Published On: Thu, Dec 8th, 2016

Panama Papers leak has ‘enormous’ financial impact

Panama PapersWASHINGTON - Over the past eight months, governments have reported using the leaked Panama Papers files to help recoup or seize tens of millions of dollars in unpaid taxes or other assets, including more than $80 million in Colombia, $1 million in Slovenia and 375 pounds of silver bullion in Australia. Billions more are being traced for potential tax evasion.

Household-name corporations also have suffered due to the fallout from the media partnership’s reporting. The Panama Papers wiped out $135 billion of the value of nearly 400 publicly traded companies with direct exposure to the Panama Papers, academics found.

“The impact is enormous,” said Hannes Wagner, associate professor of finance at Milan’s Bocconi University and one of the study’s authors.

According to Wagner, the financial hits to the companies in the wake of Panama Papers represent the largest loss in history following big data leaks or corporate scandals, greater than the combined market cap losses produced by the scandals that hit Enron and Volkswagen.

Companies with links to the Panama Papers suffered bigger losses after the project’s release than companies without links to the Panama Papers. While the study does not identify the companies, an International Consortium of Investigative Journalists (ICIJ) review of share price movements of randomly-selected corporations with ties to the Panama Papers reveal that the Swiss commodities giant Glencore and Britain’s HSBC Holdings Plc experienced drops in share price following the release of Panama Papers and the accompanying database. Glencore International AG appears as a client of Mossack Fonseca. HSBC affiliates were among the most active banks to request offshore companies for clients from the law firm.

According to the academics, the drop in value suggests that investors believe companies will have a harder time avoiding taxes in the future or may be hit by fines for tax evasion.

Following an internal audit prompted by the Panama Papers, Scandinavia’s biggest lending bank, Nordea, admitted that it had in many instances fallen “clearly below” its own standards for identifying risky customers and potential crimes such as money laundering. The bank blocked 68 suspicious accounts but claimed to find no evidence it actively helped tax evasion.

Some of the world’s largest financial institutions have formed Panama Papers response teams, according to a survey by consultancy firm KPMG. Several have set up full-time taskforces with ten employees or more, the survey found.

National responses: Legislation and investigations

From micro nations such as the Cook Islands, whose entire population is smaller than that of Ferguson, Missouri, to India, the world’s second most populous country, individual governments are responding aggressively to the Panama Papers.

The US Department of Justice and the US Attorney’s Office for the Southern District of New York launched criminal inquires relating to the Panama Papers. The Wall Street Journal reported that US prosecutors were digging into whether Mossack Fonseca employees “knowingly helped its clients launder money or evade taxes.” The Journal reported that sources familiar with the investigation said prosecutors were considering criminal charges that could include conspiracies to launder money, dodge taxes, and cover up bribes to foreign officials.

Mossack Fonseca has denied any misconduct and says the firm “has never been accused or charged in connection with criminal wrongdoing.”

US Treasury Secretary Jacob Lew wrote to Congress in May to say that “we must ensure that the United States can live up to its end of the bargain” in the fight against global tax evasion. Among the new rules his agency announced was a requirement that it said would strengthen the obligations of banks, securities dealers and other firms to verify the identities of the real owners of financial accounts.

Taiwan’s legislative assembly used the Panama Papers to adopt new tax avoidance rules. In July the assembly introduced restrictions on benefits enjoyed by Taiwanese companies that keep profits offshore. New Zealand’s government launched an inquiry into the country’s foreign trust rules after revelations the country’s clean reputation was being used as cover for selling tax avoidance vehicles. In July, the government accepted the inquiry’s recommendations and announced new legislation.

In October, following revelations from the Panama Papers that some former and current government officials held offshore companies, Mongolia’s Parliament debated a bill to penalize politicians and public servants who do not declare offshore financial interests.

“The issue you launched has set the public agenda and is officially becoming a law. Congratulations!” Enkhbayar Battumur, Mongolia’s deputy justice minister, tweeted to MongolTV, one of the partners in the Panama Papers, after the Mongolian cabinet met to discuss the proposed law.

The same month, Panama’s Parliament passed laws to toughen bookkeeping requirements for offshore companies and to allow Panama to share tax information with other countries -- a win for foreign governments that have pressed the Central American nation for years to disclose what their citizens are holding offshore. Lebanon, another offshore financial center, also passed legislation in October to ease the exchange of tax information with other countries in an effort to avoid international blacklisting in the post-Panama Papers world.

Also in October, Ireland’s finance minister cited the Panama Papers in proposing a new criminal law addressing tax evasion. In November, Germany’s finance minister introduced legislation -- nicknamed “the Panama Law” -- that would increase penalties for tax evasion and enforce disclosure of Germans’ business relationships with shell companies.

Tax probes: Thousands under scrutiny

Officials in many countries are also taking direct action against citizens suspected of having used offshore entities to reduce their tax bills.

Governments are investigating more than 6,500 taxpayers and companies, according to ICIJ and dozens of its media partners who assembled responses from government agencies and public statements.

In November alone, governments in Iceland, the United Kingdom, Canada, France, India and Pakistan announced probes of nearly 1,300 taxpayers for potential tax evasion.

In Iceland, more than 100 tax cases are under review and 46 cases of potential tax evasion have been referred to prosecutors, according to media reports. Authorities have conducted more than a dozen raids. British authorities revealed that 22 people are under civil and criminal investigations for tax evasion and that the offshore dealings of 43 other wealthy Britons are under review. Companies and properties in the United Kingdom are also being scrutinized as part of an unspecified financial sanctions inquiry, the government announced. Canada’s Revenue Authority announced 85 Canadians linked to Panama Papers were under investigation for tax evasion.

France’s ministry of finance announced it was auditing 560 taxpayers. India’s special Panama Papers taskforce said it was probing the offshore affairs of 415 Indians, making it the country’s largest-ever tax inquiry, The Indian Express reported. In neighboring Pakistan, The News reported that 20 Pakistanis have been identified by the Federal Board of Revenue as not filing tax returns during the same period they appear linked to companies set up by Mossack Fonseca.

Resignations: Officials and executives

Top officials had varied reactions to the news they’d been tied to the Panama Papers through their own offshore holdings or holdings linked to their families and associates. Russian President Vladimir Putin’s spokesman dismissed revelations about the offshore financial maneuvers by people and companies tied to Putin as a distorted “information attack” against Russia.

Icelandic Prime Minister Sigmundur Davíð Gunnlaugsson had the bad luck of having his first reaction caught on video by a TV crew. “I’m starting to feel a bit strange about these questions because it’s like you are accusing me of something,” he said, before walking out of the interview.

Video of his fumbling response to questions about an offshore company he and his wife had owned was replayed millions of times around the world.

Within 48 hours, angry protests and political pressure had forced Gunnlaugsson step down as prime minister.

Other government and corporate officials soon followed his example.

Mihran Poghosyan, Armenia’s top bailiff, known as the chief compulsory enforcement officer, resigned after initially rejecting revelations that he held shares in three companies set up by Mossack Fonseca. A criminal investigation continues.

José Manuel Soria, Spain’s minister for industry, energy and tourism, held on for five days before he, too, left his post. Soria initially denied any offshore connection but later acknowledged his family’s role in a company in the United Kingdom. In resigning, Soria denied wrongdoing but cited “a succession of errors” in his response to the issue.

The head of a state-owned bank in Austria, Hypo Landesbank Voralberg, resigned after the bank was cited in reports about the Panama Papers. In the Netherlands, a member of the supervisory board of the country’s third-largest bank, ABN Amro, resigned after Dutch journalists reported his ties to an offshore company in the British Virgin Islands.

Juan Pedro Damiani, a Uruguayan lawyer and member of FIFA’s ethics committee, resigned from the panel in the wake of reports that he had business dealings with three men who have been indicted in the world soccer body’s corruption scandal. A Finnish company fired its sales manager in response to revelations he may have helped launder Russian money through a Panamanian shell company.

By Will Fitzgibbon and Emilia Díaz-Struck

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