How to…understand the Panama Papers

During the last couple of weeks, the papers have been dominated by headlines about the Panama Papers. Questions have been raised about the morality and legality of offshore funds, and of David Cameron's involvement. But it is so hard to make a judgment amongst the jargon and lack of knowledge. So we asked a tax expert to help us understand.

The Panama Papers, over 11m documents leaked from law firm Mossack Fonseca, contain much incriminating information. Much of last week's media reporting on the Panama Papers has focused on David Cameron's investment in the offshore fund, Blairmore Global Equity Fund, apparently managed by his father. There have been calls for him to resign. But why? And what is the significance of this leak?

1. What are the Panama Papers?

This is the largest leak in history by the International Consortium of Investigative Journalists – over 2.6 terabytes. Companies such as Mossack Fonseca help their clients hide their wealth through means such as avoiding sanctions or evading taxes. Two main ways they do this is through anonymous shell companies (these are companies that only exist on paper) or offshore accounts – re-routing money through tax havens such as Panama so that they pay lower taxes.

2. We need to distinguish between illegality and morality

It is important to note that there are both legal and illegal uses of tax havens. So in one case, Mossack Fonseca gave an American millionaire fake ownership records to hide money from the authorities – a direct breach of international regulations regarding money laundering. There have also been instances of them looking the other way with regards to illegal obtaining of the money in the first place. So this becomes a legal issue.

But there is also the moral issue, which requires more personal interpretation. This is what is affecting David Cameron, who has not actually done anything illegal. At least one class of shares in Blairmore Global Equity Fund is listed as a reporting fund in HM Revenue & Customs website's list of recognised and approved reporting funds. So the conversation around this is not about whether he has done wrong in the eyes of the law, but whether he has done wrong in terms of ethical questions about supporting the re-distribution of wealth, and whether he can adequately represent the nation on the topic of taxes and offshore accounts (a topic which has caused a lot of controversy recently) when he has benefitted in the past. This is also part of a greater discussion about equality in politics, and the fact that many of our politicians come from over-represented privilege.

3. This is endemic of a wider issue, not just in Panama

A significant portion of investment funds are located in what can be described as tax havens and a significant portion of these are recognised by HM Revenue & Customs as reporting funds. This can easily be ascertained merely by looking at the HM Revenue & Customs list of reporting funds on its website.

Thousands, perhaps millions, of investors in the UK have such investments. They can range from shares in Royal Dutch A Shares to shares in Walt Disney and to shares in investment funds or pension funds. The only thing which makes them potentially criminal is failing to report a dividend earned on such an investment or a profit made on the sale of such an investment. (Clause 154 Finance Bill 2016 has made this failure a criminal offence for the first time). In other words, anyone who has a pension is potentially investing in offshore accounts.

An estimated 8% of the world’s wealth (estimated to be $7.6 trillion dollars) is in offshore accounts, most of it perfectly legally. So perhaps, as well as questioning what has really gone wrong in Panama, we should actually look a bit closer to home – choose our stance on the re-distribution of wealth, balance this with what we think about how we go about investing our assets, and see how UK law should strive to support it.

4. To summarise...

The Panama Papers are the biggest leak in history. This is a big deal.

Some of the cases reported are illegal and bad. Some of the cases reported, such as that of David Cameron's, regard offshore accounts which are not illegal, but could be immoral - depending on what you think about offshore accounts.

But the idea of offshore accounts goes a lot further than Panama law firms. Tons of people in the UK invest in them...including pension funds...so potentially you.

So rather than this being the illegality of a few, it is the system of many. In many cases, the Panama Papers just scratch the surface.

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