In contrast to the coverage of the Panama Papers, professionals in many offshore financial centers might argue that there are significant differences between offshore centers. They would say we are not Mossack Fonseca and we are not Panama. What is your view?

Bastian Obermayer
Bastian Obermayer

You really have to differentiate. If you look at the Panama Papers, you see this is a law firm in Panama that very clearly ignored a lot of laws. That is what the Panama Papers is mostly about, how their clients used this lack of regulation in Panama and within Mossack Fonseca.

The offshore system as a whole is seen by many as a problem because its anonymity is a good basis for a lot of dubious activity. Many think that you could really harm people who engage in money laundering, drug trafficking and terrorism financing by having registers of beneficial owners. Once this happens, the whole offshore problem is reduced to the question of tax.

When we talk about the Panama Papers, people are sometimes not so concerned with tax evasion, but we are saying it is not only about taxes. There are so many other real crimes and this is what we care about. The taxes – there will be a solution: The automatic exchange of tax information will come.

But the real question – because it has not been solved yet – is what are we going to do with all these anonymous companies?

But many of the anonymous companies will also be caught under the automatic tax information exchange. There is also a push for a register of beneficial ownership and the exchange of that information with law enforcement and tax authorities. All that is likely to come at some point, is it not?

Yes, but the likelihood is always depending on the political will. We know with our politicians in Germany that as soon as the pressure abates, the political will disappears.

It is important that not only authorities have access to the information on beneficial owners. We think it is important for the public to know, because founding a company is a public act. In many countries, you will get tradeoffs in taxes and other benefits from the government for doing business. We think, therefore, at the same time the people living in the country should be able to look up who the beneficial owner of a company is. Once you have this in place, there will be fewer opportunities to use anonymous companies for illicit reasons.

What we do see now is when governments ask about the identity of beneficial owners, in many countries they will get a response but it takes time. And often, once a year has passed, the company in question is already dissolved and the owners have moved elsewhere. We need to start making this information transparent when the companies are set up.

Another point that people in offshore centers would make is that the Panama Papers coverage at times gives the impression there are no legitimate uses for offshore entities at all, when in fact the opposite is true. If you looked at a company register in the U.K. and you examined 200,000 companies, you would in all likelihood find a lot of criminal activity as well. But when it is offshore, it is always portrayed as an offshore problem.

That’s because of the anonymity. Once that is gone, there is really a chance to present offshore as a transparent thing, and to focus on the real discussion, which is: Is it OK for one country not to take taxes from the citizens of another country who are doing business there; which leads to the strange situation that many countries are losing billions in tax money because some countries receive only millions [or less].

This is something that we already saw in the Luxembourg Leaks. There were these big multinational companies that were taxed at a rate of 0.001 percent. So Luxembourg only got a few millions but the countries where the multinationals operated lost billions. [Luxembourg] did not care. This is just a question of fairness.

In terms of fairness, the ability to avoid taxes offshore also relies on the tax systems onshore. They are the ones who are opening the loopholes sometimes deliberately, sometimes accidentally. How do you view the impact of the Panama Papers on the political will onshore to reform some of those tax laws?

It is a little early to draw a conclusion but we can see in Germany that there are new laws being passed. For example, we have a register of beneficial ownership and we require people to name their offshore companies and to explain the nature of their income in offshore accounts. It is not offshore against onshore, it has to be a huge effort of all the forces to eliminate money laundering, tax evasion etc.

The politicians who are very happy to rail against offshore, they have not done their homework in the past 20 years. They just watched and let it happen. And many of them were involved in offshore activities.

People from the U.S. are now pointing at small low tax jurisdictions but this is not fair, they should look inside the U.S. where they have some of the biggest tax havens.

And the argument made in Cayman is exactly that. For example, with regard to beneficial ownership, it is said “how can we introduce beneficial ownership transparency first and then all we see is that our business is moving to Delaware or Wyoming.”

Exactly. It has to happen at the same time. We mentioned it in many of our articles that the U.K. and the U.S. especially say we have to close down tax havens. And we would argue: Yes, you do but you have to start in your own country. In a way, it is good to have some common sense, which is also articulated by the U.K. and the U.S. government, and you can turn it around against them. Now everyone is against tax havens and everyone is against using those tax avoidance arrangements. Now that they have stated that, we can ask why does it not apply to [them, too]?

When you started out and you saw the data and the kind of stories you and other journalists were potentially going to write. Looking back at it now, has it turned out the way you expected it to?

It was much, much bigger than I thought even in the last days before we published, when I looked at all the stories that I knew of. I did not know all the stories because we had 400 partners and each had arranged between 10 and 40 stories in the first days. It was impossible to know all the stories. But from what I saw, I thought it was going to be really interesting but I never thought that Barack Obama or Vladimir Putin would react to the Panama Papers, or that the European Union would set up an inquiry committee looking into our findings. It got so big, one could not imagine this at the outset. When we had the stories about the godfather of Vladimir Putin’s daughter, we thought that was really good stuff and we kept finding new heads of states all the time. So it was going to be a really interesting story but no one, at least not me, thought it was going to be the monster of a story that it turned out to be.

I heard that initially you were concerned that people might not be interested, that they may not care. Is that true?

Yes, I was. It was not the first time that we wrote about tax havens. And in Germany we would get the reaction, “yes, they exist; we know that.”

But the majority of people are annoyed by the fact that there are two different democracies, like two different sets of rules, one that applies to [all the people] who have to pay taxes on their wages and the other [that applies to] people who can afford three or four good lawyers, who set up a structure involving maybe four or five tax havens, where in the end no one can really say is it legal or is it illegal?

And this is the future of those systems, I believe. The easy solutions that German banks offered 10 years ago where they would put a bank account holding a million euros into the name of a Panamanian company [to avoid paying withholding taxes under the European Savings Tax Directive], that is not working anymore because it is too dangerous for both sides. But if you have 50 million euros, they will find a way to reduce your taxes to a minimum, if you have to pay any tax at all.

The people are really annoyed by this inequality that the wealthiest pay the smallest amount. This is not fair. And it is not something that you can change unilaterally. If the Cayman Islands was the most transparent place in the world, it would not change it. It has to be a common effort.

So what is your expectation, is the system going to change by making it a little bit more transparent one step at a time? Or are the tax lawyers and advisors always going to be ahead of the regulators?

It already has changed, the very easy tax evasion that places used to offer is nearly gone. You must have a more imaginative form of tax evasion. The problem will stay with us for a while, it is hard to make a prognosis.

But I think [to change the system] we will see a lot more transparency onshore and offshore as long as the political will is there. We can see that now, but I don’t know what will happen in four or five years.

In the meantime, there will be a lot more regulation and the pressure on each country to comply will be huge.

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Michael Klein
Michael Klein Editor Compass Media Ltd. PO Box 1365, Grand Cayman, KY1-1108, Cayman Islands T: 345-326-1720C: 345-815-0064 E: [email protected] Michael is a financial journalist and copywriter.  In the past he has been responsible for the Risk Management and Corporate Finance sections of a British monthly Corporate Treasury publication.  He has written various financial handbooks, notably on European Banking and Cash Management and the Debt Capital Markets.   In addition he has worked as a copywriter for banks and investment funds and served as corporate communications consultant to US and European blue chip companies.   Michael holds an MA in Political Science and International Law from the University of Bonn in Germany. 

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