The Panama Papers

We cannot afford to be cavalier about driving away investors if we really want to consolidate Mauritius’ international financial business. It is ‘our job’ to build up trust about our jurisdiction, not that of our international competitors

Panama, which lies between North and South America, is famed for its canal which provides shipping links connecting the Pacific and the Atlantic Ocean. For those who know, it is also an important international offshore centre.

This week it was at the centre of global news following the leaking of some 11.5 million documents belonging to a Panama-based law firm, Mossack Fonseka, first to German newspaper, Sueddeutsche Zeitung, and then, through it, to a host of investigative journalists, including the BBC. The BBC aired on Monday this week the news that the leaked documents revealed how the rich and powerful hide their accumulated wealth in an offshore jurisdiction such as Panama.

From what has come out in public from journalistic sources, the Panama law firm would have helped the wealth owners, a dozen of them current or former heads of states and 60 at least linked to current or former world leaders, to conceal several billions of dollars in “shell” (having little or no material existence in real life) companies. So, it is not only the big corporations of the world which employ offshore centres to facilitate transactions. Wealth owning and political elites also employ them.

The Panama law firm would, according to these sources, have helped its clients to launder money, dodge sanctions and evade tax. It would have “structured” the transactions of its clients so as to hide from view their true identity as owners of the vast funds they have placed in offshore structures. The leaked information shows that elite politically exposed clients range from countries as diverse as China, Pakistan, Russia, Iraq, UAE, the US, Syria, Egypt, Libya, Ukraine and Iceland. In the latter case, there are mass protests already in the country for the PM – who is implicated by the leaks – to resign; China has acted to limit access to the news on the leaks.

The Panama firm is the world’s fourth biggest offshore firm. It has offshore operators in 42 countries worldwide (e.g. Switzerland, Cyprus, the British Virgin Islands, Jersey, Guernsey, Isle of Man, Bahamas, Seychelles, Samoa, etc.) with a strong connection in the UK. It also has offshore facilitators concentrated in Switzerland, Jersey, Luxembourg, the UK, Hong Kong, China and the US, among others.

Tax Havens

When damaging information involving the economic and political elites of countries makes the headlines, a lot of noise is made about the imputed corruption, crime, tax evasion and the sorts associated with offshore malpractices. The huge amounts involved are highlighted. Double tax avoidance treaties are publicly denounced as the cause of malpractice. Scapegoats are identified. It is a world full of hypocrisy. It is made out as if the malefactors are induced into wrongdoing by the availability of the offshore centres.

In the present case, one cannot help observing that the economic and political elites of a whole range of countries – developing and advanced – are concerned, not solely those of third world countries who allegedly employ “tax havens” to misappropriate ill-gotten gains. Corruption inhabits humans who are so inclined, irrespective of where they come from.

Powerful countries such as Switzerland, the UK and Singapore get away from being blamed in as strong terms as less well-off countries like Mauritius in such cases. The powerful ones place themselves as more “respected” jurisdictions than the rest by virtue of the fact that they can deploy very sophisticated techniques to shelter themselves in a club apart of stricter jurisdictions as regards strict adherence to rules in the conduct of their international financial businesses. Lesser economies like Mauritius usually get targeted and tarnished in public but the powerful ones manage to avoid getting the scorching limelight.

After the leak, the Panama law firm has claimed no less than to be abiding by the strictest norms whereas, if flaws there are, it says, these must be owned by the financial institutions which intermediate the funds for not having exhaustively done properly their what is called “due diligence” in the financial regulatory jargon. It is not the law firm itself but the financial institutions that would have failed to properly identify the beneficial owners – prominent clients “structured” by the law firm itself in the shape of shell companies – which should be responsible for compliance failure, if any.

As a result, a lot of noise is raised not by focussing on the true culprits but by generalizing on all the host of offshore centres worldwide, especially those less able to defend themselves in international fora. That’s why Mauritius gets targeted time and oft — and that too, not only by outsiders who appear to have an axe to grind against us — but not those countries which host the biggest offshore financial centres.

For example, the UK in its recent negotiations with the EU concerning a potential ‘Brexit’ has swung the conversation in favour of retaining London’s prime position as an international financial centre. Moreover, as from June 2016, UK offshore companies will have to reveal their “significant” owners, not before. Might is right. Switzerland, on its part, has agreed that it will provide as from 2018 information on individual accounts of persons dealing with its financial institutions when so requested for taxation purposes only.

Meantime, compromising accounts can be shifted away to companies such as Mossack Fonseca of Panama, a lesser jurisdiction, which can afford to take the direct hit. Yet, without exception, everyone from the State of Delaware in the US, from New York or London to Dubai, is doing the very same generic offshore business.

Imperfect World

One doesn’t have to condone malpractices wherever they emanate from. Malpractices are malpractices, no less. But it would be naïve to assume that thefts of all sorts started only when offshores were first set up on the European continent and in the US. Thefts were here from much before: one just has to seek for references in centuries’ old religious texts.

It would also be naïve to assume that leaders of today’s societies are stealing away thanks to the complexities on offer by offshore. The history of mankind is studded with leaders stealing away all they could from each other and from their vassals just the same. Had it not been the case, the Magna Carta would not have seen the light of the day in Mediaeval Britain when the king kept taxing away ever more heavily his barons to wage wars, etc.

Likewise, secrecy has not been invented by offshore business activity. Besides, financial institutions in places like Mauritius are not ‘secretive’; they are required to respect the ‘confidentiality’ of customers’ dealings with them in accordance with law which is applicable not only in Mauritius but in all decent banking systems all over the world.

Once we get past certain long-held prejudices, we should be able to cut an edge for our international financial sector with a clear conscience. This is because offshore activity is also about legitimate business activities such as for inheritance, estate planning and for carrying on of international investments. We cannot afford to be cavalier about driving away investors if we really want to consolidate Mauritius’ international financial business. It is ‘our job’ to build up trust about our jurisdiction, not that of our international competitors.

*  Published in print edition on 8 April 2016

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