Panama Papers and some inconvenient truths

Since the leak of the 'Panama Papers' uncovered the massive stash of money being deposited in offshore tax havens by powerful corporate and non-corporate actors, the so-called offshore tax havens have been castigated for their role in facilitating tax dodging or aggressive tax planning by large multinational corporations and mega-rich individuals. This manner for stashing of huge resources offshore deprives many countries from their due tax revenues. The techniques employed by the actors are sometimes outright illegal, but alarmingly in many cases, are perfectly legal. This article would seek to shed light on some less discussed aspects of the offshore finance industry.

Most commentaries are apportioning the blame on relatively easier targets, the small jurisdictions, such as the Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Isle of Man, Panama, Mauritius, etc. And such commentaries try to suggest that it is only these small jurisdictions, whose economies significantly rely on the income generated from this industry, who are the main culprits. Surely, the relatively small size of these economies and the preponderance of the offshore financial activities in their economies make them legitimate targets. However, the problem with such arguments is that they often forget that the role of some economically developed countries is no less pronounced. For instance, Delaware, a state in the USA, is well-known for its relaxed approach to corporate regulations which can be used for stashing money by using the corporate structure, with very little disclosure. But Delaware does not feature so prominently as a tax haven.

Indeed, a study by a team led by Professor Jason C. Sharman of Griffith University of Australia has sought to examine the rate of compliance on money laundering laws, particularly, setting up an anonymous corporate structure through the use of shell companies by trying to use the services of 45 service providers in 22 countries. Members of the team posed as potential clients. Contrary to conventional wisdom, in the course of their research, they found that the service providers from the Organisation for Economic Co-operation and Development (OECD) countries were much more prepared to offer anonymous services (in violation of their national laws) than their counterparts in typical non-OECD tax havens. This would imply that apportioning the blame solely or predominantly on the economically less developed tax haven jurisdictions would be misplaced and would fail to tackle the real problem.

Politicians from developed and less-developed economies alike publicly talk tough on the use of offshore financial arrangements and tax-dodging, and vow to combat it. However, they have rarely walked the talk, which is perhaps hardly surprising. After all, some of them are sometimes direct beneficiaries of these schemes. Sigmundur Davíð Gunnlaugsson, Iceland's Prime Minister who recently resigned, or David Cameron, the Prime Minister of the UK, or Nawaz Sharif, the Prime Minister of Pakistan would serve as examples of beneficiaries of the offshore financial schemes. Even when politicians may not be direct beneficiaries of these schemes, they often happen to benefit from donations coming from corporate actors who use these financial schemes to substantially reduce their tax burdens. This nexus between the politicians and users of offshore tax havens may explain why the rules of the game are so hard to be tilted in favour of greater transparency.

Many lawyers and financial planners also play a critical role in setting up of these schemes and their continued operations. Thus, their role should also be subjected to greater scrutiny. When they operate within the letters of the law, they would and should escape legal sanctions. However, a golden rule of privilege relating to communications between lawyers and their clients is that the communications can be exempted from disclosure to public authorities to facilitate the defence of an accused; but when the lawyers become privy to crimes or violation of laws, the privilege ends. 

With the political reality that often large-scale tax-dodgers and users of offshore financial schemes are in a sort of unholy alliance with politicians, perhaps it is only civil society actors, like the Tax Justice Network that can lead the fight in this regard. Of course, public opinion has to be mobilised by them, because politicians in democracies would in one way or another, respond to the voice of the electorate. It was the global financial crisis of 2007 that gave some impetus to the fight against tax dodging, which compelled some countries like Switzerland to make substantive changes to their banking secrecy laws. It can only be hoped that the Panama Papers create a similar momentum. 

The writer is an Associate Professor at School of Law, BRAC University.