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18 April, 2016  ▪  Michael Binyon

Taxes vs presidents

How the Panama leaks will affect top politicians and offshore dealings

The massive and co-ordinated leak of millions of documents showing where hundreds of the world’s tax cheats have hidden their money overseas has stirred up a storm of protest across Europe and America, exposed political leaders trying to hide their wealth and led to demands to close down the world’s main offshore tax havens.

The Panama papers, as the documents are called, have revealed that 12 national leaders, including Petro Poroshenko, the Ukrainian President, are among 143 politicians, their families and close associates who have been using tax havens to hide their money and avoid paying their fair share of tax on their wealth. The families of at least eight current and former members of China’s ruling politburo have been found to have hidden their wealth abroad.

Among the most prominent is the Russian president, Vladimir Putin, who has used close friends and shadowy intermediaries to send abroad millions of dollars. The revelation, following recent assertions by top American officials that Putin has hidden a vast fortune overseas, will come as a serious blow to the Kremlin, and will lend weight to the charges by Russian anti-corruption activists that the Putin government is mired in corruption.

The leaks, totalling 11.5 million files, all come from the database of a single law firm, Mossack Fonseca, the world’s fourth biggest offshore law firm. They were obtained from an anonymous source by the respected German newspaper Süddeutsche Zeitung, and were immediately made available to the International Consortium of Investigative Journalists. The explosive documents have been shared with leading Western media organisations, including the Guardian newspaper in London and the BBC, and have dominated the headlines for the past three days.

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The revelations have been especially damaging in Scandinavia and other Nordic countries, where high tax regimes have prompted many rich people to avoid tax by hiding their money in banks in Panama and in tiny Caribbean islands, including three British overseas territories – the Cayman Islands, the British Virgin Islands and Bermuda. Among those named by the documents is the Prime Minister of Iceland, Sigmundur David Gunnlaugsson,  and a leading Danish bank is accused to helping thousands of its richest customers to transfer their wealth abroad. Others named include Nawaz Sharif, the Prime Minister of Pakistan, Ayad Allawi, the former prime minister of Iraq, and Alaa Mubarak, the son of the disgraced former Egyptian president.  

But it is the documentary evidence that Putin has been the biggest tax avoider that will cause the greatest row. A network of secret deals and loans worth $2 billion has laid a trail leading directly to the Kremlin, and shows that many top friends and associates of the Russian president have become fabulously wealthy. The documents do not name Putin himself, but make it clear that he has directly benefited from dealings by his closest friends who have moved money out of Russia through a complicated system of loans and banks transfers involving banks in Cyprus and Switzerland. They include a ski resort where his younger daughter, Katerina, got married in 2013.

The leaks have clearly been carefully planned and made public in a way calculated to cause maximum embarrassment. Those who have seen some of the documents have little doubt that they are genuine. The files have been available to some 370 reporters from 100 media organisations, which have been studying them for a year. The fact that the journalists all agreed to make public the Panama papers on the same day suggests that the source insisted on total secrecy about the leaks until all the media outlets were ready to break the news at the same time.

Western politicians are already comparing the impact of the leaks to Wikileaks scandal or the release by Edward Snowden, the former American intelligence official, of records showing that America’s top intelligence officials kept files on thousands of leaders and ordinary citizens in other allied countries.  

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Sending money abroad to countries that do not levy tax is not a criminal offence in many countries. It is not illegal to be a director, shareholder or beneficial owner (who may not be named on the hare certificates) of companies that are registered offshore. But European leaders have in recent years campaigned strongly to end bank secrecy and stop the transfer of wealth to countries where it cannot be taxed at home. The law firm Mossack Fonseca, which is based in Panama, insists it has not broken any law, and says that it has been acting correctly for the past 40 years, observing all the international agreements to prevent money laundering. But one leaked memorandum from a partner in the company stated: “Ninety-five per cent of work consists in selling vehicles to avoid tax”. The word “vehicles” appears to refer to complicated transactions to move money to tax havens.

Pressure from Western governments is mounting on the firm, especially as one of those who has sent money abroad is a key figure of FIFA, the world football organisation whose top members have been arrested by American investigators on charges of bribery and corruption. The figure is believed to be a senior member of FIFA’s ethics committee, who acted as a lawyer on behalf of individuals and companies charged with corruption. Among those using these tax havens are some 23 individuals who have had sanctions imposed on them for supporting the governments in Russia, North Korea, Zimbabwe, Iran and Syria – all governments that have been subject to international sanctions.

The British government has been severely embarrassed by the leaks, as many of the tax havens are in the tiny British-owned islands that are among Britain’s 14 overseas territories. They have long profited from the vast inflow of money and company registrations by wealthy individuals and companies looking to hide their wealth or conceal who has the ultimate control of bank accounts overseas. Both the present Conservative government in Britain and its Labour predecessor have come under sustained pressure, especially from the United States, to rein in the banks in these overseas territories that are making vast profits as tax havens. Britain recently passed legislation to ensure that none of its overseas territories were engaged in the laundering of criminal money, but London has not stopped these territories from operating low-tax regimes to attract income from overseas.

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So far there have not been further details of how much money has been banked in these offshore accounts by President Poroshenko or any other Ukrainian millionaires. But at a time when there is huge pressure on the Ukrainian government to clean up corruption, push through economic reform and reduce the power and wealth of oligarchs, the documents will cause fury among Western governments and international financial organisations that are being asked to bail out the Ukrainian government to the tune of billions of dollars.

The same is true of Pakistan, where the government of Nawaz Sharif is fighting a desperate battle against Islamist extremism. Islamists have long accused the government of corruption, and will use these documents as evidence that the president and other leading officials are exploiting the population and enriching themselves despite the widespread poverty in Pakistan.

The Kremlin is likely to dismiss these leaks as an attempt to smear Russia’s leadership, and a Western-inspired plot to discredit President Putin. But Western journalists investigating the trail leading to the Kremlin have found that millions of dollars were channeled abroad through Sergei Roldugin, a close friend of Putin who introduced him to his former wife Ludmila and who has known him since he was a member of the KGB.  They found that some of Russia’s biggest banks have been making huge loans, at very low interest, to offshore companies controlled by Roldugin. Few Russians will be surprised by the revelations, however. Russia has won a dubious reputation as being one of the most corrupt nations in the world in which to do business.

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