Corruption | Panama Papers, tax havens and the global fight against corruption
A sign outside the building where Panama-based Mossack Fonseca law firm offices are in Panama City. Photo: AFP
A sign outside the building where Panama-based Mossack Fonseca law firm offices are in Panama City. Photo: AFP

Panama Papers, tax havens and the global fight against corruption

Investigative journalists, whistleblowers, brave prosecutors and judges remain champions of the cause

December 20, 2016 12:33 PM (UTC+8)

It started off as one of those typical conversations you have when you’re in a foreign country and the taxi driver recognizes you to be a foreigner.

“Where are you from?,” he asks, soon after I get into the bright yellow taxi cab, to which I reply “Sri Lanka.”
“Beautiful country,” he responds.
“Have you been there?” I ask him politely.
“No, but my friend went there for a holiday. He said it is a nice place, like Panama, lots of beaches,” says the driver, a burly man, in his early 60s.

I agree, smilingly and compliment him on his good English which was a rare find in this Spanish speaking nation. “I took classes,” he says proudly, as he drives along one of the well maintained roads, typical of a metropolitan city complemented by beautiful skyscrapers of varying shapes and sizes and heavy traffic.

From the world famous Panama Canal to the pristine blue beaches and casinos, Panama is home to 3.9 million people. For many, Panama City looks like any other crowded metropolis that has become in recent years the typical financial district of a country. But Panama City is also known for something more sinister – its recognition as a “tax haven.”

As the taxi carries me towards my destination, the driver asks: “Why are you here?” I tell him I am in Panama for a conference on anti-corruption.
“Ah Panama Papers,” he mutters.
I acknowledge and also tell him this is about fighting corruption and it has been organized by Transparency International.
“Your President Mr Varela is the main guest speaker,” I say very casually.

GERMANY, Berlin: Juan Carlos Varela, President of Panama, talks at the Federal Chancellery on October 18, 2016. In a subsequent meeting with Chancellor Angela Merkel they discuss bilateral and economic relations as well as regional and international political issues. - S.A. Struck
Panama President Juan Carlos Varela. Photo: AFP

The driver shakes his head disapprovingly and says: “He is involved.”
I mistook him for thinking he was talking about organizing the conference, which was supported by the government, but the driver corrects me. “He is involved with Mossack Fonseca, he is friends with the people there. You can’t have such a big operation without support from big people. We know, but we can’t do anything,” the driver says dejectedly. I just smile, thinking to myself, maybe it’s true, maybe it’s not.

Decision to resign

Mossack Fonseca is a Panamanian law firm and is also the world’s fourth biggest offshore law firm. Incidentally, founder Ramón Fonseca, was also Panama President Juan Carlos Varela’s advisor until March this year, when he stepped down just days before the Panama Papers were made public. His decision to resign was announced via Fonseca’s twitter account after his law firm was implicated in corruption scandals in Brazil and Spain.

Today, the law firm which was founded in 1977 with over 40 offices worldwide, is a shambles after the International Consortium of Investigative Journalists (ICIJ) exposed the Panama Papers in April this year. ICIJ leaked 11.5 million documents from the database of Mossack Fonseca, revealing how the firm helped political leaders, terrorism financiers and drug dealers stash away their money in offshore accounts to evade taxes.

The Panama attorney general is still investigating if Mossack Fonseca facilitated or promoted illegal activities, while the British Virgin Islands has hit Mossack Fonseca with the biggest fine in the territory’s history of US$440,000 citing eight breaches of its Anti-Money Laundering and Terrorist Financing codes and its Regulatory Code. The breaches included failures in risk assessment, due diligence and identification procedures.

Despite his affiliations with the founder of Mossack Fonseca, Varela told reporters in Munich in October that his former advisor “will have to take responsibility for his actions – and ultimately face the judge.”

The Panamanian economy is mainly service-based: 83% of its gross domestic product (GDP), estimated in 2015 at US$52.132 billion according to the International Monetary Fund, belongs to the service sector, of which less than 1% are legal services, while 90% of exports are services.

Approximately 25% of the GDP is made up of services from the Panama Canal and its related activities, trans-shipment ports and the Colon Free Zone. These are services such as the fueling, repair and maintenance of ships and containers, as well as tourism-related services for cruise ships which dock in Panamanian ports or transit through the Panama Canal.

Tourism has been rapidly growing in the country too, due to various tax privileges offered to foreign guests and retirees. Also, there are some, 124 multinational companies operating regional offices in Panamanian territory.

Despite its reputation as a tax haven, Panama has been one of the fastest growing economies in Latin America and worldwide during the past decade, with an average annual growth of 7.2% between 2001 and 2013, more than double the regional average.

Addressing the 17th International Anti-Corruption Conference (17IACC) in Panama City this month, Panama President Varela declared that even though the Panama Papers had tainted his country’s image, his government was taking the lead to become a global player in the fight against corruption.

Even countries such as the US, the UK, the Netherlands and Ireland are today recognized as tax havens and are part of the illicit flows

“Panama’s success story does not depend on the irregular flows of money into the financial system, its success is because of the hard work of the noble and peace loving people of Panama. We will take responsibility to defend our financial system and advance with the exchange of information in tax matters,” he told more than 1,600 delegates including journalists from 130 countries at the largest anti-corruption conference organized by Transparency International.

During the conference, Varela also took the opportunity to defend his country, saying Panama should not be blamed because the whole world is involved in illicit financial flows.

British author and researcher for the Tax Justice Network, Nicholas Shaxson, later told a panel session at the conference that it was normal for tax havens to point fingers at others. “Tax havens like to think that all is well. They also like to believe that they are not tax havens and instead it’s the whistleblowers who are the criminals,” he said.

Nevertheless, Shaxson indirectly agreed with Varela’s statement that it was not just small havens like Panama that were involved in money laundering. “Even great countries such as the United States, the United Kingdom, the Netherlands and Ireland which are not seen as traditional tax havens, are today recognized as tax havens and are part of the illicit flows,” he said.

The United Nations estimates that theft through corruption accounts for at least US$2.6 trillion every year, while another US$1 trillion is paid in bribes. In December last year, a Global Financial Integrity report titled Illicit Financial Flows from Developing Countries: 2004-2013 disclosed that developing and emerging economies lost US$7.8 trillion in illicit financial flows during that period, with illicit outflows increasing at an average rate of 6.5% per year — nearly twice as fast as global GDP.

The report also said that Asia continues to be the largest contributor to gross illicit outflows, providing 38.8% of the developing world total from 2004-2013. This was followed by Developing Europe at 25.5%, the Western Hemisphere at 20%, Sub-Saharan Africa at 8.6%, and MENA+AP countries at 7.1%.

As expected, the Panama Papers took center stage at the biennial conference, with Marina Walker, deputy director of ICIJ telling a panel that the expose had resulted in regulatory changes in several countries including New Zealand, Mongolia, Panama and Taiwan, while investigations have also been launched into at least 6,500 taxpayers and companies since the expose.

“Tens of millions of dollars have been recovered including in Columbia, Slovenia and Australia, while billions continue to be traced,” she said.

The leak also revealed how 143 politicians, including 12 national leaders, their families and close associates had used offshore tax havens to hide millions if not billions of their money to avoid taxation. While the leaks resulted in Iceland’s Prime Minister Sigmundur Davíð Gunnlaugsson resigning, seven of the 10 countries in which current or former heads of state were named in the Panama Papers have remained silent or refused to open investigations. They include Saudi Arabia, Qatar and Ukraine.

In Panama, a five member expert committee appointed by the government in November urged President Varela to do more to stop dark money flowing through the country’s financial system.

Little regulation

The 23-page report points out that although Panama seeks to attract world-renowned businesses to establish substantial operations in the country, legislation still allows for a high degree of flexibility in tax terms and for reporting obligations to the respective authorities. This results in the establishment of organizations in Panama that have little regulation and few control mechanisms in their place of origin.

“These transactions are legal, but create a real risk in terms of illicit capital flows, because of their laxity in controls and reporting needs. The experience of other jurisdictions indicates that at the international level, the offer of services with low tax requirements (tax competition) is not questioned as long as it is public, transparent and subject to certain limitations and to the extent that a State receives information in a timely manner with respect to such organizations for their own fiscal control.”

The experts said Panama has some control gaps that must be closed to create an environment that, without affecting the operational competitiveness of companies and organizations legally residing in the country, provides the necessary security in terms of detecting and eventually eliminating potential illicit flows.

“The country’s strategy should be to achieve a high standard of performance in transparency and effective control of illicit flows, while retaining its competitiveness as a financial services and domiciliary center of international organizations and remains off any discriminatory list or qualification of opacity or lack of transparency,” the committee said in the report.

“The moment has come. The country can no longer postpone decision-making in this field. The decision must be to act, firmly and with a view to the future, so that Panama maintains its position of economic leadership free of qualifications on its competitiveness in every sense,” the report added.

Emoluments clause

Addressing the opening ceremony of the conference, Leonard McCarthy, Vice President for Integrity at the World Bank Group, said even though everyone can say they are against corruption, there are a number of states attempting to deceive the rest of the world by trumpeting good governance publicly and perpetuating grand larceny in secrecy.

To illustrate his point, he highlighted a little known clause in the US Constitution. “The emoluments clause dictates that any officer of trust shall not receive any present from any king, prince or foreign state. Sometimes we need to be reminded of what many of us take for granted as obvious, because therein lies another gap between analysis and action. We should remember that in many countries the notion of laws to criminalize foreign bribery is regarded as a conspiracy by enemies of the state,” he said.

McCarthy said that more needed to be done to empower the prosecutors who deal with misconduct by high-level public officials, to ensure they get things right.

“As the US Supreme Court recently remarked: “Our concern is not with the tawdry tales of Ferrari’s, Rolexes and ball gowns; but with the boundless interpretation of the federal bribery statute.”

He also said that the unquestioned competence of judges is equally important. “In October last year, J.S Khehar, on behalf of the Supreme Court of India, struck down a new law on judicial appointments, saying ‘the judiciary cannot risk being caught in a web of indebtedness towards government’.”

As the world changes corruption mutates

McCarthy called on the private sector to become the future game-changer by positively influencing both the business and political landscape. “An activist investment community, multinationals that say no to corruption, and intermediaries that play an honest agency role, can help prevent major lapses like the Panama Papers,” he said.

IACC chairperson Akere Muna recalled that over the past two decades many anti-corruption conventions have been adopted by multilateral organizations and ratified by states, but their enforcement remains an issue.

“As the world changes corruption mutates, so those of us joined in the battle against corruption have realized that partnerships are one of the capital tools in our fight. In such a strategy, the golden triangle of public sector, private sector and civil society is all important. Recent developments have confirmed the critical role the media in general and especially investigative journalists have to play,” he said recalling the Panama Papers leak.

Muna said that people are aware of the harm corruption brings to individuals and societies but, as the saying goes, when you fight corruption it fights back.

“We need to act. Now. But how? The only way, we – the global anti-corruption movement – can help move the needle is in building close partnerships between all parts of the anti-corruption movement, with civil society, with our anti-corruption champions – investigative journalists, whistleblowers, brave prosecutors and judges,” he said.

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