We Asked an Offshore Banking Industry Insider How the Feds Will Respond to the Panama Papers

The massive data leak has politicians around the world on the defensive. But how will the US government react?

|
Apr 5 2016, 4:00am

The setting sun lights up the Panama City skyline, Monday, April 4, 2016. (AP Photo/Arnulfo Franco)

Over the last couple of days, dozens of media outlets have dropped stories on the so-called Panama Papers, which expose how the world's global elite hide their money. The 11.5 million documents—originally obtained by the German newspaper Sueddeutsche Zeitung—focus on a shady law firm called Mossack Fonseca, which as VICE reported in 2014, helps the rich and terrible conceal their assets. Not only did MF squirrel away cash that might otherwise have gone toward schools, highways, and hospitals, but the firm allegedly covered for people interested in financing terrorism without having their names linked to it.

Obviously, it's gonna take a long time to sift through all 2.6 terabytes of new data. But what we've seen so far suggests a conspiracy that belongs in a Bond movie, and implicates pretty much every genre of rich and powerful person on the planet.

Surely, heads are gonna roll. Already, some are calling for Icelandic Prime Minister Sigmundur Davíð Gunnlaugsson to resign over revelations about a company he and his wife held in the Caribbean. Meanwhile, UK Prime Minister David Cameron has some awkward questions to answer about an offshore fund apparently run by his father, and FIFA officials continue to have a very, very bad stretch in the public eye. Finally, on Monday, the US Department of Justice said the feds are trying to suss out an American link to the scandal. But realistically, what will happen to the country that housed the law firm that allowed all of this to go down? Perhaps more importantly, is there anything that can be done to prevent the same thing from happening again once all eyes are no longer on Panama?

To answer some of these questions, I called up Christian Reeves, a tax consultant who works at Premiere Offshore––a planning company that, as its name suggests, helps clients set up offshore assets. (The company's website boasts, "We are the only international incorporator that offers US tax compliance.") Reeves helped me get an idea of the industry reaction, and what we can expect from on high in the next couple of years.

VICE: For those of us still wrapping our heads around it, can you lay out what, exactly, the scam is here?
Christian Reeves: So what people were doing is they would find people in Panama who are lawyers or financial advisors and form companies with them as the advisors. So the advisor is the alleged beneficial owner of company and the signer of the bank account. And he goes, "This three million dollars is mine, and I want to put it into your bank." And the bank opens the account and lists the attorney or advisor as the owner––which is obviously in violation of every kind of tax compliance rule there is. But that's apparently what they've been doing at Mossack Fonseca for a number of years.

I thought the stereotype of being shady was having a Swiss bank account, not a South American lawyer.
Well, Americans were doing the same thing in Switzerland years go. The US came in and audited the heck out of UBS and eventually got them to disclose all of their American clients. What these clients had done was put nominees as signers and managers on their accounts, and a great number of them went to jail for failing to report the ownership of the account. So the same thing that happened in Switzerland is going to be happening in Panama over the next couple of years.

When did Panama become the epicenter of this sort of financial crime?
It's been an offshore center for many years, and just about every offshore center has been accused of this from Hong Kong to the Cayman Islands back in the day. Panama is certainly the biggest in terms of Latin American clients.

How big of a problem are offshore tax havens both in the US and worldwide?
The American client who has a couple hundred thousand or a million dollars hidden offshore and unreported––the US government has closed most of those loopholes. I think the ones you'll find coming out of the Mossack leak over the next couple of years will be very big, multi-millionaire clients. I would expect that these are extremely high net worth individuals because the middle of the market was pretty much shut down by the US. The average guy with a few million he wants to hide offshore and untaxed––those days are long gone.

How did the US government close those loopholes?
In the UBS case, the US came in and stripped Switzerland's financial privacy, audited all of their banks, made their banks pay giant fines, and disclose all of their clients. And then at the same time, the US issued a voluntary disclosure program that said if you had an offshore account that was unreported and know it's illegal and we catch you, the penalties are going to be extremely severe including massive fines and jail time. But they gave people the opportunity to come forward and disclose the unreported account with less severe penalties. They promised not to lock those people up, and several hundred thousand Americans went through this program, and they raised something like $12 billion.

How did the US have the ability to tell another country what to do?
In UBS, what happened is that it's a global bank—a great deal of its transactions are done in United States dollars. They have a bank license here in the US that had many hundreds of millions of dollars in it. So what the US did was say, "We're going to shut down your US bank, seize your assets, and prohibit you from doing transactions in US dollars." And maybe seventy-five percent of the world's transactions are in US dollars, so the bank would have gone out of business. So the shareholders of the bank say, "Well that's no good, you can't do that. So we'll just go ahead and eliminate the Swiss privacy that's been around for many hundreds of years." It managed to withstand World War II, but it didn't withstand the US IRS.

So will the feds do the same thing to Panama?
Well they haven't really disclosed what information is out there. The big statements are about heads of state. I have a feeling that's probably going back to the 80s. But they were talking about people who have raided their country's coffers and taken money out of the country illegally and put it in the name of the ex-president's brother, or something. What the US can do is say, "You've hidden money to escape our sanctions, so we're going to levy fines against your banks." And they were successful in doing that after the Libor scandal broke. So the US has a history of levying massive fines against foreign banks that take steps to help clients the US doesn't like.

Is this just like a whack-a-mole vibe? Are we gonna be hearing about another country doing the same thing in three years?
I think it's just gonna be whack-a-mole. Panama has an enormous banking center, much larger than any of the other little Caribbean jurisdictions like Belize. The US essentially shut down the country of Belize's banking system back in November or December. There was Bank of Belize, and the government said they were hiding clients who didn't pay taxes, so they shut them down. The Bank of Belize was the clearinghouse for every offshore bank in the country. So just about every offshore bank was shut down for three or four months, and they're just starting to get back up and running. So in theory the US can do the same thing––they can just shut down their banking and freeze the funds they have in the US and force them to comply with any rule or regulation that they want.

Based on your sense of what's come out so far, if someone's name is in the leak, are they necessarily a criminal? Or did the law firm offer legitimate services, too?
I would bet that the vast majority of the clients were doing legitimate, ordinary business and probably a small fraction of them are doing illegal business. Let's say you're an American citizen and you formed your Panama business with these guys. Should you be worried about it? Well, if you haven't reported to the US IRS, you should be extremely afraid, and the government is going to be looking to make examples of a few people in order to get a few hundred or thousand people to voluntarily disclose. What the US does when they get leaked data is go after a few people with a vengeance, one or two in each state. They'll put them in jail and put up posters on their site saying, "We got this guy for tax evasion." And the reason they do that is because it's their marketing campaign. There will be a new wave of voluntary disclosures who just want to pay their fifty percent penalty before the IRS can digest the leaks and go about their way.

What's the difference between tax fraud and tax planning? Like, why might someone have an offshore business account that's not solely to pay less in taxes?
There are a couple different reasons. One, somebody might just want to hold their funds out of the country for assets protection or privacy. They want to keep cash out of the reach of civil creditors. And such a situation would be tax neutral. It's not going to increase or decrease their US taxes, and if somebody tried to sue them, they'd have to sue them in Panama, for example, if it was a Panama corporation. Then there's people with legitimate businesses with offices and people and staff outside of the country. So let's say you're a makeup company, and you're selling to Latin America. It would probably make sense to put an office in Panama to facilitate your distribution.

I bet you get some shady calls. Are people ever straight-up, like, "Help me hide my shit"?
We get people [who ask for illegal help] all the time, but maybe ninety percent of them don't know it's illegal. They ask, "If I'm going to open a business, can't I just operate my business through an offshore corporation, live in the United States, and then pay taxes in the United States when I bring the money back?" They think that's what Apple and Google do, and I have to tell them no, because they have offices and staff and employees and a real legitimate business happening outside the US. That physical presence abroad can earn money and only be taxed when it comes back to the US. That's how they're able to do it. I think the vast majority of people who get in trouble for this have just been given bad advice; they talked to someone in Panama or Belize or somewhere else, and now they're screwed.

Follow Allie Conti on Twitter.