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Follow the money: Panama Papers just tip of the iceberg

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Sunday was a good day. I never thought I’d see the day where so many stories about financial secrecy take over the news worldwide. The offshore system is finally getting the attention it deserves – let’s just hope that the newfound interest surrounding this issue doesn't get swept under the carpet over time. Opinion piece.

The leaked documents exposed by the International Consortium of Investigative Journalists (ICIJ) confirmed what has been largely suspected for some time: there is a hidden financial universe available only to the super rich and super powerful. But unlike before, now there is enough leverage to really do something about the uses and abuses of financial secrecy – not just weak premises to continue hiding away from.

Thanks to the release of 2.6 terabytes of information containing 11.5 million internal documents dated between 1977 and December 2015, a can of worms has truly been opened over 214,000 implicated corporate entities facilitated by more than 14,000 intermediaries.

Heads of state, politicians, Forbes-listed billionaires, drug lords, celebrities, scammers, and FIFA officials… all of them are in it together. If you find it suspicious that so far no major Western actors have been revealed, think again. There are over 200 countries connected to the data. Digesting all of this information takes time, and we will no doubt see further developments unfolding in the coming weeks. This is investigative journalism at its best; and somehow the beans were not spilled in the process.

8% of the World's financial wealth stored in the offshore system

Yet this is clearly not an isolated event, but merely the tip of an iceberg exposing the fortified refuge of big finance. To really understand the magnitude of the problem, we must look at the bigger picture, step back and take a deep breath. Recent estimates by Gabriel Zucman suggest that 7.6 trillion dollars – around 8% of the world’s net financial wealth –is stored in the offshore system. Mossack Fonseca is the fourth largest firm providing offshore services worldwide, yet it is only one firm, in one jurisdiction. That really makes you wonder: who are the top three?  

Cases such as those outlined in the Panama Papers have been well documented in Bermuda, the Cayman Islands, the British Virgin Islands, and more. However, the most prominent secretive jurisdictions are not in Banana Republics, but much closer than we think – in some of the largest financial centres. The United States, Switzerland and the United Kingdom all provide escape routes from laws and conventions existing elsewhere that are not necessarily related to taxes, but to many other regulations as well –such as those relating to beneficial ownership.

Take the US for instance. It is the second easiest place in the world (behind Kenya) to set up a shell company, according to a recent study. Switzerland is a specialist at providing banking secrecy. The UK created the very concept of the offshore system through its large network of Crown Dependencies.

The lack of binding legislation

Alarmingly, most of Mossack Fonseca's operations are legal because there is simply no robust legislation governing beneficial ownership and the creation of shell companies on a global scale. While these practices are in many cases legally justified – though without any sort of regulation or due diligence requesting information on the identity of participants – such pervasive anonymity invites tax abuses, government corruption, and criminal activity to continue.

Global Financial Integrity, a Washington-based NGO, estimates that opacity in the global financial system – thanks to tax haven secrecy, anonymous companies, trade-based money laundering, and lax financial crime enforcement – drains at least 1.1 trillion US dollars per year from developing and emerging economies. That's more than what they receive in foreign direct investment and foreign aid combined. To put it another way, imagine that every time you donated a euro to a charity, ten more were siphoned away.

The International Community must address this challenge

Take a moment and think about the role that the offshore system plays in exacerbating poverty and inequality. It is central to the stories behind many of the world's headlines: The financial crash of 2008, the financial crash of 1929, arms smuggling, terrorist financing, civil wars, human trafficking during the refugee crisis, the narcotics industry, the political power perpetuated by corrupt dictatorships – the list goes on.

The Panama Paper leaks are very good news. But the great news would be if we were still paying attention to these issues in a few months time. The current momentum that the ICIJ findings have unleashed must be used to build traction and pressure the international community to really start addressing this shadow financial system. If these events cannot accomplish that, then I don't know what will.


This article was published by our local team at cafébabel Brussels.