The Panama Filing Cabinets


The headline cases from the Panama Papers illustrate the problem of criminals, sanctions breakers, corrupt officials, tax evaders and fraudsters hiding their assets behind innocent sounding corporations and trusts. With a cache of 1.5 million documents, there are likely to be secrets that are still to be revealed, but already issues of corruption, fraud and theft of public assets are beginning to be conflated with broader debates on the way that international taxation is organised. This matters because different problems need different solutions.

My super- simple mental filing cabinet for sorting out the issues related to tax havens looks something like this:

Individuals and
their financial vehicles
Major corporations

(Plcs, SoEs etc..)

Secrets and lies Corruption, fraud, tax evasion Major corporate corruption scandals
Legitimate but complex Collective investment
vehiclesTax planning
international business (and associated controversies, BEPs etc… )

The Mossack/Fonseca papers that we have been told about largely relate to the affairs of wealthy and powerful individuals. The most important revelations concern ‘Secrets and Lies’; the  well documented role of anonymous shell companies in enabling money laundering and grand corruption. As the Natural Resource Governance Institute describes, politicians and officials can use these fronts to direct lucrative government contracts towards themselves and their associates, and as a getaway vehicle to hide the loot. This is a serious problem.

It is not yet clear (and probably never will be) which of the 210,000 entities that feature in the Panama Papers should be filed under Secrets-and-Lies and which under Legitimate-but-Complex, but here are four iconic examples so you can see how the mental filing cabinet might fill up as investigations and panels around the world do their work.

Individuals and
their financial vehicles
Big companies
Secrets and lies James Ibori Petrobras “Operation Carwash
Legitimate but complex David Cameron’s Dad Heritage/ Tullow Oil

My filing cabinet model is simplistic, but broadly problems in the top drawers relate to people exploiting weak enforcement and loopholes in the rules around disclosure of ownership, in order to break other laws without being caught. Those in the bottom drawers concern the choices that governments make about how to tax economic activity that crosses borders, and arguments about the best design of those laws and the moral choices of those operating within them.

One thing that is emerging as the dust settles is that the experts (ranging from the Tax Justice Network to the Oxford Centre for Business Taxation ) seem to be in broad (and unusual) agreement that the important stuff in the Panama Papers is mainly about secrecy-enabled crime (the top drawers) not tax policy or morality questions (the bottom drawers).

However the public debate has its own dynamic. In the UK, attention got stuck on the Prime Minister’s use of an unremarkable offshore trust which looks nothing like aggressive tax avoidance, but which many labeled as ‘morally repugnant’ leading to calls for the largely symbolic act of politicians publishing their tax returns.

Another case which stands out for focusing attentions on the bottom drawer is Heritage and Tullow Oil in Uganda which features prominently in much of the coverage of what the Panama Papers mean for development. It was picked out in ICIJ’s own video about ‘the Victims of Offshore’, and also highlighted in the Washington Post and by the Inter Press Service.

It is an odd choice for illustrating ‘the shady world of offshore’ as it is not a case of an anonymous shell company, but a legal dispute over how the capital gains on the sale of an oil holding between Heritage and Tullow should be taxed. The main issue concerns the shift from a previously agreed tax exemption to a new tax law which left the companies facing an unexpected and disputed tax bill of $400 million. In response Heritage shifted the holding from Barbados to Mauritius, which has a more favourable tax treaty with Uganda. There are political, economic, administrative and ultimately legal arguments in the case, but as far as I can work out it’s a MacGuffin in terms of illustrating the issues around beneficial ownership secrecy.


A MacGuffin is an irrelevant plot device

In trying to make sense of what the Panama Papers mean for developing countries journalists have also reached for the often misunderstood big numbers on tax and development, and many got thoroughly confused:

  • The Washington Post muddled tax disputes, tax evasion and illicit flows and came up with the figure that developing countries lose ‘ten times more to tax evasion than they get in aid’. (1)
  • Foreign Policy also muddled illicit flows and revenue losses and repeated the mistaken statement that governments in Africa lose $34 billion in annual revenues through coporate taxdodging involving tax havens. (2)
  • The African Network of Centers for Investigative Reporting  misunderstood another number and stated that international banking secrecy is leading to $150 billion a year of illicit flows from the the continent. (3)

Meanwhile Oxfam chose to add up the reinvested foreign earnings of major US corporations, which are publicly reported in their annual reports and present the $1.4 trillion total as if it revealed hidden money ‘stashed’ offshore.

The question of whether the US should reform the way it taxes international earnings is by no means unimportant. But it is just not the same as secrecy, scandal and embezzlement. Both questions deserve serious attention, not a knockabout pantomime which obscures the difference.

Of course, the issue with secrecy is that we don’t know the extent of offshore assets or how they divide up between:

  1. Fully legal and disclosed (e.g.David Cameron investments apparently)
  2. Legally earned but undeclared (e.g. Arlette Ricci)
  3. Corrupt, criminal or stolen money hidden offshore (e.g. Ferdinand and Imelda Marcos)

Gabriel Zucman has had a serious go at estimation and thinks that some $7.6 trillion of private wealth is held in offshore tax havens. He does not ask how much of this are the fruits of grand corruption and crime, but suggests that the 80% of offshore funds are at least within category 2: undeclared and therefore tax evading. Others such as Tim Worstall argue that the assumption that the vast majority of private offshore wealth is routinely and easily hidden and undeclared (while earning a decent return) may turn out to be wrong (or at least out of date), given enforcement measures such as FATCA, and legal provisions such as ‘non Doms’ in the UK and India’s ‘Liberalised Remittance Scheme’, as well as datapoints such as the fact that the UK only recovered £135m of back taxes on the $22 billion revealed in the ‘Swiss leaks’ cases. The fallout from the Panama Papers may shed more light.

Certainly we should not assume huge numbers in the poorest developing countries; Zucman makes clear that most of his total relates to holdings by people from rich countries. Recent studies from Uganda, Malawi and Namibia found that corruption and tax evasion by High Net Worth individuals tended not to end up with money hidden in exotic offshore financial structures, but more simply unreported in local investments such as commercial and residential property.

Corruption, tax fraud and evasion should be prevented and punished and tax systems strengthened (this argument does not depend on there being an absolutely  huge dollar total to be distributed, but on the impacts of corruption on accountability, political and institutional development and economic growth). At the same time this does not mean that anyone holding assets or structuring business deals through offshore centres should be assumed to be up to no good. Offshore financial centres are important conduits for international investment, offering a tax-neutral base to combine investment from different sources, and trusted and familiar legal concepts and systems – all of which builds confidence, reduces costs and risk. We can’t afford to throw this baby out with the bathwater. Nor can the competitiveness concerns of small nations that have specialised in financial services be ignored. Finding the right balance between reasonable privacy and effective law enforcement, and between the interests of diverse nations is a knotty problem.

Does the confusion in the debate matter, as long as it builds general awareness, momentum and support for action? I think it does (as I may have said a few times before).

There are already a large number of rules to combat money laundering, which involve significant direct costs and administrative burden, and which can have  negative unintended impacts on financial inclusion. But success at preventing corruption and money laundering and recovering stolen assets are few and far between. Jason Sharman argues that ‘policy ignorance drives policy ineffectiveness’ and that policy makers are not looking closely enough at what works, but instead have negotiated symbolic international rules that encourage countries to establish formal policies and give the impression of compliance without effectively resolving the problems of corruption and the hiding of its gains. Symbolic actions are clearly not what is needed.



The mistakes:

  1. ‘Ten times more to tax evasion than they get in aid’ – wrongly attributed to the Tax Justice Network. What they said is that tax revenues are ten times more than aid.
  2. ‘$34 billion in annual revenues through corporate tax dodging ‘ – this based on a mistake made by Kofi Annan. It is an estimate of trade mispricing not an estimate of revenue loss.
  3. ‘$150 billion a year of illicit flows’ – this is an estimate of the direct and indirect costs of corruption developed by the African Union in 2002, much cited but not published. It isn’t about illicit (i.e. cross border) flows.



One Response to “The Panama Filing Cabinets”

  1. Really useful, thanks Maya.

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