The View

Why shady people seek tax shelters in sunny places

‘Panama Papers’ data dump reveals never-ending demand for tax avoidance and financial secrecy

PUBLISHED : Thursday, 07 April, 2016, 9:19am
UPDATED : Saturday, 09 April, 2016, 9:37am

“Don’t ask me questions so I don’t have to tell any lies,” says the client.

“We just dig the hole. We have no idea who puts which body in it,” replies the adviser.

So begins an introductory meeting in the business of illegitimately hiding assets in offshore tax havens.

However, taxes are really only paid by poor people. It took an army of journalists and media outlets to figure that out and generate enough collective outrage to highlight one of finance’s oldest vocations.

Setting up an offshore corporation and bank account is not illegal and does not necessarily suggest someone is committing a crime. However, legal firms like Mossack Fonseca can be hired to help individuals and corporations hide money from governments that might otherwise possess a right to claim taxes on it.

Dubbed the “Panama Papers”, the massive leak consisted of 2.6 terabytes of information contained in 11.5 million documents. The hacker exposed 38 years of banking files to a German newspaper and the International Consortium of Investigative Journalists. About 12 current or former heads of state and 26 Forbes-listed billionaires appear on the list.

‘Outing’ a database is the modern-day equivalent of the medieval practice of humiliating people by putting them in the town square in stocks

Database hacks and giant online dumps are a hazard of the internet’s evolution. The ability to publicly transmit, parse and disseminate vast sums of data from the internet cloud has created a wild west frontier of information where guilt is indiscriminately implied or established through raw data. “Outing” a database is the modern-day equivalent of the medieval practice of humiliating people by putting them in the town square in stocks.

Nevertheless, tax evasion is usually a predicate offence for other illegal activities. Most people evading taxes are trying to hide their source of income or assets, especially if it is illicit or criminal. Today, there is a clear difference between tax planning and tax evasion.

What the data dump revealed is the never-ending demand for tax avoidance and financial secrecy. Panama is especially attractive. It is one of the few jurisdictions offering bearer share certificates. These documents represent the ultimate in secrecy as no shareholder name is registered. They’re great for hiding the ownership of a company and its assets. They’re bad if your ex-wife or ex-mistress gets their hands on them.

In the history of the wealth of nations, prosperous and powerful countries and their elite business classes have always tolerated and demanded the existence of offshore shelters. Just think of where all the money from the British Empire, slavery, colonialism and the 19th century industrial revolution fled to when Britain was the workshop of the world and the majority of British citizens lived in poverty. Britain’s far flung fortunes spawned financial centres in the British Virgin Islands, Cayman Islands, Jersey, Guernsey and the Isle of Man.

So as China ascends and achieves that same kind of status, it is only natural that Macau and Hong Kong play similar roles. It is an inevitable part of national wealth-creation process. The rich and powerful will always require offshore tax havens because they can’t hide their cash or gold under mattresses. And governments will allow some of them to continue operating as a way to watch the flow of money from the rich and powerful. The lucre simply must disappear to foreign shores.

Banks in Cyprus were once a favourite place for Russians who needed a nearby and well-regulated euro zone member to hide deposits. However, the 2012-2013 Cypriot financial crisis resulted in failed banks and a punishing deposit levy, effectively ending the country’s role as a reliable haven.

The demise of Switzerland as an offshore money laundering and tax evasion enabler – especially for Americans – coincided with its decline as a financial centre despite its perceived political neutrality. The shift of financial power after London’s “Big Bang” in 1986 signalled the end of Zurich’s market importance. Then, the investigation of UBS in 2008 marked the end of vaunted Swiss secrecy as US authorities uncovered massive tax evasion in thousands of American accounts.

Rogues or leaders of rogue nations need offshore financial services in legitimate domiciles even if they are barely stable. Over the past 30 years, Panama’s financial centre has featured players like Manuel Noriega and Pablo Escobar. But no matter. The spotlight on Panama only sends the clients scurrying for temporary shelter in another sunny place for shady people.

Peter Guy is a financial writer and former international banker