It’s been called the largest whistle-blower data leak in history.

Known as the Panama Papers, 11.5 million documents leaked from the database of the world’s fourth largest offshore law firm, Panama-based Mossack Fonseca, reveal the various ways wealthy individuals, celebrities, high profile politicians (including twelve national leaders) and international criminals exploited secretive offshore tax regimes.

It is important to note that using offshore structures is entirely legal, and disclosure laws vary around the world. In the U.S., for example, citizens are allowed to move money offshore, but they must report the account information to the Internal Revenue Service.

There are also many legitimate reasons for doing so.  People who conduct business in countries with high levels of political or currency risk may move their assets offshore to defend them from “raids” by criminal syndicates and to get around hard currency restrictions. Other individuals may use offshore accounts for estate planning, inheritance and property purchases.

Nevertheless, the Panama Papers raise fundamental questions about the ethics of such tax havens, especially for elected officials. The revelations have led to calls for the reform of a system that is opaque and subject to abuse.

In fact, Iceland’s Prime Minister, Sigmundur Davíð Gunnlaugsson, became the first major casualty, stepping down from office amid mounting public outrage that his family had sheltered money offshore.

What does free trade have to do with offshore accounts?

In the United States, the release of the documents has reignited harsh criticism of its free trade agreement (FTA) with Panama, which went into effect four years ago.  Soon after taking office in 2009, President Obama began pushing for passage of the U.S.-Panama FTA, as well as trade pacts with Colombia and South Korea, which were also stalled.

At the time, opponents claimed the FTA with Panama would make it easier for rich American citizens and companies to set up offshore corporations and bank accounts to avoid paying taxes altogether.

In 2011, Rebecca Wilkins, a senior counsel with Citizens for Tax Justice, a nonpartisan nonprofit that advocates changes in U.S. tax policy, told the Huffington Post that:

A tax haven…has one of three characteristics:  It has no income tax or a very low-rate income tax; it has bank secrecy laws; and it has a history of noncooperation with other countries on exchanging information about tax matters.  Panama has all three of those…  They’re probably the worst.

Despite warnings from watchdog groups and objections from members of the Democratic Party, President Obama signed the trade pact in 2011, which entered into force the following year.

Since then, the United States has had a multibillion dollar trade surplus with Panama, as it did before the trade deal. Nevertheless, the release of the Panama Papers has caused outrage among opponents of the FTA, who claim that they were correct to oppose the “disastrous” deal.

The anti-trade rhetoric, which has heightened during an increasingly contentious Presidential campaign, essentially posits that passage of the FTA has made it easier, not harder, for the wealthy and large corporations to evade taxes by sheltering billions of dollars off-shore.

However, the reality is not what detractors of free trade claim.  And surprisingly, the evidence is from the Panama Papers themselves.

Did the U.S.-Panama FTA lead to more offshore accounts?

Data collected from the International Consortium of Investigative Journalists (ICIJ) reveals that the number of off-shore incorporations in Panama actually fell from 4,741 in 2005 to 835 in 2015, an 82% decrease over ten years.

Stunningly, as of 2015, Mossack Fonseca appears to have almost completely ceased incorporating the least transparent form of company – called “bearer shares” – which often don’t even register an owner’s name.

Both the United States and the European Union pressed Panama to curtail its tax haven refuge prior to the FTA.  The calls to clean up corrupt practices became even louder after the financial crisis of 2008, which highlighted the catastrophic and widespread impacts of ambiguous financial activities.

President Obama and Congress made it crystal clear that the free trade deal was contingent on a separate agreement granting U.S. tax authorities increased access to Panama’s financial system.

The United States was especially focused on limiting bearer shares.  And Panama, eager to secure a trade pact to match the agreement between the United States and its Central American neighbors (CAFTA), was willing to oblige and changed its laws accordingly.

Based on ICIJ’s analysis of the Panama Papers, there appears to be a correlation between the commencement of discussions regarding the FTA and the dramatic decrease in the amount of secretive offshore accounts for Americans.

By exposing the secret world of offshore tax havens, the Panama Papers also shine a light on the role trade pacts can play in encouraging increased transparency and cooperation between partners.

The post What the Panama Papers really reveal about trade deals appeared first on Trade Ready.

If you’ve read the news at all during the past month, you’ll know that something big has been brewing. To quote Shakespeare’s Macbeth, “something wicked this way comes.”

On April 3rd, the so-called ‘Panama Papers’ were unveiled by news outlets around the world.

Coverage of the story is likely to last for quite some time due to the size and substance of the leak, and the amount information that needs to be analyzed.

What’s the story with the Panama Papers?

In brief, the story so far goes something like this: In early 2015, Munich daily newspaper Süddeutsche Zeitung received a large cache of documents from an anonymous whistleblower using the ubiquitous pseudonym ‘John Doe.’

The documents themselves, totalling some 2.6 terabytes in size, were bundles of confidential documents detailing overseas financial holdings – many in so-called shell companies – for hundreds of thousands of individuals and corporations.

In layman terms, the documents demonstrated how the world’s rich and famous store their capital and kept it away from the hands of the taxman.

Panamanian law firm Mossack Fonseca, the original holder of the documents, was implicated in the leak.

The leak is so substantial that it dwarfs both Edward Snowden’s 2013 release of U.S. secret intelligence documents and the ‘WikiLeaks’ scandal of 2010 several times over.

In the days immediately following the leak, Iceland’s Prime Minister Sigmundur Davíð Gunnlaugsson, who was implicated in the Panama Papers, resigned amidst a flurry of protests. Gunnlaugsson was the first big name casualty of the leak, but no doubt there will be others.

Russian President Vladimir Putin and football star Lionel Messi have both been alluded to as well.

Why should Canadians care?

One question on the minds of many Canadians is “So what? What does this mean for me?”

Well, the answer to that takes a bit of crystal ball fortune telling, but also some hard facts.

If you’re not in the upper echelon of banking and business and you pay your taxes like a good, upstanding citizen, you really have nothing to worry about. But what about the 350 Canadians named in the papers, the list of which includes a former Newfoundland cabinet minister?

What about the Royal Bank of Canada, after it worked with Mossack Fonseca to set up 370 offshore accounts? Well in this case, the old adage of ‘perception is everything’ holds true.

There is nothing suspect or even illegal about holding capital in offshore bank accounts. In fact, it’s far more common than one might think.

The problem is that for every ten “good” accounts, there’s one or two “bad” ones storing capital that was acquired with ill-begotten means.

For politicians in countries with less than stellar records of democracy and financial transparency, the papers are a clear indicator of what has been said for years: that the political system in many countries is suspect, shady, and more often than not, untrustworthy.

Canada’s banking system is the ‘envy of the world’

For Canadians however, there’s really very little to worry about. “Canada has one of the best and most secure banking systems on the planet” says Peter Labrie, veteran financial securities broker and instructor in the Financial Services department at Ashton College.

I wouldn’t really recommend that people deposit money in offshore accounts. If they do, there needs to be a legitimate reason for doing so.

“That said, some offshore jurisdictions are pretty opaque.” Labrie stated.

The often murky nature of these offshore accounts means that perception in the public eye really does matter.

This is why for many Canadians, the very words ‘offshore bank accounts’ and ‘tax haven’ conjure up images of shady deals, struck in the dead of night, with anonymous brokers carrying briefcases full of money.

Facts are facts: it is estimated that offshore tax havens account for 50% of all world trade.

That means companies, many of which are well known to us, aren’t paying taxes on the commodities they import and export.

This in turn means that the capital accrued isn’t going back into its country of origin to help low income earners. Instead it just sits somewhere offshore, collecting interest and waiting to be drawn upon by the private sector.

That’s why being implicated or even named in the Panama Papers leak is bad news for PR. Royal Bank of Canada CEO David McKay told the CBC earlier this week that he was unhappy that Canada’s banking institutions were being “dragged into” the muddled controversy of the Panama Papers with no evidence of any wrongdoing.

“As a CEO, I have to be concerned about our brand and reputation, particularly in a situation where there’s absolutely no allegation of wrongdoing,” McKay said.

We just happen to have a couple hundred files, going back 40 years, that are attached to this legal firm, that’s all that’s been reported.

That being said, the fear surrounding Canadian banks being linked to the papers is unjustified.

Bank of Montreal CEO Bill Downe said last week that Canada has increased its anti-money laundering controls “dramatically” and that the result is an even safer banking system.

Canada’s banking system is the envy of the world, and while the Panama Papers scandal doesn’t do the banks justice in terms of public relations or the court of public opinion, Canadians should know that the system they utilize on a daily basis is doing exactly what it was set up to do: to provide safe, secure and above all, honest financial services.

Do you think Canadians should be worried about offshore tax havens?

The post Offshore tax havens account for 50% of all world trade – and other fun facts from the Panama Papers appeared first on Trade Ready.