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The Panama Papers, One Year On – An Overview

April 3, 2016, entered history as a black Sunday for tax evaders, arms smugglers, drug dealers, corrupt politicians, athletes and business people as well as many financial institutions around the world. That day, more than 100 media companies in 76 countries simultaneously published internal documents of the law and corporate services firm Mossack Fonseca, a provider of offshore services.1 The Panama-based law firm managed a network of 214,000 shell companies to preserve wealthy clients from the persecution by state tax authorities with the promise of financial anonymity. These shell companies were used to obscure serious crimes such as money laundering, arms and drug trafficking, to finance war and terror, to bypass UN-imposed sanctions and illegal practices of authoritarian regimes.23 The publication of the Panama Papers led to various committees of inquiry, investigations, raids and resignations around the world. A full year later, media coverage and public outrage declined noticeably. Time to take stock of progress.45

Sigmundur Davíð Gunnlaugsson resigned as Prime Minister of Iceland only two days after his involvement in offshore shell companies had become publicly exposed by the Panama Papers. In 2007, Gunnlaugsson and his wife bought the British Virgin Islands-based shell company Wintris Inc., which holds bonds of three Icelandic banks that collapsed during the financial crisis. Although Gunnlaugsson later sold his share to his wife for $1, he was required to declare a conflict of interest to the Icelandic parliamentary register. As Prime Minister he was directly involved in negotiations about the country’s bankrupt banks, which also affected the value of his wife’s bonds. The publication of the Panama Papers led to an almost 10-month long governmental crisis. Since January 2017, Iceland is once again governed: Bjarni Benediktsson is the new Prime Minister – despite former business relations to Mossack Fonseca and connections to an Offshore-Company in Seychelles.67

The Pakistan Supreme Court currently conducts hearings against the family of Prime Minister Nawaz Sharif regarding their involvement in offshore activities. The Panama Papers revealed that three of Sharif’s children own four British Virgin Islands-based shell companies, which own luxury apartments in London and corporate assets worth millions.6 The opposition suspects that family assets were obtained from illegal activities and the purpose of the shell companies is to disguise the money’s illicit origin.8 The Supreme Court’s verdict is imminent.79

International sports associations and athletes have also attracted the attention of state authorities. Former Fifa Vice President Eugenio Figueredo was already arrested for bribery by Swiss Authorities in May 2015, however, the Panama Papers revealed additional insights into his case. Figueredo and his family established with the aid of Mossack Fonseca eleven shell companies in order to launder bribes and reinvest those in real estate. Uruguayan Eugenio Figueredo was sentenced to prison. However, due to his advanced age and his medical condition he was placed under house arrest.6

In Germany criticism centers on the involvement of financial institutions in the Panama Papers. Overall, 28 German banks appear in the leaked documents. According to investigations of SZ, NDR and WDR, there are 14 financial institutions that founded or managed 1,200 shell companies, partly with the aid of foreign subsidiaries.10 In consequence, a network of federal and regional authorities was designed to process 500 suspected cases throughout the country. On a policy level, initial consequences were already drawn, although results of the official investigation are still pending. A law to fight tax avoidance is currently being drafted to dry up tax havens in third countries.11 The law significantly tightens reporting obligations of tax payers and banks, as soon as a business relation to a shell company located abroad is created. A requirement of a shareholding relationship is not necessary. Moreover, banks are liable for tax losses up to EUR 50,000, if they fail to comply with their reporting obligations. However, the so-called Panama-Law refers only to reporting obligations towards third countries, whereas European tax havens remain unaffected.121314

The Panama Papers constitute a first step in the fight against illegal shell companies. Overall, they led to more than 6,500 investigations in about 80 countries. Around the world, tax refunds worth more than EUR 80 million have been obtained. In February 2017, Panamanian authorities have detained Jürgen Mossack and Ramón Fonseca, the law firm’s founders. In a number of countries, legislation has been introduced to impede offshore businesses for illegal purposes. However, despite promising developments, investigations move forward only at a very slow pace, whereas money laundering by means of shell companies in tax havens continues to exist.1516 Indeed, a recently published study carried out by the Fair Finance Guide and Oxfam showed how 20 of Europe’s biggest banks continue to use tax havens to redirect profits and to facilitate tax evasion by clients.17 Tax havens account for 26 percent of the profits made by those banks but only 12 percent of banks’ turnover and 7 percent of the banks’ employees. In 2015, also the German financial institutions Deutsche Bank and Commerzbank generated high profits in tax havens: together EUR 2.2 billions.18

National approaches are effective only to a limited extent in light of the global dimension of offshore-businesses. Transparency initiatives, such as the EU proposal for an extension of the country-by-country reporting, are an important step to fight tax evasion. However, they frequently do not go far enough. Thus, it is necessary to remedy serious deficits within a global context and to anticipate potential future developments, such as a British tax haven if the UK is shut out of the single market in the EU.

The Fair Finance Guide offers additional information on how German banks deal with tax evasion.

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