The hidden world of elite beneficial ownership – the Panama leak

September 30, 2019 by Mark Dunn

It has been described as the biggest leak in history. More than 11.5 million files from the database of the world's fourth largest offshore law firm – Mossack Fonesca – were obtained by Süddeutsche Zeitung and the International Consortium of Investigative Journalists (ICIJ) this week. The scandal could have significant compliance implications, given money laundering, tax dodging, and sanctions breaches, are all alleged to have taken place.

The data points to numerous ways that the world's richest companies and most powerful people are able to exploit the grey area of financial jurisdictions to hide their affairs and, in some cases, avoid payments of billions of dollars of taxes.  Among the files are the details of 143 politicians and 12 national leaders as well as their families and close acquaintances.

The leak highlights how complex corporate structures, often set up in 'offshore' jurisdictions, can be used to hide the true ownership of assets and bank accounts. These structures make it difficult for investigators to track money flows and trace the real beneficial owners of the company.

Money laundering, PEPs and sanctions

While Mossack Fonesca has strenuously denied doing anything illegal, the documents allege that the company facilitated money laundering, tax avoidance and helped companies contravene sanctions.

The leak apparently contains data on at least 140 PEPs. The implication being that companies were used as a front to launder money or to hide the fact that the real owner was a known politician.

The Mossack Fonesca files also appear to implicate a number of the world's largest banks and financial institutions.  The leaked documents suggest that Mossack Fonesca worked with many banks' clients to create complex financial structures to avoid paying tax in their home jurisdictions and to conceal the flow of money from authorities.  Mossack Fonesca allegedly supplied anonymous offshore companies with nominee directors: stand-in names enabling the real owners of organisations to operate in complete secrecy.

The leak also suggests a vast money laundering ring has been moving money from Russia's state bank to hidden offshore companies.  The operation appears to have involved Bank Rossiya, the subject of US and EU sanctions.

No stranger to scandal

This is not the first time the Panamanian firm has been at the centre of allegations.  Earlier this year, Mossack Fonesca became the subject of one of the world's biggest bribery investigations – so-called "Operation Car Wash" – in Brazil.  Prosecutors alleged that Brazilian companies operated as a cartel, dividing up bidding contracts with the state-owned oil company, Petrobras, inflating prices and using profits to bribe both politicians and officials.

Eyes on Panama

While much of the focus of the world's tax authorities and regulatory authorities has been on a more transparent of ownership structure for companies, the documents suggest that Mossack Fonesca has been able to take advantage of Panama's notoriously looser laws.  Some of the media coverage alleges that the law firm included private foundations in its suite of products – entities which are not subject to taxes in the firm's home country and are able to operate under a law which does not require that the names of a trust's founders or beneficiaries are made public.

The real owners of anonymous offshore company bank accounts registered by Mossack Fonseca may be hidden behind nominee directors, and depending on how much a client pays, more than one secret jurisdiction and anonymous company can be involved.

International framework

The allegations in response to the leak again thrown the spotlight on the way that financial law is regulated across jurisdictions.  They also highlight the rules around ultimate beneficial ownership and the need for companies to know exactly who they are doing business with to comply with legislation.

Despite progress against hidden beneficial ownership in individual countries, the extent of this leak demonstrates how important it is for nations to work together to develop a global framework around ownership transparency.

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