Donald Mayer is a clinical professor in the business ethics and legal studies department of the Daniels College of Business. He is the co-editor of “Good Business: Exercising Effective and Ethical Leadership” (Taylor & Francis Inc., 2010).
Q: What are the Panama Papers?
A: The Panama Papers are a massive trove of e-documents leaked (or possibly hacked) from a Panamanian law firm, Mossack Fonseca. The firm has 40 offices worldwide, and at least 80 percent of its business involves creating “shell companies” in tax havens that use nonregulated banks to make it difficult for authorities to trace money. Anyone or any organization that wants to hide its money from governments will use nonregulated banks in jurisdictions that mandate “bank secrecy.” Terrorists, drug lords, shadowy arms dealers, anyone avoiding U.N. and U.S. economic sanctions, and wealthy individuals seeking to avoid paying taxes will resort to using shell companies in tax havens.
Q: Who has been identified in the papers, and where are they from?
A: There are high-wealth, high-profile individuals (politicians and celebrities) who have been identified as using the services of Mossack Fonseca worldwide. José Manuel Soria, a member of Spain’s acting government, resigned after revelations that linked him to offshore investments in the Bahamas. Three of the most powerful people within the Chinese government, including President Xi Jinping, have relatives with offshore companies set up through Mossack Fonseca. Prime Minister Sigmundur David Gunnlaugsson of Iceland said he was temporarily stepping aside after the Panama Papers revealed that he and his wife had set up a shell company in the British Virgin Islands in 2007.
Q: Are offshore business entities illegal?
A: David Cay Johnston wrote about the “shadow economy” in a 2003 book, “Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich — and Cheat Everybody Else.” Creating anonymity through shell companies is in itself legal, but the purpose is often used to hide illegal activity, including money laundering from narcotics traffickers, shadowy arms dealers, bribes paid to corrupt officials, and those who under-report their income for the purpose of avoiding (rather than minimizing) their tax obligations. Many observers believe that all regulated major banks in the U.S. regularly use the services of nonregulated banks offshore.
Q: No U.S. citizens — no political leaders or prominent business people — have been named in the Panama Papers. The International Consortium of Investigative Journalists plans to publish a full list of companies involved in early May 2016. Is it possible that Americans could be implicated in these documents?
A: It’s not only possible, but likely. The original release of documents was made to “Western” news sources, sources more friendly to U.S. interests. Frederik Obermaier of Süddeutsche Zeitung told the media that “there are still great stories and revelations to come out” in the future. Obermaier, along with Michael Hudson of the International Consortium of Investigative Journalists, had helped to publish the first parts of the Panama Papers. Subsequent parts may well reveal more about U.S. people and firms, as there is no reason to think that U.S. people and firms aren’t also motivated and able to use bank secrecy in so-called tax havens. At the same time, we should realize that Mossack Fonseca has less than 10 percent of the global shell company market, which means that many similar law firms could be serving more “American” clients than Mossack Fonseca does.
Q: What’s the bottom line impact of offshore companies conducting illegal businesses nationally and globally?
A: The impact is to make the bottom line of high-wealth people and organizations disappear from public view. Raymond Baker, a thoroughgoing capitalist, warned about offshore tax havens in his 2005 book, “Capitalism’s Achilles Heel: Dirty Money and How to Renew the Free-Market System.” We may not get to the bottom of all that is going on; there is so much data here that it might be difficult to see the forest for the trees. There are many who suspect that “Western” leaders, including Americans, may be deeply involved in the shadow economy, and that the CIA has been using these secret financial channels for many years in the interests of both “national security” and the desires of politically well-connected U.S. companies.