In April 2016, media headlines were filled with stories relating to the ‘Panama Papers’. This referred to the largest data leak in history, where 11.5 million files leaked from the databases of the offshore law firm Mossack Fonseca. The papers revealed information about the politicians, national leaders, companies, wealthy individuals and celebrities who used offshore shell companies and offshore trusts in low-tax jurisdictions.
Mossack Fonseca is a Panama-based law firm which is known for incorporating companies in offshore jurisdictions and administering offshore firms. It also provides wealth management services. The firm acted as the registered agent for over 200,000 companies. It acted on instructions from over 14,000 banks, intermediaries and law firms. Over 500 banks including their subsidiaries and branches had registered nearly 15,600 shell companies with Mossack Fonseca.
Mossack Fonseca stated that they did not act illegally in these matters. The firm stated that it complied with international protocols and regulatory requirements. The firm’s response to the leak stated “The documents you cite in your reporting show that we routinely deny services to individuals who are compromised or who fail to provide information we need in order to comply with our KYC [know your client] and other obligations”. The firm also stated that many of the persons mentioned in the leaked papers were not clients of the firm, but appeared in the database as related to the companies the firm had formed.
Using offshore trusts and shell companies can be, and is in the majority of cases, legal under current tax legislation. They are commonly used for inheritance and estate planning reasons. Another one of their biggest attractions is the ability to remain anonymous. However, they are subject to abuse. Money launderers are known to use these systems to launder money due to the fact that their details can be kept anonymous.
After the Panama papers leaked, there were a number of reports suggesting that the UK government were planning to establish a register to reveal the beneficial owners of offshore companies. It also sparked a series of global investigations, some of which are ongoing.
Written by Ben Thatcher
For more information check out Panama Papers: your questions answered from earlier this year.