The law firm, Mossack Fonseca, was built on assurances of bulletproof privacy for its clients. But its operations were laid bare by ICIJ by a vast leak of millions of documents that have helped expose the proliferation of shell companies and tax havens for the world’s wealthiest people. The revelations have already prompted Iceland’s PM to step aside and spurred criminal investigations on at least two continents.
PM Nawaz Sharif who is known all along amongst the business and educated circles of the country as a tax evader and in the habit of taking commissions is under immense pressure, particularly from Imran Khan, to resign.
Controversy has long engulfed PM Nawaz Sharif’s family, including three of his four children – Mariam, Hasan and Hussain – over their riches from a network of businesses that include steel, sugar and paper mills and extensive international property holdings.
At various times, depending on the political party in power, the Sharifs – one of Pakistan’s richest families – have been accused of corruption, ownership of illegal assets, tax avoidance and money laundering.
Hasan, who moved to London over 16 years ago, and Hussain have been running family businesses from abroad.
Three children of former and current Pakistan’s Prime Minister Nawaz Sharif – Mariam, Hasan and Hussain– were owners or had the right to authorize transactions for several companies.
Daughter Mariam Safdar was the owner of British Virgin Islands-based firms Nielsen Enterprises Limited and Nescoll Limited, incorporated in 1994 and 1993.
Sharif’s first term as prime minister ended in 1993. The companies owned “a UK property each for use by the family” of the companies’ owners. Hussain and Mariam signed a document dated June 2007 that was part of a series of transactions in which Deutsche Bank Geneva lent up to $13.8 million to Nescoll, Nielsen and another company, with their London properties as collateral. In July 2014, the two companies were transferred to another agent.
Mossack Fonseca knew that Mariam Safdar was Nawaz Sharif’s daughter, a “Politically Exposed Person,” and committed to checking her activities twice a year beginning in July 2012.
Hasan Nawaz Sharif was the sole director of Hangon Property Holdings Limited incorporated in the British Virgin Islands in February 2007, which acquired Liberia-based firm Cascon Holdings Establishment Limited for about $11.2 million in August 2007. Mossack Fonseca resigned as agent for Hangon because Hasan Nawaz Sharif was a “Politically Exposed Person.”
The two partners of the law firm came together in an era of political and economic uncertainty in Panama: One a reserved German immigrant whose father served in the armed wing of the Nazi party, the other a gregarious, aspiring novelist whose family opposed Panama’s military dictatorship.
With the nation still under the sway of Gen. Manuel Noriega, the pair merged their small law firms in 1986, creating what would become a powerhouse of secretive offshore banking for the elite. Over the next three decades, Jürgen Mossack and Ramón Fonseca expanded their practice to a staff of 500, with affiliate companies around the world and a client list of the powerful, the famous and, sometimes, the infamous.
In January, a prosecutor investigating the sweeping corruption in Brazil publicly called their law firm “a huge money launderer.”
The partners had become very wealthy, and Mr Fonseca leveraged the firm’s success to gain an influential role in the upper ranks of politics. He told associates that he wanted to clean up the government, serving as a special adviser to President Juan Carlos Varela until the corruption scandal in Brazil forced Mr Fonseca to resign in 2016.
The leak has also brought more scrutiny to Panama’s financial and legal sectors, just as the country’s leadership was trying to shed its longstanding reputation as a haven for the loot of the criminal and corrupt. In February, Panama was removed from a watch list maintained by an international agency that sets standards to combat money laundering and terrorism financing, but it remains under scrutiny as a haven for tax evaders.
Panama’s president has vowed to cooperate with any judicial investigations stemming from the leaked information, which could put him in the awkward position of allowing an inquiry into his former adviser.
Mossack Fonseca has denied that it committed any wrongdoing, and Mr Fonseca proclaimed his firm’s innocence.
“At the end of this storm the sky will be blue again and people will find that the only crime is the hacking” of the firm’s documents, he said.
But some in Panama who know Mr. Fonseca say the leak’s contents are at odds with how he has tried to portray himself and his role in the country.
Among the leaked documents was an email exchange obtained by the International Consortium of Investigative Journalists, in which the firm’s top partners realized they had worked for years with clients from Iran who had been listed on a sanctions list published by the United States government and the United Nations.
“This is dangerous!” Mr. Mossack wrote in an email to Mr. Fonseca and others at the firm. “A red flag should have been raised immediately.”
Mr. Mossack placed blame for the oversight on employees in the law firm’s London office who were “not doing their due diligence thoroughly, (or maybe none at all).”
The leaks have roiled Panama’s legal and banking sectors, bedrocks of the country’s economy, and chilled Panama’s business class. The country’s bar association has come to the firm’s defense, saying the leak amounted to an attack on the country’s reputation.
“Terrible damage is being done to them, to all lawyers and their country at large,” the association’s president said.
There is a lot at stake for Panama, a country whose economy heavily relies on the legal and financial services industries.
The rise of Mossack Fonseca coincided with the emergence of Panama as a capital of the worldwide offshore banking industry. The increasing flow of global capital across borders during the 1970s and 1980s fueled a market for lawyers and accountants capable of sheltering the money, and Panama was primed to take advantage of the boom.
Beginning in the early 1900s, its station as a trade and shipping center — at the intersection of two continents and at the convergence of the Pacific Ocean and the Caribbean Sea — made it an obvious candidate for offshore accounting. International ships flew the Panamanian flag to take advantage of its advantageous corporate tax structure, which some experts say was copied almost directly from the state of Delaware.
Because it has always been at the center of international trade, it was a natural fit for things like offshore finance and international offshore tax planning.
The firm was aggressive and nimble, capable of responding to an evolving regulatory landscape. Its reputation flourished.
But other Panamanian law firms joined the fray, too, including larger and more prominent practices than Mossack Fonseca.
All the important Panamanian law firms have a division like this.
In fact, Mossack Fonseca is just one of countless firms around the globe dedicated to a worldwide industry that harbors trillions of dollars and may deprive nations of as much as $200 billion in tax revenues each year, tax and legal experts say.
Mossack Fonseca’s founding partners bought large homes in exclusive neighborhoods in Panama City as well as luxurious weekend retreats. Growing up, their children borrowed the company plane and took friends on trips.
But despite their parallel ascents in business and society, Mr. Mossack and Mr. Fonseca apparently kept their social lives separate. Friends and associates describe their personalities as completely distinct.
Mr. Mossack was born in Germany in 1948, and during World War II, his father was a member of the Waffen-SS, according to United States Army intelligence files obtained and provided by the International Consortium of Investigative Journalism. The family moved to Panama in the 1960s where, according to the intelligence files, Mr. Mossack’s father offered to spy for the CIA.
Mr. Mossack has maintained a low profile, eschewing the party scene of Panama’s high society while adopting a disciplined approach to his work. Though he is more focused on the day-to-day operations, he has so far declined to comment publicly about the document leak.
Mr. Fonseca, by contrast, has for years been something of a man about town. Born in Panama in 1952, he studied at the London School of Economics and later worked for several years at the United Nations in Geneva — “trying to save the world,” as he described it in the interview.
It was then, he said, that he first began to ponder writing a novel. Decades later, in the 1990s, he became famous as a novelist, twice winning Panama’s highest literary prize.
Within Mossack Fonseca, both founding partners had swagger. Former employees said the firm had a staff of aides, whose job it was to arrange hotel, car service and entertainment for wealthy clients when they came to town — like tours of the old city or the Panama Canal.
Experts say that checking boxes is not the full measure of compliance. Rather, it comes with a law firm’s willingness to push its clients to reveal the true identity of those involved in offshore transactions, and the source of their money.
Too often, these offshore firms are willing to take on just about any customer and follow their instructions.
As offshore accounts have multiplied during the past several decades, they have increasingly been used to launder money, evade taxes or finance terrorism. Those seeking to break the law have often enjoyed the same secrecy as accounts used for legitimate purposes.
An international transparency movement developed over the past decade, spearheaded by major international agencies. But Panama, long accustomed to following its own path, was far behind in compliance.
In 2014, the Financial Action Task Force put Panama on its list of countries where transparency and accountability systems were woefully lacking, a major blow to the nation. Mr. Varela quickly pushed through legislation to address the issue, leading to Panama’s removal from the list in February.
The Last Big Holdout
But Panama has been more reluctant to follow a transparency initiative started in 2009 by the Organization for Economic Cooperation and Development. While most other international financial centers, like the British Virgin Islands, the Cayman Islands and Singapore, quickly agreed to the initiative, Panama held back.
Panama is the last major holdout that continues to allow funds to be hidden offshore from tax and law enforcement authorities.
But several tax experts pointed out that Panama, in its refusal to comply with international transparency standards, is in esteemed company: the United States.
Foreign nations have had trouble getting information about accounts their citizens hold in America as well.
“Panama isn’t the real story,” said the executive director of the Institute on Taxation and Economic Policy, a research group based in Washington. “This leak is giving a window into a much broader world, but it should be understood as giving a window into how things work in the U.S. as well.”
Contrary to media reports, Panama does not make special allowances for “offshore” structures. The association of Panama with offshore activities comes from the fact that we tax only income derived from within Panama, not from without, which remains taxable pursuant to the laws of relevant jurisdictions. These rules, based on laws in New York and Delaware, originated in 1927 and are common today. While these laws have been buttressed by additional regulations, they can still be manipulated for illicit purposes.
Under previous governments, Panama was no doubt a target of money launderers. Today, Panama is committed to adopting all transparency reforms needed to satisfy the international community.
The Government of Panama says that it has taken steps to increase the transparency and strength of our financial legal systems. It claims to have developed a robust treaty network that allows exchange of information. “Know your client” regulations were substantially enhanced and extended not only for financial and corporate providers but also for key nonfinancial industries vulnerable to abuse. And as of January 2016, it requires identity certification of shareholders of all Panama companies.
It has announced a commitment to the automatic exchange of financial and corporate information, and has proposed steps it believes are consistent with the goals of the international community, including the Organization for Economic Cooperation and Development through its Common Reporting Standards proposal.
Panama’s President, Juan Carlos Varela, says that “after decades of dictatorship, Panama is a stable democracy committed to the rule of law and the regional headquarters of more than 100 transnational companies. To fulfill our democratic evolution, we must have a government committed to transparency, accountability and the separation of powers. Our response to the current crisis will test our resolve and our potential.”
Since the data leak, both the firm and Mr. Fonseca have said that they are not responsible for the actions of the shell companies they create.
Mr. Fonseca said that the company was careful to vet clients, and that it would drop any it discovered with a “bad reputation.” But he was insistent that his clients were lawyers, accountants and intermediaries — not dictators, for instance.
“We are like a car factory who sells its car to a dealer (a lawyer for example), and he sells it to a lady that hits someone,” he wrote in a message. “The factory is not responsible for what is done with the car.”
Mr. Fonseca said his firm tried to determine “to the best of our knowledge” the actual owner of a shell corporation.
“The industry is becoming more regulated and serious about being used by the bad guys and we welcome this,” he wrote, adding, “But pls remember that 15 years ago the term due diligence was unknown.”
Over the years, courts and government investigators have occasionally managed to puncture Mossack Fonseca’s shield of secrecy.
In Brazil, Mossack Fonseca was linked to a corruption investigation into bribes paid to politicians by companies doing business with the state-run oil company. Investigators began focusing on the firm after finding an array of apartments in the names of relatives of an imprisoned politician.
Recent litigation in the United States uncovered a connection between a shell company set up in Nevada and Mossack Fonseca’s headquarters in Panama. The breakthrough came after almost three years of legal wrangling by the plaintiff, one of the world’s best-financed hedge funds, run by the billionaire Paul Singer.
Mr. Fonseca said he was currently working on a novel about an investigative journalist who is “honest and looking for the truth without agendas.” And he has already begun outlining another book.
The Scope of the Leaks
The scope of the information is breathtaking: The files include information on more than 14,000 banks, law firms, corporate incorporators and other middlemen from more than 100 countries, which is just a small part of a worldwide industry that harbors trillions of dollars.
That some can rig the system to hide their wealth is not merely unjust; it also harms global development by siphoning off revenues that could be directed to education, health care and infrastructure.