Now that it has been a few days since the news broke on the Panama Papers it's worthwhile to take a minute to put things into perspective and examine the implications of the leak.
What are the Panama Papers?
The Panama Papers are a large set of documents said to have been leaked by an insider from the fourth biggest offshore international law firm Mossack Fonseca. The documents are currently only accessible by over 200 news agencies and are said to contain information about the law firm's clients offshore activities, including many prominent politicians, celebrities, and millionaires/billionaires, as well as some individuals involved in criminal activities.
Who is involved?
Many of the headlines sensationalize the leak as being one that reveals people trying to evade taxes and hide criminal activity. So far various media organizations have revealed twelve national leaders out of 143 politicians, their families and close associates are said to be named in the Panama Papers. Among the politicians implicated are Russia's Putin, Iceland's Prime Minister, and Prime Minister Nawaz Sharif's family. Celebrities such as Amitabh Bachchan and Aishwarya Rai were also implicated in the Panama papers, but Bachchan has issued a denial of any wrongdoing. We will undoubtedly see more people being named as the story develops. At the same time the law firm, Mossack Fonseca, has issued a statement denying any wrongdoing while insisting there are inaccuracies in the information released.
Why are these people going to Panama?
Why people are going to Panama should be at the heart of the discussion because people with fame and/or wealth have been shifting money and property ownership offshore for decades now, but also to understand the implications. There are 3 main reasons why people have gone offshore with their money and property:
- Asset Protection
However, with increased financial oversight and regulation after 9/11 and the UBS scandal, privacy in banking has been reduced through new regulatory frameworks created by the United States, the EU, and India. The efficacy of the use of offshore jurisdictions to hide assets from taxation authorities has been greatly reduced by new regulations leaving only privacy and asset protection as major reasons. What this means is that most of the people who's names have found their way onto the list were probably concerned more with privacy and asset protection than taxation in light of the all disclosure requirements imposed upon countries and the banking system. In and of itself a desire for privacy and protection against frivolous lawsuits, are legitimate objectives for people to pursue and if done correctly, with adequate disclosure to the relevant authorities. So what does this leak really mean?
The Impact of the Leak
Undoubtedly this leak will lead to the pursuit of criminal charges against people who have been connected with illegal activities, both within a nation's borders and doing business with foreign nations that were subject to sanctions. For the rest of the people named in the Panama Papers, their privacy will be compromised bringing their assets into public view. In theory, even with the removal of the privacy most of the people named will retain whatever asset protection advantages they were seeking under the regulatory framework of Panama by setting up the structures in question. In the short term many governments will pursue legal action against the bad actors and allow the legitimate structures to continue on in their purposes of protecting privacy and protecting assets from lawsuits. In the long run, we will probably see new frameworks being created to share even more information between governments as well as increased disclosure requirements so that people cannot hide illegal activities in offshore jurisdictions.
The trend of shifting assets into offshore jurisdictions will continue as long as privacy and asset protection remain concerns for people with wealth and/or fame. In fact, recognizing the need for privacy and asset protection several states in the U.S. have enacted their own domestic asset protection laws allowing people to set up similar structures domestically. Perhaps the leak of the Panama Papers will cause an increase in business in the U.S. states with laws in place. Irrespective of what comes of the leak increased regulation and scrutiny is the new climate and the perceived tax advantages of hiding money offshore will all but disappear leaving in its wake opportunities for legitimate offshore and onshore solutions stepping into the limelight not only for the wealthy, but even the middle-class worldwide.