Thursday, 11 August 2016

‘White Papers’ from Panama Part – I

‘White Papers’ from Panama Part – I

For the last couple of years two parallel efforts have been going on to check tax avoidance and evasion through international cooperation. After several rounds of discussions in G-20, OECD and other fora, in 2014 the OECD finalised a convention which has already been accepted by more than 90  countries and jurisdictions for sharing information with each other for combating tax avoidance and evasion. The automatic flow of information from the signatory countries would start flowing from the next year. In addition to automatic exchange of information, the convention requires cooperation for recovery of foreign tax claims. India too is a signatory but China and Russia have expressed their reservations. The US  too has not yet signed, apparently on the plea that the purpose is served by its own Foreign Account Tax Compliance Act (FATCA), 2010, that requires all US persons including those living outside the country to submit annual reports on the non-US financial accounts to the Financial Crimes Enforcement Network and all non-US (foreign) financial institutions to report about assets of all US persons to the US Department of Treasury. The objective is to cut tax invasion, raise revenue and provide domestic jobs stimulus. More than 100 countries including India  have signed agreement to implement the US law. The agreement provides for reciprocity, without guarantee of the US Congress though.

Panama has entered into agreement with the US to abide by the FATCA but has expressed reluctance to sign the OECD convention. As the arrangements exist today, Panama is committed to share information only with the USA. But what the international efforts would not achieve, an anonymous whistle blower, referred to as “John Doe”, did more than a year ago. In early 2015, ‘he’ managed to obtain and make available to a German newspaper tons of secret documents   about   thousands of companies, trusts, foundations, world leaders and their relatives and associates, celebrities and superstars indulging in tax evasion and money laundering since 1977. Those named and shamed by the ‘biggest leak of inside information in history’ include Presidents of Russia, UAE and Ukraine, King and Prime Minister of Iceland, (dead), father of present British Prime Minister, children of Prime Minister of Pakistan, superstar Amitabh Bachchan and his daughter-in-law, to name a few. In all there are 12 present and ex-world leaders, 128 politicians and public officials, besides billionaires, celebrities and superstars.

 The US- based International Consortium of Investigative Journalists (ICIJ) got the documents examined by 400 journalists in 76 countries. On April 3, 2016, 11.5 million documents about 21,000 entities were released to the media. The next lot is expected next month.   Surprisingly, for more than one year there was not even a whisper anywhere about what was being examined by such a large number of journalists.  The ICIJ described the document as ‘Panama Papers’ because all the entities covered are or were clients of  Panama’s law firm  Mossack Fonseca, one of the world’s biggest creators of shell companies but more than half of the companies exposed are located in British Virginia Islands and most of the affiliated banks and middlemen are in Hong Kong.  

 While leaders like Prime Ministers of UK, Pakistan and Iceland are facing political heat, Russian President has dismissed the papers as false. While journalists and analysts have written and will continue to write millions of words, the tax authorities across the world are examining documents.

I have an entirely different take on the Panama Papers. I would like to treat these papers as ‘White Papers’. White Papers, as we know, are documents containing information to help understand the complex issues for taking better decisions in future. The ‘White Papers from Panama’ give such an opportunity to all the three sets of stakeholders: those who want an end to the tax heavens; those who have vested interest in maintaining tax heavens; and the tax authorities whose job is to catch tax dodgers. Obviously, the first and the third are working against the second.  

Worries of ordinary people who want an end to the tax heavens

  George Osborne, the UK Chancellor of Exchequer in the Cameroon Cabinet has  said: 'Tax evasion is not just illegal, it is immoral. You are robbing from you fellow citizens and should be treated like a common thief. The scourge  of tax evasion could only be tackled with a global solution.' His German counterpart Wolfgang Schauble has declared that 'we are creating more transparency and more evasion will no longer be worth it.'

    Such high sounding assurances by those participating in international gathering to devise ways and means to check tax evasion should sound very assuring to the common people who have to bear more tax burden because most of the rich and powerful do not want to pay their share. These common people may have genuinely believed  that the Presidents and Prime Ministers were negotiating international conventions to check tax avoidance and evasion. To such people names revealed by the "Panama Papers" must have come as big shock.  By now they must have realised that no tax haven - a place where there is no income tax or very low rate of income tax, the strict bank secrecy laws and history of non-co-operation with other countries on exchanging information about tax matters and is ideal for formation of shell companies, not necessarily illegal but used as a front for companies indulging in money laundering and tax evasion  -  can exist without the support of powerful politicians. True, there are leaders who genuinely echo what the British and German Finance Ministers are saying but not all 
world leaders  mean what they say publicly.  

     Panama has been a tax haven for over 115 years. Switzerland, respected all over the one for its political neutrality since 1815, started providing shelter to tax evaders and other criminals over  80 years ago. Several overseas territories and Crown dependencies under the control of the United Kingdom have been flourishing as tax heavens. Despite so many tax heavens in the world we have not heard a word about economic sanction against such countries and territories. Today powerful leaders of the US, UK, France and Russia are fighting a war to finish the ISIS. The tax heavens may not be as dangerous as the ISIS but certainly deserve to be treated as ‘rogue states’ responsible for the wealth in the hands of terrorists and other criminals. The actions of these ‘rogue states’ are also dangerous for world peace and prosperity. Economic sanction against tax heavens would have solved the problem long ago.

Thanks to the efforts of the rich and powerful people (RAPP) of Panama and  the USA, Panama has become the sleaziest tax heaven and  home to nearly 400,000 offshore companies, more than any other tax heaven except Hong Kong. The history of evolution of  Panama as tax haven should be of some interest to the readers.

After the end of Spanish rule, Panama became part of Colombia in 1821, without popular support though. The separatists got a major boost when the RAPP of Panama realised that being part of Colombia they were net losers. On the other hand, the RAPP of the USA were keen to acquire control over the isthmus to build a canal to link the Atlantic and the Pacific oceans to reduce distance by 3500 miles and to boost their foreign trade. Their other interest was to have access to a country outside of the USA where they could keep their secret treasure. Their dream was fulfilled by charismatic and visionary Theodore Roosevelt who in September 1901 at the age of less than 43 became the youngest President in US history. Among other things, he is remembered for separating Panama from Colombia, taking control of a slice of Panama  for the construction  of canal, taking action against powerful business magnets of the USA and at the same time helping them initiate the process of converting Panama into a tax haven.

In September 1902 Theodore Roosevelt signed a treaty with Colombia for control of land to build the canal but the Colombian Senate refused to ratify it. The year1903 saw a ‘mock’ war between the Colombian army and separatists that lasted only a few hours. I call it a ‘mock’ war because the Colombian army men were bribed $50 each to lay down their arms while the US Navy was waiting off the coast to meet any eventuality. On November 03, 2003 Panama declared itself independent. It adopted a constitution already prepared by an American lawyer who was very close to powerful banker JP Morgan. Shortly thereafter the US and Panama signed the treaty earlier rejected by the Colombian Senate that granted rights to the US “as if it were sovereign” in a 1280 km², to build, administer, and defend a canal “in perpetuity”.  The   Canal was completed in 1914.  

Roosevelt’s other mission was to curb increasing powers of US capitalists. He believed that ‘the rise of industrial capitalism had rendered limited government obsolete’. He initiated an era of greater government control over the economy by taking strong actions against large monopolistic corporations and their business practices. In 1902 when coal mine owners refused to accept legitimate demands of labour – better wages and less working hours – and 140,000 workers went on strike, Roosevelt threatened to hand over the mines to the army. The mine owners agreed for settlement. The same year, he initiated legal proceedings against a  company owned by JP Morgan and others that controlled most of the railroads in north-western US and was trying to create a monopoly. He came out victorious; the US Supreme Court ordered dissolution of the company.

While curtailing their powers in the USA, Roosevelt extended full support to the US business magnets  to turn Panama into a financial centre. The objective was to keep US clean and let the rich and powerful keep their dirty money into Panama. Since then tightening of US laws to curb tax invasion in the country and increasing facilities to keep dirty money in Panama has moved in tandem. JP Morgan & Co was appointed as the US ‘fiscal agent’ in charge of managing $10 million the US government gave to Panama in aid. The Panama government allowed foreign companies to register foreign ships, a move that helped  oil magnet Rockefeller save taxes in the US. In 1927, Panama made a law to allow foreigners to establish tax free, anonymous companies without any difficult question being asked. In the Colon Free Trade Zone created in 1948 illegally obtained goods can be purchased and sold, a facility liberally used to launder  dirty money. In the 1970s the US government further tightened laws to plug loopholes used by tax evaders and Panama added an extra layer of protection to the banks.  By 1980s Panama had become a favourite of drug cartels for money laundering through shell companies. Bank deposits jumped from a small amount in 1970 to $ 50 billion in 1980, in a country in which even today, according to the World Bank, the GDP is less than $ 27 billion. In 1990s, political leaders of several countries started using the facilities. Any amount of cash in US dollars can be deposited in banks protected by the strict secrecy laws without any question being asked.

Like Theodore Roosevelt who was awarded the Nobel Peace Prize, not for his success in separating Panama from Columbia though, another Nobel Peace Prize winner US President, Barack Obama, too has taken measures to keep America ‘clean’ through FATCA of 2010 and Panama safe for ‘dirty’ money by signing a free trade agreement with Panama in 2011.  He succeeded in getting Congress approval for the treaty on the ground that it would force Panama to agree to tax information system   which would improve transparency in financial deals taking place in that country. Actually in 2007 President Bush had negotiated the free trade agreement but could not sign. Soon after Obama took over, two powerful lobbying groups of US business, the US Chamber of Commerce and the Business Roundtable, became active and Obama and his the then Secretary of State Hillary Clinton started persuading the Congress to rectify the agreement which was signed in 2011. In a statement issued in support of the agreement, Clinton stated that it “will make it easier for American companies to sell their products.” But the terms of treaty guarantee Panama that the US would take no action to combat financial crimes, notwithstanding Obama’s much publicised domestic agenda to crack down on tax heavens and tax dodgers and to create more jobs

In recent years, the Panamanian government passed certain laws to monitor and take action against banks and businesses indulging in illicit activities. The government succeeded in giving an impression to the world that it was cracking down on criminal activities.  In February this year, the Financial Action Task Force, an international body that sets standards for anti-money laundering rules, removed Panama from its "blacklist" of countries that were not complying. However, the International Monetary Fund is not convinced. Its investigations have revealed that while regulating banks and other financial institutions, the law does not cover lawyers, accountants, insurance companies and hosts of others indulging in illegal activities. It described these exceptions as ‘systemic deficiency’.

Panama’s status as a safe tax haven is further guaranteed by the fact that any disruption of movement of ships through Panama Canal would seriously hurt the trade of Western countries, especially the USA. 10% of US exports is through Panama Canal. England exports its products to several southern American countries through the canal. The alternative to the European countries is via Cape of Good Hope that means an additional distance of 5000 miles. The western powers would never tolerate any disturbance in Panama

There would be no end to the worries of ordinary people as long as RAPP of the powerful countries need tax heavens. As of now now we have no idea of the value of treasure revealed by the Panama Papers but according to the Bank of Italy the value of black money kept in the tax havens across the world is between six and seven trillion dollars; the Indians' share in that is estimated between $ 152-181 billion. Some experts feel that what Indian have stashed in tax havens is much more, more than .India's GDP In 2012 the British Tax Justice Network had estimated that anything between $21 trillion and $33 trillion was kept in tax havens.

Devendra Narain
April 24, 2016