Tuesday, 5 April 2016

What is 'Panama Papers' leak?

The Panama Papers is a leak into how the rich and famous hide their millions of wealth in Off-Shore companies. More than 11 million files were obtained from the Panama based Off-Shore Law Firm thats been operating for nearly 40 years. It is also being called the 'Wiki Leaks' of the super rich! The ICIJ has done and reported this leak.
More than 100 politicians from 50 different countries are named in the files, most famously Vladimir Putin. State Leaders, Sports Stars, Business, powerful people are many of the listed clientele of this Law Firm which exists 'in the shadows'.

The Mossack Fonseca (MF) Law Firm allegedly sells anonymous offshore companies around the world. These shell companies enable their owners to cover up their business dealings, no matter how shady. Shell Companies are often used as proxy for businesses as a way to hide who is doing what for corporate secrecy.

Though the stashing of funds is not directly done by the named clients, they are done by their group, relatives, friends and associates. There is also speculative question as to involvement of Big 4 Accounting Firms in this alleged investments in tax havens. The Dutch Financial Tax Authorities have fined the Big 4 very recently. These were the Firms who were auditing these Banks involved.  

Over 100 of Indians are included in this list. These Individuals have registered lots of OffShore entities in Tax Havens. The legal position in India needs to be checked here. For a very long time India (the RBI) did not allow convertability of Rupee i.e. you cannot convert the Rupee into Dollars and move them overseas. This position was till the year 2004. It was in 2004 the RBI announced the Liberalised Remittance Scheme (LRS) where every Individual was allowed to take $25,000 outside India per year. The purpose for outwards remittance could vary from hospital expense, gift, children education, donations, buying/investment of Shares etc.  This limit of $25000 was increased to $2,50,000 a year.
RBI however did not officially make a statement until 2010 whether an Indian Resident Individual can incorporate a company outside India. However, since investment in shares were allowed from the beginning, the individuals also opinionated that they can form a company as well outside. Thus, a clarification was issued in 2010 that the LRS scheme to be used for all the purposes mentioned therein which also prohibits resident individuals from setting up a company abroad. 
However still, consultants perceived that 'setting up' of companies is not as same as 'acquiring' of a existing companies. 

The MF Law Firm which specialises in Incorporating of companies used to set up such companies in huge numbers just like a machine. Thus, they were offering companies 'off-the-shelf' to resident Indian Individuals. Anybody could cherry-pick companies for setting up. 
In 2013, RBI allowed Resident Indian Individuals to invest through Overseas Direct window (ODI). Through ODI a person could set up a 100% subsidiary company or also invest in a Joint Venture company. It also issued a statement that the individuals who had incorporated companies overseas prior to August 2013 have technically violated the LRS rules (FEMA guidelines). 
However, the Panama Papers reveal that individuals have set up companies overseas even before 2004! There was no specific rule to investment/acquiring/setting up of companies before 2004 which is a clear violation. 

The issue with Tax Haven countries is the layers of secrecy and tax saving schemes which is closely related to tax avoidance or money laundering. Thus, basically these off-the-shelf companies were formed to avoid tax, evade tax, and to maintain secrecy of the owners. The shareholders register of these off-shore companies have no direct link with the actual owner of the shares. Thus, it is difficult to identify the owner of these companies. Nominee Directors, nominee shareholders from their own associates were also provided by the MF Law Firm so that no direct link is established with the real owners. The Panama Papers breaks this tightly held secret links!

The RBI and Income Tax Department of India would be keenly interested to know the names and details of such Individuals who had parked their funds abroad safely.

The Law Firm Mossack Fonseca have issued a Statement in response : 'In 40 years MF has operated beyond reproach in our home country and in other jurisdictions. Our firm have never been accused or charged in connection with criminal wrongdoing.'

These Shell companies are used to hold the Assets of the companies or individuals so that they can avoid being taxed in their own country and also distance themselves in case of troublesome transactions. It is alleged that these shell companies can be used to do some shady business like taking commissions, bribes etc.

Though Mr Putin's name is not directly mentioned in the list of files leaked, the data reveals a pattern where his friends, relatives and associates have earned millions from the transactions which could not happened without his blessing. 
Key Highlights
Ultimate beneficial owner, beneficial owner, beneficiary
The person who is the true owner of a company and/or a bank account. In the offshore world, the identity of beneficial owners is often kept secret.
Nominee directors
Stand-ins who control a company on paper but exercise no real authority over its activities.
Nominee shareholder
A person who is listed as a shareholder on a company’s documents but has no real power over the company or claim to its assets. This is common practice in offshore financial structures to hide the identity of the real owner.
A go-between for someone seeking an offshore corporation and an offshore service provider -- usually a law-firm or a middleman that asks an offshore service provider to create an offshore firm for a client.
Power of attorney
Authorization given to a person to represent the offshore company. It can confer rights that include managing the company without any limitation, carrying out contracts, purchasing products and borrowing or lending money. Each authorization notes which powers are granted to the person who will act on behalf of the company and whether they are general or specific.
Bearer shares
Whoever physically holds a certificate of shares is considered the owner of the shares. Bearer shares provide one of the deepest levels of secrecy. Many countries have banned bearer shares because they are considered a facilitator of tax evasion and money laundering.

The ICIJ has listed details according to persons and relatives of the famous politician names mentioned in the files. For example lets take a look at Mr Nawaz Shareef, the current Prime Minister of Pakistan.

Nawaz Sharif

Prime Minister of Pakistan (1990-1993) (1997-1999) (2013-present)

Relatives in the data: Mariam Safdar, Hasan and Hussain Nawaz Sharif

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