Global Shockwave: The Panama Papers

Quick Quiz

Question: Which "papers" have recently been in the news?

1) Pickwick Papers

2) Pentagon Papers

3) Panama Papers

4) Federalist Papers

Answer: 3)

Ask volunteers to read the following out loud, or ask students to read silently.

2.6 Terabytes of Tax Avoidance

Unless you were hiding a massive amount of money in a phony company, you'd have no reason to know about a Panamanian law firm called Mossack Fonseca.

But on April 3, 2016, that changed. On that day, a coalition of over 100 media outlets made public a project they all had been working on in secret for over a year.

Someone leaked or hacked an enormous number of documents from the Mossack Fonseca law firm--over 11 million documents. The documents were leaked to a German newspaper called the Suddeutsche Zeitung, which shared it with the International Consortium of Investigative Journalists. The ICIJ describes itself as "a global network of more than 190 investigative journalists in more than 65 countries who collaborate on in-depth investigative stories."

ICIJ helped organize hundreds of journalists from around the world to read the documents, organize them and put them in searchable form.

The documents revealed how Mossack Fonseca had been using a variety of shady and perhaps illegal schemes to hide hundreds of billions of dollars for its wealthy customers. This allowed thousands of very rich people to shelter vast sums of money not only from scrutiny, but from taxes that could have been used to fund human needs in countries around the world.

As massive as the leak is, the tax avoidance revealed in the Panama Papers represents the tip of an iceberg. Mossack Fonseca is only one of many companies that serve to shelter money for the wealthy and corporations. And Panama is just one of the countries that serve as a tax haven. The UK-based Tax Justice Network estimates there are over 80 tax havens in the world, hiding somewhere between $21 trillion and $32 trillion. The annual economic output of all the world’s countries combined comes to about $62 trillion.

Mossack Fonseca’s customers include politicians, their relatives and associates from more than forty countries. In just one week, we've seen a blizzard of news stories highlighting some of the individuals named in the leaked papers. Here is a sampling of headlines from around the world:

India's Rich and Famous Named in Panama Papers (Forbes)
'Panama Papers’ company set up 1000+ businesses in USA (rt.com)
Panama papers: Mossack Fonseca offices in El Salvador raided (BBC)
American executives' names surface in Panama Papers (USA Today)
Swiss police raid UEFA as Panama Papers scandal spreads (Reuters)
Panama Papers: British Banker Helped North Korea Sell Arms, Expand Nuclear Program (Newsweek)
Panama Papers open new chapter in Argentina corruption drama (Financial Times)
Heads roll in European banks, protests in Paris after Panama Papers leak (Toronto Star)
Panama Papers Tie More of China’s Elite to Secret Accounts (NY Times)
Iceland PM steps aside after protests over Panama Papers revelations (Guardian)
Panama Papers: David Cameron embroiled in tax avoidance row after details of father's Bahamas business interests are leaked (Telegraph)
Panama Papers show Syria regime circumvented sanctions (The National)
Panama Papers: How family that runs Azerbaijan built an empire of hidden wealth (Irish Times)
Panama Papers: Hundreds of Israeli Companies, Shareholders Listed in Leaked Documents Detailing Offshore Holdings (Haaretz)

The thousands of stories in media around the world have resulted in numerous investigations, the fall of Iceland's leader, promises of indictments, frantic denials and an unmeasurable amount of embarrassment.

How Does It Work?

Mossack Fonseca and many other companies like it, specialize in hiding money. The reasons for hiding vast fortunes can include:

to avoid paying taxes
to enable leaders to profit from their political positions without getting caught
to launder money from criminal activities like selling drugs
to avoid international sanctions (for example, trading with Syria or Iran)

What the law firms do is create fake ("shell") companies with fake directors to own the money. The money is held in banks and investment firms in "tax havens" like Panama that collect no taxes, have big tax loopholes, and/or have little regulation and oversight. Mossack Fonseca alone created over 200,000 such shell companies.

Mossack claims that their work is entirely legal. In one of the leaked documents, one of the firm's partners says: "Ninety-five per cent of our work coincidentally consists in selling vehicles to avoid taxes." (A "vehicle," in this context, is not a car, but a financial strategy or entity.) In many cases tax "avoidance" is legal, but tax evasion is not.

But legalities aside, citizens around the world have expressed outrage that the wealthiest among them are finding ways to avoid paying taxes that could be used to reduce poverty and help pay for schools, hospitals, libraries, and other needs in their countries. The Panama Papers shine a light on one way that the most affluent people in the world have managed to increase their share of wealth, widening the gap between rich and poor.

"The victims are ordinary people, like you and I," John Christensen, director and co-founder of the U.K.-based Tax Justice Network told Newsweek. "It goes back to the simple rule of law—if the rich and powerful pay less tax, then the rest of us end up paying more."

The impact of tax dodging is perhaps greatest in poor countries. A spokesman at Oxfam notes that "As much as 30 per cent of all African financial wealth is estimated to be held offshore in tax havens, costing an estimated $14 billion in lost tax revenues every year. This is enough money to pay for healthcare for mothers and children that could save four million children's lives a year and employ enough teachers to get every African child into school."

What about the U.S.?

Most of the headlines have highlighted Mossack's big-name clients in other countries. Why aren't there more from the US—which has more than its share of super-wealthy people? The answer might surprise you.

The United States is itself a tax haven country. "If a company in the U.S. can do the exact thing for you as this company in Panama, then you might as well do it right here in the U.S. And its perfectly legal, which is the issue," said Ana Owens from the advocacy group Public Interest Research Group (PIRG).

According to the Tax Justice Network, the United States ranks third in the world as a haven to avoid taxation. TheStreet (a financial media company) cites the U.S.’s many tax loopholes, lack of disclosure regulations, and the ability of individual states to set their own low standards to attract more banks. Only Switzerland and Hong Kong are easier places to hide money.

Discussion

Read the following anecdote told by John Bogle, an investment fund founder who was named by Fortune Magazine as one of the investment industry's "Four Giants of the Twentieth Century."

At a party given by a billionaire on Shelter Island, the late Kurt Vonnegut informs his pal, the author Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch 22 over its whole history. Heller responds, "Yes, but I have something he will never have . . . Enough."

Discuss:

Why do the super-wealthy avoid (or evade) taxes?
Heller seems to imply that there's something in the psychological make-up of billionaires that drives them to accumulate ever more wealth. What do you think? If you agree, does that argue for stricter regulations to ensure that everyone pays their share of taxes?
Some millionaires become philanthropists and give huge amounts of money to charities. Is this comparable to paying taxes? What is the difference between donating your money and paying taxes?
In what ways could the injustices revealed in the Panama Papers be addressed?
Wealth inequality has become a national issue, including in the 2016 presidential race. Are you optimistic or pessimistic about the chances of meaningful changes to reduce the ever-widening gap? What do you think it would take?
Wikileaks and Eric Snowden have revealed massive amounts of leaked information to the public. This leak is many times larger. Do you think leakers should be punished? If you think it depends on the circumstances, what circumstances warrant punishment, and what circumstances don’t?