“The leak of Mossack Fonseca’s internal records included details of more than 214,000 offshore entities, with ties to people in more than 200 countries. Mostly the law firm set up anonymous shell companies, which do not carry out any business themselves, but act as a vehicle that could be used by clients to hold assets offshore, or handle cross-border deals. ”
Offshore companies can be legal. So can setting up a firm whose owners are not known to the public. But as the Panama Papers leak has shown this weak, these business tactics can lead to gross distortions of the rules.
The leak of Mossack Fonseca’s internal records included details of more than 214,000 offshore entities, with ties to people in more than 200 countries. Mostly the law firm set up anonymous shell companies, which do not carry out any business themselves, but act as a vehicle that could be used by clients to hold assets offshore, or handle cross-border deals.
Some were in Panama, others were in a constellation of tax havens including the British Virgin Islands and the Seychelles. Since 2009 clients have been rapidly shutting down these vehicles as global regulations caught up with the practices, according to leaked documents.
The scale of the firm’s operations is industrial but not unique. One building in the US state of Delaware, for example, has 285,000 registered businesses. The two-storey building at 1209 North Orange Street houses firms that only need to declare a registered holder, which can be another company, to take advantage of the state’s liberal tax and corporate rules.
Ugland House in the Cayman Islands, meanwhile, has about 12,000 companies registered inside, attracting the attention of US President Barack Obama in 2008. “That’s either the biggest building or the biggest tax scam on record,” he said.
What has grabbed the world’s attention in the Panama leak is not that shell companies and tax dodging exist – the OECD club of rich nations has spent years working to prevent profits artificially shifting from one jurisdiction to another – but that there are still so many surprises lurking.
From Simon Cowell to the now-outgoing Prime Minister of Iceland, those named in the 11 million pages leaked to the media by an anonymous source come from all corners of the world. A dozen global leaders including Vladimir Putin and Xi Jinping have also been dragged into the story.
“Fifteen years ago, due diligence didn’t exist and they are judging us by other standards,” said Ramon Fonseca, the co-founder of Mossack Fonseca, in defence of his firm after the story broke. “This is a tropical storm, like the ones we have here in Panama where once it passes the sun will come out. I guarantee you that we will not be found guilty of anything.”
London lawyers and accountants said that use of a Panamanian vehicle was considered highly unusual in UK corporate circles, who tend to employ vehicles in Luxembourg, the Channel Islands or the Isle of Man if all they want is to minimise tax and red tape on profits earned globally.
As well as cutting tax, the other main reason to move assets offshore is to keep participants anonymous. One lawyer, who himself did not wish to be named, suggested that a legimiate use of anonymity would be a Mexican businessman who did not want to become a target for kidnappers by declaring his assets in public.
The most eye-catching examples in the Mossack Fonseca files go far beyond these goals. Memos from inside the firm discuss whether to continue dealing with a convicted money launderer linked to the Brink’s Mat gold robbery in 1983 after the lawyers realised who their client was.
Mossack Fonseca itself has a complex network of separate subsidiaries and associated firms. Its business ties extend to a squat office block in Hertfordshire, where Mossack Fonseca & Co UK was established in Invision House on the outskirts of Hitchin, in 1994.
These offices are shared with more than 700 other companies including Raymond Morris Group, a specialist in company formations.
Manny Cohen, who set up RMG in 1986, also happens to be a director of the UK firm bearing the name of Mossack Fonseca, along with about 150 other British companies, ranging from the Armadillo Stationery Shop to the British Bobsleigh and Skeleton Association.
When contacted for details of his involvement with Mossack Fonseca, his lawyer issued a statement stressing that the company is a separate entity to the Panamanian group but that it has a “licence to distribute services under the brand”.
“On principle Mossack Fonseca & Co (UK) will not comment on any allegations, or commentary, where these are sourced from data that has been stolen and published without the authority of the data owner, concerning the Panamanian law firm Mossack Fonseca or its clients,” it said.
RMG is just one of the myriad company registration services available in the UK. For five minutes’ work and about £1,500 in fees all in, a visitor to one of its websites can register a UK company. The form reminds applicants they must check the identity of their fellow directors under the 2007 Money Laundering Regulations. It also offers the option of supplementing the company board with a nominee director supplied by the registration company.
Several other directors in Mossack Fonseca & Co (UK) are nominees. One former director is registered to a “virtual office”, a letterbox used to give a prestigious address to firms. In this case, his listed address is in the same central London building as the Telegraph.
None of this suggests wrongdoing by any of the parties. Convoluted companies aren’t in themselves unlawful. However, complex structures can aid those looking to slip through the regulatory cracks.
“If people want to keep illegal activities secret they can use many things that are perfectly legitimate [otherwise],” said Barry Vitou, partner at the law firm Pinsent Masons. “To the extent that governments consider that as wrong, they should be the ones who legislate to close them down.”
The Financial Conduct Authority has told UK banks to declare any links to Mossack Fonseca by the end of next week, so the watchdog can investigate any potential wrongdoing. HSBC, UBS, Rothschild, Coutts and Credit Suisse are among the institutions named in the leaked documents.
The OECD and national authorities have already spent several years clamping down on those flouting tax laws and evading justice, with mixed results. The Base Erosion and Profit Shifting rules, agreed last October, are aiming to curtail the estimated $240bn a year in forgone tax revenues as a result of international loopholes.
Even Panama has given some ground in the global clean-up, agreeing in 2014 to comply with the US pursuit of taxes on Americas’ foreign wealth. However, progress is slow, and as other jurisdictions crack down the temptation remains among those seeking shelter to move money into the Central American country.
“Panama has an extremely aggressive and obstructive attitude. Dialogue has broken down,” said Pascal Saint-Amans, the OECD’s tax chief, about the global reforms. “It is the last financial centre that has refused to implement global standards of fiscal transparency. There has been very strong pressure from the law firms on the Panamanian government.”
The banks themselves are also subject to greater scrutiny. HSBC is spending $700m on a “know your customer” programme on top of its $1.9bn penalty for allowing what the US described as “drug kingpins and rogue nations” to funnel money through its accounts.
In the UK, George Osborne has been a vocal supporter of the OECD reforms, although he is also overseeing a £210m programme of cuts at HMRC.
David Cameron hosts a global anti-corruption conference next month, during which the Prime Minister will come under fresh scrutiny for his own family tax arrangements, as well as for the next steps that he and other global leaders hope to take on tax and transparency evaders following the revelations of the past week