It’s the call any law firm dreads receiving: “Hi, I’m a journalist. We have a batch of leaked documents from your company and we are writing about them.” For firms that work in sensitive areas—like, say, incorporating companies in offshore tax havens—it is especially troubling.
The Panamanian offshore specialist Mossack Fonseca got a doozy of a call recently, after 11.5 million of its internal documents were leaked to the German newspaper Süddeutsche Zeitung. The paper shared the cache with the International Consortium of Investigative Journalists (ICIJ), which enlisted hundreds of reporters around the world to sift through the documents.
The initial reports based on the leaks have linked 72 current or former heads of state to offshore entities created by Mossack Fonseca. Other political figures, top executives, and celebrities have also appeared in the files, leading to accusations of tax evasion, money laundering, sanctions busting, and other unsavory behavior.
There are legitimate uses offshore companies in places like Panama and the British Virgin Islands, and Mossack Fonseca has defended its business practices in a series of statements on its website and emails to media outlets. As you would expect, these are written in dense legalese. Below are some of the key passages from the company statements (in block quotes), followed by Quartz’s comments.
It is legal and common for companies to establish commercial entities in different jurisdictions for a variety of legitimate reasons, including conducting cross-border mergers and acquisitions, bankruptcies, estate planning, personal safety, restructuring and pooling of investment capital from different jurisdictions in neutral legal and tax regimes that does not benefit or disadvantage any one investor.
Yes, but there are also plenty of illegitimate reasons to build a web of anonymous shell companies in far-flung tax havens with poor reputations, points out Richard Murphy, a chartered accountant, author, and director of Tax Research UK. “The only reason you are going to Panama compared to Delaware or the UK, or frankly a more reputable offshore jurisdiction, is you want something Panama offers and no one else has, and that’s deep secrecy,” he says. “Why would you need that deep secrecy if what you were doing was something you were proud of, which was honorable or of real benefit? I can’t think of that.”
…approximately 90% of our clientele is comprised of professional clients, such as international financial institutions as well as trust companies and prominent law and accounting firms, who act as intermediaries and are regulated in the jurisdiction of their business. These clients are obliged to perform due diligence on their clients in accordance with the [Know Your Customer] and [Anti-Money Laundering] regulations to which they are subjects.
Yes, but the banks haven’t proved themselves the most effective judges of character. Several large banks have recently been hit with fines for clumsily trying to skirt US sanctions, for example. Consider this passage in an email between Commerzbank bankers, revealed in its settlement with US authorities, in which they discuss transfers on behalf of blacklisted Iranian clients: “under no circumstances may anyone mention that there is a connection to the clearing of Iranian banks!!!!!!!!!!!!!”
More directly, a new report alleges that Mossack Fonseca gave preferred banks special treatment when it came to verifying that their customers weren’t involved in illegal activities, under sanctions, or otherwise up to no good. It apparently dubbed this practice “DD light” (Due Diligence light).
The firm cites its “duly established policies and procedures” for dealing with so-called politically exposed persons—considered high-risk clients, given their offices. So it doesn’t look good that when Sergey Roldugin, a close confidant of Russian president Vladimir Putin and godfather to his eldest daughter, was asked on incorporation forms if he has relations with political figures, he simply answered “no” and became the owner of offshore companies that handled tens of millions of dollars worth of transactions.
We are legally and practically limited in our ability to regulate the use of companies we incorporate or to which we provide other services. We are not involved in managing our clients’ companies. Excluding the professional fees we earn, we do not take possession or custody of clients’ money, or have anything to do with any of the direct financial aspects related to operating their businesses.
Our company does not advise clients on the structuring of corporate vehicles and the use they may make of them. We likewise do not offer solutions whose purpose is to hide unlawful acts such as tax evasion. Our clients request our services after being duly advised by qualified professionals in their places of business.
Yes, but how can the firm be sure that its “solutions” are not used to evade taxes if it is never involved in advising or managing the companies it creates? “I don’t how they can say that,” says Murphy. “That’s contradicted by the statement that they are not responsible for the use made of the companies they created.”
And what about the companies where representatives from the firm act as directors? Don’t directors have a duty to determine what their companies actually do? Not necessarily, says Mossack Fonseca: such an agent ”has no economic interest or commercial link to the company’s activity and he/she does not endorse, participate or assist in the commercial or passive roles of a company in any way.” These directors are only there to help with paperwork.
For 40 years Mossack Fonseca has operated beyond reproach in our home country and in other jurisdictions where we have operations … All of the jurisdictions where we have operations have made significant strides in their efforts to comply with global protocols to prevent abuse of their financial and corporate systems.
Yes, but Panama—where the law firm is based—is one of a handful of countries that has not committed to the OECD’s global standard on the automatic exchange of tax-related information (pdf), which the organization says “reduces the possibility for tax evasion.”
According to the Tax Justice Network (TJN), Panama sits in 13th place in the global ranking of countries with the greatest financial secrecy. “In recent years it has adopted a hardline position as a jurisdiction that refuses to co-operate with international transparency initiatives,” the TJN says (pdf).
In the firm’s initial response to media outlets, Carlos Sousa, Mossack Fonseca’s PR director, did not mince words on one thing:
…it appears that you have had unauthorized access to proprietary documents and information taken from our company and have presented and interpreted them out of context. We trust that you are fully aware that using information/documentation unlawfully obtained is a crime, and we will not hesitate to pursue all available criminal and civil remedies.
He then signed off, somewhat incongruously, with “kind regards.”