Skip to main content

Panama City on April 4, 2016. A massive leak of 11.5 million tax documents on Sunday exposed the secret offshore dealings of world leaders and celebrities.RODRIGO ARANGUA/AFP / Getty Images

The Panama Papers are a trove of 11.5 million leaked documents from Mossack Fonseca, a Panamanian law firm that has been retained by politicians and business leaders around the world to channel money beyond their countries' borders and into tax havens through the creation of offshore accounts. These files, which have not been viewed by The Globe and Mail, are said to expose how the world's elite move cash from place to place – and where the money stops in between. So far, the full extent of the allegations is not clear. While wealthy people may hold their funds in an offshore account, there isn't necessarily anything illegal about it. Often, what is illegal is when these accounts aren't declared.

'You've got gangsters, dictators, people trying to evade taxes, and then you have entities that are doing it for legitimate purposes that may lead to governance or oversight problems,' said Michel Magnan, an accounting professor at Concordia University who studies offshore financial centres. 'It's very far-reaching once you look at who is involved and the amounts of money involved. We're talking trillions of dollars.… What was disclosed today is just the tip of the iceberg.'

A look at what shell companies are

A cache of leaked confidential files dubbed the Panama Papers highlights the widespread use of so-called shell companies: Legal structures that don't often sell or own anything – or employ anyone.

These companies act as a shelter for – in many cases – large sums of cash that can be moved in and out of accounts without much fuss. These structures come in many flavours and can be attractive ways for the superrich to reduce their taxes and boost their income. Creating one can be cheap, quick and usually comes with a promise of anonymity. Once formed, they can be used to escape the rules, whether related to tax, criminal law or financial disclosure. Shell companies are common and legal – until, that is, they become vehicles for illegal activities.

There is a spectrum of legal and ethical acceptance of shell companies and offshore accounts, and plenty of grey zones in between:

Ticket to a haven …

Anyone can hire Canada's brightest and most creative tax lawyers and accountants to minimize tax obligations. One strategy the experts may suggest is to relocate money to another country with a more favourable tax rate – places that are known to be tax havens for non-residents. These include: the Cayman Islands, Panama, Barbados, Bermuda and Belize. A shell company, or another similar arrangement, can house these funds and do so in a way that doesn't break any laws or treaties.

...or a prison

Or, people can try to illegally dodge the payment of these taxes by making the decision to forgo reporting the amount they're holding in offshore accounts or the income that it generates to the Canadian tax authorities.

Going public, privately

Shell companies play a leading role in reverse takeovers. This occurs when a publicly listed company, typically one with few assets, acquires a private company in a share swap, allowing the private company to become public more cheaply than through an initial public offering and out of the view of the prying eyes of Canadian securities regulators. Sino-Forest Corp., the Toronto-listed Chinese forestry giant that collapsed amid fraud allegations in 2011, was born from a reverse takeover.

Playing hide and seek

Buyers of real estate, yachts and artwork can hide their identities behind a shell company. Then again, so, too, can buyers of weapons and drugs. Instead of owning a house directly, a person can own a property through a shell company. Local land registry records will identify the shell company as the owner, as opposed to the person behind it.

On the topic of hide and seek, a person on the fast track to divorce can conceal a fortune from a scorned spouse behind a shell company. Partners at a law firm defending against a costly lawsuit have also been known to protect their personal assets by doing the same or by placing them in a trust, making it hard or nearly impossible to seize them.

A criminal element

If shell companies leave little or no paper trail, criminals can move money in and then out of them in order to finance the world's deadliest terrorist organizations, drug cartels and other forms of violent organized crime while hiding in the shadows. If law enforcement can't follow the money, they can't find its source.

Only a fool holds money that can be traced back to a crime in their own name. Before that ill-gotten cash is spent or relocated to its final destination, shell companies can act as the middle man by camouflaging the illicit source of income.

--------------------------------------

Leaks trigger international response

Reports drawn from 11.5 million leaked documents detailing how and where politicians, businesses and celebrities hide their wealth are triggering reactions from around the globe. Here's a look at some responses the reports are drawing.

Iceland

News reports alleged that Prime Minister Sigmundur David Gunnlaugsson and his wife set up a company in the British Virgin Islands. The reports have prompted calls for a no-confidence vote in parliament, the Althing, against him. Mr. Gunnlaugsson said he would not resign.

The United States

The Justice Department is reviewing the leaked documents to determine whether they point to evidence of corruption and other violations of U.S. law.

Russia

The documents allege that President Vladimir Putin's friends, including Sergei Roldugin, were engaged in an offshore scheme. Mr. Putin's spokesman, Dmitry Peskov, told reporters on Monday that there was nothing to implicate the President and suggested the publication of the documents was a smear campaign with Mr. Putin as a target.

France

Prosecutors launched an investigation into possible money laundering. Several hundred French citizens reportedly feature among the individuals mentioned.

Italy

L'Espresso weekly said about 1,000 Italian clients turned up in a database of offshore accounts cited in the media investigation, including Alitalia chairman Luca Cordero di Montezemolo.

Ukraine

Documents indicate President Petro Poroshenko set up an offshore holding company to move his candy business to the British Virgin Islands, possibly saving millions of dollars in Ukrainian taxes.

Australia

A tax agency said it is investigating more than 800 wealthy people for possible tax evasion linked to their alleged dealings with Mossack Fonseca, the Panamanian law firm from which the documents were leaked. The Australian Taxation Office said it had linked more than 120 of those people to an offshore-services provider in Hong Kong, but did not name the company.

Argentina

The office of President Mauricio Macri confirmed a report by La Nacion newspaper that a business group owned by Mr. Macri's family had set up Fleg Trading Ltd. in the Bahamas. But it said Mr. Macri himself had no shares in Fleg and never received income from it.

Norway

The bank DNB said it regrets having helped about 40 customers open offshore companies in the Seychelles with the help of Mossack Fonseca. The bank was reacting to a report in the Norwegian newspaper Aftenposten showing it had helped customers set up shell companies in the Seychelles to avoid taxes. The bank said the fact "that it was legal to set up [these types] of companies doesn't mean that it was correct for us to do it for these customers."

Austria, Sweden and the Netherlands were among other countries that said they had begun investigating the allegations.

Associated Press

Interact with The Globe