A Desultory Philippic On The Panama Papers

A great deal has been reported about the shady business practices revealed by the so-called Panama Papers.  There is a lot of insight to be mined from the 11.5m pages of documents.  Therefore, the following is merely a short list of reactions.

Firstly, evasion and corruption are not the reserve of autocratic states or rulers, although they figure prominently.  Scores of other current and former heads of state and prominent public figures are named, including UK Prime Minister David Cameron and Iceland’s (now former) Prime Minister Sigmundur Gunnlaugsson.  And one might remember that former US presidential candidate Mitt Romey was previously discovered to have owned or to had interests in companies in Bermuda and the Cayman Islands.

None of this is to be excused.  Even where legal, it raises issues of ethics and conflict of interest in government and personal affairs that deserve public debate.  The scale of activity by autocratic states and rulers, such as Russia and China, is breathtaking though and has a much greater economic impact.  RussiaToday reported in November 2014 that Russian authorities believed US$200 billion had flowed offshore in 2014 and as much as US$2 trillion had flowed offshore over recent years.  That is about 17% and 170% of Russia’s current total GDP, respectively.   Those figures will have only grown larger over 2015.

Though businessmen are well represented in the Panama Papers, the impression is that there are more politicians, familymembers of politicians, and close associates of politicians, which suggests the true purpose of shell companies is not ordinary business.  Particularly, well represented are senior Russian and Chinese politicians, but they are by no means alone.

Offshore accounts are defended as good business practice when disclosure might have a negative business impact.  However, domestic laws respecting confidentiality are more than sufficient to protect corporate interests and provide a level playing field for corporations.  Companies are not entitled to unfair advantages based on excessive secrecy that obscures what the limits of acceptable business practices are and circumvents protection against corrupt practices.  The business case for offshore shell companies can't be made on the basis of secrecy.

Some of the nominally legal practices described in the Panama Papers defy rational economic explanation and therefore cast doubt on the legitimacy of those practices.  For example, as reported by Russian news service, Vedomosti,

“On February 10, 2011, the secretive company, Sandalwood Continental, registered in the British Virgin Islands, loaned $200 million to a shadowy Horwich Trading registered in Cyprus, which sold on the next day the right to receive the interest and principal to Ove Financial for $1. On the same day, Ove sold for $1 these rights to the Panama-registered International Overseas Media. In one day the exchange of rights to the principal and interest passed through three banks and four countries. (Courtesy of Vedomosti via Paul Roderick Gregory, Forbes)

A global network of financial and legal firms facilitates evasion and corruption, in Switzerland and Panama, BVI, etc., without which evasion and corruption could not flourish.  Think Panama is the worst practioner?  According to the Panama Papers between 1977 and 2015 the Panamanian law firm at the center of the drama, Mossac Fonseca, registered the largest number of offshore companies not in Panama but the British Virgin Islands, a member of the British Commonwealth.  Panama is a distant second.  The US and UK are a very distant eighth and tenth, respectively, but still in the top ten.

The reaction to the leak has been equally interesting for what it shows about the difference in approach to ethics and corruption of democratic and autocratic states.  Chinese authorities have shut down access to the story on the Internet.  The Chinese press doesn’t cover the story.  In Russia the press gives the story brief attention and blames it on an anti-Russian Putinophobia.  Meanwhile, in the West, disclosure has shamed and shocked governments and others to confront issues of the public interest. 

Putin’s reaction is particularly interesting.  He is not directly named in the offshore accounts or in any wrongdoing, despite the swirl of offshore activity around him by his closest associates and personal friends.  However, even though the Panama Papers demonstrate that much of this hidden wealth involves Russian state companies, Putin has not said a word about protecting the Russian state’s interest, including protecting state corporations from misappropriation of financial resources.  He has not announced any investigations.  This is perhaps more telling about the true state of affairs than the failure to link Putin to any one transaction.

There is a principle in statistics about misplaced attention—what is a problem gets the most attention, distorting the true picture of an event or condition.  Most business and political leaders are honest, they just don’t get the attention that dishonest business and political leaders get when these are exposed by something like the Panama Papers.   At least, I hope that is the case.

Extensive coverage of the Panama Papers can be found at panamapapers.icij.org.

Dirk Mattheisen is a writer and blogger on political economy with a focus on European affairs.  He is also an independent consultant on institutional governance of international economic and financial institutions.  Dirk Mattheisen is a former Assistant Corporate Secretary of The World Bank Group.