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“The Panama Papers Leak” these days this is the most running hot news on newspapers, TV channels, Internet & all other sources of media. Everyone wants to know, what it is all about, mostly due to the names of personalities being associated with it. Here, in this article I have tried to dwell upon it and explain it in concise & easily understandable manner.

So, what are these Panama Paper?

The Panama Papers are a leaked set of 11.5 million confidential documents that provide detailed information about more than 214,000 offshore companies listed by the Panamanian corporate service provider Mossack Fonseca, including the identities of shareholders and directors of the companies. The documents show how wealthy individuals, including public officials, hide their money from public scrutiny. The information from an unremunerated whistleblower documents transactions as far back as the 1970s and eventually totaled 260 GB (2.6 Terabytes) of data and till date, this records as World‟s biggest information leak.

First word “Panama”, most of the people must have heard this name for the first time (Including Me). Panama is a country in Central America situated between continents of North & South America. Without going on to unnecessary geographical & political details & coming to the point, Banking, Commerce & tourism are most rapidly growing sectors in Panama. It‟s the 2nd largest economy in the Central America, and also the fastest growing economy and largest per capita consumer on Central America. It ranks 59th in the world on Human Development Index (HDI) & has just 2.7 % unemployment. Must say, its way ahead in development. And finally most important thing, Panama is a major hub of offshore financial centres or simply put, a Tax Heaven.

The Tax Justice Network called Panama one of the oldest and best-known tax havens in the Americas, and "the recipient of drugs money from Latin America, plus ample other sources of dirty money from all over the world.

The two big draws that offshore entities in jurisdictions such as British Virgin Islands, Bahamas, Seychelles and more specifically Panama, offer are: secrecy of information relating to the ultimate beneficiary owner and zero tax on income generated

While no formal definition exists, a jurisdiction is typically considered an offshore financial center, sometimes less formally known as a tax heaven, when it‟s banking infrastructure:

1. Primarily provides services to people or businesses who are not its residents
2. Require little or no information disclosures before doing business
3. Offer low taxes. Their customers may require offshore accounts for any of a number of reasons, some entirely legal and ethically irreproachable.

Shell companies used for this purpose "plays an important role in large-scale money laundering activities" and also corruption: they are often a means to "transfer bribe money". Further, law firms play an important role in offshore financial operations and setting-up these shell companies. And this is what Mossack Fonseca does & did. Mossack Fonseca, the Panamanian law firm whose work product was leaked in the Panama papers affair, is one of the biggest in the business. Its services to its clients include incorporating and operating shell companies in friendly jurisdictions on their behalf. They can include creating "complex shell company structures" that, while legal, also allow the firm's clients "to operate behind an often impenetrable wall of secrecy. The leaked papers detail some of their intricate, multi-level and multi-national corporate structures.

Mossack Fonseca has managed more than 300,000 companies over the years. More than half were incorporated in the British Virgin Islands; others in Panama, the Bahamas, the Seychelles, Niue, and Samoa. Mossack Fonseca's clients have come from more than 100 countries. The leaked documents indicate that about USD $2 trillion has passed through the firm's hands. More than 500 banks registered nearly 15,600 shell companies with Mossack Fonseca, with HSBC and its affiliates accounting for more than 2,300 of the total.

The word, “Shell Company” is being used many times above, so what are these ?

A Shell company is a company which serves as a vehicle for business transactions without itself having any significant assets or operations. Some shell companies may have had operations, but those may have shrunk due to unfavorable market conditions or company mismanagement. A shell corporation may also arise when a company's operations have been wound up, for example following a takeover, but the “shell” of the original company continues to exist. Shell corporations are not in themselves illegal, and they do have legitimate business purposes. However, they are a main component of the underground economy, especially those based in tax havens. They may also be known as international business companies, personal investment companies, front companies, or "mailbox" companies. Shell companies are widely used for tax avoidance. A classic tax avoidance operation may utilize favorable transfer pricing among multiple corporate entities to lower tax liability in a certain country; e.g. Double Irish arrangement.

How did this whole thing worked?

When you get a quarter you put it in the piggy bank. The piggy bank is on a shelf in your closet. Your mom knows this and she checks on it every once in a while, so she knows when you put more money in or spend it.
Now one day, you might decide "I don't want mom to look at my money." So you go over to Johnny's house with an extra piggy bank that you're going to keep in his room. You write your name on it and put it in his closet. Johnny's mom is always very busy, so she never has time to check on his piggy bank. So you can keep yours there and it will stay a secret.

Now all the kids in the neighborhood think this is a good idea, and everyone goes to Johnny's house with extra piggy banks. Now Johnny's closet is full of piggy banks from everyone in the neighborhood.

One day, Johnny's mom comes home and sees all the piggy banks. She gets very mad and calls everyone's parents to let them know.

Now not everyone did this for a bad reason. Eric's older brother always steals from his piggy bank, so he just wanted a better hiding spot. Timmy wanted to save up to buy his mom a birthday present without her knowing. Sammy just did it because he thought it was fun. But many kids did do it for a bad reason. Jacob was stealing people's lunch money and didn't want his parents to figure it out. Michael was stealing money from his mom's purse. Fat Bobby's parents put him on a diet, and didn't want them to figure out when he was buying candy.

Put in other way keeping it to an Indian angle, Because of the high tax structure in India, some people who earned foreign income preferred to keep their money abroad. But individual Indians were not allowed to convert their rupee to foreign currency and invest abroad. Companies however, were not bound by this rule and were able to buy out companies abroad after taking requisite permissions from the central banker and the government.

Since individual Indians were not legally allowed to open bank accounts abroad or buy assets they needed a structure to do so, where the money or the asset is not under their name but is held by some other „trusted‟ person holding a power of attorney (POA). The law firm Mossack Fonseca provided the „trust‟ element on account of its size and standing in the market, being among the top five in the business. Further, along with such foreign income, people started putting up their money which they don‟t want to give tax on or other money from illegal activities like Bribery money etc.

Non-disclosure of an overseas asset (in this case the company acquired or floated) will be of interest to authorities and regulators here in India. Floating these companies and depending on the reason for which they are put to use, could also violate, individually or jointly, the Foreign Exchange Management Act, the Prevention of Money Laundering Act, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, the Prevention of Corruption Act and the Income-Tax Act.

How all this remained Secret ?

The offshore entity need not appoint natural persons as directors or have individuals as shareholders. The Registered Agent, Mossack Fonseca in this case, offers its own executives to serve as shareholders or directors. Sometimes, an intermediary law firm or a bank acts as a director or a nominee shareholder. So the real beneficiary remains hidden. The registered agent provides an official overseas address, a mail box, etc, none of which traces back the entity to the beneficial owner. In many cases, the shareholding of these entities is vested in a Panamanian Trust or Foundation. The Foundation further masks beneficial ownership. A professional trustee is often the nominee shareholder of the Foundation. The beneficiaries of the Foundation‟s assets are mentioned in the Regulations, and these Regulations do not form part of the Public Deed executed by the trustee.

Further, we all have been hearing about the Swiss Bank accounts, Tax Heaven in Switzerland, Cyprus, Hong Kong, Cayman Islands et al over the decade. Now, the thing is same just the place of parking money has changed as others came to fame & were much known by regulators and governments.


After all the huge leaks and fuss being created around about the many famous personalities including Heads of States of many countries, big businessmen, actors, other celebrities, bureaucrats and of course politicians; government authorities, regulators have of various countries including India have ordered an immediate enquiry on the issue. In India, Prime Minister Narendra Modi has ordered an inquiry, and subsequently the Indian government announced that it is going to constitute a special multi-agency group comprising officers from the investigative unit of the Central Board of Direct Taxes and its Foreign Tax and Tax Research division, the Financial Intelligence Unit and the Reserve Bank of India.

Now, lets wait for the future to know whether this so called enquiry commission does some work or is just another political gimmick. But still I hope it will do the righteous thing and all the culprits get punished & penalized accordingly.

Source:, Wikipedia, The Indian Express, The Guardian


Published by

Damandeep Singh
Category Others   Report

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