Monday, June 27, 2016

The Panama Papers Are Only The Tip Of The Iceberg

Most international business lawyers know that the use of offshore companies disclosed in the Panama Papers - as massive as it is - represents only the tip of an iceberg of wealth, tax evasion, corruption and international crime.

The press, led by the International Consortium of Investigative Journalists, is focusing on Mossack Fonseca, the Panamanian based law firm from whose files leaked a mind-boggling 2.6 terabytes of documents. And with some justification. MF reportedly set up more than a prodigious 200,000 offshore companies by itself.  But a preoccupation with just MF vastly underestimates the use of entities in tax havens.

There are dozens of law firms in Panama alone that promote themselves as experts in doing what MF does. Scores more are located in other tax haven jurisdictions, such as the British Virgin Islands, the Cayman Islands, the Bahamas, Seychelles, Jersey, Luxembourg, Mauritius, Niue, Hong Kong and, of course, Nevada. What does that tell us about the number of tax haven entities in the world? Let’s grant to MF the status of being a global leader in the industry - a characterization which it undoubtedly once welcomed and now regrets. And let’s further adjust for the fact that many schemes utilize more than one jurisdiction.  Even bearing those caveats in mind, it is clear that MF accounts for only a tiny fraction of the millions of entities located in tax havens around the world. Does the number of entities tell us anything concrete about the amount of hidden wealth? Not directly. But in his 2013 paper, “The Missing Wealth of Nations,” Gabriel Zucman estimates that as much as 8% of global wealth is held in tax havens, three quarters of which is not reported in official statistics.

To be sure, some, perhaps even most, of these entities are set up for legitimate purposes and are operated legally. Just as surely, many others have evading taxes as their goal, a practice that robs governments of funds they would otherwise receive and forces them to raise rates on less creative taxpayers. But others are used for even more nefarious purposes - the subject of my next two blogs.

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