The Panama papers leaks brought into the limelight one of the world’s biggest economic scandals. The leaks provided 11.5 million files with 2.6 terabytes of information obtained from Mossack Fonseca’s database by Anonymous hackers. The scandal came to the attention of the world through the International Consortium of Investigative Journalists (ICIJ) that shared it with major international media networks. Mossack Fonseca, the Panamanian law firm at the centre of this particular scandal claims that its services are above board. But their clandestine operations confirmed through the leaked documents have been linked to about 143 politicians, 12 of them national leaders including Vladimir Putin and the Icelandic prime minister, Gunnlaugsson. These rich individuals take advantage of tax havens like Panama, Cayman Islands, or anywhere no serious regulations exist to control the offshore finance industry especially regarding tax compliance.
The Panama papers leaks reveals how big the offshore wealth management industry has become, and thrives on helping the rich to hide their wealth while potentially evading taxes or even laundering money. Many choose not to declare ownership of their offshore companies, so most of the wealth created in such environments where operations are shrouded in secrecy easily avoid paying. David Cameron has been a tax-evasion crusader, targeting to have the owners and tax compliance status of offshore companies linked to Switzerland, Singapore, and other tax havens known to authorities in the UK. But he may just have lost any trust earned after being linked to the scandal through his father’s offshore trust in Panama. He now admits to have profited from that offshore trust, although after the leaks his answers on the matter were not straightforward.
Creating an offshore company in any of the tax havens isn’t necessarily illegal. It depends on whether an individual does it for the right reasons. If done purely to protect business plans or brand identity, without any tax evasion, it’s legal. But some wealthy individuals take advantage of tax secrecy, so that they can choose not to declare their offshore wealth. In this case, Mossack Fonseca like many other law firms thriving in tax havens helps these rich individuals or their family members to create shell companies through which their financial assets can escape taxation. Without strict regulation, some offshore companies can easily be setup for all manner of illegal operations including money laundering.
When the rich hide their wealth in tax havens, poor citizens are forced to shoulder the tax burden because they will have to pay more taxes. The financial systems of the countries deprived of the taxes may also be seriously affected. The balance sheets of the exchequers will obviously have some issues that can be explained by the undeclared offshore wealth. It is estimated that about $8 trillion of wealth worldwide is hidden in tax havens. The Panama leaks triggered a protest in Iceland which made Gunnlaugsson to bow to the pressure and resigned after a meeting with his party. Reports indicate that the few Russians who dared protest and called for the resignation of Vladimir Putin were immediately arrested. The Russian president has been linked to an offshore trail of $2 billion through his associates though he dismissed the claims days later.
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