The original article was published by the Organization for World Peace on April 16, 2016. The original article can be read here.
Introduction
The Panama Papers leak made strange bedfellows of political enemies. For instance, the British Prime Minister David Cameron and the Ukrainian President Petro Poroshenko have found themselves in the same boat as Vladimir Putin, many of whose associates have also turned up on the list of those engaged in tax avoidance. In another case, former Israeli officials were using the same money-laundering services as their Palestinian counterparts.
The publishing of the Panama Papers is raising new ones regarding how to regulate global financial networks. First, the exposure of massive numbers of public officials engaged in offshore tax evasion is alarming. This phenomenon raises the question of how to combat corruption when those responsible are themselves benefitting from it.
Secondly, the Panama Papers also illustrate the enormous scope and difficulty of regulating international finance. The leak from a single Panamanian law firm has exposed powerful people across the world who have been stashing away money in the identified offshore bank accounts. The difficulty of combating money laundering when it involves many different jurisdictions and stakeholders is another global issue.
A final consideration is the role of whistleblowers who expose criminal acts from within organizations. Whether whistleblowers should be encouraged categorized or as threats to privacy rights and national security, is another hotly debated topic.
The Leak
ICIJ Database: https://offshoreleaks.icij.org/
Tax Havens and Shell Companies
The scale of the tax evasion exposed by the Panama Papers is shocking. The list of names covers virtually every continent, including current heads of state, public officials, their family members, businesses, and international organizations. The Panama Papers totals over 11.5 million documents in 2.6 terabytes. The information covers 214,000 offshore companies that people have used to shield private wealth from law enforcement.
Tax havens are jurisdictions that offer shelter for private capital with little oversight and taxes. As a result, these offshore tax havens tend to attract foreign capital in the form of private bank accounts. The modern offshore banks offer financial services with minimal questions asked regarding source wealth or the purpose of the account. This often leads to people with illegitimate income using tax havens to park their money to avoid scrutiny and/or taxes.
Tax havens are also often the registered address of shell companies. Shell companies are businesses that at first glance are legitimate, but in reality, are nothing more than a front with no real business activities. Law enforcement agencies are also concerned that offshore shell companies are used by criminal groups to conduct illegal activities.One infamous example is Viktor Bout, who used a series of shell companies to transfer and disguise revenue from his illicit weapon smuggling operations. The position of many of the people found to have maintained offshore tax havens is concerning because sometimes they are the very people their citizens depend on to enforce laws and manage their national wealth.
A Public Accountability Problem
The fact that many public officials are hiding their income from their own national tax system is a cause for concern. Tax evasion deprives the national government of resources to spend on programs that can public welfare. International organizations, not least the U.N. and the World Bank, have identified corruption as a major stumbling block to sustainable national development.
The fact that such a massive number of public officials are engaging in illicit activities themselves is distressing. Public officials are supposed to be the people that safeguard the public’s interest. By breaking their own state’s laws, it undermines the social contract between the governments and their citizens. In the long term, the breaking of the trust between public officials and citizens leads to political turmoil and instability. This further hampers any country’s ability to implement public policy and public programs.
Globalization
A Global Network
Globalization has made possible the system that allowed wealthy individuals and businesses to stash their assets outside of their own country. Globalization has resulted in tremendous social, economic, and political changes. Unfortunately, globalization has also given illicit proceeds more ways of evading detection by moving across multiple jurisdictions. Not all jurisdictions are determined to combat corruption and illicit proceeds flow. If anything, some jurisdictions welcome it.
The leak of the Panama Papers is a good demonstration of just how globalization has changed the nature of corruption. With the end of capital controls, it is now easier than ever to transfer money across the world. An industry has sprung up to help others to move their capital to avoid detection by law enforcement agencies. Tiny countries with few or no industries now try to attract capital by lowering their taxes and promising lax oversight. In the case of the Panama papers, half of the known shell companies set up by Mossack Fonesca are in places such as the British Virgin Islands, Seychelles, Niue, Samoa, and other such remote island nations away from the prying eyes of the world.
Combating International Financial Crimes
An international effort is required to effectively tackle international money laundering. It involves chasing after assets that have the ability to quickly and cheaply move at a moment’s notice. It also requires cooperation between multiple jurisdictions to trace the flow of proceeds and their true owners. However, ironically, global cooperation is something that has not improved with globalization.
Combating an issue as large as global tax evasion and money laundering runs into the problem of jurisdictions and different legal systems. Efforts by countries to strongarm the “tax havens” to allow external auditors access run into conflicts over sovereignty and state interest. For example, Ireland strongly resisted the E.U.’s attempts to force the country to accept external scrutiny after the investigators exposed Ireland to have offered the technology giant Apple a one percent corporate tax rate deal.
Why Countries Want to Become Tax Havens
To many people, it may seem counter-intuitive why some countries may want to become tax-havens. By becoming a tax haven, a government cannot tax meaningfully tax corporations least these companies move their capital elsewhere. Becoming a tax haven may also attract the wrath of the larger global economic players, such as the U.S. and the E.U. In short, it hampers the country’s ability to implement effective tax policy and attaches a negative reputation to the country.
However, for some countries, the potential benefits of becoming a tax haven outweigh the cons. The first benefit is country’s banking sector can greatly expand its clientele with a portfolio of prominent international businesses. Secondly, for some countries, even the meager tax revenue collected from the offshore tax accounts and a potentially enlarged banking sector may be greater than what the government may have been able to otherwise collect.
Needless to say, it is in Ireland’s economic self-interest to offer such services to attract investment. The same is even more true of other offshore tax havens, such as the British Virgin Islands. In these jurisdictions, offshore banking comprises a larger proportion of their economy. The governments of these countries have the incentive to turn a blind eye to their financial sector. If it has not been for whistleblowers, these national governments would certainly lack the incentive to scrutinize their own banking systems.
Whistleblowers
The Panama Papers raises the question of the ethics of whistle-blowers in exposing secrets. The Panama leak began when a whistleblower handed the data to the German newspaper Süddeutsche Zeitung and was slowly released by the journalists from there.
that But the banking industry is based on trust between the parties to a transaction. Whistleblowers undermining that trust cause these customers to turn to other alternatives are even more difficult to trace and regulate.
The role of whistleblowers themselves has in recent times has also become shrouded in controversy. In the private sector, the whistleblower also risks exposing sensitive data of their company’s clients. Clients who use an institution to conduct illegal business will certainly be unhappy. But there are also grey area activities that are legal but not considered ethical by many people. Many of the activities uncovered as a result of the Panama Papers fall into this category.
To use the Apple in Ireland example again, the one percent tax rate allowed Apple to avoid taxes in other markets through a process called “tax shifting”. Tax shifting involves avoiding corporate income taxes in jurisdictions that actually generate most of a company’s revenue by “shifting” their profits and pay taxes to Ireland. This practice is legal in many jurisdictions, even if many people consider it unethical.
Finally, there is also the risk of unanticipated collateral damage that harms those who use the banks for perfectly legal and ethical purposes. Ultimately, exposing sensitive information leaves all of these clients for attacks. Legitimate clients may suffer, both on the reputation front due to association, but can also expose these clients to theft and blackmailing if a leak exposes too much sensitive information.
Conclusion
The Panama leaks are the latest in a series of prominent “whistleblowing” incidents where secrets are exposed by people working from within the organizations. It also raises uncomfortable questions the international community needs to answer. The fact that many government officials are engaged in depriving their countries of crucial resources raises the question of public accountability. The international scale of the operations is both a testimony to modern globalization, as well as presenting problems for international efforts at curbing corruption. The ethical dilemma of the whistleblowers, between accountability and functionality, right to privacy, is another issue that is yet to be answered. To answer these questions would require international cooperation in law enforcement as well as domestic institutional reforms.
So far, however, international cooperation remains elusive. In the wake of the Panama leaks, Russia has quickly gone public to claim the leak is a plan orchestrated by the United States to discredit Putin. Some Western media in turn has claimed it to be a Russian plot. Continued international non-cooperation between the major global has allowed tax havens to thrive in a legally murky area. Unfortunately given the current international disunity, events similar to the Panama Papers will likely repeat themselves into the future.
Bibliography
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