The Real Scandal Behind The Panama Papers
Above Photo: Outside the Mossack Fonseca headquarters in Panama City. By Alejandro Bolivar/EPA/Redux.
After the leak of more than 11 million documents detailing sensitive, and often terrifying, information about offshore financial and legal activities, the Nobel-laureate economist Joseph Stiglitz was enlisted to help Panama reform its practices. But nothing could have prepared him for what came next.
29 Sep 2016 – I’ll confess that my jaw dropped when I looked beyond the headlines about the Panama Papers last spring and began to read the fine print. “Panama Papers” is shorthand for the widely publicized report of the International Consortium of Investigative Journalists, originally published on April 3, 2016. The story broke simultaneously on the I.C.I.J. Web site and in newspapers around the world and detailed what had been going on behind a cloak of secrecy. An enormous leak of 11.5 million documents from the Panamanian law firm Mossack Fonseca provided the investigative journalists with a trove of information about 200,000 entities incorporated in offshore havens—companies whose real owners were difficult or impossible to trace. The newspaper Süddeutsche Zeitung had obtained the documents; realizing that to analyze the data was beyond its own capacities, it enlisted the help of the I.C.I.J., which worked for a year through 107 media organizations in 80 countries before breaking the story.
Panama is but one of a large number of “offshore” corporate havens, which include the British Virgin Islands, Cyprus, and the Cayman Islands. Often, the owners of a corporation in one secrecy haven will be a web of corporations incorporated into another. Why the secrecy and the dizzying complexity? In many instances, it is to throw law-enforcement agencies, tax collectors, and investigative journalists off the scent.
The range of alleged activities encompassed by the Panama Papers was broad—from tax evasion and tax avoidance to money laundering associated with a variety of nefarious activities. The range of public figures who made an appearance in the documents was equally impressive. The publicity brought down the Icelandic prime minister, and forced Britain’s prime minister at the time,David Cameron, to explain why his father’s name appeared in the documents. The prominence of Putin associates in the Panama Papers led to accusations (from Moscow) that the revelations were a Western plot. China, too, had its share of prominent people represented.
As Mark Pieth, a Swiss lawyer and anti-corruption expert at the University of Basel, put it in an interview this summer with The Guardian: “I have had a close look at the so called Panama Papers and I must admit that, even as an expert on economic and organized crime, I was amazed to see so much of what we talk about in theory was confirmed in practice.” The newspaper itself noted that the Panama Papers may include “evidence of crimes such as money laundering for child prostitution rings.”
Years ago, after serving as chief economist of the World Bank—where I saw the role that corruption, tax evasion, and money laundering play in bleeding developing countries of money they need for development—I had urged that secrecy havens be shut down. With Leif Pagrotsky, Sweden’s trade minister at the time, I published an opinion article on the subject in the Financial Times. These centers are a cancer. The lack of transparency at their heart undermines the functioning of the global economy. What the Panama Papers showed was that matters were far worse than I had imagined.
So it was with some surprise that, just a couple of weeks after the release of the Panama Papers, I received a call from Panama’s vice president, Isabel Saint Malo, asking me to serve on a special commission that Panama was setting up. The purpose was to recommend steps that Panama could take to promote transparency in its offshore financial-services industry—not just the banks but the full array of “service providers,” including its law firms, one of which had inadvertently opened a window onto what was going on. I wondered if the government was serious. It was obvious that officials were concerned about Panama’s public image. They repeatedly pointed out the unfairness of the title “Panama Papers,” since only a fraction of the bad activities had actually occurred in Panama. But the central player was Mossack Fonseca, the Panamanian law firm that had used its expertise in secrecy—garnered from years of operating in Panama—to expand globally. Panama was perhaps particularly unhappy because it had worked so hard to live down the reputation earned under strongman Manuel Noriega, when it had been such a key logistics hub for the drug trade that the U.S. felt it had to invade.
Two things convinced me to serve. First, the vice president flew to New York to meet me in my office at Columbia University—an indication that the government might be serious. Second, the government also sought the participation of Mark Pieth, who has devoted much of his life to fighting corruption, bribery, and secrecy. Pieth knew in detail how global standards were improving, how the noose was tightening around the neck of the secrecy havens. I hadn’t met him, but I knew he would agree that not enough had yet been done. We both understood why secrecy havens were tolerated: people in the advanced countries, including and especially in the financial sector, benefitted enormously. But it was becoming intolerable to citizens and their governments that so much money was escaping taxation, effectively enjoying protected status beyond prying eyes. Indeed, far worse was being done under cover of secrecy.
If we could actually get one of the havens to reform itself, it could become a model for others to follow—including “onshore” secrecy centers like London and Delaware. Panama had passed legislation on bank and corporate secrecy that moved in the right direction. The Panama Papers showed, however, that there were large gaps between legislation and enforcement—and often a kind of foot-dragging that raised questions about Panama’s commitment to transparency. Panama had also refused to sign on to what was becoming the global standard for best practices, what is known as the multilateral automatic exchange of information among tax authorities. Such exchange is necessary if tax authorities are to trace all the jurisdictions in which their citizens and residents are working.
In short, Panama seemed tantalizingly on the edge—and with the right sort of shove, maybe it could be pushed over into the group of transparent countries. The proposed commission might be the means, and Pieth and I agreed to join.
The seven-member international commission, described by the government as an “Independent Committee of national and international experts established by the Government of Panamá to evaluate and adopt measures to strengthen the transparency of the financial and legal system of the country,” which I co-chaired and which included several Panamanians, including the other co-chair,Alberto Alemán Zubieta, was inaugurated in Panama City on April 29 by none other than the president, Juan Carlos Varela, before a large convocation of ambassadors and international officials. In retrospect, this moment can be seen as the high point. Because events quickly took a less auspicious turn.
No sooner had the preliminary work gotten under way than the intermediary between the government and the commission, a private-sector lawyer named Maruquel Pabón de Ramirez,sent the group an e-mail where an item at the top of her proposed agenda was “confidentiality of the report.” Perhaps naïvely, Pieth and I had assumed that a government asking us to produce a report on transparency would commit itself to transparency in the release of the report. What confidence would there otherwise be in its work? What would it mean if the government could cherry-pick, releasing only those recommendations with which it agreed? Pieth and I both came from countries where there are basic standards of transparency in the public sector, giving citizens certain rights of access to information concerning what the government does and what is done on behalf of the government. There are especially strong standards when it comes to outside commissions appointed by the government that might influence its workings.
On June 3, at the first full meeting of the commission, in New York, I, as co-chair, opened with a discussion on the subject of the transparency of the group’s work. The commission came to an agreement: it would require that the government commit itself to releasing the full report, whatever the findings might be. At the same time, the government of Panama would be permitted a period of time to prepare its response before the report went public. The summary of that session, as recorded by Erika Sui—a legal expert on international taxation and how the international system has been used for tax avoidance and evasion, whom I had asked to work with me on this project—was clear: the group came to a consensus that the report go through a process of consultation with the president and that the report be made public by December 1, 2016. Maruquel Pabón, our intermediary with the government, was asked to convey this stipulation regarding transparency as soon as possible.
The commission had a second request, because it was clear that we would need resources to proceed with our work. The members of the commission were providing their services pro bono, but it was not reasonable to ask support staff to do the same. The government had indicated that it understood this, but for a variety of reasons no funding had yet materialized. Thus, the second request to Maruquel Pabón was to obtain the government’s commitment to provide the necessary funds, which in any case were relatively modest.
These were the only two “hard” topics taken up at the New York meeting. The commission quickly agreed on the scope of its work, on its work program, on the division of responsibilities, and so forth. One of the central messages to the government was that, because global standards were changing rapidly, Panama would have to respond quickly, both in terms of legislation and enforcement. To advise Panama on where it should go, it was agreed that there had to be a discussion of these evolving global standards. And Panama, in order to comply, would have to increase its capacities in several directions. The commission agreed that its discussions had to go beyond the banking sector to encompass all those who play a role in making Panama’s status as a secrecy haven possible, including lawyers and those people who serve as registered agents for corporations.
I believe, as Pieth does, that transparency reforms will strengthen Panama’s economy in the long run. Indeed, time is running out for the old model based on secrecy. It will not be long before those nations that opt to continue with old-style secrecy will be labeled pariah states and be cut off from the global financial system.
With the organizational work out of the way, each member of the commission went about preparing specific sections of the report, with a commitment to exchange drafts in early August. We waited (and waited, and waited) for the government’s response to our two requests: for a commitment to transparency and for modest funding to support the necessary work. On July 29, after almost nine weeks had elapsed, the acting vice minister of foreign affairs, Farah Urrutia, sent an e-mail telling the commission to keep the scope of its inquiry narrow and rejecting the request for funds to support its work. The e-mail simply ignored our insistence on a commitment to transparency.
The commission had agreed that it would not proceed without such a commitment. It seemed clear that we were at loggerheads with the government. At that point, the commission’s co-chair, Alberto Alemán Zubieta, said he was coming to New York. Could we meet? I arranged a breakfast on August 1 at Community Food & Juice near Columbia—normally too noisy and crowded with students for a serious conversation, but ideal with students away for the summer. Given the issue that had arisen, I felt it was important to have someone else at the meeting, and when an associate who had been working with me couldn’t make it, I asked my wife, Anya, who had come down to Panama City and participated in some discussions there and in New York. Alemán himself was joined by one of the other members of the commission, Domingo Latorraca, who worked with the auditing firm Deloitte in Panama City. Alemán and Latorraca had come to the conclusion that the government would not comply with our requests. They recommended that the commission be disbanded. My view was that a joint resignation by all members would have the most impact on the government, and Anya was asked to draw up a joint letter.
Pieth had scheduled a call with Alemán to follow directly upon our meeting. Pieth was worried about the adverse effects that a joint resignation would have on Panama and its reputation. He also wondered whether there had perhaps been a miscommunication with the government—that maybe those who were supposed to be the intermediaries hadn’t done their job. Before sending in our resignations, he suggested, we should make one more attempt to explain to the government the importance of transparency and the risks it faced by continuing in its stance. We tried every channel we knew to get this argument to the right ears, and were rebuffed every time.
As the group attempted to agree on a common resignation letter, Pieth and I began to suspect that something was afoot behind the scenes—that hidden agendas were at play. In version after version of the resignation letter, some of the Panamanian members insisted on obfuscating the true reason for our resignations: the failure of the government to affirm a commitment to make our report public, no matter what it said. They suggested saying that there were divisions within the commission on matters of substance that impeded its work. This was not true.
There was one other odd event in our dealings with some of the members of the commission that contributed to an intimation of double dealing: in mid-July, we had received something from Alemán labeled an “interim report.” In the agenda originally prepared by Maruquel Pabón, there had been mention of such an interim report, but with the final report coming out by November—and with no further meeting scheduled before the end of August—an interim report had come to seem both unnecessary and unrealistic. Alemán had apparently on his own decided to write one up, including draft recommendations that were his own.
The group had briefly discussed some possible recommendations in our New York meeting, but had not gone into detail. I for one would have gone much further than Alemán was proposing. To begin with, there should be a Freedom of Information Act, so that there wouldn’t have to be this squabble over whether a report to the public was made public. Every citizen would have the basic right to know. There were other measures I would have added—or at least would have wanted to discuss thoroughly. There should be a public registry of the true owners of all corporations registered. Because corporations operating in tax-free zones (Panama has a couple of such zones) are especially at risk for being used for money laundering, the true owners of any firms receiving preferential tax treatment should be known, and none should be of the sort that might want to make use of these tax-free opportunities for money laundering. Further, law firms and other service providers associated with illicit activities should lose their license to practice. In some areas, Panama had already put transparency on the books—the question was enforcement.
In the work I was preparing for our next meeting, I had begun drafting such a list of strong recommendations. I began to respond in detail to Alemán’s so-called interim report but quickly came to the view that his report was far from being presentable—and far from representing the consensus of the commission. Pieth and I independently wrote unequivocal e-mails saying that the “interim report” should not be sent to the government. Indeed, there was no reason to rush—as noted, the committee was intending to send in its report by the end of November. Why not just wait until we all met in August to discuss the recommendations?
Nevertheless, Alemán sent the interim report to the government anyway, despite my request that we wait. Had I known, I would have rushed to send my views. Alemán now says that he polled the other members of the commission. I was the co-chair, and was not polled—nor informed of such a poll. Neither was Pieth.
It increasingly became clear that the government, with the assistance of at least some of the Panamanian members of the commission, had a purpose other than reforming the system in a transparent way. What it really wanted was to get the positive glow of an announcement while avoiding the need to make any real changes. Under the circumstances, Mark Pieth and I had no choice but to resign.
The “Independent Committee of national and international experts” was established in part to persuade advanced countries that Panama was cleaning up its act. The rump commission that continues in operation is unlikely to take significant steps that would truly force Panama to do so. After our first meeting, back in New York in June, the government did make one significant change in the status quo, agreeing to the multilateral automatic exchange of information. But much more is needed, starting with a public registry of the beneficial ownership of corporations registered in Panama. That would enable a newspaper in some country—to take a completely hypothetical example—to find out, for instance, who the real owner is of a mining company that was just awarded a government contract under suspicious circumstances—and to discover, say, that it was none other than the brother-in-law of the president. Were it to adopt such a policy, that would say something. We will see.
While we criticize Panama, it needs to be emphasized that onshore secrecy havens, like Delaware and London, are as important as offshore ones; and that vested interests associated with onshore centers have been working just as hard to preserve their secrecy status as those in offshore centers like Panama. The release of the Panama Papers does seem to have made a difference: since their publication, the U.S. has announced strong new measures against secrecy. In the words of a May 5 Treasury Department press release, issued between the time of the convening of the Panama Committee and our first meeting in New York, the new legislation and rules would require banks to “collect and verify the personal information of the real people (also known as beneficial owners) who own, control, and profit from companies when those companies open accounts” and “would require companies to know and report adequate and accurate beneficial ownership information at the time of a company’s creation, so that the information can be made available to law enforcement.” The rules would apply everywhere in the U.S.—even in Nevada and Delaware. And while they don’t go as far as I believe is necessary for transparency—which would require making that information publicly available—they are a big improvement over current arrangements.
Governments and many in the corporate sector thrive on secrecy, and do whatever they can to expand its scope. In contrast, among citizens in general there is a widely shared vision of an “open society.” It is a never-ending battle. Those of us who have grown up in a world where there is more than lip service to transparency are sometimes inclined to take it too much for granted—we don’t always appreciate its significance or its power. If nothing else, the experience in Panama is a reminder of how frightening transparency seems in the eyes of its enemies.
Joseph Eugene Stiglitz is an American economist and a professor at Columbia University. He is a recipient of the Nobel Prize in Economic Sciences (2001) and the John Bates Clark Medal (1979). He is a former senior vice president and chief economist of the World Bank and is known for his critical view of the management of globalization, free-market economists (whom he calls “free market fundamentalists”), and some international institutions like the International Monetary Fund and the World Bank. Stiglitz is the author of The Price of Inequality.
Mark Pieth is a Swiss lawyer and anti-corruption expert at the University of Basel.