“A man, a plan, a canal: Panama.” So, at least, runs the British schoolchild’s palindrome, but it is, in truth, some time since the Central American country confined itself to the trade of maritime navigation devised for it by the French engineer, Ferdinand de Lesseps.
The most lucrative of Panama’s “offshore” activities have long taken place on dry land, amid the soaring offices of its business district. The state’s willingness to play host to foreign companies and individuals on a few-taxes and nearly-no-questions-answered basis has allowed it to build an international business of enviable financial reward — if uncertain reputability. And it is some of these transactions that are now rightly coming under scrutiny following the leak of 11.5m internal records from the prominent Panamanian law firm Mossack Fonseca.
As with past leaks of the client lists of Swiss banks, the disclosures are likely to provoke red faces and furious denials. Hundreds of politicians, business and sports people, including 72 current or former heads of state, have been implicated. According to findings published by the International Consortium of Investigative Journalists, the records include at least 33 people and companies blacklisted by the US because of evidence of proscribed activities, such as dealings with Mexican drug lords, terrorist groups and sanctioned states including North Korea and Iran.
It is, of course, true that possession of a Panamanian corporate identity does not itself equate to evil intent. But the mini-state has done more than most “light touch” jurisdictions to make it easy to keep a dark secret. Not only does corporate ownership remain highly opaque; it is also the most significant financial centre to hold out against a global transparency initiative led by the OECD. Only Bahrain, Vanuatu and Nauru have similarly spurned the rules, which provide for tax data to be automatically exchanged.
The disclosures will undermine the territory’s secretive selling proposition. The tax authorities in Australia, New Zealand and the UK have said they will follow up allegations of tax evasion and money laundering resulting from the leak. Some politicians named in the files, especially those dependent for power on democratic whim, may face challenges to their positions. Iceland’s prime minister, Sigmundur David Gunnlaugsson, must fight a vote of no-confidence after disclosure of offshore holdings linked to him and his wife.
Just as the Swiss disclosures punched holes in that country’s traditions of secrecy, the Panamanian leaks should prompt further pressure on tax havens. Reputational risk may give some companies and individuals pause before entrusting their fortunes to a Panamanian intermediary. But the business of these centres, profiting by helping people move money out of high tax jurisdictions, will not be so easily stopped.
The impetus must come from investors as in the case of some tax havens such as the hedge fund friendly Cayman Islands, or from other governments. This should be forthcoming now that austerity policies have made it politically hard to tolerate tax avoidance or illegal tax evasion. The years since the financial crisis have shown that power still resides where wealth is created. US toughness towards Swiss banks forced Switzerland to lift the veils that previously shrouded its banks in legally mandated secrecy.
Until now the business and tax benefits from industries linked to the havens has seemed to nurture an unholy tolerance in some bigger states, including the UK. The more their citizens learn from disclosures such as these, the more they will ask why more is not done.
Editorial do FT