The Pandora Papers, launched on Monday, is a series run by the International Consortium of Investigative Journalists, that exposes the hidden operations of offshore economies which allow for the world’s rich and powerful to hide their wealth, and pay little or no tax.
Whilst shocking, they are not that surprising. We’ve known for decades that people hide money overseas. What’s shocking is that it’s not the typical places that you’d expect.
Among a string of leaks, including the Panama Papers, the Paradise Papers, LuxLeaks and FinCen Files, it is currently believed to be one of the world’s largest data leaks in history. Here’s what we know so far.
What are the Pandora Papers?
In 2019, an anonymous source shared 2.94 terabytes of confidential financial files, which included 11.9 million documents over five decades, with the International Consortium of Investigative Journalists (ICIJ). The ICIJ is a Washington based group, which became independent in 2017, and the Pandora Papers is their largest data project to date.
Since then, over the past 18 months, over 600 journalists globally in over 130 media outlets have been analysing and investigating the data and documents, which shed a light on the thousands of offshore companies that are used to hide wealth and evade tax. The documents include emails, share certificates, bank statements, spreadsheets and passports which date back to the 1970s.
The documents reveal the use of offshore shell companies and incognito bank accounts, to hold luxury items, and undergo evasion of tax.
Who has been named?
Over 330 politicians from 90 countries, as well as celebrities, sports stars, judges, tax officials and some of the world’s richest individuals have been featured in the data leak. Here are some key findings that we are aware of:
- The King of Jordan spent $130 million on properties in the United Kingdom and United States through secretly owned companies.
- Kenyan president Uhuru Kenyatta’s family secretly owned a network of offshore companies for decades.
- Tony Blair, former UK prime minister, bought an $8.8million Victorian building in 2017 by buying a British Virgin Islands company that held the property, evading over $400,000 in property taxes.
- The Czech prime minister failed to declare an offshore investment company used to purchase two French villas for around $23 million.
- Russian President Vladimir Putin was linked to assets in Monaco, and an offshore shell company purchased a $4.1million property there.
- Whilst New Zealand is not a tax haven, New Zealand has appeared four times as a venue for a country office.
- The Australian Tax Office is investigating the documents to understand if the 400 Australians that have been named in the leaks, have been a part of any wrongdoing.
What is an offshore company?
An offshore company or shell corporation is a business that’s created for the sole purpose of holding funds and managing another entity’s financial transactions. Unlike a traditional company, it doesn’t have employees, make money or provide customers with a product or service. While shell corporations aren’t illegal, in the case of the Pandora Papers, many were created for illegal purposes. Shell corporations can allow companies to exploit the benefits of liberal tax laws, anonymity and relaxed regulatory regimes in countries like the Panama or the Cayman Islands.
While there are legitimate uses for offshore companies, this leak is a reminder that there is often one set of rules for the the world’s most powerful people, and another for everybody else. Anyone can set up an offshore company in a low tax jurisdiction, like Puerto Rico, Monaco, Panama, Samoa or the Cayman Islands.
Why is this concerning?
People who trade across multiple countries often set up offshore companies in tax havens to pool profits to avoid being taxed twice. This only becomes illegal if the profits are not declared in the individual’s home country.
The biggest concern with shell corporations is their ability to provide anonymity. In the Caribbean, banking secrecy laws allow owners of shell companies to conceal ultimate beneficial ownership (UBO) details, and therefore their identities. This makes it easier for illegitimate funds to be concealed and transferred to others, without any oversight or ability to track the source of funds.
There is a lot of grey in multi-jurisdictional finance, however shell companies are also used for outright illegal purposes, such as tax evasion, money laundering, fraud, and organised crime.
Some of those who should be gatekeepers to anti-money laundering, such as accountants, take pride in exploiting legal loopholes to help their clients minimise tax and shield assets from law enforcement. They aren’t just turning a blind eye, some of them are overtly complicit. These professions should be captured activities, but they are actively helping people to hide their money instead.
There are a lot more tax havens today than there ever have been before, which highlights what the anti-money laundering space is trying to combat. However, it also highlights that the sector has been massively underinvested in – first being seen as a burden rather than something that actively fights money laundering. The money hidden in offshore accounts is more than the GDP of the US, it’s a crazy amount of money that’s continuously being hidden under layers. Modern day anti-money laundering technology needs to be invested in like how money laundering is being invested in – it’s becoming harder and harder to find. Firms, governments all need to make that investment, to help fight that.
Why are the Pandora Papers so significant?
In 2016, the Panama Papers was a massive data breach at Panama-based law firm Mossack Fonseca & Co, which led to approximately 11.46 million files of confidential financial data being leaked. These documents exposed a firm that was helping clients launder money, dodge sanctions and evade tax. Numerous multinational companies and high-ranking government and public officials were identified in the documents.
The Panama Papers highlighted the need for banks and other financial institutions to understand the risks of doing business with entities located in tax havens. This leak allowed companies to recoup over $1.3 billion in unpaid taxes, and opened conversations about tax abuse, corruption, financial crime and inequality.
It was also the beginning of the conversation of changing anti-money laundering laws in New Zealand. The Panama Papers showed that money laundering and other illicit financial activities are all too common – particularly when tax havens and shell corporations are involved. Financial institutions need to be aware of these risks when offering services to such customers.
The Pandora Papers investigation is larger. And once again, it’s set to force the global elite to explain why they’re sending money offshore.
Modern criminals need modern solutions to stop them. Some massive developments in regtech recently help counter complex foreign ownership by drilling down into the ownership structure, verifying and understanding a lot of complex information quickly, and helping surface the data to firms to easily digest and understand – allowing them to make risk based approvals quickly.
The problem is, criminals know that firms are time poor and dealing with a lot of information, so they create complex structures to overload the system. Technology helps solve that problem by crunching through a lot of information quickly, and surfacing any red flags.
About First AML
First AML is an AML technology provider, and the maker of Source, an all-in-one AML platform. Source powers thousands of compliance experts around the globe to reduce the time and cost burden of complex and international entity KYC. Its enterprise-wide, long term approach to the KYC / CDD data lifecycle addresses time and cost challenges while minimising compliance, reputational and security risks.