Tax havens

The global financial system is under pressure to improve transparency after the provocative revelations coming out of the so-called Panama Papers, giving a glimpse into the murky global network that’s keeping huge amounts of money out of public coffers. Global leaders are already feeling searing public anger over a system that favours the wealthy and operates with near impunity.  

The 11.5 million files taken from Panama-based law firm Mossack Fonseca show how the financial elite exploit a secretive system to manoeuvre wealth anonymously and ensure the taxman doesn’t take his cut. The firm is the world’s fourth biggest provider of offshore services, with about $42 million in yearly revenue. The documents contain information about more than 214,000 shell companies, trusts and foundations — usually used to hold or transfer financial assets while obfuscating the identity of their real owner — that were registered with the firm.

It’s difficult to delineate what constitutes a tax haven but it’s generally agreed that, depending on the criteria, there are between 70 and 92 of them worldwide. And there’s an estimated two million shell companies registered with offshore firms in these states.

Perhaps most troubling, according to one economist, is that somewhere in the ballpark of $1 trillion is illegally funnelled out of developing nations each year into mysterious shell companies. Public anger is putting pressure on governments to finally crack down on tax dodgers that cost countries billions each year. 

Iceland’s coalition government, shaken by revelations that the family of Prime Minister Sigmundur David Gunnlaugsson had holdings in an offshore company, said late Wednesday that it had agreed on new leadership, becoming perhaps the first major casualty of the Panama Papers. General elections, set to occur in spring 2017, will now take place this autumn, in response to people’s demands.

If it weren’t for leaks like the Panama Papers, most people would have no idea that so much law avoidance is possible, let alone legally permitted. Many governments know about it, and as the Panama Papers reveal, many public officials take advantage of the benefits these firms provide. 

For Sri Lanka the problem, at least as far as the Panama Papers are concerned, is ensuring investigations pledged by the Government actually take place and offenders are brought to justice. The international journalists association has pledged to release a full list by May, which will include nearly two dozen shareholders in three offshore companies. 

Public officials who want to put a stop to offshore financial activities face a losing battle due to entrenched conflicts of interest. Because these activities are often formally legal and extremely lucrative—particularly for nominally onshore countries—there is little will to shut them down, and thereby turn off the spigots of economic growth. This means that reform-minded officials are unlikely to gain the cooperation of their colleagues and government agencies in fighting against the secrecy and shell games through which the tax avoidance business operates. 

Anyone pushing for change rapidly comes to the realization that, at both the personal and institutional levels, many governments are deeply enmeshed in the kind of financial activities revealed by the Panama Papers. Often, the very same people who rail against tax avoidance and offshore finance are themselves beneficiaries of those strategies.