In 2015, journalist Bastian Obermayer from the Süddeutsche Zeitung , a Southern German Newspaper, was approached online by an anonymous source.  He or she provided him with a database from Panamanian law firm Mossack Fonseca.

They are the Panama Papers. Named in the leak were 12 current or former world leaders, 128 other public officials and politicians, and hundreds of celebrities, businessmen and other wealthy individuals of over 200 countries. They made it clear how the world’s elite hides their wealth from the people, avoids paying taxes, and launders their money.

Today we start a series about money laundering, offshore shell companies, and how they work.

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  • Setting up offshore companies isn’t itself illegal. 
  • People set them up because they want to hide something – from the taxman, their ex-wife, their former business partner or the prying eyes of the public.
  • But they are often used for illegal purposes. 
  • Experience shows that it is usually individuals whose business depends on anonymity who favour the anonymity that shell companies provide.
  • These include gunrunners, people traffickers, drug smugglers and other criminals, as well as investors who do not wish to reveal their true identities and their true intentions, senior politicians who’d like to spirit their wealth abroad (perhaps because they have accumulated it dishonestly) and companies looking to funnel bribes.
  • The list could go on and on.
  • The most obvious use of offshore financial centers is to avoid taxes.
  • Oxfam blamed tax havens in its 2016 annual report on income inequality for much of the widening gap between rich and poor.
  • “Tax havens are at the core of a global system that allows large corporations and wealthy individuals to avoid paying their fair share,”
  • International Monetary Fund (IMF) researchers estimated in July 2015 that profit shifting by multinational companies costs developing countries around US$213 billion a year, almost two percent of their national income.
  • This is usually how it works.
  • Contact is made with a firm like Mossack Fonseca via an intermediary – for example a bank, a lawyer or an asset manager.
  • These are Mossack Fonseca’s actual ‘clients’: they order the product, they handle communications and they pay the bills.
  • The product is mainly an off-the-peg offshore company.
  • Mossfon offered firms in some twenty jurisdictions, most frequently in the British Virgin Islands and Panama, but also in the Bahamas, Bermuda, Samoa, Uruguay, Hong Kong, the US tax havens of Nevada, Wyoming and Delaware and, more recently, Florida and the Netherlands.
  • The newest name is that of the emirate of Ras Al-Khaimah in the United Arab Emirates.
  • The companies are sold from nearly fifty offices worldwide or from Mossfon’s headquarters in the centre of Panama City.
  • Mossack Fonseca isn’t the only provider of shell companies headquartered in Panama.
  • Other major players are also based there, for instance the law firm Morgan y Morgan, probably Mossfon’s great competitor.
  • It is no coincidence that offshore providers have clustered together in this small Latin American state of all places.
  • Panama has always been an extremely dependent country.
  • Having long been a poor province of Colombia, the country gained its independence in 1903 partly because American bankers and industrialists managed to persuade the then US president Theodore Roosevelt to support Panamanian separatists.
  • US lobbies hoped to make money from the Panama Canal, which was under construction at the time.
  • Roosevelt sent troops to occupy parts of the newly independent state and make it clear to Colombia that it could kiss goodbye to its former province.
  • A nation was created by the grace of the United States and the US flag did indeed fly over the Panama Canal Zone, where big business was to be done.
  • Thousands of American soldiers protected the sovereignty that the Panamanian government granted to the USA in 1903 and which was only returned to Panama in 1999.
  • The lucrative business with shell companies is based on a law that came into force on 26 February 1927.
  • This law – Law 32 – guarantees the secrecy of estates, money transfers and, most importantly, company owners, and offers so-called ‘sociedades anónimas’ exemption from taxation.
  • This name sounds more mysterious than it actually is, because an ‘anonymous society’ is actually nothing more than a public limited company.
  • The secrecy afforded by Law 32 has changed very little to this day, with the exception of the odd – largely cosmetic – reform driven by efforts to have Panama deleted from a number of black and grey lists of countries that abet money laundering and tax evasion.
  • The favourable environment for the offshore industry has remained more or less unaffected over the years, and the state also benefits, for example from corporation tax from law firms, their employees’ income tax payments, and fees for setting up companies.
  • Another reason this business is so attractive is because it is as simple as it is lucrative.
  • A standard shell company costs the seller next to nothing and the formalities are quickly dispatched.
  • The buyer has his company in a click of the fingers for only a few hundred US dollars, and can dispose of it again quickly and easily once it has served its purpose.
  • Also, no one will ever find out to whom it belonged, which is ideal for dodgy dealings.
  • When an offshore company is set up in somewhere like Panama, it has a few nominee directors. 
  • People who work for Mossfon – often lowly-paid women. 
  • Secretaries. 
  • They are the directors of the new company. 
  • They sign the incorporation documents. 
  • For example, let’s say we needed to hide our millions of dollars in an offshore account. 
  • We’d set up a fake company – Pulla Sulla Inc. 
  • The directors would be three nobodies – Barry, Stan and Larry. 
  • They all work in Panama for Mossfon, earning $5 a day. 
  • They will sign ANYTHING. 
  • They sign loan documents on behalf of that company, open bank accounts, buy yachts, real estate, weapons, you name it. 
  • For all intents and purposes, they are the owners and directors of the company, should anyone come looking. 
  • But secretly, you and I own the company. 
  • Mossfon runs it on our behalf. 
  • According to a set of instructions from us to our lawyer, and from our lawyer to them, possibly through another couple of intermediaries first, which good luck ever having the patience to find any of that out without a 5 year investigation involving Robert Mueller, the CIA and Sherlock Holmes. 
  • We say to our advertisers, hey, don’t pay us millions, pay Pulla Sulla Inc. in Panama. 
  • Then Pulla Sulla Inc buys mansions in New York and Paris. 
  • And rents them out to us for $1000 a month. 
  • We get paid a simple salary, on which we pay taxes like good citizens. 
  • From the outside, Pulla Sulla Inc is a black box.