, have lifted a bank-secrecy veil to show how a large Panama-based law firm, Mossack Fonseca & Co., helped leaders of Russia, Pakistan, and other countries, plus gun-runners, drug dealers, soccer bureaucrats, and private citizens, hide money from taxes and disclosures. The firm says it cooperates with investigators and drops clients it finds aren't honest.
This exposure comes as tax avoidance by multinational corporations is once again a presidential campaign issue - and as digital technology, by making it easier to catch and spread data once hidden in paper files, gives whistle-
blowers and tax collectors a new edge.
"This is very unusual in terms of the size and scope. But it also fits in a larger way with what has been going on," says Peter Hardy, a former federal criminal tax prosecutor, now a partner at corporate-defense firm Ballard Spahr L.L.P. in Philadelphia.
Beginning with Swiss banks identifying once-secret U.S. customers under threat of criminal prosecution in the late 2000s, and continuing with the federal Foreign Asset Tax Compliance Act requiring foreign banks to tell which U.S. taxpayers have accounts, it's been getting harder to hide money in offshore havens. The Panama Papers publicity "will push this further," Hardy says.
"The irony is that while the U.S. has been very aggressive in suggesting other countries become more transparent to the U.S. taxing authorities, the U.S. is finding that it is regarded as a tax haven for foreign investors" who export money here to avoid paying taxes at home, Hardy adds.
American centers for foreign tax cheats include Nevada and Wyoming, where corporations can more easily operate with no owners identified or questions asked.
Delaware, also a tax haven, doesn't ask for names, either. But it charges companies a franchise share tax, so the private agents who service corporate clients there must know who the company owners are - and can be forced to tell in criminal cases. Delaware partisans say this keeps the state attractive for legal tax avoidance, but discourages fraud. Mossack Fonseca has affiliate offices in Nevada and Wyoming, but not Delaware. "No special reason," says Mossack Fonseca spokeswoman Ana Heeren.
Offshore tax avoidance is among the rare issues that seems to attract bipartisan backing in Congress. U.S. Reps. Carolyn Maloney (D., N.Y.) and Peter King (R., N.Y.) in January sponsored a bill that would force all states to register corporation owners.
Maloney and King praised Global Witness, a British investigative nonprofit whose staff went undercover, asking 13 New York lawyers how to illegally move foreign public funds to the U.S. "All but one of the lawyers had suggestions," it reported.
Tom Clancy's novel Commander in Chief portrays a Russian leader who hides billions in the British Virgin Islands, a popular banking-
secrecy center patronized by such firms as Mossack Fonseca.
"These law firms in various so-called bank-secrecy jurisdictions provide services to all kinds of people," says Thomas W. Ostrander, partner at Duane Morris L.L.P. "Having offshore structures is not improper, not unethical, not illegal. The questions that arise are: Are you reporting [to tax agencies] the existence of these structures and the money earned from them? If you do, these are kosher. They run afoul when they are used to hide income from the taxing authorities, business partners, or soon-to-be ex-spouses."
Ostrander says too many clients still think foreign banks will keep their secrets safe. "I tell them, 'What about some whistleblower?' " Efficient digital information has become easier to steal, and modestly paid service employees find it easier to pass clients' secrets to regulators and the public.
Milwaukee fraud-recovery lawyer Brian Mahany says he's been approached by three potential clients notified by Mossack Fonseca of the data breach and "very worried that their names may be in the files that were hacked."
By waiting until later this spring to move most of the Panama Papers online, the reporters consortium is effectively giving U.S. tax avoiders who are clients of the Panama firm time to report their possible wrongdoing to the IRS and other tax agencies, making penalties less likely.
"Once the list is public," Mahany told me, "the IRS won't make deals."
215-854-5194@PhillyJoeD