Grey matters

The first wave of ‘Panama Papers’ scholarship
Not surprisingly, the public availability of portions of the Panama Papers and the impact of the disclosures worldwide have attracted academic attention. Four of the first wave of academic papers are worth a look.

The Value of Offshore Secrets – Evidence from the Panama Papers
James O’Donovan, Hannes F. Wagner and Stefan Zeume (April 27, 2016)
available at

The authors use the data leak of the Panama Papers on April 3, 2016 to study whether and how the use of offshore vehicles affects valuation around the world. The data leak made transparent the operations of more than 214,000 shell companies incorporated in tax havens by Panama-based law firm Mossack Fonseca. The Panama Papers implicate a wide range of firms, politicians, and other individuals around the globe to have used secret offshore vehicles. Allegations include tax evasion, financing corruption, money laundering, violation of sanctions, and hiding other activities. The authors find that, around the world, the data leak erased an unprecedented risk-adjusted US$230 billion in market capitalization among 1,105 firms with exposure to the revelations of the Panama Papers. Firms with subsidiaries in Panama, the British Virgin Islands, the Bahamas, or the Seychelles – representing 90 percent of the tax havens used by Mossack Fonseca – experienced an average drop in firm value of 0.5 percent – 0.6 percent around the data leak. They also find that firms operating in perceivably corrupt countries – particularly in those where high-ranked government officials were implicated by name in the leaked data – suffered a similar decline in firm value. Further, firms operating both in Mossack Fonseca’s primary tax havens and in countries with implicated politicians experienced the largest negative abnormal returns. For instance, firms linked to Mossack Fonseca’s tax havens and operating in Iceland experienced negative abnormal returns of -1.4 percent; the data leak revealed that Iceland’s prime minister failed to disclose beneficial interest in a British Virgin Islands incorporated shell company. Overall, their estimates suggest that investors perceive the leak to destroy some of the value generated from offshore activity.

CFR comment:
Using stock market data from firms traded in 73 countries, this study looks at the impact on firm value of the April 2016 leak of the Panama Papers data. They also plan to expand the paper to include more detailed data, bringing in additional analysis of individual firms, individuals, countries, and politicians. This is a clever use of event study methodology to see whether there is an impact from large-scale data leaks. As the analysis is extended, it will get more interesting. This is a project worth following.


Wealth Management, Tax Evasion and Money Laundering:
The Panama Papers Case Study
Ehi Eric Esoimeme, (April 27, 2016)
available at

Purpose: This paper aims to discuss the various anti-money laundering programs that banks are required to put in place, to mitigate the tax evasion and money laundering risks in wealth management.
Design/Methodology/Approach: This paper uses the “Panama Papers” revelations to illustrate the vulnerability of private banks to money laundering. Private banks are banks, or operational units within banks, which specialize in providing financial services to wealthy individuals. These services are often referred to as wealth management services.
Findings: This paper determined that effective implementation is the key to lifting the veil of secrecy once and for all and eradicating tax evasion. Rather than create new laws and policies, efforts should focus on supporting effective implementation, and promoting enhanced cross-border and inter-agency co-operation on tax and financial crimes.
Research Limitations: This paper will focus on one aspect of our banking system – wealth management – that may be particularly attractive to criminals who want to launder money.
Originality/Value: While most articles are focused on the money laundering/tax evasion risks posed by offshore locations, this article is focused on domestic banks that allow funds to be transferred to offshore locations.

CFR comment:
This brief paper uses examples from the Panama Papers to argue that better enforcement of existing laws and practices would have prevented the abuses identified. Compliance officers may find it useful as a source of examples for training employees.


Disclosure of Beneficial Ownership after the Panama Papers
Mark Fenwick & Erik P. M. Vermeulen
Lex Research Topics in Corporate Law & Economics Working Paper No. 2016-3 (May 8, 2016), available at

The publication of the so-called “Panama Papers” has focused public interest on how elaborate corporate structures and offshore tax havens can be used by politicians, celebrities and other elites to conceal their beneficial ownership of companies and obscure their personal assets. Rather than taking the Panama Papers as an indication of the need for more and stricter disclosure and reporting rules, however, this paper advocates an alternative approach. The authors begin by acknowledging that many companies are currently experiencing “disclosure and reporting fatigue,” in which the constant demand for “more” and “better” transparency and reporting is having the unintended effect of promoting indifference or evasiveness. Disclosure and reporting is widely perceived as an obligation to be fulfilled and not as an opportunity to add value to a firm.
This is confirmed by the findings of an empirical study that examines how disclosure rules operate in practice across various jurisdictions. The key takeaway of this empirical study is that – even in those jurisdictions that have a robust disclosure regime – the majority of firms engage in “grudging” or “boilerplate” compliance in which ownership and control structures are not adequately revealed in an accessible way and – perhaps more importantly – the impact of these ownership and control structures on the governance of a company are obscured.
Rather than focus on introducing more stringent and mandatory disclosure rules, the paper advocates an approach based on the current communication strategy of a minority of firms in the sample. Interestingly, a small number of firms engage in what the authors characterize as “open communication” in which information on control structures and its effect on governance are presented in a direct, accessible and highly personalized manner. Such firms seem to recognize the commercial and other strategic benefits to be gained from open communication, and the paper explores the implications of such an approach for both business and regulators.

CFR comment:
Using a sample of 2014 annual reports from 280 listed firms in 14 jurisdictions (the top 20 in each jurisdiction by market capitalization), this paper examined the disclosure of beneficial ownership information in each. Based on this analysis, it concludes that “for the vast majority of firms, we do not really know what is going on” in all types of firms (public, family-controlled, state-owned). The authors then suggest a strategy by which firms can effectively communicate beneficial ownership information in a way that is understandable and useful. They also suggest that rules-based approaches produce “an unhealthy standardization” of information that “may actually obscure control issues” and reveals little information. Both regulators considering how to handle beneficial ownership disclosure and professionals advising firms will find this paper of interest.


Following the Money: Lessons from the Panama Papers, Part 1: Tip of the Iceberg
Lawrence J. Trautman, (May 23, 2016)
available at

Widely known as the “Panama Papers,” the world’s largest whistleblower case to date consists of 11.5 million documents and involves a year-long effort by the International Consortium of Investigative Journalists to expose a global pattern of crime and corruption where millions of documents capture heads of state, criminals and celebrities using secret hideaways in tax havens. Involving the scrutiny by over 400 journalists worldwide, these documents reveal the offshore holdings of at least several hundred politicians and public officials, including the prime ministers of Iceland and Pakistan, the president of Ukraine, and the king of Saudi Arabia. More than 214,000 offshore entities appear in the leak, connected to people in more than 200 countries and territories.
Since these disclosures became public, national security implications already include abrupt regime change, and probable future political instability. It appears likely that important revelations obtained from these data will continue to be forthcoming for years to come. Presented here is Part 1 of what may ultimately constitute numerous-installment coverage of this important inquiry into the illicit wealth derived from bribery, corruption, and tax evasion. This article proceeds as follows. First, disclosures regarding the treasure trove of documents from the Panama-based law firm Mossack Fonseca are reviewed. Second, is a discussion of the impact and cost of bribery and corruption to the global community. Third, the paper defines and briefly explores issues surrounding “tax evasion.” Fourth, the impact of social media and technological change on transparency is discussed. Next, a few thoughts about implications for future research are offered.

CFR comment:
This lengthy paper summarizes some of the initial impacts of the Panama Papers. Those looking for a quick guide to the story will find many references here documenting the evolution of the story. It also provides a summary guide to many of the issues raised by the Panama Papers.


Although not directly on the Panama Papers, four other recent papers tackle issues that relate to them.

Big Data and Tax Haven Secrecy
Arthur J. Cockfield, Florida Tax Review, Vol. 18, pp. 483-539 (2016)
available at

While there is now significant literature in law, politics, economics, and other disciplines that examines tax havens, there is little information on what tax haven intermediaries – so-called offshore service providers – actually do to facilitate offshore evasion, international money laundering, and the financing of global terrorism. To provide insight into this secret world of tax havens, this article relies on the author’s study of big data derived from the financial data leak obtained by the International Consortium for Investigative Journalists (ICIJ). A hypothetical involving Breaking Bad’s Walter White is used to explain how offshore service providers facilitate global financial crimes. A transaction cost perspective assists in understanding the information and incentive problems revealed by the ICIJ data leak, including how tax haven secrecy enables elites in nondemocratic countries to transfer their monies for ultimate investment in stable democratic countries. The approach also emphasizes how, even in a world of perfect information, political incentives persist that thwart cooperative efforts to inhibit global financial crimes.

CFR comment:
This thorough article argues for additional measures to prevent tax avoidance and tax evasion. Although the author (a professor at Queen’s University in Canada) is highly critical of offshore financial centers, it presents a thoughtful analysis of the barriers to implementing measures to restrict OFCs. Policy makers and professionals in OFCs should read it to understand the challenges they are likely to face in the future.


The Relationship between Offshore Evasion and ‘Aggressive’ Tax Avoidance Arrangements: The HSBC Case
Iulia Nicolescu, Financial Regulation International (Informa Law), (March 18, 2016)
available at

This paper critically analyses the relationship between tax evasion and ‘aggressive’ tax avoidance with a view to arguing their equivalence from a moral perspective. This is supported by factual similarities in the offshore financial sector, notably their mutual employment of confidentiality-bound trusts and other special purpose vehicles (SPVs). Taking the HSBC case as an example, the research is prompted by the recent debate surrounding the ambiguity of tax avoiding practices of major international banks and MNEs. At international level, regulatory response has translated into the OECD’s Base Erosion Profit Shifting (BEPS) Project and the Common Reporting Standard (CRS) for automatic exchange of information (AEOI). In the U.K., the introduction of a new ‘offshore tax evasion’ offence is currently being proposed by the HMRC. The paper first considers the taxonomy of tax avoidance, arguing the equivalence of ‘aggressive’ tax avoidance with evasion from a moral and regulatory perspective. The second section compares offshore evasion with aggressive tax avoidance arrangements and discusses the case of HSBC. The final section concludes with a consideration of the effectiveness of anti-evasion and avoidance measures.

CFR comment:
This paper by a researcher at the University of Warwick in the U.K. argues that “aggressive” tax avoidance is equivalent to tax evasion. This is an argument that will be welcomed by, among others, French and German tax authorities. Those who work to reduce taxes for clients would do well to familiarize themselves with the argument since it is one they will be hearing in the future from revenue authorities.


Italian and Swiss Voluntary Disclosure Policies: A Critical Comparative Analysis
Davide Marchesini Mascheroni,  (May 13, 2016)
available at

The fight against offshore evasion is increasingly becoming a global current topic of fair taxation, specially following the international agreements on automatic exchange of information in tax matters entering into force in the near future. In particular, how to design a voluntary disclosure program, complementing and reinforcing one’s own tax compliance strategy, represents one of the main issues being discussed today into the international tax environment.
A growing number of internal legislators have been drafting their own rules on voluntary disclosure, trying to find a meeting point between the need to provide sufficient incentives for non-compliant taxpayers to come forward and the will not to reward a non-compliant conduct.
This article compares the key features of two targeted strategies, different from each other, adopted into the Italian and Swiss legislations and highlights the reasons behind both approaches, trying also to deliver new arguments on eventual inferences in the short term arising from the end of the era of banking secrecy.

CFR comment:
This brief paper describes and compares the Italian and Swiss approaches to voluntary disclosure programs for taxpayers. Since such programs are likely to recur, it provides useful assessments of the reasons for the two programs’ successes and missteps.


Bank Secrecy in Offshore Centres and Capital Flows: Does Blacklisting Matter?
Olga Balakina, Angelo D’Andrea, & Donato Masciandaro
BAFFI CAREFIN Centre Research Paper No. 2016-20 (May 1, 2016) available at

This study analyses cross-border capital flows in order to verify the existence and direction of the effect of the soft regulation promoted by international organizations against banking secrecy which characterized the so called tax and financial heavens. This effect is called in the literature ‘stigma effect’ but both the existence and the direction of the stigma effect are far from being obvious. The international capital flows can simply neglect the relevance of the blacklisting, or worst, the attractiveness of banking secrecy can produce a race to the bottom: The desire to elude more transparent regulation can sensibly influence the capital movements. The authors test whether being included and later excluded from the FATF blacklist is an effective measure that influences countries’ cross-border capital flows. Using annual panel data for the period 1996-2014, they apply their framework to 126 countries worldwide. They find evidence that in general the stigma effect does not exist.

CFR comment:
Governments and multilateral organizations seem unable to resist blacklists as a policy tool to coerce other jurisdictions to adopt regulations that the listing governments and organizations want adopted. This paper suggests that there is little impact on capital flows from being on a blacklist. In a rational world, this ought to lead to a reduction in the use of blacklists.


Cables, Sharks and Servers: Technology and the Geography of the Foreign Exchange Market
Barry Eichengreen, Romain Lafarguette and Arnaud Mehl
ECB Working Paper No. 1889 (April 25, 2016) available at

The authors analyze the impact of technology on production and trade in services, focusing on the foreign exchange market. They identify exogenous technological changes by the connection of countries to submarine fiber-optic cables used for electronic trading, but which were not laid for purposes related to the foreign exchange market. The authors estimate the impact of cable connections on the share of offshore foreign exchange transactions. Cable connections between local markets and matching servers in the major financial centers lower the fixed costs of trading currencies and increase the share of currency trades occurring onshore. At the same time, however, they attenuate the effect of standard spatial frictions such as distance, local market liquidity, and restrictive regulations that otherwise prevent transactions from moving to the major financial centers. The authors’ estimates suggest that the second effect dominates. Technology dampens the impact of spatial frictions by up to 80 percent and increases, in net terms, the share of offshore trading by 21 percentage points. Technology also has economically important implications for the distribution of foreign exchange transactions across financial centers, boosting the share in global turnover of London, the world’s largest trading venue, by as much as one-third.

CFR comment:
As a rule of thumb, anything economist Barry Eichengreen writes is worth reading. He is one of the most important analysts of money writing today. This paper, coauthored with analysts from the ECB, is a clever exploitation of data on foreign exchange transactions and the investment in undersea cables. Their results are likely to matter for understanding how markets are likely to develop for trading in RMB or euros. Well worth a read for anyone affected by foreign exchange trading.


Not everyone is writing about the Panama Papers or policy measures aimed at OFCs. Two other recent papers provide food for thought about key areas of international finance: foreign exchange markets and securitization.

Development Financing during a Crisis: Securitization of Future Receivables
Suhas Laxman Ketkar and Dilip Ratha
World Bank Policy Research Working Paper No. 2582 (April 2001) available at

Market placements backed by future receivables can allow public and private sector entities in a developing country to escape the sovereign credit ceiling and raise lower-cost financing from international capital markets. If planned and executed ahead of time, such transactions can sustain external financing even during a crisis.
Mexico’s Telmex undertook the first future-flow securitization transaction in 1987. From then through 1999, the principal credit rating agencies rated more than 200 transactions totaling $47.3 billion. Studying several sources, Ketkar and Ratha draw conclusions about the rationale for using this asset class, the size of its unrealized potential, and the main constraints on its growth.
Typically the borrowing entity (the originator) sells its future product (receivable) directly or indirectly to an offshore special purpose vehicle (SPV), which issues the debt instrument. Designated international customers make their payments for the exports directly to an offshore collection account managed by a trustee. The collection agent makes principal and interest payments to investors and pays the rest to the originator. This transaction structure allows many investment-grade borrowers in developing countries to pierce the sovereign credit ceiling and get longer-term financing at significantly lower interest costs. The investment-grade rating attracts a wider group of investors. And establishing a credit history for the borrower makes it easier for it to access capital markets later, at lower costs.
This asset class is attractive for investors – especially buy-and-hold investors, such as insurance companies – because of its good credit rating and stellar performance in good and bad times. Defaults in this asset class are rare, despite frequent liquidity crises in developing countries.
Latin American issuers (Argentina, Brazil, Mexico, and Venezuela) dominate this market. Nearly half the dollar amounts raised are backed by receivables on oil and gas. Recent transactions have involved receivables on credit cards, telephones, workers’ remittances, taxes, and exports.
The potential for securing future receivables is several times the current level ($10 billion annually). The greatest potential lies outside Latin America, in Eastern Europe and Central Asia (fuel and mineral exports), the Middle East (oil), and South Asia (remittances, credit card vouchers, and telephone receivables).
One constraint on growth is the paucity of good collateral in developing countries. Crude oil may be better collateral than refined petroleum. Agricultural commodities are harder to securitize.
Another constraint: the dearth of high-quality issuers in developing countries. Securitization deals are complex, with high preparation costs and long lead times. The ideal candidates are investment-grade entities (in terms of local currency) in sub-investment-grade countries (in terms of foreign currency).
Establishing indigenous rating agencies can slash out-of-pocket costs. Developing standardized templates for certain types of securitizations might help. A master trust arrangement can reduce constraints on size. Multilateral institutions might consider providing seed money and technical assistance for contingent private credit facilities.
This paper – a product of the Economic Policy and Prospects Group – is part of a larger effort in the group to monitor capital flows to developing countries. The study was funded by the Bank’s Research Support Budget under the research project “Innovative Mechanisms for Raising Development Finance – Future-Flow Securitization.”

CFR comment:
OFCs excel at securitization. This paper’s analysis of the barriers to securitizing developing country cash flows points to opportunities – fixing these barriers would increase the availability of securitizations for businesses in developing economies. First movers in finding such solutions ought to benefit. Ready, set, go.



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Andrew P. Morriss

Andrew P. Morriss, Chairman, is the D. Paul Jones, Jr. & Charlene Angelich Jones – Compass Bank Endowed Chair of Law at the University of Alabama School of Law. He was formerly the H. Ross & Helen Workman Professor of Law and Business at the University of Illinois,Urbana-Champaign. He received his A.B. from Princeton University, his J.D. and M.Pub.Aff. from the University of Texas at Austin, and his Ph.D. (Economics) from the Massachusetts Institute of Technology. He is a Research Fellow of the N.Y.U. Center for Labor and Employment Law,and a Senior Fellow of the Institute for Energy Research, Washington,D.C., as well as a regular visiting faculty memberat the Universidad Francisco Marroquín,Guatemala. He is the author or coauthor of more than 50 scholarly articles, books, and bookchapters, including Regulation by Litigation (Yale Univ. Press 2008) (with Bruce Yandle and Andrew Dorchak), and is the editor of Offshore Financial Centers and Regulatory Competition (American Enterprise Institute Press 2010).

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