At the Center of the Storm – Mossack Fonseca
The Panama Papers leak involves the international law firm Mossack Fonseca (MF)
headquartered in Panama, a notorious tax haven country. MF has offices in the U.S. (Nevada and Wyoming) and throughout the planet, conducting business with hundreds of international banks, often spinning an intricate and undetectable web of anonymous companies used to launder dirty money.
MF forms companies to facilitate hiding income and assets of, among others, heads of governments, politicians, tax evaders and drug cartels. It supplies “middlemen”– sham directors and officers — to evade detection of the actual owners. According to the Panama Papers, MF also specializes in backdating documents, often an indication of fraud.
Several of the world’s most notorious “criminal” Swiss banks, including UBS, and their subsidiaries are implicated in the Panama Papers. Recently, as Swiss banks suffer the wrath of the U.S. for their tax evasion schemes, MF has taken over direct client contact to protect them from heightened due diligence requirements (all with a wink of an eye, no doubt).
Creating the Panama Papers Database
About a year ago, more than 11.5 million documents, amounting to 2.6 terabytes (2,600 gigabits) of confidential information, spanning almost 40 years, were obtained from MF’s computers by an anonymous whistle-blower and leaked to an international consortium of reporters, called the International Consortium of Investigative Journalists (ICIJ), who have painstakingly sorted and indexed the material to make it searchable. The Panama Papers mention over 200,000 companies operating in more than 200 countries and territories. Much of the Panama Papers reporting centers on the technical feat of receiving and manipulating the 2.6 T of data to make it searchable, and how the leak remained secret for such a lengthy period. ICIJ journalists now have access to 11.5 million documents by using a simple search engine, similar to Google.
Who is Implicated?
At this time, names of prominent world leaders and famous people who are connected to companies in the MF files have surfaced, but there has not been notable stories tracing actual transactions through the MF web. The files contain the names of 200 prominent politicians from around the globe, including a number of ministers. Famous names include Jackie Chan, Vladimir Putin, the Prime Ministers Iceland, Argentina, Pakistan and the UK, the presidents of Ukraine and Azerbaijan, the king of Saudi Aribia, the Xi Jinping (President of China) and many Chinese Politburo standing committee members.
The papers disclose 29 billionaires and the bribery situation with the infamous FIFA (soccer); even Lionel Messi, soccer’s superstar, owns a Panama company. Of course, China and Russia immediately denounced the Panama Papers and a U.S.-hatched plot and China moved quickly to suppress any information regarding the scandal from its internet. Putin’s billions were controlled by his long-term personal friend, a Russian cello player and godfather to one of his children. When asked why a cellist controlled companies worth billions, Putin arrogantly proclaimed that he needed to buy musical instruments!
Although thus far, the information is more tabloid in nature (look who is caught up in this potential world-wide scandal) there were several revelations.
First, I never suspected the existence of a world-wide conspiracy of large law firms and banks acting in such an interconnected manner. I assumed that tax–haven companies were formed in a series of independent and isolated transactions, precisely because of the danger of a Panama Papers leak that could collapse the off-shore financial industry.
Second, I realized that this is how the world pays bribes to crooked politicians. If one is looking to build a project in a country and needs to bribe the leader, the project builder does not walk into the leader’s office with a suitcase of cash and says “here you go.” The bribe is paid to an offshore entity controlled by the leader, usually through family members or close associates.
Third, we learned that much of the world’s privately-held art and mega yachts are owned by mysterious shell corporations. The same is true with valuable real estate, especially expensive residential properties.
Fourth, regardless of where the transactions occur, at some point they pass through New York because everyone wants funds in U.S. currency and the world’s clearinghouses are the New York-based banks. Thus, the worldwide financial system flows through New York City and the U.S. Department of Justice has jurisdiction over the banks implicated in the Panama Papers. This could prove damaging, if not fatal, to international legal, accounting and financial institutions engaging in, or facilitating, illegal activities, such as bribes, money-laundering, fraud and tax evasion.
Somewhat surprisingly, no major U.S. individuals, companies or banks have yet surfaced in the documents, but I suspect that once transactions, especially bribes, are traced through the Panama Papers, U.S. companies will surface. After all, in many countries paying bribes is the cost of doing business, and major U.S. companies are operating across the globe. Time will tell.
As far as U.S. individuals and companies, including hedge funds, the Cayman Islands is the tax haven of choice; Panama has a tawdry reputation because of its links with dictators and drug lords. If there is a similar leak involving the Cayman Islands, watch out!
 A tax haven is a country with no income taxes charged to foreigners who form companies there, and the country invariably has secrecy laws that criminalize disclosure of ownership. The country extracts an annual fee for use of its tax haven laws. The leading tax haven jurisdictions are the British Virgin Islands (BVI) a favorite of China, the Channel Islands preferred by European citizens, the Cayman Island, the jurisdiction of choice for U.S. taxpayers and those investing in the U.S. and Panama, an old-time and somewhat passé tax haven known to cater to drug dealers and corrupt politicians. Switzerland, Lichtenstein and Hong Kong are still popular, although recent international government crackdowns make them less appealing.
 There are some legitimate foreign companies formed for specific investment purposes, but many sham entities involve funds and assets from dubious, if the illegal, sources.
 MF even has a fee schedule: $8.75 per month for each month it backdates a document.
 UBS plead guilty to fraud in the U.S. and violated a deferred prosecution agreement based on tax fraud and evasion in the U.S. See the U.S. Department of Justice press release dated May 20, 2015.
 There are several interesting articles starting to emerge involving world scandals and MF’s role in facilitating them, along with an email spat between UBS and MF regarding which company had the responsibility of due diligence (answer: neither), but there has not been an expose tracing fund through an offshore structure to its ultimate owner.
 According to a recent New York Times article, approximately 50% of expensive real estate is owned by shell companies and 64% of condominiums located in the Times Warner Center in New York list shell companies as the owner. See: Towers of Secrecy – Piercing the Shell Companies, a 5-part New York Times series on the hidden ownership of expensive real estate.
 According to Forbes, there are more than 10,000 hedge funds in the Cayman Islands. While there are legitimate reasons for forming off-shore hedge funds, undoubtedly there are plenty of unscrupulous investors involved. After all, where else would a crooked country leader or crime boss park his/her ill gotten gains?