Thoughts on the Panama Papers

The leak of 11.5 million confidential papers from the Mossack Fonseca consulting firm in Panama promises to be a major source of information on the tax avoiding shenanigans of the elites. Already, 800 Australians are reportedly under investigation, and dozens of heads of state around the world are having serious questions raised about their willingness to pay their fair share of taxes. At the minimum, the papers show how normal it has become for the elites of many countries to minimize their personal tax contributions to their own country. At worst, it shows the widespread betrayal of the elites of the ideals of patriotism and social conscience.

The last leak of this kind was the Falciani list, where Herve Falciani was an IT guy who disclosed the files of up to 130,000 tax evaders from Europe using the Swiss branch of HSBC. He tried to sell the data he stole from his employer around 2007, but in the end the French authorities simply raided his house and distributed the files amongst various governments in Europe.The Panama Papers too have now been shared with the authorities.

The lack of fallout from the Falciani list is instructive, despite coming during a financial crisis: to this day, Greek authorities have apparently done nothing with their portion of the list, except to try and persecute the Greek journalist who published the list (known as the Lagarde list given to Greek authorities in 2010, which one can find online).

We basically don’t know what most other governments did with their portion of the Falciani list, except for the UK, which openly decided not to prosecute anyone but to use the files to force 500 out of the 6000 people named to pay the taxes owed, presumably with a fine.

Based on this, we can give a reasonable guess as to what one can expect to happen next with the Panama Papers:

1. The list will be used by vigilant authorities to get more tax, but is unlikely to lead to many prosecution. If the same strike rate (1 out of 10) holds for this list as with the UK portion of the Falciani list, then this would mean around 80 rich Australians having to cough up some additional taxes. A good outcome, but less than what many commentators will be hoping for.

2. The list will be ignored in countries with weak institutions: the revelations are no worse than what is already in the open for a whole set of countries, including Russia, Turkey, Greece, and others. The elites in these countries have shown in the past that they can simply weather the storm, and one should expect the same to happen this time.

3. Unlike the Falciani list, this one is likely to become public at some stage because it was directly leaked to journalists who spread it around a network of journalists, meaning that there will be open attempts to name and shame tax dodgers. That might sound bad for the tax dodgers as such a thing has not happened before in ‘well-run’ countries, but I think they will manage to ride the storm. Here in Australia, for instance, previous scandals about the low tax payments of many of the biggest companies in Australia did not lead to large fall-outs, and tax reductions for big companies are currently on the political agenda despite such bad behaviour. We should expect the same this time round with these rich individuals and their companies: the real bite will probably come from the tax authorities, not from any outcry from the general public.

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conrad
conrad
5 years ago

Thank god for Iceland.

Jim
Jim
5 years ago

Paul

Great post. I wonder if the tax authorities in countries in Australia might broaden their investigations from the Australian individuals on the list to any affiliated businesses also based in Australia as a means of identifying dodgy transfer pricing or other dubious practices? If the Authorities can search the database for names, surely they can search for Australian ABNs.

Jim
Jim
5 years ago

I heard a snippet on the news tonight when I was driving home. It was a guy from Mossack Fonseca stating all they do is legally register the companies. It is the companies themselves (third parties) that do the illegal tax dealings.

I think this is the equivalent to the gun manufacturers’ gun control arguments in the USA. “Guns don’t kill people. People do”.

derrida derider
derrida derider
5 years ago

Ah, I guess for a while we will see fewer of those ads in the back of The Economist and other international business magazines that begin “Are you tired of intrusive authorities breaching your privacy? Nocturnal Aviation Pty Ltd (incorporated in the Cayman Islands) exists to address your concerns ….”?

paul frijters
paul frijters
5 years ago

I expect the opposite: more ads and more tax evading. You see, the competitors to Mossack Fonseca will now be advertising about their greater degree of cyber-security and reputations for discretion. And the wealthy people who havent yet gone for these scams will feel they have missed out and funnel their wealth away too. I have seen that latter dynamic quite few times now and think it will be the main thing coming out of this: more of the elite will start to do this. Why, even I am asking myself if I am rich enough yet to re-invent myself as an off-shore company.

Tim Macknay
Tim Macknay
5 years ago
Reply to  paul frijters

Yes, that occurred to me too. If it’s established that much of the tax avoidance under scrutiny is legal, then that may well encourage people who have never before contemplated using tax avoidance services to actively consider them.

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
5 years ago

I recall in the late 90s when there was a controversy about whether or not to publish senior executive salaries. The BCA (at which I worked for a while) had resisted it. I remember Stan Wallis saying he expected that far from exerting a chilling effect via public shaming it would exert a thawing effect via peer pressure. In the upshot it looks like he was right and the lefties wrong.

paul frijters
paul frijters
5 years ago
Reply to  Nicholas Gruen

yes, but that game has further moves in it: in the short-run (a few years), the immediate effect is copy-cat behaviour by those executives who haven’t yet maxed-out on their bonuses. Inequality grows. But the next thing that happens in some countries, like the Netherlands where this precise scenario unfolded, is that the population starts to resist leading to counter-moves from the government to reduce the salaries. Caps start to get introduced on incomes connected to the public sector. Caps and limitations on bonus contracts then spread to private companies wanting to get big contracts from governments. Populations become less tolerant about the top incomes and tax regimes are re-assessed.

So the lefties do have a point, but it takes a long time. Executive incomes have been public in the Netherlands now for, I think, some 20 years, and only now do you see the counter-movement making serious legislative ground. As a result, inequality there has stopped growing, but not seriously reducing.

Patrick
Patrick
5 years ago

Good points.

The part about Falciani is a bit different to what I heard.

I believe he sold the data to the French (he may have given it to them but I would not bet on this) but the investigating magistrate told them it was inadmissible. So he was invited to a hotel in Monaco, and when he left his laptop in his room the French police raided it.

It then became admissible. That was a long time ago as you say. At that time there were 6000 names on the list.

Two years ago the French released the list (the sharing in question) publically, with about 2000 names missing. Amazingly no senior French businesmen or politicians made the cut, or missed the cut if you prefer.

The great irony here is that the main solution is not the stupid public disclosure of all interests in companies and trusts that the taxjustice idiots twerk on about, but automatic exchange of information between tax authorities… which actually exists already, albeit it only becomes really effective in 2017 and tax authorities won’t receive real data until 2018/2019 and won’t work out how to use it properly until 2025.

I do expect two things you don’t list:
– lawyers and accountants will cope a layer of useless regulation in many countries
– The US will benefit from a greater perception of security and lack of transparency and undeclared foreign money in the US will increase.

paul frijters
paul frijters
5 years ago
Reply to  Patrick

Hi Patrick,

the history of the Falciani case is long and convoluted, including a conviction by a Swiss court in 2015, the Mossad, an escape to Spain on the advise of the US, and various other twists and roundabouts. I just tried to give a quick intro. And there’s no definitive version of the truth as his version is a bit fantastical. See https://www.icij.org/project/swiss-leaks/whistleblower-thief-hero-introducing-source-data-shook-hsbc

The list was bigger than 6000 people though. The UK part alone was 6000.

Otherwise, you make good points. Yes, a bit more regulation is possible and the US might well benefit from even more capital flight. We in Australia too might get some of that.

You seem very optimistic about the upcoming exchange of information between tax authorities. I don’t expect much from that exchange. The race between the tax authorities and the tax evaders wont have a final solution, I think. Just an endless chase where the evaders can hire the best brains.

Patrick
Patrick
5 years ago
Reply to  paul frijters

You are right about the number on the list, I confused it with something else. You are also right that no-one knows the “whole truth”, possibly not even Falciani who may be sufficiently delusional to believe half his own press.

I am not all that confident in CRS, but my point was the the answer to the question apparently posed by Panamapapers is, in fact, automatic exchange of information as already put in place. Whether it works well or not is a different question.

At the same time, the cost of evading is increasingly steadily, and this will certainly reduce the amount of evasion by some amount.