A huge leak of documents from a Panamanian law firm, Mossack Fonseca, has thrown new light on how the rich and powerful hide their wealth. It has also led to renewed attention on one of the world’s best-known tax havens.
The Republic of Panama is considered one of the most well established pure tax havens in the Caribbean due to extensive legislation that strictly regulates the country’s offshore jurisdiction and financial services.
The Panama Papers are a leaked set of 11.5 million confidential documents that provide detailed information about more than 214,000 offshore companies listed by the Panamanian corporate service provider Mossack Fonseca, including the identities of shareholders and directors of the companies.
The documents show how wealthy individuals, including public officials, hide their money from public scrutiny. At the time of publication last week, the papers identified five serving heads of state or government leaders from Argentina, Iceland, Saudi Arabia, Ukraine, and the United Arab Emirates; as well as government officials, close relatives, and close associates of various heads of government of more than forty other countries, including Brazil, China, France, India, Malaysia, Mexico, Pakistan, Peru, Romania, Russia, South Africa, Spain, Syria, and the United Kingdom. The UK was singled out by the media as being “at the heart of super-rich tax-avoidance network”.
While the use of offshore business entities is not illegal in the jurisdictions in which they are registered, during their investigation, reporters found that some of the shell companies may have been used for illegal purposes, including fraud, drug trafficking, and tax evasion.
A 2013 academic study published by the Norwegian Center for Taxation revealed that the history of Panama as a tax haven began in 1919 when it started to register foreign ships to help American oil giant Standard Oil escape US taxes and regulations. Where Standard Oil led, other US ship owners followed, some seeking to avoid higher wages and better working conditions imposed by US legislation.
Among other applications of Panamanian registration at this time, US passenger ships were able to serve alcohol to their customers during prohibition without breaking the law.
Within a few years, Panama saw the opportunity to extend the principles it had applied to shipping of minimal tax, regulation and disclosure requirements to offshore finance.
Wall Street interests helped Panama introduce lax company incorporation laws, which let anyone start tax-free, anonymous corporations, with few questions asked, the Norwegian study revealed.
For decades, offshore finance had a relatively modest profile in Panama, but it took off in the 1970s as world oil prices surged. The country passed laws entrenching corporate and individual financial secrecy. Strict confidentiality laws and regulations were put in place, with severe penalties for violations. The names of corporate shareholders were not required to be publicly registered.
The country also has strict banking secrecy laws, with financial institutions prohibited from giving information about offshore bank accounts or about account holders. The only exception is reported to be a specific Panamanian court order in conjunction with investigations into terrorism, drug trafficking or other serious offences, but excluding tax evasion.
Unlike many other countries, Panama does not have tax treaties with other countries, providing an extra layer of protection for foreigners involved in money laundering and tax evasion. The country also does not have foreign exchange controls, which means there are no limits or reporting requirements for money transfers in or out of the country.
By 1982, partly attracted by business opportunities deriving from the Panama Canal and its free trade zone, more than 100 international banks had offices in Panama City.
When Manuel Noriega, commander of the Panama Defence Forces, took power in 1983, he essentially nationalised the money laundering business by partnering with notorious groups and drug cartels, allowing them free reign to operate in the country.
The International Transport Workers Federation (ITF) said last week that revelations of tax avoidance and related activities, mentioned in the leaked Panama Papers could lead to a change in the current climate of tacit approval for this kind of “socially damaging behaviour”. ITF cited the Flag of Convenience as an example of such tax evasions.
“And who pays the price? Seafarers, who are subject to poor conditions and lower wages because they are at the mercy of a system that allows for minimal regulation and the acquisition of cheap labour,” the body of seafarers said.
ITF tasks governments to ensure that there is a “genuine link” between the real owners of a vessel and the flag the vessel flies, in accordance with the United Nations Convention on the Law of the Sea (UNCLOS).
“FOC registries make it more difficult for unions, industry stakeholders and the public to hold ship owners to account. In many cases, the registries themselves are not even run from the country of the flag,” ITF said.
Considering the role of flag of convenience in the making of Panama as a tax haven, the mind-boggling revelations coming out of the Panama Papers leak and the potential damage to national economies, perhaps the time has come to begin to review the regulations guiding vessel registration under FOC.
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