“The reputational deterioration, the media campaign, the financial siege and the irregular actions of some Panamanian authorities have caused irreparable damage, whose obligatory consequence is the total cessation of operations to the public at the end of the current month”
- Statement by Mossack Fonseca
Mossack Fonseca
This unprecedented leak revealed how the world's most powerful, wealthy and corrupt individuals and companies offshore substantial amounts of money in countries such as Panama where financial regulations are notoriously deficient. In 2016, publications by the ICIJ indicated that Mossack Fonseca enabled the world's rich and powerful to create shell corporations for the purposes of tax evasion.
Mossack Fonseca has vigorously denied that the firm is in any way involved in criminal activity:
“For 40 years Mossack Fonseca has operated beyond reproach in our home country and other jurisdictions where we have operations.”
“Our firm has never been accused or charged in connection with criminal wrongdoing.”
In a recent press release, the Panamanian law firm reveals that it will close its doors to the public by the end of March 2018. Citing extensive damage to Mossack Fonseca's reputation from the ICIJ investigation as a leading cause for the firm's dissolution.
[The full document is available on the ICIJ website - in Spanish]
Established in 1977, Mossack Fonseca specialized in offshore accounts eventually expanded to 40 offices around the globe. By 2013, the firm employed over 600, acting on behalf of 300,000 companies and with an annual billing surpassing $42 million. German lawyer Jurgen Mossack founded the company which partnered with Panamanian lawyer Ramon Fonseca and eventually adding lesser know Swiss lawyer Christopher Zollinger in later years.
Shell Companies
So, just what exactly makes Panama a haven for tax evasion and money laundering? Fundamentally, there are several key ingredients that make the central American country a premier location for hiding wealth.
First, under Panamanian law any pair of individuals from any country in the world can create a company in Panama, even if neither individual resides in Panama.
Two or more adults of any nationality — even those who do not physically reside in Panama — can create a company in the country, according to Law 32 in the Panamanian legal code. They can choose to register the company as either a persona natural (“natural person”), which means the company is essentially a person, associated with their identity document; or as a persona juridica (“legal entity”), a corporation that is identified through its registration with Panama’s Taxpayer Registry (RUC by its Spanish acronym).
PDF Panamanian legal code (spanish) PDF
However, corporations in Panama will often opt to register as a sociedad anonima (“anonymous society”), or bearer share corporation. This protects the confidentiality of the company’s assets, the identity of its owner or owners, and all business and banking transactions under Law 32.
While the founders of a sociedad anonima are required to sign documents identifying themselves as such before a Panamanian notary, laws firms in the country offer a convenient loophole. For a fee, the sociedad anonima can hire lawyers to sign the required paperwork before a notary in their place. As part of the deal, lawyers retain the ability to renounce their obligations to the company if their clients are not in Panama. All of this further conceals the identities of the company’s owners.
As we can see, registering as an anonymous society allows the individuals behind the legal entity to remain anonymous while giving lawyers the ability to sign in their place. At the same time, the companies assets remain confidential and so do the banking transfers related to the company.
Operating as a 'anonymous society' has further benefits that are conducive to money laundering.
In addition, foreign companies that operate outside of Panama are not required to obtain a license for their foreign business activities. On top of that the average cost for registering a company in Panama is relatively cheap at just under $1,000 usd.
Minimal reporting is required - Corporations do not have to file tax returns
Tax exemptions - Corporations only need to pay a yearly franchise tax of $300 (no income tax, no capital gains tax, interest income tax or sales tax)
Confidentiality - Personal details of owners are not filed with Panamanian Public Registry and changes of ownership documents are also not required by the Public Registry.
As a result, only the sociedad anonima’s directors know the identities of the actual owners, since they maintain the sociedad anonima’s records and distribute the share certificates. However, under Panamanian corporate law, corporations do not need to keep records of any transactions. And even if the records exist, corporations are not required to disclose them to foreign governments and can keep the records outside of Panama.
The other main factor that makes Panama an attractive location for the world's rich and powerful is:
Panama’s limited regulation of bearer shares. These are equity securities that are exclusively owned by whoever physically possesses them. Bearer shares are also highly vulnerable to money laundering, as those who issue them don’t keep records of the buyers, and selling them is as easy as delivering a piece of paper to someone else.
No one keeps tracks of this buying and selling process, which makes it extremely difficult to determine who owns the share. Before Congress passed reforms earlier this year, Panamanian law made it even more difficult, as the original owner of the bearer share was not required under any circumstance to turn it over to an authorized custodian such as a bank or an attorney.
Unlike registered shares that are electronically logged along with the name(s) of the share owners, bearer shares are basically paper certificates that belong to whomever is in possession of them at the time.
The embattled law firm has decided to close it's doors by the end of this month, March 2018. However, a skeleton-crew will be left behind to comply with the Panamanian government's investigations and with other private and public entities.
Make no mistake, the closing of Mossack Fonseca is a small victory in the fight against international corruption, yet it's estimated that the law firm represents the 4th largest operation of its kind across the globe.
Rest assured One-Percenters, international money laundering will continue undeterred in countless other tax havens from the Caribbean to the Mediterranean.
Additional credits
cbc.ca
The Guardian
