Five things you need to know about the Panama Papers

This leak is just the tip of the iceberg. From Prime Minister Trudeau’s reaction to what’s next, here’s what Canadians should know about the issue. 

By: /
April 8, 2016
People demonstrate against Iceland's Prime Minister Sigmundur Gunnlaugsson in Reykjavik, Iceland on April 4, 2016. REUTERS/Stigtryggur Johannsson

The world now has a glimpse into a part of the global economy previously shrouded in darkness.

Sunday’s release of the Panama Papers, the result of the work of 400 journalists pouring over millions of confidential documents from a Panamanian law firm that sells anonymous offshore companies around the world, has prompted widespread analysis, outcry and, so far, the resignation of a least one global leader.

How did it happen? An anonymous source leaked the encrypted internal files of the firm, Mossack Fonseca, to German newspaper Süddeutsche Zeitung, which then decided to analyze the data in cooperation with the International Consortium of Investigative Journalists (ICIJ) due to the sheer size of the leak. The documents were dubbed the Panama Papers, and may be the largest leak of information ever to fall into the hands of journalists: 11.5 million files including emails, PDFs, photos and excerpts from the Mossack Fonseca database that span nearly 40 years.

As Süddeutsche Zeitung puts it, the data proves “how a global industry led by major banks, legal firms, and asset management companies secretly manages the estates of the world’s rich and famous: from politicians, FIFA officials, fraudsters and drug smugglers, to celebrities and professional athletes.”

Over 100 media organizations were involved in the massive investigation of more than 214,000 offshore entities, including the Toronto Star and CBC/ Radio Canada. While the knowledge of the Panama Papers’ existence took the world by storm this week, there is still a lot that has yet to be disclosed. The ICIJ said it will release a full list of companies and people linked to the documents in "early May." (And if you’re unsure about how tax evasion through offshore accounts works, one Reddit user explains it through a piggy bank analogy.)

Here’s what you need to know so far.

1. Canadians are involved.

The CBC and the Toronto Star reported that among the hundreds of thousand of files was the passport information of 350 Canadians. So far only a few stories have broke regarding Canadian individuals and institutions, but both media companies promise more in the coming weeks. Some Canadian connections that have been revealed so far:

  • A Canadian art research firm was involved in fighting for possession of a C$35 million Modigliani painting supposedly stolen by the Nazis, according to the Star.
  • Helene Mathieu, a lawyer from Quebec currently based in Dubai, has provided legal services to almost 900 companies, including three tied to violence in Syria, registered in well-known tax havens, according to the Star.
  • Both the CBC and the Star reported Monday that the Royal Bank of Canada (RBC) and its subsidiaries helped clients set up 378 offshore companies. The RBC is denying any wrongdoing.
  • The Star also named five people who have registered companies through Mossack Fonseca, including a Montreal resident facing criminal charges in the U.S., a former Newfoundland cabinet minister, and a mixed martial arts trainer from Vancouver.

2. Not everyone who has an offshore account is a criminal.

There are dozens of different purposes for shell companies, says Arthur Cockfield, a law professor at Queen’s University specializing in tax law. Shell companies allow individuals to anonymously hold bank accounts and corporations, which can be used to move sums of money around. They are common, inexpensive to create and often operate lawfully.

“There's a legal purpose and an illegal purpose,” Cockfield explains. “The legal purpose is to help companies reduce their global tax liabilities. The illegal purpose is to help criminals evade payment for their taxes.”

Cockfield provides a hypothetical scenario for an illegal use of a shell company: “Say you've got a million dollars. You don't want to disclose it to the government of Canada, so you put your money offshore in one of these corporations that are formed within the tax haven. That will help to anonymize your identity so that the Canadian government will not find out who you are.”

In turn, the corporation holds all of the person’s assets and they become a shareholder. Because the government has no authority to get foreign banks to report on the interest earned by a Canadian citizen with an offshore bank account, the person then is able to not tell the government of the account’s existence and receive interest without paying personal income taxes on it back at home.

3. The Canadian government plans to take action.

On Monday, Reuters reported that the Canadian Revenue Agency (CRA) is looking to get their hands on the leaked documents, despite Mossack Fonseca's claims that they operate legally. A spokesperson for Diane Lebouthillier, Minister of National Revenue, said that the minister has “instructed Canada Revenue Agency officials to obtain the list of data leaked through the Panama Papers."

“If you think about those 350 accounts, it will be pretty easy for the government to figure out whether there was illegal activity simply by looking at the taxpayer name and then turning to the tax return to see if they disclosed any offshore holdings,” said Cockfield. “And if they didn't, they may have committed the criminal offence of offshore tax evasion.”

In the meantime, Prime Minister Justin Trudeau said to reporters in Montreal on Wednesday that dealing with tax avoidance has been a “long challenge,” and called for global consensus on any tax law reform before moving ahead with changes to Canadian law, reported the Star.

Tackling tax evasion and avoidance is on the Liberal party’s agenda. The government pledged $88.8 million a year – roughly $444 million over five years – in the federal budget to combat the issue.

Global tax evasion costs countries trillions of dollars. In 2013, Cockfield worked with the ICIJ as a legal consultant when it obtained 2.5 million leaked documents that exposed tax evasion from high ranking figures from Canada to the Philippines. He says that Canada has a terrible record of successful prosecution of offshore tax evasion, but also that “the track record of most other countries is similarly poor. Governments have a very hard time tracking down these offshore tax cheats…There are some governments that seem to be doing a bit of a better job, including the United States and Germany.”

In 2014, Canadian corporations stashed $199 billion in the top 10 tax havens around the globe, according to Statistics Canada. Canadians for Tax Fairness, a not-for-profit organization advocating for fair and progressive tax policies, says that number is “likely much higher because it includes only ‘officially’ reported funds and doesn’t account for money parked in havens by wealthy individuals.” The group estimates that the federal and provincial governments lose $7.8 billion each year due to money laundering schemes.

4. Global implications: A global governance system fraught with problems.

The revelations outlined in the Panama Papers have sparked global outrage, most notably in Iceland, where protests erupted in the nation’s capital after information was revealed that Prime Minister Sigmundur Davíð Gunnlaugsson’s wife owned an offshore company with major claims on the country’s collapsed banks following the 2008 financial crisis. Tuesday, the prime minister stepped down, Reuters reported.

Russian President Vladimir Putin is also embroiled in the scandal. Putin’s friend Sergei Roldugin and a few other of the president’s close associates have been reported to have been shuffling around approximately $2 billion in offshore accounts. As the Star reports, the evidence suggests Roldugin is the figurehead of the operation that perhaps involves the Russian leader himself.

It has been revealed that the U.S. Justice Department is reviewing the leaked documents to see if they constitute evidence of corruption under U.S. law, which could then lead to prosecution, according to several reports. In Switzerland, the FIFA headquarters were raided by Swiss officials, provoking another investigation of corruption on the heels of criminal inquiries from late last year.

Other world leaders and their associates have been accused of illegal activity: the president of Azerbaijan, Ilham Aliyev, and his family are said to have used a vast network of companies in tax havens to buy property in parts of the country rich in natural resources. British Prime Minister David Cameron’s late father is said to have held an account with the Panamanian firm, and Cameron admitted Thursday that he owned shares in the offshore fund. While Downing Street has denied any illegal activity, that hasn’t stopped the opposition, the Labour Party, from demanding the family’s tax returns be made public.  

5. The Panama Papers are just the tip of the iceberg.

We’re only see the tip of the iceberg in terms of how much money is held offshore,” explained Cockfield. “Globally there is an estimate of between 10 and 36 trillion dollars, but nobody really has a clue because it's all a secret world.”

Mossack Fonseca is just one law firm in a global web of offshore service providers that range from Switzerland to the Cayman Islands to the Isle of Man and beyond. “So the scope of the problem is difficult to say at this point,” Cockfield said. “I don't think that that leak is going to help us understand it.”

Canadians will be able to reap the benefits if the government can recover even some of the billions in lost tax revenues. While the government has been adept at chasing down and prosecuting small time tax cheats, the same cannot be said about the “fat cat crooks” offshore, said Cockfield.

“As a tax researcher, [I] worry that people will become demoralized, and [that] the average taxpayer will be more reluctant to pay their tax liability if they think the fat cats are getting let off the hook.”