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The Panama Papers: How Money Does Not Trickle down but Simply ‘Disappears’

The ‘Panama Papers’ caused quite a stir in the international media and launched a heated political debate. The sheer amount of the disclosed data was unprecedented, indeed the ‘biggest leak in the history of data journalism’, as commented on by Edward Snowden on the 4th of April:  with 11.5m documents and 2.6 terabytes of information taken from Mossack Fonseca’s internal database   the amount of data exceeds that of all other recent leaks (as shown in the graph below taken from The Guardian).

At the centre of the scandal is Mossack Fonseca, a law firm, founded by Jürgen Mossack, the son of a German ex SS officer, and Panamanian novelist/lawyer Ramón Fonseca, a former adviser to Panama’s President Juan Carlos Varela, and already involved in a corruption scandal concerning the Brazilian oil company Petrobras. The firm has offices in 35 locations around the globe, and, as described by ICIJ, it is ‘one of the world’s top creators of shell companies, corporate structures that can be used to hide ownership of assets’ with more than 214,000 offshore companies connected to people in more than 200 countries and territories.

The vastness of data is reflected in the variety of personalities, countries and institutions involved. VersuchII As pointed out by the Italian journalist Baranes, Mossack Fonseca’s clients come from 204 different countries and, in a sense, they are  ‘more representative’ than the United Nations, which only consists of 193 members. However, two types of clients take the centre stage: banks and politicians.

Overall, according to what was reported by ICIJ  ‘more than 500 banks, their subsidiaries and branches have worked with Mossack Fonseca since the 1970s to help clients manage offshore companies. UBS set up more than 1,100 offshore companies through Mossack Fonseca. HSBC and its affiliates created more than 2,300.’

Even more ‘impressive’ than the banks ‘performance’ is that of heads of state and their entourage:  61 family members and associates of prime ministers, presidents or kings figure among the clients of the law firm, including David Cameron, Xi Jinping, Petro Poroshenko, Argentinean President Mauricio Macri and friends of Vladimir Putin. (The details of the mechanisms adopted to hide and launder money are extensively explained here.)

People all over the world were flabbergasted. But, whereas in some countries the revelations provoked mass protests, everything remained quiet elsewhere. In Iceland, 10,000 people (out of a population of 330,000) demonstrated immediately on the 4th of April, asking for the resignation of Prime Minister Gunnlaugsson, who, so it turned out, owned, with his wife, an offshore firm on the British Virgin Islands. He eventually stepped down. On the 9th of April, thousands of people gathered at 10 Downing Streets asking for Cameron’s resignation. The British Prime Minister reacted like a child caught with its fingers in the jam pot and declared he knew ‘he should and he could have handled this better.’

The violence of capitalism: profit accumulation vs. social needs

Unfortunately, the risk with this scandal is that it is so big and complex that people are overwhelmed; persevere in a general sense of nausea, disillusion, unable to react. This practice, now ruthlessly revealed, has spread everywhere, and the EU is no exception. In fact, some European countries feature on the top list of tax havens and, according to the report of the Tax Research UK [2] , tax evasion and tax avoidance might cost the governments of the European Union Member States € 1 trillion a year. Another report published recently shows that a quarter of the international activities of French banks (13.5 billion on 53 billion) is made in countries considered tax havens, and one third of their total branches are located in these countries (641 of 1,854 branches). In the USA, the situation is not better (even if Americans do not appear among Fonseca’s clients, at least until now) and, as shown by the economist Zucman, more than half of the foreign profits of US firms are booked in tax havens.

Two French Sociologists, Monique Pincon-Charlot and Michel Pinçon, wrote a book, ‘Tentative d’évasion (fiscale)’, on tax fraud. However, when asked about their book, they pointed out that their goal was to write a book, not on tax evasion only, but on the ruling class in its current oligarchic dimension. According to the authors, no one made the point they wanted to make: ‘Namely that tax havens are a creation of the ruling class to prevent understanding that tax fraud is a systemic practice of the oligarchic class which does no longer want to contribute to any form of solidarity with the people.’

Break through

Mossack Fonseca vehemently defends itself, declaring that it actually complies with anti-money-laundering laws and that it will not stop to do its job.  If the story of Fonseca is, in some way, the story of the offshore system itself, then this reaction is the strongest and most effective j’accuse against our international legal system in terms of tax rules. The scandal is not Fonseca itself, but the lack of clear legislation against these practices. In this sense, politicians who on the one hand, declare to fight against tax evasion and on the other hand prevent their own money from being taxed; money, which should be invested in national services they are in charge of, are not showing schizophrenic behaviour. On the contrary, they act in perfect accordance with the functioning of an economic system which pushes towards further deregulation, wage moderation and increasing inequalities.

After the Offshore Leaks in 2013, Fonseca reassured its clients about the safety of their private offshore holdings, informing them that any communication was ‘handled through an encryption algorithm that complies with the highest world-class standards.’ Clearly, decrypting the algorithm is not enough to fight corruption and tax evasions, but at least, it gives us the chance to unmask the rhetoric on austerity and, for instance, on the alleged unsustainability of social services, or the costs of the current migration crisis. It definitely demolishes the ‘fairy tale’ about money and profits, according to which progressive taxes should not be implemented as they depress growth, because they prevent profits from ‘trickling down’ and reaching the poor section of society. As the Panama leaks show:  rather than trickle down profits tend to accumulate and then disappear into one of the tax havens.

You can download the article in PDF here.

[1] The data includes emails, financial spreadsheets, passports and corporate records revealing the secret owners of bank accounts and companies in 21 offshore jurisdictions, including Nevada, Hong Kong and the British Virgin Islands.

[2] References found in this article:  http://www.eunews.it/2016/04/08/altro-che-panama-il-vero-paradiso-fiscale-e-leuropa/55223


Armanda Cetrulo (*1988) recently received her Master degree in Economics from the University of Bologna. Before, she obtained a Bachelor degree in Economics from La Sapienza University in Rome. She has served as promoter for Sbilanciamoci, a network of economists, researchers, students and NGOs. Till August 2013 she was national coordinator of Rete della Conoscenza, an Italian student association which addresses the issues of knowledge and public education. She has been involved in the Young Scholars Initiative of INET which promotes a pluralistic approach in the study of economics at university. In 2014 Armanda Cetrulo participated in the Young Voices of Europe blog and in 2014 she blogged on Reshaping Europe.

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