Understanding the Panama Papers

You’ve likely heard about the leak of the Panama Papers. But, you may not understand how the leak occurred or why it matters.

So, here are questions and answers to help clarify why the data dump has made headlines all over the world.

What are the Panama Papers?

The Panama Papers are more than 11.5 million computer files, spanning 40 years, that belong to Mossack Fonseca, a law firm based in Panama City. The files are made up of transaction records, passport photos, emails, contracts and other documents detailing 200,000 offshore companies it had set up for clients. Last year, an anonymous whistleblower leaked the papers to a German journalist. It’s the biggest data leak in history — many times bigger than the previous record holder, 2010’s leak of U.S. diplomatic cables via WikiLeaks.

The International Consortium of Investigative Journalists (ICIJ), a network of more than 190 investigative journalists from across the globe, has been sifting through the Panama Papers for the past year. They’ve discovered links between offshore shell companies and dozens of dictators, criminals and celebrities.

“The documents give an unprecedented glimpse of how the wealthy protect and hide their money,” Maclean’s reports. In tax havens such as Bermuda and the British Virgin Islands, certain taxes are levied at a low rates or not at all, and setting up shell companies in these regions can help foreign owners shield their identities from tax officials at home.

ICIJ says the cache of records also shows how “a global industry of law firms and big banks” are involved. The documents detail how more than 500 banks, and their subsidiaries and branches have created more than 15,000 offshore companies through Mossack Fonseca.

Why do these papers matter?

As ICIJ reports, “[The documents] allow a never-before-seen view [of] the offshore world.” In particular, the documents allegedly show how money that hasn’t been reported to tax officials has flowed through the global financial system.

Setting up offshore companies isn’t illegal. As Maclean’s reports, people who set up such companies could simply be “taking full advantage of regulatory loopholes and tax-minimization schemes.” They could also be conducting legitimate everyday business through their companies. What’s more, Maclean’s says, there’s no evidence the people and companies named in the Panama Papers have done anything illegal.

The Panama Papers won’t be released to the public, but their influence is already wide-reaching. For instance, the Prime Minister of Iceland, Sigmundur Davíð Gunnlaugsson, resigned once his family’s offshore company was revealed–the company holds large stakes in three failed Iceland banks implicated in the 2008 financial crisis. Also, authorities across the globe are already talking about designing stricter rules to ensure offshore companies aren’t being abused by tax evaders and criminals.

As ICIJ reporters worldwide continue to release their findings, we will learn more about the activities of those involved.

According to MoneySense, the Panama Papers leak is striking a nerve mainly because paying taxes can be onerous. In fact, “The idea of avoiding taxes is appealing to just about every Canadian, regardless of their income bracket, […] because we pay a lot of taxes. On average, a working Canadian (single or family income) earns just over $79,000, but paid $33,272 in total taxes, as of 2014. To put this in perspective, that same Canadian paid just $28,887 on food, clothing and shelter combined.”

This is why wealthier individuals “have a long history of finding ways to avoid paying tax,” adds MoneySense. Click here to learn more about tax strategies you should and shouldn’t use.

Also, you can learn more about how and why someone might hide money from tax officials; ICIJ offers the below tool to educate investors on how the offshore system operates. Click here to access the tool on ICIJ’s website.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.