Panama Papers: Hiding Cash Has Become Crummy Business
By Ken Brown, The Wall Street Journal
Two months before the release of the Panama Papers, the attorney general of once-secretive Switzerland publicly proclaimed that $4 billion may have been misappropriated from state-owned companies in Malaysia.
The statement set off a bomb under the long-running scandal of a Malaysian government investment fund, known as 1MDB. It also showed how much has changed in the murky world of secret offshore bank accounts and corporations. For the Swiss prosecutor—one of whose predecessors once said, “It’s hard to determine which suitcase of money is clean money or dirty money”—to come public was remarkable in itself.
And so while the Panama Papers are dramatic and will further shake that world, a closer look at both global enforcement and the law firm behind the documents shows how much has changed in the industry of hiding people’s money.
Business at the Panamanian law firm where the papers allegedly originated has been tumbling for a decade as global regulators led by the U.S. cracked down on offshore tax havens and money laundering. The firm, Mossack Fonseca & Co., incorporated 13,287 offshore companies in 2005 but just 4,341 in 2015, a decline of two-thirds. In the past three years, according to the Panama Papers, clients of the firm have incorporated 16,323 companies but deactivated 28,777.
The law firm has said it broke no laws and that news reports about its business “rely on supposition and stereotypes.” The leaked emails and data on the firm’s business couldn’t be independently verified.
Mossack Fonseca, like many other firms in this world, had a good business in bearer shares. Under this somewhat archaic structure, the shares in a business are owned by whoever possesses the physical stock certificates, allowing companies to exist without a registered owner. In 2005, the law firm represented nearly 6,000 businesses using bearer shares in Panama alone. Now the total is 170, according to the documents.
“People are just getting out of this business,” said Bryan C. Skarlatos, a tax lawyer at Kostelanetz & Fink LLP.
The Panama Papers, which go back to 1977, are in some ways a trip down memory lane for the business of hiding assets offshore, either for privacy, to avoid taxation or to hide ill-gotten gains. There are still plenty of places to hide cash, but the tried-and-true methods have become riskier and more expensive, making them less attractive.
The latest crackdown began first in the U.S. with the effort to cut terrorism financing after the 9/11 attacks. It moved on from there with a crackdown on tax evasion after a series of whistleblower cases involving Swiss banks and the global financial crisis. While there was some grumbling overseas, most of the rest of the world followed along, in part because they couldn’t afford to be cut off from the U.S. financial system, but also because they saw the opportunity to boost their own tax revenue.
The Organization for Economic Cooperation and Development took up the mantle several years ago and now says 96 countries have agreed to exchange information about financial transactions and use common reporting standards. Panama had committed to the standards and then backtracked, earning themselves a public scolding from the OECD in February.
The U.S. hasn’t signed up for the OECD plan but is effectively doing the same thing under its own laws.
Despite the global effort, the system remains flawed. The biggest weakness is enforcement inside countries, which can choose to ignore information about wrongdoing inside their borders.
But even then, information once shared has a way of getting out.
That’s what happened in Malaysia. Malaysian investigators looking into 1MDB found that $1 billion was transferred to the accounts of Prime Minister Najib Razak and revealed a money trail that included banks in Switzerland, Luxembourg, Singapore and elsewhere.
Switzerland and at least six other countries are investigating 1MDB. The Swiss were five months into their probe when Malaysia’s attorney general cleared the prime minister of wrongdoing, saying the money was a legal donation from Saudi Arabia’s royal family and that most of it was returned.
The domestic effort to clear Mr. Najib ran into obstacles overseas. Days later, the Swiss attorney general said he wanted to share what his investigators found with Malaysian authorities and dropped his bomb: $4 billion may have been misappropriated from the fund.
It’s rare enough for a top law-enforcement official to raise issues about possible corruption in another government, but for the official to be Swiss illustrates a decadeslong transformation of the country from grudging cooperator to eager prosecutor. The Swiss action led governments in Luxembourg and Abu Dhabi to launch new overseas investigations into 1MDB.
Malaysia’s attorney general and 1MDB have said they are cooperating with investigators and Mr. Najib has denied wrongdoing or taking funds for personal gain.
People who track hidden cash say they are certain that new ways have evolved to keep money away from authorities. The main strategy is to keep the cash as far away from the international banking system as possible. Some point to digital currencies like bitcoin, others say the crackdown on tax havens has led to the boom in high-end real estate.
“The places to hide are really, really squeezed,” said Monica Bhatia, head of the OECD’s effort to boost transparency. “Taxpayers can buy diamonds and lock them away but there are fewer and fewer places to hide.”