People demonstrate against Iceland's Prime Minister Sigmundur Gunnlaugsson in Reykjavik, Iceland on April 4, after a leak of documents by so-called Panama Papers stoked anger over his wife owning a tax haven-based company with large claims on the country's collapsed banks. (REUTERS File Photo)
Your guide to Panama Papers and Offshore operation
Moa Jamir
Morung Express Feature
An investigation into the sprawling secretive industry of offshore dealing known as the “Panama Papers” was released recently exposing offshore financial dealings of the rich and famous and politically connected, as well as the leaders of some countries.
The International Consortium of Investigative Journalists (ICIJ), after a yearlong collaborative investigation of leaked documents from a Panamanian law firm, Mossack Fonseca, published the papers exposing the tax evasion by rich and famous across the world by creating offshore companies in British Virgin Islands (BVI).
ICIJ said the leaked documents — totaling 11.5 million records and 2.6 terabytes of data - were reviewed by a team of more than 370 journalists from 76 countries. The records shows how a global industry of law firms and big banks sells financial secrecy to politicians, fraudsters and drug traffickers as well as billionaires, celebrities and sports stars.
The question is what exactly these papers are and how it operates?
What is offshore and offshore company?
A conventional business lexicon would describe ‘offshore’ as - registering or operating outside of a person's or business' national boundary with the intention of accruing financial, legal and taxation benefits. A company incorporated for the purpose of operating outside the country of its registration and/or the place of residence of its directors, shareholders and beneficial owners is therefore referred as an offshore Company. A company may legitimately move offshore for the purpose of tax avoidance or relaxed regulations but often it can be used for illicit purposes such as money laundering and tax evasion.
According to the Economist, companies such as Mossack Fonseca specialise in helping foreigners hide wealth. The main tools for doing so are anonymous shell companies (which exist only on paper) and offshore accounts in tax havens (which often come with perks such as banking secrecy and low to no taxes). These structures obscure the identity of the true owner of money parked in or routed through jurisdictions such as Panama.
Why British Virgin Islands?
The island is an attractive tax haven. Investopia.com, an online financial content provider, defines a tax haven is a country that offers foreign individuals and businesses little or no tax liability in a politically and economically stable environment. It also provides little or no financial information to foreign tax authorities and the non-residing investors can take advantage of these countries' tax regimes.
The Canada's Toronto Star reported that each tax haven has a specialty: the Cayman Islands have secret bank accounts; the Cook Islands have private trusts; Luxembourg attracts opaque “foundations.” In the BVI, it’s the cheap and easy incorporation of anonymous offshore companies.
The BVI government normally has no idea who actually owns the tax-free companies or what they do, the Guardian reported, but the only significant information supplied to the official registry is the name of the company's agent – one of the local firms who arrange incorporations and collect the hefty annual fees. The agents will rigidly refuse to release further facts to anyone.
The Modus Operandi - Two Scenarios
In the ICIJ website, the modus operandi for the tax evasion in a tax haven is explained through a simple interactive game. If you are a politician, celebrities in various field or a businessman, the interactive games provides you three scenarios to successfully park your money in a tax haven. Here the first two are explained.
A Celebrity or a Star
Suppose you are a sports star or movie star who has negotiated a $50 million sponsorship contract with a global fashion and sportswear brand. Instead of paying required taxes on the deal, you decide to hide the money from the tax collector.
What do you do? Open an offshore company. The Bank will register the company as for e.g. “ETC PVT LTD” in BVI and your new bank account will use that name instead of your real name.
To keep the identity secret, earlier two methods were used - name a friend or employ a nominee shareholder or use ‘bearer shares’. But the latter was outlawed by an Act by BVI in 2004.
Thus, you take the route of a “nominee shareholder” – who is an unrelated third party, who is officially registered as the holder of shares in the company. “The purpose of the nominee shareholder is to uphold client secrecy by shielding the actual owner of the company from being publicly associated with that particular offshore company” (Investopia).
The company that supplied you with “ETC PVT LTD” will provide you with a nominee shareholder whose name will appear on the company’s public documents. Ultimately, a British citizen in Panama will act as the beneficial owner, also known as natural person nominee, of your company. This will cost more than $15,000 a year, but keeps your tax liability hidden from authorities (Until it is exposed as in the case of Panama Papers).
A political star is on the rise:
You are a rising political star with potential as a key political player and potential future leader. Your father, a controversial political figure passed away, leaving behind a secret multimillion-euro Swiss bank account.
After careful consideration, you decide not to disclose this secret account lest it raise questions about your connections to your father’s controversial past. What do you do?
While Switzerland still refuses to reveal the identity of its banking clients, a bill called the European Savings Directive (ESD) came into effect in 2005 which makes it mandatory for banks to pay tax on any interest earned in the account (for European Client).
If you don’t want to pay that, your financial adviser suggests two options. 1. Sell your shares, 2. Open an offshore company. If you follow the first option, your game is up but if you opt for the latter and create an offshore Company “Family Secrets Ltd”, you are safe.
A few years pass you run for the top political post and inquisitive journalists and political opponents dig into your finances.
Worried about the outcome, you decide to distance yourself further from your “Family Secrets Ltd” – but how? The best option is to create a private foundation. You create the “BEHIND CLOSED DOORS FOUNDATION,” which becomes the shareholder of Family Secrets Ltd. The public face of your private foundation is a council filled with nominees provided by the law firm handling your company’s affairs, ensuring your name will not appear on any public documentation.
If your political opponents catch wind of a Swiss account left by your father and tip off a reporter about your secret stash of cash, you deny connection. Thankfully for you, private foundations offer robust ways to hide your identity. The law prevents your registered agent from revealing the true owner of the Behind Closed Doors Foundation, even to authorities. The registered agent is in the business of acting as intermediary for a companies registered in specific jurisdiction, often where companies has little or no physical presence in that jurisdiction (ICIJ). Your secret is safe until someone in the agency goes rogue.
A more or less same route is used by businesses. And until the company or agency handling your affairs is exposed or someone leaks the company documents through ‘whistleblower/s’ or hacking, your money is safely parked in the tax haven.
