Will the Panama Papers Lead to Criminal Prosecutions?


“[T]housands of prosecutions could stem from the Panama Papers, if only law enforcement could access and evaluate the actual documents. [But] ICIJ and its partner publications have rightly stated that they will not provide them to law enforcement agencies.”

Manifesto of “John Doe,” the Panama Papers leaker, May 6, 2016

Is Mr. Doe correct?  Will thousands of tax cheats, corrupt politicians and other crooks get off scot free because prosecutors, anticorruption commissions, tax and customs authorities, and other law enforcement agencies can’t obtain the documents that constitute the Panama Papers?

This is surely a possibility.  In some countries the stories written on the Panama Papers do not identify who used the services of Panamanian law firm Mossack Fonseca to establish a corporation in the British Virgin Islands, Nevada, or other offshore jurisdiction.  The rules governing the opening of a criminal investigation in most countries are (with very good reason) quite stringent, and without knowing who actually opened an offshore corporation the authorities in some countries will be powerless to proceed.  Even in those countries where the owners of offshore corporations have been revealed, that may not be enough for a criminal investigation.  As Mossack Fonseca and its defenders have reminded the public (ad nauseam), owning a corporation in another country is not by itself illegal.

One tact authorities in these countries could take would be to focus on the law firms, banks, and other entities in their countries that introduced their nationals to Mossack Fonseca.  As explained in earlier posts (here, here and here), these “introducers” are the critical link in the chain of transactions that starts with a tax evader or corrupt politician’s need to hide money and ends with his or her ownership of an offshore corporation that cannot be traced to them. Moreover, not only are the introducers the critical link; they are the vulnerable link as well.

As Mossack Fonseca explained when the first Panama Papers stories appeared, “90% of our clientele is comprised of professional clients, such as international financial institutions as well as prominent law and accounting firms, who act as intermediaries. . . .”  In other words, it is the rare case where the firm dealt directly with someone wanting to hide money.  Nine out of ten times Mossack Fonseca worked through an intermediary.  Not just any intermediary, though, but one willing, presumably because of friendship or money or both, to misrepresent if not conceal outright the identity of the money hider and why he or she wanted to establish an offshore corporation.  The Panama Papers stories make it clear that the introducers had actual knowledge of the intended deceit.  This is because each time an introducer referred a client to Mossack Fonseca, the introducer stated that it had investigated the reasons why the client wanted to establish a corporation and determined they were legitimate.

To insulate itself from charges it was facilitating criminal acts, Mossack Fonseca did not simply rely on oral  representations by introducers.  Rather, it demanded written assurance from them that they had indeed conducted such an investigation.  Furthermore, under the laws of BVI, Panama, and the other jurisdictions where it created corporations for clients of introducers, Mosack Fonseca had to have a written agreement with each introducer where the introducer pledged to conduct the required investigation. The existence of these documents in the files of the introducers offers law enforcement a way into exposing unlawful schemes.

One approach would be a review of introducers procedures by the financial services commission or other entity responsible for ensuring compliance with the national antimoney laundering laws.  Most if not all introducers will be subject to their nation’s antimoney laundering laws and thus to audit by the designated regulatory authority.   The audit should require the introducer to provide copies of any agreement it has with Mossack Fonseca and other offshore corporate service providers as well as correspondence showing what investigation it conducted on each client it referred to Mossack Fonseca or to another provider.  Discovery of those documents will almost surely trigger the collapse of any house of cards the introducer, its client, and Mossack Fonseca constructed to conceal wrongdoing.

Prosecutors in some countries may be able to achieve the same result without going through the financial sector regulator.  Mossack Fonseca has said any number of times that it relied on introducers to conduct the investigation the antimoney laundering laws require before it established a corporation for an introducer’s client.  If the introducer lied to Mossack Fonseca about conducting an investigation, Mossack Fonseca itself could be in jeopardy; it could be exposed to criminal or civil penalties in the BVI, Panama, Nevada, or wherever it established a corporation without investigation.  Mossack Fonseca thus relied on a statement that was false and that reliance may work to its detriment.  That, as readers will recognize, constitutes the crime of fraud under the laws of many nations.  Taking Mossack Fonseca at its word, it would appear that whenever it established a corporation for a tax evader, corrupt official, or other criminal it was the victim of a fraud perpetrated by the introducer.  This theory may in some instances be sufficient for authorities to open a criminal investigation against introducers; it could also be enough to support a mutual legal assistance request to Panama for copies of documents in Mossack Fonseca’s files relating to introducers in the authorities’ countries.  (Yes, foreign law enforcement agencies have reported difficulty in getting Panama to respond promptly to mutual legal assistance requests, but in light of the many statements Panamanian authorities have made in the wake of the Panama Papers revelations, one suspects they will now be more than anxious to cooperate.)

These are just two suggestions for how law enforcement might proceed to initiate investigations into the extraordinary level of wrongdoing the Panama Papers show is rampant in the offshore industry.  Prosecutors and investigators in different countries are likely to hit upon many more, and more solid ones, than the two this armchair analyst has dreamed up.  What will be important is that they share, at least in broad outlines, their thinking with authorities in other countries to ensure that the “thousands of prosecutions” John Doe says the Panama Papers could produce become a reality.  This writer and this blog would be happy to facilitate that sharing, for to maintain public confidence in law enforcement it is critical that those who abused the offshore industry to hide their crimes be brought to justice.

1 thought on “Will the Panama Papers Lead to Criminal Prosecutions?

  1. Pingback: Will the Panama Papers Lead to Criminal Prosecutions? | Anti Corruption Digest

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