Panama: The Hidden Trillions

Panama Papers - The Secrets of Dirty Money-popFilm

In a seminar room in Oxford, one of the reporters who worked on the Panama Papers is describing the main conclusion he drew from his months of delving into millions of leaked documents about tax evasion. “Basically, we’re the dupes in this story,” he says. “Previously, we thought that the offshore world was a shadowy, but minor, part of our economic system. What we learned from the Panama Papers is that it is the economic system.”

Luke Harding, a former Moscow correspondent for The Guardian, was in Oxford to talk about his work as one of four hundred–odd journalists around the world who had access to the 2.6 terabytes of information about tax havens—the so-called Panama Papers—that were revealed to the world in simultaneous publication in eighty countries this spring. “The economic system is, basically, that the rich and the powerful exited long ago from the messy business of paying tax,” Harding told an audience of academics and research students. “They don’t pay tax anymore, and they haven’t paid tax for quite a long time. We pay tax, but they don’t pay tax. The burden of taxation has moved inexorably away from multinational companies and rich people to ordinary people.”

The extraordinary material in the documents drew the curtain back on a world of secretive tax planning, just as WikiLeaks had revealed the backroom chatter of diplomats and Edward Snowden had shown how intelligence agencies could routinely scoop up vast server farms of data on entire populations. The Panama Papers—a name chosen for its echoes of Daniel Ellsberg’s 1971 leak of the Pentagon Papers—unveiled how a great many rich individuals used one Panamanian law firm, Mossack Fonseca (“Mossfon” for short), to shield their money from prying eyes, whether it was tax authorities, law enforcement agencies, or vengeful former spouses.

Tax havens are supposed to be secret. Mossfon itself, for instance, only knew the true identity of the beneficial owner—a person who enjoys the benefits of ownership even though title to the company is in another name—of 204 Seychelles companies out of 14,000 it operated at any one time. The Panama leak blew open that omertà in a quite spectacular fashion. The anonymous source somehow had access to the Mossfon financial records and leaked virtually every one over the firm’s forty years of existence—handing to reporters some 11.5 million documents. By comparison the Pentagon Papers—the top-secret Vietnam War dossier leaked to The New York Times by Ellsberg—was around seven thousand pages. Harding estimates that it would take one person twenty-seven years to read through the entire Panama Papers.

Why did the source leak the papers? In a two-thousand-word manifesto published after the publication of the main material, he or she claimed to be motivated by exposing income inequality—and the way in which the “wealth management” industry had financed crime, war, drug dealing, and fraud on a grand scale.

“I decided to expose Mossack Fonseca because I thought its founders, employees and clients should have to answer for their roles in these crimes, only some of which have come to light thus far,” he or she wrote. “It will take years, possibly decades, for the full extent of the firm’s sordid acts to become known. In the meantime, a new global debate has started, which is encouraging.”

The first contact from the whistleblower came at 10 pm one evening in the spring of 2015. Bastian Obermayer, an investigative reporter for the German newspaper Süddeutsche Zeitung, was checking his e-mail while staying with his parents when a message pinged onto his laptop. “Hello. This is John doe. Interested in data? I’m happy to share.”

The German paper soon realized that it did not have the resources to do justice to the material that had started to gush from this unknown source. Obermayer and his near-namesake colleague Frederik Obermaier reached out to the International Consortium of Investigative Journalists, a foundation-supported body that has been coordinating joint inquiries into issues of global interest since 1997.

The information kept washing in: it gradually dawned on the journalists that the source, whoever he or she was, appeared to have ongoing access to Mossfon’s servers—not least because he or she could monitor internal conversations about how the firm would respond to the reporters’ initial questions. “When we look at our files we keep coming across emails that are only a few days old,” the German reporters recalled later in their book, The Panama Papers:

It’s almost as if we were following events in real time, as if we were inside the law firm that provides assistance to so many criminals. As if we were standing behind the employees in Panama City, whose names are now so familiar to us, and looking over their shoulders at their screens. 

Except that they cannot see us….

So now we know that Panama is reading what we publish. But they don’t know that we are reading their e-mails…

The story of how hundreds of reporters around the world set to work on this vast database is racily told by the pair known in their office as the Brothers Obermay/ier—or as racy as anything involving complex tax structures can be. Their book should be read in journalism schools as well as by tax authorities.

As more and more data sloshed in, the Brothers Obermay/ier repeatedly had to purchase ever-larger computers to handle it. How on earth to secure, scan, search, store, order, distribute, edit, and share such vast amounts of information across continents? A new breed of data specialists from around the world had to be assembled to advise on encryption, creating databases, search software, data visualizations, graphics, and communications.

It’s doubtful that any one news organization could have gathered together the amount of expertise needed to work on the material, still less have the language skills, legal resources, and local knowledge to grasp the significance of the characters and defend the stories that emerged. The kinds of collaborative journalism that began with WikiLeaks, Snowden, and the offshore leaks stories found new expression with the Panama Papers and are a pointer to future partnerships.

In writing about extremely powerful individuals, states, and corporations there is some safety in numbers—though the Western reporters were extremely conscious of the dangers faced by their Russian and Chinese colleagues, in particular, as they delved into the evidence of how prominent families had used Mossfon to salt away billions. And though journalists in countries with repressive media laws should in theory benefit from being able to publish in conjunction with news organizations protected by more enlightened constitutions and courts, this is far from being the case.

The German reporters use the word “addiction” to describe the work on which they now embarked:

If we didn’t both have families we would probably spend every evening on our laptops, clicking and clicking away. Yet even while keeping halfway regular working hours, it takes us only a few weeks to grasp the basic business model….

From the outside at least, it is a black box.

Not from the inside, though. Inside, in the computer folders we mine day after day (and often night after night), lie thousands of internal email exchanges between Mossack Fonseca employees. These messages are a seam of gold running through this mountain of data, repeatedly turning up vital nuggets of information about the true owners.

rusbridger_2-102716Gradually, a picture emerges of how the substantial mechanisms of offshore tax avoidance work. The rich person with money to hide would generally contact Mossfon via an intermediary—a bank, a lawyer, or an asset manager. These were Mossfon’s “clients,” the ones who ordered up an off-the-peg offshore company in the British Virgin Islands, Bermuda, the Bahamas, or elsewhere. Mossfon would then appoint directors to look after this company. These directors, uniquely in the world of high finance, appeared to have few qualifications for the job.

The Brothers Obermay/ier discovered an example of one such director—a woman called Leticia Montoya, whose name appeared “more than 25,000 times in the Panamanian company register alone.” They found that she lived in “a poverty-stricken area outside Panama City” and calculated that her countless directorships earned her just $400 a month.

These days, most respectable banks will set up accounts for offshore companies only if their ultimate beneficial owner is named—a measure considered essential to prevent money-laundering, financing terrorism, and other forms of crime. Mossfon, by contrast, appears to have been remarkably incurious about whose money it was accepting. The authors describe one case pursued by Süddeutsche Zeitung:

Mossack Fonseca ignores so many warning signs it is almost incredible. The parties concerned were at times reluctant to provide sufficient information about themselves, they used multiple accounts, they acted conspiratorially, they gave conflicting explanations about the origin of the money and they had even been investigated for financial crimes.

According to the reporters, Mossfon repeatedly found ways of getting around the difficulties of verifying ownership—typically offering the use of a nominee beneficial owner in place of the ultimate beneficial owner. Commerzbank, in Frankfurt, which was propped up by €18 billion from German taxpayers during the financial crisis of 2008, is singled out for helping German clients “on a routine and systematic basis to evade taxes” with the help of Mossfon. For example, by setting up shell companies, the Luxembourg subsidiary of the bank helped its clients to avoid paying taxes. “It doesn’t look very good to take billions from the state with one hand and yet help other clients to cheat the same state with the other,” observe the authors drily.

Such stories need villains, and there is no shortage of them as the teams of reporters around the world mined the databases, sharing their findings on a web-based forum, with occasional meet-ups to compare notes. A sorry parade of arms smugglers, oligarchs, defense contractors, mafia dons, drug dealers, gambling fraudsters, sanctions breakers, and kleptocrats emerge from the papers. And then there are the eye-catching names. They include the richest man in Syria, a Uruguayan presidential candidate, three current prime ministers, a well-known film director, a former Iraqi vice-president, a top soccer player, a clutch of Arab heads of state, the brother-in-law of the Chinese president. We get glimpses into billions siphoned out of Africa, China, Libya, and Russia—all from a single law firm. How many others have kept their work on tax avoidance secret?

The Russian story—the specialty of Luke Harding—is a particularly juicy one, involving Sergei Roldugin—a moderately well-known cellist but, more importantly, a lifelong friend of Vladimir Putin—who shows up in connection with five offshore companies worth hundreds of millions of dollars. Roldugin was one of a number of Putin’s circle to have become fabulously wealthy, earning millions in deals that, as The Guardian delicately put it, “seemingly could not have been secured without [Putin’s] patronage.”

Interesting as the individual characters are—and the dryness of tax avoidance schemes certainly needs a bad-guy narrative to keep the reader reading—the mechanisms of how money that should be taxed is instead routinely kept offshore are just as gripping. Harding was fascinated by the pristine respectability of the London offshore enablers: “I think the kind of big reveal for me was the role played by the West, and law firms, and banks, and so on,” he told his Oxford seminar. “It’s easy to think kleptocracy is a problem of faraway, nasty countries, about which we don’t want to inquire too deeply, but it turned out that we’re the biggest crooks of all, actually, in that we facilitate this.” His “we” refers to the British:

We found it over and over again in the Panama Papers that there were very expensive law firms, especially in London, in the Isle of Man, in Jersey, who charged big fees. If you look at their websites, they look eminently respectable, you know, they have pictures of stucco Georgian office blocks in London with neatly topiaried trees—but it was just so depressing to see these lying lawyers lying about who their clients were and, meanwhile pocketing enormous fees.

The history of British involvement in tax havens is traced in Nicholas Shaxson’s bookTreasure Islands, which shows how attitudes toward tax avoidance have substantially shifted over the decades since the late 1930s, when the US Treasury secretary, Henry Morgenthau, informed the president that some wealthy American tax evaders had started to set up dummy corporations with dummy directors in British colonies. “The ordinary salaried man and the small merchant does not resort to these or similar devices,” wrote Morgenthau disapprovingly.

Legalized avoidance or evasion by the so-called leaders of the business community…throws an additional burden upon other members of the community who are less able to bear it, and who are already cheerfully bearing their fair share.

In other words there was, before the World War II, something shameful in the rich trying to avoid the taxes that the rest of us have to pay.

The extreme liberalization of London’s financial arrangements is usually dated to the Big Bang—the deregulation of British financial markets by the Thatcher government—of 1986. Shaxson shows in Treasure Islands how the modern offshore system in fact dates back to the decline of the British Empire after the war. He quotes the historians P.J. Cain and A.G. Hopkins:

As the good ship Sterling sank, the City was able to scramble aboard a much more seaworthy young vessel, the Eurodollar. As the imperial basis of its strength disappeared, the City survived by transforming itself into an “offshore island” serving the business created by the industrial and commercial growth of much more dynamic partners.

The formal empire dwindled into fourteen small island states that opted to become British Overseas Territories, with the queen as their head of state. Half of them—Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat, and the Turks and Caicos islands—remain “secrecy jurisdictions,” actively supported and managed from Britain and intimately linked with the City of London. The United Kingdom also maintains sovereignty over the Crown Dependencies of Jersey, Guernsey, and the Isle of Man.

By the end of 1959 about $200 million was on deposit abroad. By 1961 the total had hit $3 billion, by which time offshore financial engineering “was spreading to Zurich, the Caribbean, and beyond” as jurisdiction after jurisdiction got in on the game. Today, the economist Gabriel Zucman estimates that there is $7.6 trillion of household wealth in tax havens globally—around 8 percent of the world’s wealth.

Ronen Palan, professor of international politics at City University London, describes the birth of tax havens in a similar way in his The Offshore World (2003), a process that took about ten years. “These satellites of the City were simply booking offices: semifictional way stations on secretive pathways through the accountants’ workbooks,” writes Shaxson. “But these fast-growing, freewheeling hide-holes helped the world’s wealthiest individuals and corporations, especially the banks, to grow faster than their more heavily regulated onshore counterparts.”

Thus began a race to the deregulatory bottom. Each time one haven changes its laws to attract more funds, the rival havens have to respond. “This race has an unforgiving internal logic,” writes Shaxson.

You deregulate—then when someone else catches up with you, you must deregulate some more, to stop the money from running away.

He describes how the US eventually found it impossible to resist the lure of hot money, with a gradual blurring of the onshore and offshore escape routes from financial regulation. The end result is as described by Harding: the offshore world becomes inextricably embedded in the global political economy.

It is not a victimless system. A 2010 report by Global Financial Integrity (GFI), a nonprofit research organization in Washington, concluded that the total illicit financial outflows from the African continent were anywhere between $854 billion and $1.8 trillion. Shaxson quotes another study calculating the real capital flight from Africa over a thirty-five-year period to 2004 at $420 billion. He contrasts this with the total debt of these forty countries—“only” $227 million:

So, the authors [of a 2008 University of Massachusetts, Amherst, study] note, Africa is a net creditor to the rest of the world, with its net external assets vastly exceeding its debts. Yet there is a crucial difference between the assets and the liabilities…. “The subcontinent’s private external assets belong to a narrow, relatively wealthy stratum of its population, while public external debts are borne by the people through their governments.”

Shaxson, a former Reuters correspondent based in Angola, is particularly interested in the billions he estimates have disappeared offshore through opaque oil-backed loans channeled outside normal state budgets, many of them routed through two special trusts operating out of London. He adds:

Having watched people die before my eyes in Angola…I am seared by having witnessed some of the ways Africa’s people bear their public debts, in the forms of poverty, war, a hopeless lack of real opportunities and the regular physical and economic violence perpetrated against them by corrupt and predatory offshore-roaming elites… Raymond Baker, director of [Global Financial Integrity], was quite right to call the emergence of the offshore system “the ugliest chapter in global economic affairs since slavery.”

The Panama Papers confirm this picture. They found that businesses in fifty-two out of Africa’s fifty-four countries used offshore companies created by Mossfon. In forty-four countries offshore companies were used to assist oil, gas, and mining deals with more than 1,400 companies.

One of the least savory characters in the Panama Papers is Beny Steinmetz, one of the richest men in the world, who uses his private jet to commute between Tel Aviv, London, Geneva, and his many diamond companies. He has been the subject of intense curiosity by students of corruption in Africa since, in 2008, the Guinean authorities withdrew the license of the Anglo-Australian company Rio Tinto to extract iron ore from the Simandou mountain range—possibly the largest untapped deposit in the world—giving it instead to Steinmetz’s Group Resources company, BSGR.

A year later BSGR sold half of the Simandou arm of the business empire to the Brazilian mining company Vale for $2.5 billion (the entire annual Guinea government budget at the time was $1.2 billion). The deal led to one of Africa’s biggest-ever corruption investigations. The NGO Global Witness investigated the deal, led by Daniel Balint-Kurti, a former journalist who had reported from Ivory Coast. In 2013 BSGRstarted legal proceedings against Global Witness, trying to find out who its sources were.

Balint-Kurti had done his best to investigate—but always ran into a brick wall of multiple shell companies created by Mossack Fonseca. With the aid of the Panama Papers documents, the German reporters discovered strong evidence that Balint-Kurti was on the right track.

How significant are such revelations and what can be done to deal with them? This will be the subject of a second article.

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