Moneycontrol PRO
you are here: HomeNewsWorld
In-Depth: Pandora Papers and role of offshore banking network, tax havens

In-Depth: Pandora Papers and role of offshore banking network, tax havens

Pandora Papers come at a time when the rich-poor divide across the globe sharpened with COVID-19 pandemic acting as a catalyst. The revelations carry political weight even in countries where leaders are not often held accountable.

Bombshell revelations made by a consortium of journalists began reverberating beyond the secret world of the rich and powerful almost immediately after the authors started opened a box of Pandora Papers on October 3. The report is a collaboration by the International Consortium of Investigative Journalists (ICIJ) and media partners, including The Washington Post, The Guardian.

One of the largest ever global media investigations, the Pandora Papers involves over 600 journalists from 117 countries who jointly analysed some 11.9 million documents from financial services companies around the world to allegedly expose a hidden world of shielded wealth.

They found links between almost 1,000 companies in offshore havens and 336 high-level politicians and public officials, including more than a dozen serving heads of state and government.

shutterstock_1061229488 (1)

What is Pandora Papers?

Pandora Papers are based on what its authors described as records leaked from 14 firms in the offshore financial services industry.

Pandora Papers are the latest of ICIJ leaks of financial documents, from LuxLeaks in 2014, to the 2016 Panama Papers, which led to Iceland’s PM’s resignation and paved the way for Pakistan PM to be ousted. Panama Papers were followed by the Paradise Papers in 2017 and FinCen files in 2020.

In the latest leak, key names in the leak include Jordan’s King Abdullah for amassing $100 million in property; Russian President Vladimir Putin’s alleged mistress, who managed to covertly buy a luxury residence in Monaco; Members of Pakistan Prime Minister Imran Khan's inner circle, including cabinet ministers and their families, for secretly owning companies and trusts holding millions of dollars.

Others in the files include former UK Prime Minister Tony Blair, Czech Republic Prime Minister Andrej Babis, Kenyan President Uhuru Kenyatta, Ecuador’s President Guillermo Lasso, and others close to Vladimir Putin’s circle, including a childhood friend.

Back home, over 300 Indians have been named in the papers so far, including film stars, former cricketers, bankrupt businessmen, and others.

The Indian Express, the media partner of the ICIJ, has since October 4 released a number of reports detailing how Indian elites have stashed their wealth offshore.

The top Indians mentioned in the leak, directly or indirectly, are Anil Ambani, BR Shetty, Kiran Mazumdar-Shaw, Sachin Tendulkar, Nirav Modi, Iqbal Mirchi’s family, Jackie Shroff and family, Samir Thapar, Vinod Shantilal Shah Adani, Pramod Mittal, among others.

Days after the names were published, the Centre announced that relevant investigative agencies will investigate the offshore secrets of wealthy elites.

"The Government has taken note of these developments. The relevant investigative agencies would undertake an investigation in these cases and appropriate action would be taken in such cases as per law," the Central Board of Direct Taxes said in a release.

Customers hold a banner with Arabic that reads: "Pandora (Papers) exposed you," during a protest in front of the Central Bank in Beirut, Lebanon, Wednesday, Oct. 6, 2021. Dozens of Lebanese gathered outside a bank in Beirut's downtown demanding that they be allowed to withdraw their deposits that have been blocked amid Lebanon's severe financial and economic crisis. (AP Photo/Bilal Hussein) Customers hold a banner with Arabic that reads: "Pandora (Papers) exposed you," during a protest in front of the Central Bank in Beirut, Lebanon, Wednesday, Oct. 6, 2021. Dozens of Lebanese gathered outside a bank in Beirut's downtown demanding that they be allowed to withdraw their deposits that have been blocked amid Lebanon's severe financial and economic crisis. (AP Photo/Bilal Hussein)

penmanship-g28e62fa4d_1280 (1)

How Do The Wealthy Hide Money?

Among the biggest revelations from the leak is not about the names but rather how highly compensated enablers devote to helping the richest people in the world get richer and to pass on their wealth while avoiding or evading taxes. While they may not be as fortunate as their clients, but they are paid in millions to hide trillions of the ill-gotten wealth.

The well-established wealth defence industry works in collaboration with advisers, bankers, lawyers, accountants, notaries and estate agents who use anonymous shell companies, family offices, offshore accounts and trusts to help the world's richest people shield their wealth from tax collectors.

Demonstrators take part during a protest against Brazil's Economy Minister Paulo Guedes at the Ministry of Economy building in Brasilia, Brazil October 7, 2021. REUTERS/Adriano Machado - RC235Q9NI19Y Demonstrators take part during a protest against Brazil's Economy Minister Paulo Guedes at the Ministry of Economy building in Brasilia, Brazil. REUTERS/Adriano Machado

As per the reports, a single Panamanian law firm was responsible for the creation of offshore shell companies meant to hide money for over 160 politicians and public figures.

Aleman, Cordero, Galindo & Lee, or Alcogal, was involved in creating shell companies to move money for Jordanian King Abdullah II, Czech Prime Minister Andrej Babis, Montenegro President Milo Djukanovic and three former presidents from Panama, among others, according to the report.

The ICIJ noted that 14,000 offshore entities in Belize, the British Virgin Islands and Panama were created with the help of Alcogal in an effort to stash money away from public scrutiny for some 15,000 clients since 1996.

The firm rejected accusations of shady dealings in a statement, saying it was considering legal action to defend its reputation "in a vigorous manner where necessary."

"Alcogal rejects the conjecture, inaccuracies and falsehoods in the papers," the firm said as per an AFP report, offering to work with authorities to investigate any irregularities.

Secret ownership of homes and other assets can be cloaked by anonymous companies — companies that are not required to identify their owners.

In some countries, there are no regulatory requirements to identify and register the so-called beneficial owners of the property — the people who directly benefit from property even if someone else’s name is listed as the owner.

The use of this beneficial ownership loophole enables the true owners to hide behind layers of legal records that can be difficult or impossible to disentangle: The owner of company A can be identified as company B, and the owner of company B can be identified as company C, and so on.

Hiding wealth is a specialty offered by tax havens such as Panama, Dubai, Monaco, Switzerland, and the Cayman Islands.

The ICIIJ report also highlights that the United States has become a top offshore destination for the rich and powerful to hide their assets. The US has such an appeal that many have moved their money from other better-known tax havens to the United States.

South Dakota in has also emerged as a top destination for foreign assets.

“Over the past decade, South Dakota, Nevada, and more than a dozen other U.S. states have transformed themselves into leaders in the business of peddling financial secrecy,” ICIJ said.

A combo of file pictures show portraits of Lebanese politicians who their names revealed in Pandora documents, Lebanese Prime Minister Najib Makati at the government palace, in Beirut, March 22, 2013, left, Riad Salameh the governor of Lebanon's Central Bank, smiles during a press conference, in Beirut, Lebanon, November 11, 2019, center, and former Lebanese Prime Minister, Hassan Diab, at the presidential palace, in Baabda, east of Beirut, Lebanon, December 19, 2019, right. The Pandora Papers confirmed what many Lebanese had long assumed: While they battled poverty and struggled to obtain basic services like water and electricity, their politicians were transferring millions to offshore accounts and buying luxury properties abroad. (AP Photo/Hussein Malla) A combo of file pictures shows portraits of Lebanese politicians whose names revealed in Pandora documents, Lebanese Prime Minister Najib Makati, left, Riad Salameh the governor of Lebanon's Central Bank, center, and former Lebanese Prime Minister, Hassan Diab, right. The Pandora Papers confirmed what many Lebanese had long assumed: While they battled poverty and struggled to obtain basic services like water and electricity, their politicians were transferring millions to offshore accounts and buying luxury properties abroad. (AP Photo/Hussein Malla)

shutterstock_1188557530 (1)

The Grey Zone

While creating an offshore company is not illegal, but their use can be if the owners do not report their assets and earnings to the authorities in their country, and pay any taxes due.

ICIJ, too, stressed that in most countries, it is not illegal to have assets offshore or to use shell companies to do business across national borders. However, critics say that the system is abused and vulnerable to corruption.

The Pandora Papers list many instances where assets have been presumably hidden and not declared to authorities. The documents also contain many cases wherein offshore companies were used to "optimise" taxes in ways that are technically legal.

Much of the offshore financial services industry is unregulated or self-regulated. Many of the bankers, auditors and accountants are ones who know the gaps in the system.

“The Pandora Papers reveal the inner workings of what is a shadow financial world, providing a window into the hidden operations of a global offshore economy,” said the Independent Commission for the Reform of International Corporate Taxation, a Paris-based advocacy group that welcomed the report.

It said the system “enables some of the world’s richest people and multinationals to hide their wealth and in some cases pay little or no tax.”

The European Union must do more to combat tax evasion and aggressive tax planning, said EU Commission President Ursula von der Leyen in the wake of revelations in the Pandora Papers.

"Tax evasion and aggressive tax planning is completely unacceptable," von der Leyen said, adding "We have in the European Union some of the highest tax transparency standards in the world, but as we see it's not enough, more work is needed."

US President Joe Biden’s press secretary said that the White House has read Pandora Papers reporting and that the President is committed to enhancing the US’s fight against financial crime.

A fishing boat is pictured as the skyline of the city is seen in the background, in Panama City, Panama October 4, 2021. REUTERS/Erick Marciscano - RC233Q9FULRJ A fishing boat is pictured as the skyline of the city is seen in the background, in Panama City, Panama October 4, 2021. REUTERS/Erick Marciscano

RTXI8C30 (1)

Implications

The reports come at a time when the rich-poor divide across the globe sharpened with the COVID-19 pandemic acting as a catalyst. The revelations carry political weight even in countries, such as Russia and Jordan, where leaders are not often held accountable due to authoritarian and monarchy setup.

Oxfam International, a British consortium of charities, lauded the Pandora Papers saying that greed deprived countries of tax revenue that could be put to better use to finance programs and other projects for the greater good.

“This is where our missing hospitals are," Oxfam said in a statement.

“This is where the pay-packets sit of all the extra teachers and firefighters and public servants we need. Whenever a politician or business leader claims there is ‘no money to pay for climate damage and innovation, for more and better jobs, for a fair post-COVID recovery, for more overseas aid, they know where to look,” it added

While many world leaders outright denied claims of tax dodging, others smelled ‘conspiracy’ and were on the defensive.

President Vladimir Putin of Russia is not directly named in the Pandora report but was linked by associates to assets in Monaco, including a home acquired by a Russian woman who was reported to have had a child with him. Putin’s spokesperson called the findings unsubstantiated.

King Abdullah of Jordan was accused of using shell companies registered in the Caribbean to acquire 15 properties in the United States, Britain and elsewhere. His office said the king had used his own personal wealth to buy them.

While for other leaders it was plain embarrassing as they actively campaigned and endorsed action against corruption — like those in Pakistan, the Czech Republic and Kenya.

Demonstrators take part in a protest against Brazil's Economy Minister Paulo Guedes and Brazil's President Jair Bolsonaro next to the Ministry of Economy building in Brasilia, Brazil October 7, 2021. REUTERS/Adriano Machado - RC2X4Q9EILH6 Demonstrators take part in a protest against Brazil's Economy Minister Paulo Guedes and Brazil's President Jair Bolsonaro next to the Ministry of Economy building in Brasilia, Brazil October 7, 2021. REUTERS/Adriano Machado

000_9PB4PK (1)

Efforts To Combat Money Laundering

The Pandora Papers has revived the public debate about tax avoidance, which is legal and exploits loopholes, and tax evasion, which is illegal.

Experts hope that the Pandora report would accelerate action to strengthen international financial regulations, curb tax avoidance and severely restrict the ways in which the wealthy can hide assets.

The European Commission, the 27-nation European Union’s executive arm, said in response to the revelations that it is preparing new legislative proposals to enhance tax transparency and reinforce the fight against tax evasion.

International bodies like the G7 group of wealthiest nations and the Financial Action Task Force have begun initiatives in recent years to improve ownership transparency, but the efforts are yet to pick up the pace.

Critics have also called for a global wealth registry that would make shady investments in shell companies public.

In US, the Biden administration is also pushing for US banks to be required to report customers’ account information to the IRS as part of the $3.5 trillion economic and social spending package before Congress.

In July, negotiators from 130 countries, representing more than 90% of global GDP, agreed to a global minimum tax of at least 15 percent to prevent big multinational corporations from minimizing taxes by shifting profits from high- to low-tax jurisdictions such as Bermuda and the Cayman Islands.

Details of the plan by the Organization for Economic Cooperation and Development (OECD), are yet to be worked out. The plan is supposed to take effect in 2023.

The plan would cover huge multinational corporations. However, it would not include the shell companies and other entities described in the Pandora Papers.

Read more weekly in-depth articles from Moneycontrol here

Sections
ISO 27001 - BSI Assurance Mark