For hiding U.S. money, experts say, Panama’s hopelessly out of style.
The Panama Papers sent ripples across the globe Monday after revealing that
140 politicians from more than 50 countries, including Russian President
Vladimir Putin and Iceland President Sigmundur David Gunnlaugsson, were linked
to offshore accounts set up by the Panamanian law firm Mossack Fonseca.
Despite its breadth, the scandal so far has barely touched American
individuals and companies. There were no mass protests, as occurred in Iceland
where protesters demanded the resignation of Gunnlaugsson; no U.S. leaders were
forced to deny accusations of tax evasion as Putin did.
How have Americans so far escaped the biggest leak of financial data of all
time? It’s not because wealthy Americans don’t use offshore bank accounts to
avoid U.S. taxes: they do—to the tune of $1.2 trillion in 2014, according to
one estimate. Some professors have suggested that Americans may have
disguised their accounts at Mossack Fonseca behind another party. But
there’s also a more structural answer, tax experts say—one that has to do with
shifts in global financial policy—and, to an extent, taste.
Tax evasion overall is a far larger problem in developing countries, where
norms around paying taxes are weak and rules designed to stop such evasion are
ineffective. And when wealthy Americans do want to evade taxes, they turn to
Bermuda, or the Cayman Islands, or Singapore. They don’t park their money in
Panama.
“Within the [high-net worth] world, there is a national taste as in
anything else,” said Edward Kleinbard, a professor of law and business at the
University of Southern California, “and I think Panama is a disfavored country
among U.S. advisers because it is viewed as an outlier relative to world
norms.”
If the Panama Papers had come out in the early 1980s, the scandal may have
implicated far more Americans. Back then, experts say, Panama was a popular
spot for parking money offshore for its lax bank secrecy laws and currency
controls.But in 1989, under then President George H.W. Bush, the U.S. invaded
Panama and deposed the military dictator, Manuel Noriega, and wealthy Americans
have largely avoided the country since.
At the same time, countries such as Bermuda, the British Virgin Islands
(BVI) and the Cayman Islands all have changed their laws to court investment,
giving them significant advantages over Panama. Those three countries operate
under a derivative of English common law, which gives American lawyers a sense
of familiarity and confidence in their legal systems. Further strengthening
that trust, Panama is a Spanish-speaking country, while Bermuda, BVI and the
Cayman Islands all use English.
Wealthy Americans are also more confident in
the political systems of the three countries as opposed to Panama, which many
see as more unstable. Other countries have also become more appealing spots to
hide money by combining strong bank secrecy laws with a stable legal and
political system.
“If there was a leak from Singapore, as opposed to Panama, which is what we
have so far, we might find more [evasion],” said Reuven Avi-Yonah, a law
professor at the University of Michigan who has testified before Congress about
tax evasion.
Last year, economist Gabriel Zucman in his book “The Hidden Wealth of
Nations” estimated that 8 percent of the world’s financial assets were held
offshore, costing governments nearly $200 billion a year in lost tax revenue.
But that 8 percent figure masked wide variations between countries. America’s
offshoring problem is relatively modest. While 4 percent of U.S. financial
wealth was held offshore, that number was 52 percent for Russia and 57 percent
for the Gulf countries.
The United States and other European countries have made cracking down on
offshore tax evasion a priority in recent years. Congress passed the Foreign
Account Tax Compliance Act (FATCA) in 2010, which imposed new requirements on
foreign banks to provide information about their American clients. Since the
law took effect, there has been a notable uptick in the number of Americans
renouncing their citizenship. But experts also say it has also made a tangible
impact on reducing tax evasion.
“The United States and other countries have made a lot of progress on
shining a light on the assets of individuals from their respective countries
held in offshore accounts,” said Kleinbard.
One place Americans can hide assets, though? The United
States. Experts point out that it’s stable, it’s safe, and the laws make it
fairly easy to structure your holdings – legally – to keep taxes low.
“Not too surprised,” Zucman wrote in an email about the lack of Americans
in the Panama Papers. “Part of the reason is that it’s unfortunately way too
easy to create anonymous shell companies in a number of US States like Delaware
and Nevada, so no need to go to Panama.” In fact, multiple international
organizations rated the U.S. as one of the world’s biggest tax havens last
year.
So even as Congress has passed laws like FATCA to force foreign banks to
hand over more information about Americans, the U.S.’s own legal system offers
them plenty of creative ways to stash their money. For instance, a limited
liability company, or LLC, acts as a partnership, so any income is passed
through to the partners, avoiding the corporate tax. For foreign-owned LLCs,
this structure allows them to avoid U.S. taxes.
According to Fusion, which collaborated on the
Panama Papers release and also raised the question of where the American names
were, the International Consortium of Investigative Journalists has identified
211 people with U.S. addresses in the data—not necessarily Americans, but
account holders whose address is listed in the United States.
None of the half dozen tax experts I spoke with were surprised with the
lack of American names in the Panama Papers. And they also emphasized that
storing money in an offshore account does not necessarily mean that the account
holder is breaking the law. The German newspaper Süddeutsche Zeitung, which was
one of the leading news organizations behind the leak, has been careful not to
accuse any of those with accounts at Mossack Fonseca of wrongdoing, and it has
not released—and does not intend to release—the actual data.
But the paper does intend to release more stories in the days ahead, and
those stories may include more Americans. When asked about the lack of
Americans in the original release, the German newspaper’s editor responded mysteriously: “Just wait
for what is coming next.”
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