Panama Papers

The Panama Papers are 11.5 million files obtained from the database of the law firm, Mossack Fonseca. The documents were leaked to the German newspaper Süddeutsche Zeitung (SZ) by an anonymous whistleblower. The newspaper then shared the papers with the International Consortium of Investigative Journalists (ICIJ). Around 107 media organizations in 80 countries analyzed the documents and after a year-long analysis the documents were first published on April 3, 2016. John Doe is the pseudonym used by the whistleblower, who leaked the documents of Mossack Fonseca. John Doe has cited growing income inequality and global financial corruption as reasons for his actions.

About Mossack Fonseca

Mossack Fonseca is a Panama based law firm which has a worldwide operation. It is the world’s fourth biggest provider of offshore services. It has offered services for more than 300,000 companies. The services offered include incorporation of companies in offshore jurisdictions and wealth management. It specially specializes in setting up of shell companies for its clients in jurisdictions that make little information available about the people behind a company name. It also administers the offshore firms in return for a yearly fee. It employs around 600 people in 42 countries. In addition, it has franchises around the world. It also operates in tax havens like Switzerland, British Virgin Islands, Cyprus etc.

About the Leaked Data

The leaked data covers nearly 40 years from 1977 to 2015 and is one of the biggest and unprecedented leaks in history, larger than WikiLeaks of 2010. The leaked data is also largest ever release of information about offshore companies and those people operating behind them. It contains 11.5 million documents and 2.6 terabytes of information obtained from the internal database of Mossack Fonseca. It is made up of more than 320,166 text documents, 1.1 million images, 2.15 million PDF files, 3 million database excerpts and 4.8 million emails.

Key Personalities in loop

Panama Papers have shown the extent of wealth offshore, hidden from tax authorities by thousands of businessmen, criminals, political leaders, sportspersons and celebrities across the world. They revealed the identity information about shareholders and directors of 214,000 shell companies {Shell company means a company created not for business but only as a vehicle for various financial manoeuvres}  along with some of their financial transactions. Some prominent names include Ukrainian President Petro Poroshenko, Saudi Arabian monarch King Salman, former Prime Minister of Iraq Ayad Allawi, Iceland Prime Minister Sigmundur David Gunnlaugsson, Pakistan’s Prime Minister Nawaz Sharif, Movie star Jackie Chan and soccer player Lionel Messi etc.

The list also includes 2000 Indians as shareholders, directors and beneficiaries of offshore companies. The database for India shows 22 offshore entities and 828 addresses from cities like Delhi, Mumbai, Kolkata, Chennai, Bhopal etc. Even addresses from mofussil locations like Sirsa, Muzzafarpur, Mandasaur have figured in the database.

The prominent Indian names are Harish Salve (former Solicitor General), Amitabh Bachchan, Aishwarya Rai Bachchan, Ajay Devgan, Mallika Srinivasan (chairman and CEO TAFE), Shishir Bajoria (SK Bajoria Group), Onkar Kanwar (Chairman and MD of Apollo Tyres), Vinod Adani (Adani Group) etc.

Among global leaders, though Russian President Vladimir Putin is not directly named in the documents, a $2 billion trail apparently leads to Putin. Similarly, Britain Prime Minister David Cameron is facing the heat as his father ran an offshore fund that avoided ever having to pay tax in Britain by hiring residents of Bahamas to sign its paperwork.

Other Notes

The documents reveal that the most popular tax havens for clients of Mossack Fonseca include British Virgin Islands (more than 1 lakh companies), Panama and Bahamas in the Caribbean; Seychelles in Africa and Niue and Samoa from Oceania.

Mossack Fonseca acted on instructions of intermediaries and did not deal directly with the company owners. The intermediaries are usually the accountants, lawyers, banks and trust companies.

Mossack Fonseca has robustly defended its conduct and has refused to discuss some cases of alleged irregularities citing its policy of client confidentiality. The firm has stated that it fully complies with anti-money laundering laws and says it cannot be blamed for the wrongdoings and failings on the part of intermediaries.

To incentivize its client, the law firm made its own executives to serve as shareholders or directors and in some cases banks or intermediary law firm was made as a director or a nominee shareholder to ensure the real beneficiary remains hidden. In addition it provides an official address and a mail box none of which could identify the entity with the beneficial owner. In short it did all it can to veil the original beneficiaries.

Questions & Answers

Implications of Panama Papers

What the Panama Papers tell us about collaborative journalism?

The Panama Papers investigation was led by International Consortium of Investigative Journalists (ICIJ) together with 370 journalists from over 100 media outlets.  This team spent almost a year to investigate into the 11.5 million leaked files of Mossack Fonseca, which turns out to be one of the world’s largest creator of shell companies to hide ownership of assets. Its importance lies in the meticulous, painstaking and ethical reporting which extracted relevant stories from a cache of 2.6 terabytes of data. The Panama papers tell us that the idea of cooperation and collaboration in journalism can be used for joint investigation into global issues and crimes such as terror links and networks, mis-use of nuclear and other weapons, illegal smuggling of wildlife fauna / flora and products etc.

How Panama Papers give boost to leaktivism?

The activism using leaking important secret / classified papers/ documents has been called leaktivism. Leaktivism has been said to be an effective form of “social protest” and marks its beginning with WikiLeaks and charecterised by rise of Julian Assange, Chelsea Manning, Edward Snowden and the Panama papers fame anonymous “John Doe”. The Panama Papers presents coming-of-age of such type of activism because this leak has dwarfed all earlier leaks so far via its size that is 40 years records, 11.5 million files and 2.6 terabytes of data. Some call is professional leakitism which replace the amateurism of WikiLeaks.

What Panama Papers tell us of global governance?

The Panama Papers make it clear that people, whether in UK, Russia, Pakistan or Brazil, face the same globalized enemy i.e. the greed of the ultra rich to wield their wealth to maintain a stranglehold on power; while simultaneously hiding from the tax authorities. This highlights a fundamental problem that wrong people are in power; and that 1% global political elites should be in Jail instead of being in government.

Basics on Tax Havens

What is difference between Tax Avoidance, Tax Evasion and Tax Planning?

Tax Planning is reducing tax liability using laws to minimize the tax liability. For example, Government allows rebate on income tax for investments in fixed deposits or government bonds. A person can invest up to a limit {currently Rs. 1.5 Lakh} to get rebate on tax payable on that income.

Tax avoidance is legal management to avoid tax. In other words, it uses loopholes in the laws, rules, treaties etc. to reduce tax liabilities. Most popular tools of tax avoidance include stashing money in tax havens, treaty shopping, round tripping, transfer pricing, thin capitalization etc.

Tax evasion is illegal means to reduce tax liabilities. This includes falsifying accounts, suppression of income, overstatement of deductions etc.

What are Tax Havens?

Tax havens refer to the countries or territories where tax is either very low or not levied at all. Switzerland, Luxembourg, Isle of Man, British Overseas Territory, Bermuda, British Virgin Islands, Cayman Islands, Puerto Rico etc. are some of the popular tax havens around the world. Tax havens are used by High Net worth individuals, multinationals etc. for tax planning as well as tax avoidance.

Each tax haven has its own comparative advantage whether in terms of cost or time taken up in setting up structures or secrecy provided. However, all tax havens have some of the common features such as low or nil income tax, ease of setting up companies/trusts/foundations, minimal disclosure requirements, secrecy etc.

What are offshore shell companies? Why they are used?

Offshore shell companies are legal entities incorporated or registered in a tax haven or offshore financial centre {OFC}. Examples of tax haven include Bermuda, British Virgin Island and Cayman Islands. These companies are statutorily exempt from taxation in their jurisdiction of registration if they do not carry out business with persons resident in that jurisdiction.

Offshore companies are used for a variety of commercial and private purposes, legitimate as well as illegitimate activities including money laundering, tax evasion, fraud and several forms of white collar crimes.

The people in Russia and Ukraine keep money in OFCs to defend it from raids by criminals. This is one example of legitimate use of offshore financial centres. In fact the journalists on the investigative team have concluded that many business transactions to be quite legal. In some cases it does not show anything more than prudent financial management.

The corrupt, criminals and money launderers take advantage of anonymous company structures to hide money in OFCs. This is one example of illegitimate use of OFCs.

What are the benefits of registering a foreign company in tax havens like Panama?

The places like British Virgin Islands, Bahamas, Seychelles and especially Panama offers the benefit of zero tax on income generated and secrecy of information about the ultimate beneficiary. Moreover, it is easy to setup an entity abroad.  An entity can be setup in a couple of days just by spending a few hundred dollars. Also, in Panama, bearer shares which do not have the name of the owner are available for individuals. It is to be noted that the bearer shares have been abolished in many countries because they have been used by corrupt and tax evaders for money laundering.

What is the relevance of the revelations to the black money debate?

Globally, offshore entities are seen as vehicles set up to evade or avoid tax. While companies call this as tax planning, the IT departments see it as tax avoidance. With stringent efforts taken by groupings like G-20 to crack down on activities like tax avoidance and money laundering, there is rising scrutiny over companies like Mossack Fonseca which helps in setting up of offshore entities.

Panama Papers and India

How the revelations will affect the Indians?

Non-disclosure of an overseas asset and floating of offshore companies could be seen as a violation by the Indian regulators depending upon the reason for which the company is put to use. On proper grounds, they may be seen as a violation individually or jointly to the following acts:

• Foreign Exchange Management Act (FEMA),
• Prevention of Money Laundering Act,
• Black Money (Undisclosed Foreign Income and Assets),
• Imposition of Tax Act,
• Prevention of Corruption Act, and
• Income-Tax Act.

Similarly, NRIs are not needed to report their offshore entities. But the income earned by them in India falls under the ambit of Indian regulators.

Does Indian Law allow individuals to stack money abroad?

Yes via LRS scheme. Before coming to this, we need to understand FERA and FEMA. FERA was enacted at the backdrop of inadequate foreign exchange holdings in the 1980s and 1990s to impose severe restrictions to prevent the outflow of foreign exchange. So, the residents secretly opened Swiss bank accounts and offshore companies through hawala transactions.

But after liberalization in 1991, FERA was replaced by FEMA in 1999. Subsequently when India’s foreign exchange reserves rose to $100 billion in 2004, RBI allowed companies to invest up to 100 per cent of their net worth (at present 400 per cent of net worth) abroad. It started limited capital account convertibility by introducing the Liberalized Remittance Scheme (LRS) in 2004. The intention of allowing LRS by the RBI was to allow resident individuals in the spirit of liberalization to diversify their assets and to promote trade and exports. But the motive was not to let them set up companies, which could be put to misuse.

The LRS limit was initially $25,000 a year but subsequently it was increased in phases and at present stands at $250,000 a year. This means, every year an Indian resident individual can invest up to a limit of $250,000 abroad in buying shares or property or gift or donate to anyone living abroad.

Do the Indian regulators are aware of the firms like Mossack Fonseca?

There are many individuals who opened offshore entities by mis-interpreting LRS. But on August 5, 2013, RBI allowed resident Indians to make investments directly in joint ventures and overseas subsidiaries through LRS. Hence, it is held technically that those individuals who had setup offshore entities prior to August 2013 to be the violators of the rules. Before 2013, on the advice of chartered accountants many individuals believed that acquiring companies was not the same as setting up of companies and bought companies made available by the firms like Mossack Fonseca.

In certain cases, RBI imposed penalty after such violations came to its notice, or the individuals themselves disclosed such violations. In some other pre 2013 cases, the RBI directed the individuals either to divest or unwind their operations. Similarly, while some individuals have declared their investments to IT authorities many others have refrained from doing so owing to fera of prosecution.

What will be the next step for the RBI and IT department?

The RBI may have to take a decision on whether to allow compounding (by considering the individuals has erred bona fide and regularizing the investment in the offshore company by imposing a penalty) or ask the individuals in the list to wind up their offshore investments made prior to August 2013.

The IT Department may have to investigate whether any round tripping (routing of investments made in offshore companies back to India) of funds have occurred or not. It will also need to check whether the incomes and assets of the offshore entities have been declared by the owners or not.

What steps have been taken by the Indian government after the revelations?

Prime Minister Narendra Modi had ordered an enquiry and a special multi-agency group was constituted. The agency comprises of officers from the investigative unit and the Foreign Tax and Tax Research Division of the Central Board of Direct Taxes (CBDT), the Financial Intelligence Unit and the Reserve Bank of India (RBI).

HOT Questions for Writing Practice / Discussion

• [Paper-IV] “Proving that certain behavior is ‘legal’ does not prove that it is ethical or just.” Discuss in the light of recent spate of leaktivism.
• [Paper-III] To what extent, the indictment of global capitalism through the Panama Papers leak is justified? Argue. {reference link}