The article is subtitled “What every fraud examiner should know about the Panama Papers.” It describes the leak of offshore data from the Panama law firm Mossack Fonseca in spring 2016. The release of 11.5 million records examined by the International Consortium of Investigative Journalists (ICIJ) became the biggest international news. The database contained information about approximately 214,000 offshore legal entities. The article features the opinions of financial experts on what the leak’s meaning is and what its consequences might be. There are three main points discussed in the article: the work for fraud examiners in the leaked offshore data, the purpose of shell companies, and the role of Mossack Fonseca.
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The article asserts that there is much work for fraud examiners in the Panama Papers. The leaked offshore data contain a lot of materials to be investigated, particularly from the perspective of taxation. However, it is also noted that the information released by the ICIJ is insufficient for a comprehensive fraud examination.
The database contains names of the companies, executives, and shareholders, while a fraud examiner needs more information, such as contacts, invoices, payment records, and a range of other financial documents. Also, the most important thing to know for a fraud examiner about an offshore shell company is its ultimate beneficial owner (UBO). UBOs are often hard to identify.
The article then argues that there may be many reasons for establishing a shell company. They are not necessarily malicious or illegal. A shell company is one that possesses all the rights and capabilities of a legal entity but has no assets or employees. Mossack Fonseca was specializing in creating such companies for its clients. Businessmen and celebrities or public figures may create shell companies to protect their privacy and assets or to optimize their taxes. Nonetheless, many shell companies are created to laundry money or hide crimes such as bribing or tax evasion. Knowing the UBO is necessary to identify whether the money used in transactions with shell companies is illegally appropriated, used to evade taxes, or its owner is just hiding the money from an ex-spouse.
Finally, the article discusses the role of the Mossack Fonseca law firm in the offshore scandal. On the one hand, the Panama law firm was assisting its clients in creating shell companies without direct involvement in illegal activities such as money laundering. On the other hand, financial experts have argued that the law firm should be responsible for the illegal use of the shell companies it had created. After the offshore data had been revealed, Mossack Fonseca representatives claimed that the law firm could not have been accused of any crime.
They compared the firm to a car manufacturer that cannot be held responsible for the death of a person hit by a car it manufactured driven by one of its customers. However, financial specialists oppose such comparison and claim that Mossack Fonseca knew for what the companies it had created were being used.
At the end of the article, several recommendations are proposed to address the issues described above. First, the offshore world should improve its regulatory and investigative infrastructure to effectively distinguish between shell companies created for benign purposes, and those created with illegal intentions. Second, the onshore world should deal with the issue of unregulated incorporation centers such as Delaware, Nevada, and Wyoming, where shell companies appear in abundance, too, due to specific provisions of the taxation legislation. Third, a business system needs to be created that rewards those who play by the rules and punishes those who do not.
It is emphasized that sooner or later the global economy will have to deal with the issue of offshore companies because there are many of them, and the ones revealed in the Panama Papers are just the tip of the iceberg.