Deepali Srivastava

Spare a thought for Panama, folks. Yes, that tiny nation sandwiched between North and South America where the world’s rich and powerful stash their wealth, conceal their assets, and avoid paying taxes. 

Millions of papers leaked from the Panamanian law firm Mossack Fonseca are exposing the offshore holdings of world leaders, business tycoons, celebrities, and criminals.  Work by the International Consortium of Investigative Journalism has revealed sensitive information about 214,000 shell companies. But here’s the thing, said Ivan Zarak, Panama’s vice minister of economy at the Wilson Center in Washington DC last week:  “More than 75% of those companies were established outside of Panama.”

Panama’s reputation as a money laundering haven is indeed well-deserved. For almost a hundred years, Panama has served as a reliable place to secretly park or funnel large sums of money.  According to the Tax Justice Network, Panama is home to more than 350,000 secretive International Business Companies (IBCs).  But history shows Panama’s place as a puppet rather than an orchestrator in the world of global business and finance.  

The nation of Panama was carved out of Colombia in 1903 when local business groups and the US government fomented a revolution in the city of Colón. The war ended quickly and Theodore Roosevelt’s administration moved swiftly to secure rights to build the Panama Canal. (Europeans too had long dreamt of a Central American canal, and the French, in particular, lost thousands of lives and millions of dollars in pursuit of that unfulfilled dream). Then in 1919, John D. Rockefeller's Standard Oil Company began to register its ships in Panama, hence avoiding U.S. taxes and laying the foundation for Panama’s tax shelters. In 1927, guided by Wall Street bankers, Omar Torrijos’s government passed laws that allowed Panama to register tax-free, secretive corporations.  Since then, the country’s open, dollar-ized economy, at the confluence of major drug trafficking routes and corrupt dictatorships, has been a magnet for money launderers.  
Ironically for Panama, the infamous papers leaked just when the country finally seemed to be cleaning up its act.  

In February this year, Panama’s name was removed from the notorious “grey list” maintained by the Financial Advisory Task Force (FATF), an international body that sets standards for anti-money laundering and combating terrorist financing (AML/CTF). Zarak’s visit to Washington DC was intended to be celebratory. Instead, he and government officials who accompanied him, found themselves facing tough questions from media about their country’s role in international financial crime.

Zarak and his colleagues insisted that under President Juan Carlos Varela, elected in 2014, Panama has made rapid strides in increasing financial transparency. For proof, they pointed out, look at how fast the attorney general moved to raid Mossack Fonseca’s headquarters in Panama City.  Uncomfortably for Panama, Ramón Fonseca, a co-founder of the law firm, was an advisor to President Varela until his recent resignation. “We cannot deny that,” acknowledged Zarak, adding, “It will be up to the attorney general’s office to make the appropriate investigations…Panama is respectful of the rule of law.” 

For more intriguing than any relationships within Panama is the complex web of international financial transactions aimed at concealing the sources, ownership, and beneficiaries of funds and assets. Money laundering is a sophisticated exercise in placement, layering and integration of illicit funds. It involves using multiple accounts all over the world, disguising transfers as payment to fake companies, and converting illegal cash into legitimate tax-saving assets. This gross over-simplification merely scratches the surface of these intricate and opaque mechanisms. 

Many of the transactions revealed by Panama Papers are completely legal.  Panama Papers are not just about dirty money but also the relationship between transparency and power. Leaders like British Prime Minister David Cameron can scarcely ask for privacy at a time when governments are stepping up surveillance of citizens in the name of national security.  Influential individuals have the law on their side, allowing them to siphon away their wealth in a global economy in which almost half of the population lives on less than $2 a day.  

Many of these dealings are happening far beyond Panama. Hong Kong, the gateway to China and new money, is home to Mossack Fonseca’s busiest offices. For those wondering why there aren’t more Americans in the Panama Papers, there are many theories to choose from. The inconvenient truth, though, is that Panama doesn’t offer much that Delaware, Nevada, and US Virgin Islands don’t. According to Tax Justice Network’s Financial Secrecy Index, the US is far more secretive than Panama, and behind only Switzerland and Hong Kong in providing accounts that cannot be investigated by overseas authorities.  Anonymous, Inc., a recent edition of CBS’s 60 Minutes, caught American lawyers and financial intermediaries on hidden cameras helping to move dirty money through dummy corporations and offshore accounts. 

Chip Poncy, senior advisor at the Center on Sanctions and Illicit Finance (CISF) at the Foundation for Defense of Democracies and former US representative at the FATF came out in strong support of Panama government’s position that these papers are not just about Panama.  “We have countries that aren’t prosecuting money laundering and countries that don’t have authority to freeze terrorist-related assets outside of Al Qaida and ISIS.  Everybody is a player. There should be attention to detail on the question of what element of the AML/CFT regime is lacking in which country.”  

Fighting financial crime is a collective action problem that requires meticulous global coordination. The moral case for doing it couldn’t be more obvious: money laundering and tax evasion divert resources away from the economy and rampant corruption eats away at the basic structures of society. So far it hasn’t moved the global community. Now the question is: will the forced transparency of our digital age make the difference? 

Deepali Srivastava is Content Director at Kite Global Advisors and a writing instructor to young people of all ages, from fifth graders in Brooklyn to undergraduates at Hofstra University. She is an award-winning journalist whose articles have appeared on and Business Standard (an Indian business daily). She has a Masters in International Political Economy and Development from Fordham University. Twitter @deepalisriv