Panama Papers Global Scandal - Literature review Example

Panama Papers

Introduction

The “Panama Papers” is a global scandal that sufficed in 2016; whereby, a whistleblower from a law firm in Panama decided to release more than 11.5 million documents revealing financial transgressions. As noted by Alvarado (par 14), the released documents comprised of PDF files, emails, and texts that make up a data size of about 2.6 terabyte. Even though the size is not important, it indicates the amount of information exposed, thereby making the Panama Papers financial scandal the largest so far. The law firm from which the documents were derived is known as Mossack Fonseca, whose main operations are to offer clients with the opportunity to set up “shell” companies. As defined by Harding (par 8), shell companies are those formed with the main intention of providing discretion and only exist on paper, meaning that the companies do not exist in reality but legally on paper documents.

Before the release of the documents, investigations have been taking place for more than 12 months, such that 400 journalists undertook the responsibility to carry out the investigations, which were coordinated by the ICIJ (International Consortium of Investigative Journalists). The journalists made analysis of documents and cases that dated four decades back, and in the process uncovering suspicious and crooked financial activities (Golshan pars 2-3). According to Winship (par 4), the data recovered from the Panama Papers leak provide a rare insight into a world that is not so common among the public. The revelations indicate and prove how major banks, asset management companies, and legal firms are secretly managing the wealth of the rich people and celebrities from all over the world (Pogge and Krishen 125). The aim of this literature review is to examine and explain the reasons why tax haven is a common practice in the modern world. The objective of this paper also includes enlightenment on why and how tax haven is practiced by the rich and powerful. In the process, this literature review relates the objectives with the “Panama Papers” case.

Tax Havens Definition

According to Levy, tax haven is definable as a place where tax does not exist or is extremely low (221). A tax haven is territory where financial secrecy is a guarantee such that banks and asset management companies are not required to reveal the financial endeavors of their clients. The financial secrecy and freedom to remain discrete is an aspect that is deemed attractive to most people such that they are attracted to engage in illegal financial activities like tax evasion, fraud, and money laundering (Alvarado, pars 7-10). Regions and nations considered tax havens are popular among people who want to practice such illegal undertakings. Popularity of such tax havens has prompted countries like United States and United Kingdom to impose ban on their citizens in engaging in any financial endeavors with such regions and countries (Hüttl and Leandro, par 14).

As noted by Winship, some of the common tax havens include Bahamas, Seychelles, Virgin Islands, and Panama (par 13). Most of the tax haven countries are commonly known for being great and amazing tourist destinations and not as homes for shell companies. The law company Mossack Fonseca has assisted several business people institute shell companies in places such as the aforementioned. Kelly discovers that 80 percent of those clients have their companies registered and initiated in British Virgin Island (pars 7-12). The tax haven places are known to care less about the financial activities of these clients, or they are too busy to notice the inconsiderate financial deeds by such companies like Mossack Fonseca. Therefore, many people are attracted by the lack of serious attention to examine and monitor their financial statements. According to Winship, the Panama Papers revelations made a significant and clear aspect that tax havens are ubiquitous and a common practice from a global perspective (par 7). The practice is so common that it makes it impossible to control and avoid such occurrences.

As noted by Golshan, tax havens are not only in existence in countries such as Panama and the Cayman Islands, but they also exist in countries like the United States, particularly in Wyoming and Delaware (par 14). That is, it has recently been noted that the world’s favorite new tax haven is the United States, which is a point reiterated by American law firms (Hüttl and Leandro, par 8). The point is further echoed by financial experts, whereby, they claim that some states in United States are perfectly effective regarding free or low taxes, thus, making them ideal tax havens. It is ironical that America is known for criticizing other countries in assisting the rich people avoid taxes yet tolerate the opportunity for some of its states to offer tax evasion activities. Pogge and Krishen note that the tolerance of the United States and its popularity as a tax haven indicates the prevalence of fraudulent activities from a global perspective (125). Therefore, given that the United States is in tolerance with the fraudulent activities, then it means that more countries are likely to follow the example and create tax havens of their own. The behavior is on the rise, which is the reason the whistleblower decided to expose the Panama Papers (Harding pars 5-9).

Why Tax Havens Exist

As per Pogge and Krishen, the existence of the tax havens is attributed to the presence of the current global tax system, which came into existence due to the tax treaties (125). The tax system is also because of the international structuring, which arose from the desire by several governments in trying to maximize their tax revenues. That is, countries such as Panama, Mauritius, Seychelles, and many other tax havens made recognition that there were constant situations requiring international corporations to pay taxes due to certain jurisdictions. The resultant is the occurrence of a double taxation, particularly for similar revenue (Levy 221). It meant that an international corporation would result in bankruptcy, thus, the need to offer low taxes and offer privacy regarding the same financial activities. The objective for the low taxes for the international corporations was (and still is) to attract investment into these tax haven nations.

It means that the big corporations and investors from developed countries are encouraged to start companies in countries like Panama and Cayman Islands, which would assist the locals by creating employment as well as enjoy other benefits. Therefore, it means that the tax havens are operating from a legal perspective. However, as per Alvarado findings, most people and governments are taking advantage of this legality and set up shell companies with the aim of relishing on low taxes and free operations within these countries (pars 9-13). In other words, countries like Ukraine, Russia, and Spain have been utilizing the freedom offered by the tax haven nations to create offshore accounts with the aim of evading taxes from their parent countries. For instance, the Panama Papers reveal that the Prime Ministers of Ukraine and Iceland were among the people with personal offshore accounts in Panama. The leak further translates that prominent government officials have been using the tax havens as a means to evade taxes in their own countries, which is ironical given that they are the leaders mandated to ensure that all citizens follow the law and pay tax (Winship pars 11-14).

The existence of tax havens is also attributed to the fact that every nation has its own set of rights to ensure that the company operates fairly, thus giving rise to tax competition. Citizens from developed nations where taxes are high have the opportunity to live in tax haven countries, mainly because of the lower taxes and lower standards of life. According to Golshan, governments from the tax haven countries tend to lessen the stringent tax policies on investors from the developed nations, thus the reason why tax havens are in existence (par 12). The lower taxes are meant to attract and keep these investors into the country. Therefore, the tax havens are supposedly forced to be reluctant with their rules on offshore accounts and formation of shell companies. The governments benefit so much from the millions of dollars invested in their country in the form of the shell companies (Harding pars 9-14).

Offshore Shell Companies

According to Levy, the purposes of offshore accounts come in several reasons, some of which are for good reasons while others are for the wrong reasons (221). For instance, there are reasons why people and businesses need to keep their financial histories private and away from the public domain. It does not mean that such reasons are illegal and that they will be doing illegal activities (Golshan par 8-9). One particular reason for keeping financials private is the case of signing a will on how to divide inheritance. Businesses are sometimes obliged to keep their money private until a time when the finance is needed for use, which is in a similar manner that banks operate. However, not all reasons are good, and so people and many businesses take advantage of the legalities in starting up offshore companies and in the process use the money to evade taxes and keep secret their financial statements (Hüttl and Leandro pars 13-15). The result is that countries from developed countries are losing taxes that they would otherwise have gathered, and which would have assisted in further development of the country.

According to Harding, it is easily conclusive that tax evasion via offshore accounts is not moral and ethical, thus the measures by the parent countries to limit and prevent their citizens from carrying out the offshore companies (para 10). Money laundering is another reason why offshore shell companies are being created by the people from developed countries (Alvarado pars 2-5). It is a common practice that people who make and earn money through illegal means have made it possible to create and manage shell companies within the tax haven nations. The intentions for opening the shell companies are to launder money and make them seem like genuine companies while at the same time avoiding taxes. Some of people and businesses that embrace money laundering via offshore companies include drug dealers and businesses whose practices have been restricted in certain countries (Pogge and Krishen 125). From the Panama Papers, there is a disclosure that even governmental officials and prominent leaders launder their money that they acquire from illegal (and sometimes legal) means. The leaders and the well-known celebrities are creating the offshore companies as a means to dodge corporate and national tax structure in their own countries.

As noticed by Winship, even though most people are now accustomed to tax havens, the actual practices regarding wealth management tend to be more secretive, whereby wealth management has become a profession on the defensive (par 3). The exact practices are particularly recognizable among the international tax agencies and state revenue authorities most of who seek to impose the rule of law on individuals with high net worth (Kelly par 4). The high net worth individuals are definable as those earning or are worth more than 30 million in terms of investable assets. In most nations, such individuals are known to avoid hefty fees imposed on tax evasions, and they do this by paying off wealth management professionals. As illustrated by Harding, such “indoor” cases and practices are uncommon among most people such that it is was not until the Panama Papers leaks that the public generation came to realize the prevalence of such fraudulent practices (par 6). The secrecy among the wealth management professions is possible since the same professionals are trying all they can to conceal their identities, as well hide the identities of their clients. Shell companies are the best tools and methods through which wealthy people are utilizing to protect their assets.

Legality of Tax Havens (Internal Loans and Royalty Payments)

According to Hüttl and Leandro, the legalities of tax havens are easily explainable by asking the questions on how comes money is effortlessly transferrable to offshore countries and back again (pars 6-8). The answer to this question is through legal means, which include internal loans and royalty payments, whereby both ways are legal. The first method is internal loans, which are definable as the process through which a home company pretends to be loaning money to an offshore company, but only that both companies are owned by the same parent company (Golshan, pars 6-8). Therefore, when a loan is paid back, it means that the parent company earns the interest, thus resulting in surplus money being channeled back to the main company.

Regarding royalty payments, it is definable as an agreement through which a company receives a loan with the intention to provide payments back to the main company because of using its brand name. In simpler terms, it means that an offshore uses the brand name of the main company. Alvarado illustrates the misuse of the legalities of tax havens and the use of royalty payments such that a company may decide to create an offshore shell company that uses its brand name (pars 7-12). The intention in such a case scenario is to receive royalty payments, which appear in surplus within the company financial statements, but only that the payments are from the shell company, and not from any other separate entity (Levy 221).

As per Winship, two important questions arise from the Panama Papers leak, is it legal? Is it ethical? (Pars 9-13) For the first question on legality of the practices, the answer is YES. Setting up offshore companies as well as being secretive with financial practices in offshore countries like Panama is legal. Individuals and companies are allowed to create an offshore account, but they are only allowed to do this with good intentions. Despite the legality in offshore accounts and companies, it has become uncontrollable for people with power and money to use the offshore accounts for wrong reasons, which include tax evasion.

The wrong or right doings bring about the second question, which is to ask whether the practices are ethical. As noted by Harding, the answer to this question is NO whereby he notices that a legal practice does not necessarily mean that the same actions are ethical (pars 7-10). Many rich and famous people are using the offshore accounts as a means to engage in illegal financial activities, which are also unethical. Even though some of the people setting up these offshore accounts are genuine and do such for the good reasons, it is indisputable that some people have intentions that are not good. The result is a tedious process in determining who has the best interests and who does not when setting these offshore accounts (Kelly pars 3-6). Consequently, it is imperative that governmental institutions create methods that can be useful in limiting the unethical practices by the rich and famous individuals, as well as the renowned business brands. Otherwise, the world would continue seeing the practice of taking the law for granted with the purpose of hiding their illegal activities.

Accountability

As per Pogge and Krishen findings, it is vital to ask the inevitable question regarding the Panama Papers and many other tax haven leaks (125). Who is to blame on these cases, and who is to be held accountable for the outcomes and the malpractices? Ever since the Panama Papers were released, there has been pressure from the public via social media platforms demanding that leaders mentioned in the scandal to resign from their offices. The pressure has been successful since the Ukrainian Prime Minister resigned right after the claims. However, the pressure has not been successful in other countries like United Kingdom and Iceland where Prime Ministers of both countries are yet to resign. However, Alvarado notes that the resignation of the leaders is not enough for the accountability, and instead, she asks if the blame should be placed on the entire offshore industry in spite of its legal existence (pars 8). Many critiques challenge the existence of the tax havens and doubt if the companies are operating on a proper manner. For instance, Golshan believes that the countries operating under the legalities of offshore shell companies are known to lack proper monitoring (pars 9-15).

The query that arises is the fact that the blame and accountability should be on the governments, most of which allow the existence of the tax evasion schemes by letting them find loopholes within the financial laws regarding offshore accounts. As Levy suggests, critiques regarding the accountability of offshore accounts and leaks such as the Panama Papers are required to maintain a presumption of innocence (221). Furthermore, the tax haven countries such as Panama need to recognize the role and responsibility to investigate and penalize illegal activities in accordance with laws. The investigations are underway and are through proper institutions within the tax haven countries such as Panama.

Harding clarifies that the world needs to work together in fighting the challenges facing systemic tax evasions, which in turn deprives taxpayers from across the world of more than 200 billion every year (pars 7-10). The measures to restrict and control tax evasions and malpractices in tax haven nations such as Panama are supposed to be applicable. For instance, other nations should follow the example of Panama, which set up a tribunal to investigate the flaws in the financial system, decide on the best practices to consider, and recommend measures to strengthen a legal transparency (Kelly pars 9-12).

Conclusion

According to Winship, the release of the Panama Papers is a chance for the international community to change and mend the long broken “offshore” system (pars 4-6). It is probably the perfect time for governments and the necessary authorities to push for the creation and agreement on stricter rules regarding the beneficial owners of the offshore shell companies. Moreover, the opportunity should be taken to initiate commitments that help with the implementation of the new legislation. The leaks serve as a reminder on how rampant the malpractices are affecting the people of the countries where tax are evaded. The reminder is that changes are required, particularly altering long and outdated rules and regulations that have governed the offshore accounts and companies.

As per Hüttl and Leandro, the best way to fight the abusive use of shell offshore companies would be to find the owners of the companies, which would be possible through creation of comprehensive registries (pars 3-12). The investors of these shell companies will be required to record and reveal themselves rather than keeping themselves secret from the public. The result is a powerful manner through which financial transparency is possible, and in the process fighting money laundering and tax evasions. Alvarado explains that there already exist registries for land and real estate, and suggests that the same should be applicable and extended to cover financial assets such as bonds, equities, derivatives, and mutual fund shares (pars 9-13). Suggestions are further made on central registries regarding beneficial ownership of the offshore companies such that they should be open to tax officials, the public, and the law enforcers. Regulations should be placed on law firms and intermediary financial authorities involved in setting up of offshore companies (Golshan, pars 9-15).