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The Panama Papers: what’s the big deal and why if you don’t care, you really should

Written by Richard Francis // Posted on // Found in HomeLife, TopicalLife

If you’ve seen the news recently, you’ll have heard about the Panama Papers by now – aka the biggest information leak in history.

Panama papers

Before this week you’d be forgiven for not having heard of Mossack Fonseca, but the recent revelations of the law firm’s role in facilitating offshore tax avoidance means that it now a household name for all the wrong reasons.

In case the scandal has passed you by, however, let’s recap: following the leak of millions of documents, it’s been revealed how the Panama-based law firm Mossack Fonseca – a company with 40 offices worldwide – has acted as the conduit through which the rich and powerful have moved financial assets into offshore tax havens, such as the British Virgin Islands, in order to avoid paying taxes in their host countries.

Whilst the lion’s share of this tax avoidance was enabled by the existance of legal loopholes, meaning that it took place within the letter of the law, the Panama Papers leak has caused outrage. It is this, alongside the the evidence of money laundering, and the calculated evasion of criminal prosecution that has caused a multi-trillion dollar global scandal, not to mention a major headache for those who have been implicated.

What makes the Panama Papers leak particularly shocking, however, is less so the exposure of such practice – we live in cynical times, after all. Rather, it’s the scale of such practice, and just how high-profile some of Mossack Fonseca’s clients are that has taken the world by surprise – many of the names that have been implicated would feature in a who’s who feature in Times Magazine.

The leak: who leaked the Panama Papers?

Mossack Fonseca mole

Nobody actually knows, or will likely ever know the identity of the individual responsible for the leak.

What we do know is that a little over a year ago a mystery source made contact with a German newspaper, Süeddeutsche Zeitung, offering up millions of internal documents from Mossack Fonseca. These documents, the source explained, would open a door into the company’s key business, namely its specialism in selling offshore-based ‘shell companies’ to its clients, which they could then use to hide their financial assets and therefore avoid tax in their home countries. Interestingly the source didn’t ask for any kind of cash payment or compensation – instead, he said he wanted one thing: “To make these crimes public.”

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Following this contact, Süeddeutsche Zeitung was sent 2.6 terrabytes of data, which they then shared with the International Consortium of Investigative Journalists (ICIJ), and for good reason – the scale of the leak is unparalleled, and it took 100 media organisations from 80 countries around the world close to a year to sift through the leaked documents.

In all, there were over 11 million documents detailing the tax-avoidance skulduggery of over 210,000 companies, trusts, foundations, political leaders, kings and queens, celebrities, public officials, arms dealers, organised criminals and high-power businessmen. More importantly, however, the Panama Papers revealed exactly how Mossack Fonseca’s model works. They exposed exactly how this mysterious company helped its high-profile customers avoid their tax commitments, whilst also opening the door to a global industry which has stronger links to bribery, corruption and crime than many ever thought possible.

The scheme: how does it all work, and is this kind of tax avoidance illegal?


Here’s how it works: Mossack Fonseca’s wealthy clients use the law firm as a middle-man to set-up ‘shell-companies’ on their behalf – companies which exist on paper but do not actively engage in any business activities, or own any assets themselves. They are quite literally empty shells, as their name suggest.

These companies are exclusively set up in one of a number of tax havens around the world, with the British Virgin Islands being particularly popular. There are many reasons for this popularity, chief amongst them being that banking services are available to all, so long as clients have a plentiful amount of money to deposit – there are few questions asked about a client’s background or where their money comes from.

Once purchased, the shell company is owned by a Mossack Fonseca client, but they themselves are not actually named – instead, somebody else, like the wife or husband, a friend or a family member of the client, is named as ‘company director’ so that the real owner can remain anonymous and keep their identity secret.

In other words, what you then have is the perfect vehicle for storing financial assets anonymously – any money which the owner of a shell company pays into or out of it is discreet and hidden away from prying eyes. They are the metaphorical equivalent of a safety deposit box or a secret hiding place under the floorboards, and the real owner’s home country, which doesn’t know the shell company exists, can’t tax the money or financial assets that are held within it.

Any money that’s paid into the shell company, withdrawn from it, or moved around by its owner is marked down as a ‘business deal’ – the Panama Papers have shown how sums of money being paid into or out of shell companies do so as ‘consultancy fee’ payments or share trades, for example.

In itself, the existence and purchase of such shell companies isn’t actually illegal – it’s also important to add that Mossack Fonseca has not broken the law by offering the services which it does. However it is very illegal for shell companies to be used as tools for hiding money and financial assets to dodge paying tax, or any other activity which evades investigation and protects criminal activity such as money laundering.

Here in Britain, HM Revenue & Customs has set-up a taskforce to investigate the documents from the Panama Papers leak, along with any other allegations of tax-dodging and money laundering, and so too have the tax collection agencies of dozens upon dozens of other countries around the world.

It would be safe to say that there are more than a few of Mossack Fonseca’s paying customers who have experienced some discomfort since news of the leak emerged.

A mute reaction to the Panama Papers – why are we not angry about tax avoidance?

So why is it that even though it’s been proven beyond all reasonable doubt how trillions of pounds is being funnelled offshore by the rich and powerful, in order to avoid paying tax, that we’re nowhere near as angry as we really should be about the scandal?

It’s understandable how many of us have greeted the news with little more than a shrug, in a way: we’re so used to corruption stories and scandals now that we’re no longer surprised when proof of it comes to light – it wasn’t their honesty and integrity that got them to the top of the greasy pole, was it?

This, and the fact that we hate paying tax ourselves has to be factored in. You hate tax. I hate tax. Everyone hates tax. It gobbles up a sizeable chunk of what little we earn, seemingly giving us little in return. If the Panama Papers are about the rich and powerful, and how they’ve been dodging paying theirs, what about it, and why should we care? Some might even say that should they be able to, they’d do the same.

This is why millions around the world have reacted to the revelations with nothing but indifference – our collective care cups are far from over-spilling.

Why should I care that rich people haven’t been paying their taxes? And more to the point, why should I care about tax in the first place?

Everyone hates paying tax. You, me, everyone does. Especially when you’re not paid a lot to begin with. It can be sickening to look at your payslip and see just how much the light fingers of the HMRC have pilfered from your paycheque.

But for all that paying taxes grinds our gears, most of us know, even if only in the back of our minds, that our taxes play an important purpose – tax revenue isn’t just a piggybank for MP’s who like to claim stuff on expenses. Rather, tax revenue is used to pay for the construction and upkeep of the roads we drive on, the hospitals which treat us and our families, and the schools and colleges that teach our children to read and write. It pays for the police which allow us to sleep safe in our beds and the emergency services, and an army which is amongst the best in the world. Tax pays the welfare bill too, meaning that the vulnerable in society are protected – if your life crumbles around you, you won’t find yourself sleeping on the streets because you can claim benefits which will tide you over until you are back on your feet again.

We pay a lot of money out of our salaries in taxes, which helps pay for Britain to be what it is today – our great, wonderful, imperfect home. A Britain which is the world’s fifth-richest and most influential country. We pay our share, in other words, at a time when many families and households have little spare cash left over after they’ve paid for the essentials. This is why some are understandably upset. It sticks in the throat a little that the millionaires and billionaires of the world who enjoy extravagant lifestyles and unimaginable wealth, supercars and mansions, are probably paying as much tax as we are, if not less.

The trillions of pounds which is being channelled offshore into global tax havens instead of the national coffers of countries around the world is depriving all of us of better roads, better schools, better hospitals, better services. Everybody understands and accepts that there will always be rich and poor, but as it stands the average Joe isn’t getting a fair deal.

Who’s been caught?

Who hasn’t? Some very big well known companies and individuals have been named and shamed.

Russian President Vladimir Putin has been named, as has the now ex-Icelandic Prime Minister, Sigmundur Gunnlaugsson – a man who, ironically, was elected off the back of his promise to reform the Icelandic banking sector after the 2008 Great Recession. Pakistani Prime Minister Nawaz Sharif, and even our PM David Cameron have faced uncomfortable questions relating to the scandal – the latter’s late father’s name came up on the list too. And things went from bad to worse yesterday when our Prime Minister revealed that he had in fact benefited from the sale of shares in one of his father’s offshore companies to the tune of £30,000 in 2010. His nemesis, Lord Ashcroft has been named too, as has Baroness Pamela Sharples and former MP Michael Mates – both members of the ruling Conservative Party.

Others to feature include Argentinian President Mauricio Macri, Ukrainian President Petro Poroshenko, the Saudi Arabian King, Lionel Messi, and even Jackie Chan! Family of the Chinese President Xi Jinping have been named, as have Mexican drug lords and key personnel from rogue nations like North Korea, and 29 billionaires from Forbes’ rich list. Former Libyan dictator Colonel Gaddafi features too, as does embattled Syrian President Bashar Al-Assad, and a number of Middle Eastern oil sheikhs and royal family members. Also, 20 as-of-yet to be named top football players from Europe’s superclubs, like Barcelona and Manchester United appeared, as has Michel Platini of FIFA corruption scandal infamy.

And no doubt this is the mere tip of the iceberg – expect to see other high-profile names join the blacklist over the coming weeks.

What’s going to happen? Will in anything be done in light of the Panama Papers scandal

It’s difficult to say. David Cameron and Barack Obama have announced the creation of anti-corruption teams who will no doubt sieve through the leaked Panama Paper documents with a fine toothcomb. Certainly, there are many Mossack Fonseca clients around the world who are waiting uncomfortably for a phone call or a knock on the door from the tax authorities.

Will tax havens be put out of business, and will the millionaires and billionaires of the world be forced to start paying their taxes, on the other hand? It’s unlikely, sadly. Loopholes may be closed, but people will always find ways and means of hiding money that they don’t want to reveal.

The moral of the tale: Mossack Fonseca are naughty, tax is important, and so too is keeping on top of your own tax affairs

There are a few things we can glean from this sorry tale: firstly, in case you didn’t know, there’s a fairly big cross-section of the super-wealthy who don’t like paying tax – this is hardly breaking news.

Secondly, Mossack Fonseca might want to give its staff training on how not to make enemies of enigmatic characters who will later blow the whistle on their shady business practices to the entire world.

Last but not least, this scandal highlights the importance of keeping your tax affairs in order and, above all, making sure they are legal and above board. In the aftermath of the Mossack Fonseca scandal, there are going to be a lot of companies and individuals out there who are justifiably terrified at the thought of getting an absolute spanking by the tax authorities. And what an almighty spanking they will receive, too – bodies like HMRC take no prisoners when it comes seeking out and punishing tax evasion. The scale of the scandal means that a furious public will demand anybody who has illegally avoided tax be brought to justice, they will settle for nothing less.

While we might not have access to Panamanian tax havens like really, really wealthy people, what we can do instead is check that we’re paying the correct levels of income tax each year – you can do this by doing your homework online at gov.co.uk, or by booking an appointment with your local Inland Revenue office. This way you can avoid finding yourself paying too much or too little tax, both of which can prove very costly.

Doing this could save you a few quid legitimately. Oh, and while this goes without saying, always fill in your tax returns fully and properly, and always send it on time (unlike Jeremy Corbyn).

Written by Richard Francis // Posted on // Found in HomeLife, TopicalLife

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