The Panama Papers reveal a problem, but not just about Panama

For the last couple of weeks, it has been impossible to turn on the TV and not hear the name of another President, Monarch or Prime Minister related to the recently leaked offshore holdings documents dubbed the “Panama papers.” The Panama Papers are the 11.5 million documents from the Panamanian law firm Mossack Fonseca that were released by a massive global reporting partnership of over 100 publications led by the International Consortium of Investigative Journalists (ICIJ). These documents identify about 215,000 offshore shell companies and 14,153 clients tied to Mossack Fonseca and linked to the use of tax havens to shield vast wealth.

While names of the like of Putin, Cameron, Almodóvar, and even Messi keep being named as shareholders, directors and beneficiaries of offshore companies, it is interesting to note that so far only a very small number of American names have surfaced. However, that in no way means that American citizens are refraining from such practices. Wealthy individuals and businesses that want to mask their ownership can conveniently do so in the United States. Delaware allows companies to shift royalties and similar revenues where they actually do business to holding companies in Delaware, where they are not taxed.

Panama’s president claims the massive data leak, “wrongly called the ‘Panama papers’ is not a problem of our country, but of many countries of the world.” He is right, to be clear, Panama is one of many jurisdictions where shell companies can be created for the purpose of tax evasion. A tax haven has been described a place that: (1) has no income tax or a very low-rate income tax; (2) it has bank secrecy laws; and (3) it has a history of non-cooperation with other countries on exchanging information about tax matters. Many states in the US have those characteristics.

Those seeking to veil their assets and shield some of their income from taxation can establish a shell corporation in Wyoming, Nevada or Delaware with very little effort. Constituting a company is a simple process (most states allow for online filing) and can be done cheaply. The fee payable to the Secretary of State for the filing is somewhere between $300 and $500, depending on the state where the company is created. There are online services that charge an additional couple of hundred dollars, in addition to the fee, for constituting a company. Constituting a company in most states requires no identification whatsoever from the organizer, the board of directors, or its shareholders.

In 2010, the United States passed the Foreign Account Tax Compliance Act, which requires financial firms in other countries to disclose details about American clients with offshore accounts. However, the United States is one of the few countries that has refused to sign new international standards for exchanging similar financial information with other countries. Thus, it is not surprising that other nations often fail to cooperate with the US in regards to financial disclosure.

In sum, the Panama Papers reveal many problems, including the evident lack of cooperation between countries in regards to financial information. That translates into tax havens where the rich can hold their money and avoid paying their share of taxes. In 2012, Tax Justice Network estimated that somewhere between $21 trillion to $32 trillion is hidden away by the super-rich in offshore entities. However, we would be mistaken to think that the problem is limited to Panama. In fact, the fundamental problem is the failure of nations to require more transparency in financial transactions that could reveal financial fraud, tax evasion or other crimes. While the Panama Papers reveal serious problems with the international tax system, the key to a more equitable future for all is more effective global governance.





We Deserve Better than Corrupt Politicians

All one needs to do is pick up a newspaper in nearly any part of the world to read about the misdeeds of elected officials and others in positions of governmental authority. In the United States, for instance, we can read about former Rep. Jesse Jackson Jr., who plans to plead guilty to using campaign dollars to buy more than $750,000 worth of luxury items, memorabilia and other goods. Or to Spain where the ruling People’s Party (PP) has been buffeted over the last fifteen days by media reports alleging its former treasurers operated a slush fund with donations from construction industry executives that were then doled out to President Rajoy and other party leaders. Or to South Africa where tens of millions of dollars were said to have been paid for contracts related to the building of soccer stadiums for the FIFA World Cup held in that country in 2010.

On December 2012, Transparency International, a non-profit organization, issued its annual ranking on corruption in the public sector around the World. Greece is the most corrupt nation in Europe, Germany is 13th, United Kingdom is 17th. Denmark, Finland and New Zealand, all equal first with a score of 90 out of 100; bottom at equal 174th come Afghanistan, North Korea and Somalia. Since the rankings are of “perceived levels”, it is always possible to argue aboput who exactly should be in which positions. But the rankings are likely not much of a surprise for business people who have to navigate their way through such places as Mexico , 105, Dominican Republic, 117, or Kazakhstan, 133, where bribes are the way business gets done.

The consequences of corruption for economic and social development are severe. Corruption stymies sound investment and thwarts growth. It fosters inequality and eats away at fiscal and macroeconomic stability. It negates the potential positive impact of development assistance and gives an incentive to negligent exploit natural resources, adding to the damage to the environment. It severely curtails the effectiveness of government and the public sector in general and decreases the resources available to actually help the people, diverting resources away from direct impact to the citizenry into the hands of a corrupt officials and others who benefit from corruption. Additionally, there is an erosion of the rule of law that permeates the entire society and harms the national reputation and confidence in institutions, both private and public.

But it is not just the theft from public coffers or the direct costs of bid rigging and bribes. As states in a governance and corruption survey, for example, in Cambodia lower income households spend 2.3% on average of their income on bribes compared to 0.9% for rich households. In South Africa, an estimated 10% of the social security budget is lost due to fraud, theft and inefficiencies.

In short, corruption funnels resources (wealth) away from the people and serves to make the corrupt wealthier at the expense of society as a whole. It ultimately, results in poorer quality of services, infrastructure and services with a correspondence decrease in the quality of all three.

However, developed countries are not immune from the scourge of public corruption. In the US, according to FBI figures the costs associated with political corruption alone runs into the billions of dollars annually. In Illinois, Governor Rod Blagojevich is the fourth governor of Illinois out of the last seven to be convicted, and adds to the 1,828 public corruption convictions that state saw between 1976 and 2010. A report by the University of Illinois at Chicago estimates that corruption costs the state more than $500 million a year. Two states had even higher numbers of appointees, government employees (and a few private individuals) convicted of public corruption: New York, with 2,522 convictions and California with 2,345 convictions. Of the largest states though, Illinois had the highest per person conviction rate for public corruption, at 1.4 per 10,000 population.

I would propose the following possible areas for attacking public corruption:

1. Transparency in government procurement; 2. Create holistic training programs regarding corruption for business, government and the public; 3. Encourage the adoption of business codes of conduct; 4. Strengthen the legal and regulatory framework on anti-corruption; 5. Better pay for public officials others in government in developing countries.   Can you think of others?

By Guest Contributor Ivan E. Mercado, Mercado & Rengel