The unprecedented leak of 11.5 million files at the centre of the Panama Papers scandal has caused headlines around the world and a headache for many rich and powerful people, including our own Prime Minister.  But what was surprising, argues Dr Nicholas Lord, was not just the sheer size of the leak, but that the leak even occurred. And, he explains, while the proposed ‘Central Register’ is a step in the right direction, major stumbling blocks to exposing secret and criminal activity remain.

Rich global elites

The Panama Papers illuminate how rich global elites, both individuals and companies, are able to use offshore financial centres and offshore companies to manage their finances and wealth for varied legal and illegal purposes. The use of such mechanisms is not a new phenomenon and in a legal sense represents a well-founded and common approach to business (e.g. providing an ability to incorporate companies in low or no tax regimes, flexibility in global markets, less regulation), though the Papers do provide insights into the flows of (illicit) monies through the global financial system and the extensive concealment of legally and illegally generated wealth.

Setting up companies in offshore tax havens is relatively straightforward. Usually, individuals and businesses will enlist the services of agents or intermediaries to set-up, service and sell them these offshore companies. The spotlight in this case has fallen on Mossack Fonseca, a law firm and company service provider based in Panama that specialises in creating these offshore companies in jurisdictions like the British Virgin Islands and the Bahamas.

Ethics and opportunities

It emerged last week that Prime Minister David Cameron financially benefited from one such offshore company, Blairmore Holdings Inc. – in this case, local Bahamas residents were employed to sign paperwork and present a superficial appearance of company control, enabling the true financial beneficiaries based in the UK to avoid paying tax on profits made. The legality of arranging one’s finances in this way is not (yet) in question, but we might look to the underlying motivations of doing so, consider the wider ethics and harms of such behaviours, and analyse how a person’s position in society provides such opportunities.

We’ve known for some time that offshore companies, secretive tax jurisdictions, and anonymous corporate vehicles, whilst ostensibly legal and ‘legitimate’, are central to a wide array of economic crimes and unethical behaviours. The implication raised in the Panama Papers is that these legal mechanisms are being misused and abused for illicit and illegitimate purposes, such as the evasion and avoidance of tax by wealthy individuals, the concealment of corrupt funds by public officials, and other criminal behaviours like money laundering.

Concerns over such misuse have been prominent for some time and we can see this in the data presented in the numerous reports by intergovernmental and non-governmental organisations (see OECD, FATF, StAR, Christian Aid/Global Witness, and Transparency International, to name just a few). The Papers have reinforced these concerns worldwide, and brought them into public awareness, resulting in a surge of moral indignation.

Criminal activities

Offshore companies are attractive for criminals and unethical individuals and groups, as they are set-up in secretive jurisdictions that provide anonymity to their owners and the transactions processed through them effectively become virtually untraceable. From a criminal perspective, this means you can control, conceal and convert your illicit finances with relative ease. For instance, a politician in country X receiving a bribe by corporation Y to award them a business contract, could use these legal mechanisms to hide and launder the criminal origin of the money and use it to invest into a legitimate system to obtain usable assets. Ideally, we would be able to identify the primary ‘offenders’ and scrutinise their finances. But this is not straightforward due to the inherent secretive features of such companies and jurisdictions.

What we do know is that such offenders and their activities are supported and facilitated by a range of third party actors such as lawyers, accountants, banks and other professionals. A key question to ask, therefore, is how much do company service providers and facilitators, such as Mossack Fonseca, actually know (or should do all they can, to know) about the misuse of the companies that they create and are they complicit in their misuse for illicit purposes? In this case Mossack Fonseca has denied the allegations.

Policy implications and stumbling blocks

In policy terms, we need to place increased attention and responsibility onto third party intermediaries and actors who, whether knowingly, with wilful blindness or through incompetence, facilitate the concealment of illegal behaviours. Increased regulation of these third party legal and accounting professionals and the removal of excuses is vital, yet they often operate with impunity. If we can increase the perceived effort and risks, and remove the potential rewards for such facilitators, we can ensure a more capable regulatory environment.

In enforcement terms, major obstacle is the lack of transparency. As the illegal and unethical behaviours are well hidden behind otherwise legitimate business structures and mechanisms, this makes detecting deviant behaviours and obtaining evidence incredibly difficult for responsible enforcement authorities – making transparent the anonymity provided by such structures is widely recognised as essential to responding to wide array of economic crimes and ought to be a key policy focus.

There are steps in the right direction. From June this year it will be a requirement for all businesses to maintain a central register of accurate and current ownership. This will be publicly available in the UK and this is important for enabling competent law enforcement authorities but also civil society, non-governmental organisations and investigative journalists to play a role in the regulation of those seeking to hide their assets for illegitimate reasons. Yet we might question why governments have not sought to address these problems sooner?  A critical observer would look to where the money in those offshore accounts comes from, and goes to, in order to gain an appreciation of the financial and political beneficiaries of such arrangements.

And  a major stumbling block remains over the transparency of companies registered in overseas UK territories. Unlike the UK mainland, they will not need to provide a ‘public’ register, yet the majority of companies created by Mossack Fonseca are registered in UK administered tax havens!

So the gaze of civil society and concerned groups will be excluded from observing those dark and secretive environments where it is most needed.

And this may render a promising policy mostly impotent.