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On April 3, 2016, the first news reports of the “Panama Papers” (Panama Leaks) were published. These reports included approximately 149 documents, out of the 11.5 million leaked documents. The information in the documents goes back as far as 1977 and as recent as December of 2015. These papers detail attorney–client information for more than 214,000 offshore entities (including companies, trusts, and foundations) associated with the Panamanian law firm and corporate service provider, Mossack Fonseca. The bulk of the information is in the form of emails, but also includes images of contracts and passports. The reports linked over 140 people, including public figures, heads-of-state and their relatives, executives, and celebrities around the world to overseas assets in offshore tax havens. The politicians are from more than 50 countries. There are legitimate ways of using tax havens. In this case, however, this was about hiding the identity of the true owners of the money, the origin of the money, and avoiding paying taxes on the money by creating shell companies.

How are some of these accused people reacting? The Panamanian law firm, Mossack Fonseca, denies wrongdoing even though the files show how Mossack Fonseca clients were able to launder money, dodge sanctions, and avoid tax. They have also claimed that they have been operating beyond reproach for 40 years and never been accused or charged with criminal wrong-doing. Iceland’s Prime Minister, Sigmundur Gunnlaugsson, has now resigned. Pakistan’s prime minister has left his country. Russian President Vladimir Putin’s spokesperson Dmitry Peskov deflected criticism, saying that the reports were down to "journalists and members of other organizations actively trying to discredit Putin and this country's leadership." Publication of the leaks may be down to "former employees of the State Department, the CIA, other security services," he said. However, the files reveal a suspected billion-dollar money laundering ring involving close associates of the Russian President.

The identity of the source was not “known/disclosed," but Mossack Fonseca says that it has been a “victim” of a hack from servers based abroad. Regardless of how they were acquired from the firm, the 11.5M documents were ultimately obtained by the German newspaper Sueddeutsche Zeitung.  The newspaper, in turn, shared it with the International Consortium of Investigative Journalists (ICIJ). The ICIJ then worked with 370 journalists from 107 media organizations in 76 countries to analyze the documents for over a year. There is currently no searchable archive of the files, for public consumption. As the investigation continues, I am sure that more information will be made available.

Why did they use Panama?  For a long time, Pan​ama has been known as a key jurisdiction for offshore corporations because of its well-established legal system and banking infrastructure. It has not been considered a financial powerhouse, like many of the “developed” nations. It was just below the radar. As the U.S., in collaboration with other countries, moves towards greater transparency and financial information sharing, many things were discovered. At one point, more than 70 Swiss banks confessed to the US that they had encouraged tax evasion. Many said they participated in schemes using Panamanian corporations. Several people have been going with the “do it until you get caught” mentality. As far as the “less-developed” countries are concerned, they will probably see few, if any, changes because of this latest situation.

Now that this information has been brought to light (same situation…different country), we have to be asking “Where did the money come from, which they are trying to hide?” Was it from a legitimate business?  From taxpayers?  From bribes?  From extortion?  From theft?  From embezzlement?  There are a number of various sources for these monies. Even though this was the largest leak in recent history, figures show a decrease in the use of these offshore vehicles in recent years. I can only image how many people across the world have suffered because of the greed of so few. There are also many ways for the few to stockpile their wealth without regard to people that they step on and over.

To combat this type of behavior, the U.S. has levied huge fines on international banks for avoiding sanctions and poor compliance. Within the U.S., the IRS has made it increasingly more difficult for people to utilize offshore accounts to hide money from them. The U.S. and the international community have been working on implementing projects, which will automatically transfer financial data between countries that will expose undeclared offshore accounts. More than 54,000 U.S. taxpayers have paid more than $8 billion to resolve cases involving “secret” offshore accounts since 2009.  As more countries get on board, it is coming down to “when” you get caught, not “if” you get caught. The IRS has programs in place that allow taxpayers effected to come forward to claim their offshore accounts, if they are not already reporting them. The consequences will most likely include fines and penalties, but the communication shows an act of good faith. However, if the IRS initiates the investigation before you speak up, then all bets are off. The consequences will be more severe. 

The U.S. Justice Department is currently reviewing the “Panama Papers” to see if there is evidence of corruption that can be prosecuted. The top prosecutor in Panama is launching an investigation in the firm Mossack Fonseca. Other countries will probably follow suit. This situation will garner more attention throughout the world and especially at gatherings like the G-20 Summit. As big as the world appears, technology has made it extremely small. We have instant access to almost anything. I applaud the ICIJ for taking time to analyze the documents and for getting their facts straight before going public. Without that due diligence effort, I think that more people that were directly affected would have called foul. This will take some time to sift through all of the facts of this situation. The consequences

The disclosure of the leak of the “Panama Papers," not all of the documents themselves yet, is estimated to have reduced stock prices by an unprecedented US $230 billion around the world. The fact that this impacted markets world-wide has some cause for concern as the ICIJ will be publishing a full list of companies involved, in early May 2016. This will most likely cause another stock price reduction and precipitate declines in the various stock exchanges throughout the world. Your portfolio may or may be effected. I believe that the average person will see small to modest negative changes in their portfolios (investment and retirement), at least in the short-term. For those that have more substantial investments, especially in the companies involved, they may see catastrophic plunges. Investors should keep an eye on things as the stories unfold. Be careful not to have any knee-jerk reactions. You should think strategically, but make tactical moves/choices. As far as having foreign accounts or do business in foreign countries, you can still participate. 

However, this clarity will hopefully even the playing field a little more for all those involved.  Governments already share financial information and that transparency will be become even more focused, with greater cooperation. The subsequent taxes, fines, penalties, and jail time will increase, with less discretion, should you choose to hide income through shell companies like these.  Technology is becoming the government’s ally, not the criminal’s. It is a tool for monitoring, controlling, and enforcing compliance. I do believe that the U.S. Government, along with others, will pursue legal actions against individuals, businesses, and governments involved in the “Panama Schemes." When reviewing your choice of paths, be sure to choose wisely.  You may not get a second chance to do the right thing.

-Michael Hermanson, CPA | CGMA