The Cheat Sheet: The Panama Papers leak (Updated)

Everything you wanted to know about the Panama Papers but were afraid to ask...

Around one year ago, some brave/poor (depending on your position) soul leaked 11.5 million confidential documents (2.6 terabytes of data) from Panamanian law firm Mossack Fonseca to German newspaper Süddeutsche Zeitung.

Süddeutsche Zeitung then passed the documents on to with the International Consortium of Investigative Journalists (ICIJ), who then shared them with a select network of international partners, including the Guardian and the BBC. And the results were published this week. 

If you’ve been too busy to read the screeds and screeds written about the leaks, but have heard rumblings of Putin’s hidden billions, the Prime Minister of Iceland being fired, Lionel Messi evading millions in tax, and New Zealand becoming 'the Cayman Islands of Asia-Pacific', you probably have a lot of questions and not many answers.

So, today, let’s try and break it all down for you and answer what we assume will be your most pressing questions.

So, what is Mossack Fonseca and what do the documents show? 

Mossack Fonseca is a large law firm that specialises in setting up and administering offshore shell companies, which wealthy individuals and entities use to hide money. The documents show who the firm has acted for and, in many cases, how much money they have administered for them.

Who’s involved?

Most headlines have named Vladimir Putin, who appears to have approximately US$2 billion squirrelled away through a network of friends and companies and suspicious loans.

Others include the King of Saudi Arabia, the President of Ukraine, the Prime Minister of Iceland, and the President of Argentina.

There are also relatives of government officials, including UK Prime Minister David Cameron’s father and former UN Secretary General Kofi Annan’s son, as well as private individuals like international football star Lionel Messi and FIFA executives.

Here’s a nice infographic from ICIJ of all the officials involved and the web of entities they used to hide money.

Image c/o ICIJ

What is an offshore shell company?

It’s a company (duh) so it can hold and move money around. It’s offshore (duh) as in it is registered in a low-tax, low-regulation tax haven, such as the Cayman Islands, the British Virgin Islands and Bermuda. Switzerland and Luxembourg also count but are usually watched too closely these days to be as popular for shady money maneuvering as they used to be. And it’s a shell, as in it exists for no other purpose than to hold and move money. It doesn’t make actual goods or provide actual services (through they’re often used to move money to and from companies like arms manufacturers, etc.)

These entities are usually controlled by people with large amounts of money to move around and a good reason to keep it away from prying eyes, but are actually owned by a oblique network of other shell companies and trusts, that help obscure the actual parties who benefit from the maneuvering.

If it’s still not clear, here’s a nice cartoon from Vox with kids and piggy banks.

Main image c/o Vox

Is it illegal?

No. Starting, owning, ‘investing’ in or ’loaning’ money to offshore shell companies is usually entirely legal. It’s the purpose of the offshore shell company that may be illegal.

What are the illegal reasons?

Tax evasion (which is illegal, as opposed to tax avoidance, which is legal financial planning to minimise tax exposure), hiding money from bankruptcy court, divorce court. Also laundering money from crime (bribery, theft, corruption, drugs, arms, etc, etc.), or dodging national sanctions.

Here’s a chilling video from the ICIJ:

And the legal reasons?

Tax avoidance (as above), hiding money from people you don’t want seeing you as someone who has a lot of money (e.g. you’re an elected official who: A. Has a lot more money than people know about; or B. Makes money in ways that would just be a really bad look politically).

How do I set up an offshore shell company?

It’s easy! Just Google it, click on a website and give one of them a call. Listen to Planet Money do it here. They registered a company in Belize and Delaware and appointed fake directors and shareholders, so that the true owners of the company – the presenters of the podcast – can only be discovered through a (difficult to attain) court order. Sounds easy, right? It is! 

What can I do with an offshore shell company?

Well, most people use them to hide money, evade taxes, and/or launder money. Once Planet Money set up its shell companies, they looked into doing just that here. Warning: there’s more paperwork and hassle than they initially thought.

We love a New Zealand connection to any news. Please tell me there’s a connection...

There is! We don’t just rank high in rugby and hours of Tolkien movies produced, we’re also routinely ranked in the top three of ‘ease of doing business’ polls (we’re currently ranked second in this one). Part of this means that it’s easy to set up and register companies and trusts, and move money in and out of those entities with minimal (or no) tax implications. Great news! Sure, if it’s all on the level.

While the leaks show only a few cases of money funneling through New Zealand, the leak has opened up debate about New Zealand’s position as a “tax haven” as the ICIJ calls it in its report.

After vigorously defending the tax system yesterday, John Key seems to have softened his stance today. He has previously said that he wants New Zealand to be the “Switzerland of the South Pacific”. Is he getting what he wished for?

So what’s the fallout so far?

Many of those named will have not done anything untoward other than use the system to their advantage (or, presumably, had their people use the system to their advantage). Some may have not even known they were involved. But, to be sure, there’ll be some fishy smells and some good stories behind some of those shells.

Stay tuned!