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In May 2020 Mauritius, curiously one of the African countries that perform well on the annual Corruption Perceptions Index, was listed by the European Commission (EC) as a high-risk country for money laundering and funding of terrorism. It was joined on the revised EC list by Botswana, Ghana, and Zimbabwe, among others. The former is one of the African countries perceived to be more free of corruption than others.
These illegal activities often occur in tax havens around the world. A tax haven is generally an offshore location or country that attracts foreign investors – individuals and businesses – by offering low or no taxation rates. They are also typically known for sharing limited or no financial information with foreign tax authorities.
It’s been four years since the Panama Papers story broke across the world. Leaked in April 2016, the trove of 11.5-million documents provided financial and attorney–client information for more than 214 488 offshore entities. The information was created by, and taken from, Panamanian law firm Mossack Fonseca, hence the name.
The Panama Papers were notable for providing evidence that some of Mossack Fonseca’s shell corporations were used for illegal purposes, including fraud, tax evasion, and evading international sanctions.
The International Consortium of Investigative Journalists (ICIJ) worked extensively on exposing information deliberately secreted away in the databases at Mossack Fonseca. Journalists from 107 media organisations in 80 countries, including South Africa, spent huge chunks of time analysing the documents. ICIJ continues to report on Panama Papers developments and recently published this detailed and informative guide to tax havens. Read the full article below.
By Will Fitzgibbon and Ben Hallman
First published on ICIJ
Tax revenue keeps civilization afloat. But not all taxpayers play by the same set of rules.
With the help of lawyers, accountants, white-shoe professionals and complicit Western governments, the wealthy and well-connected have avoided paying trillions of dollars in taxes. The rest of us cover the difference — or, more commonly, can’t, leaving treasuries bereft of monies needed to build roads, schools and tackle existential threats like climate change and global pandemics.
Tax havens make it all possible.
By some estimates, about 10 percent of the total output of all the economies in the world is parked in offshore financial centres, held by shell companies that exist only on paper. The cost to governments, in lost revenue, is estimated to exceed $800-billion a year.
The wealthy keep the money to build intergenerational fortunes, creating a new global aristocratic class and exacerbating the divide between the global haves and have-nots.
Multinational companies use the extra cash to reward shareholders and edge out smaller competitors.
Countries that need tax revenue the most lose more tax money, as a percentage of GDP, than wealthy countries. As with other inequities, the poor get it the worst.
Years after Panama Papers, the ICIJ remains committed to exposing those who exploit tax havens — a long list that also includes corrupt politicians, mobsters, drug traffickers and other criminals who launder cash and assets through offshore companies to throw law enforcement off the scent. The easy movement of illicit money destabilises governments and helps despots stay in power.
Here is a guide we’ve assembled to help explain how offshore finance works, and why it matters. If you have questions we haven’t answered, email us here.
What is a tax haven?
There is no universal definition, but tax havens, or offshore financial centres, are generally countries or places with low or no corporate taxes that allow outsiders to easily set up businesses there. Tax havens also typically limit public disclosure about companies and their owners. Because information can be hard to extract, tax havens are sometimes also called secrecy jurisdictions. Tax havens nearly always deny being tax havens.
Where are these tax havens?
All over the world. Some are independent countries, like Panama, the Netherlands and Malta. Others are within countries, like the US state of Delaware, or are territories, like the Cayman Islands.
ICIJ investigations have focused on different tax havens, often depending on the origin and content of documents. Panama Papers, for example, exposed how Mossack Fonseca, one of the biggest offshore law firms in the world, sold thousands of shell companies in the British Virgin Islands to clients around the globe. Mauritius Leaks examined how companies used Mauritius to avoid taxes, while Paradise Papers revealed the secrets of Bermuda, the island where the law firm Appleby was founded.
Some tax havens, like Niue and Vanuatu, have cleaned up their act under international pressure while others, like Dubai, are emerging as new hotspots of illicit wealth.
Why would a country, or state, decide to become a tax haven?
Money. Tax havens make significant income from fees paid by people and companies who create and use shell companies. Tax havens also create work for lawyers, accountants and secretaries. Mauritius, for example, has said 5 000 people would lose jobs if the country stopped being a tax haven.
What is a ‘shell’ company?
A shell company is a legal entity created in a tax haven. Shell companies typically exist only on paper, with no full-time employees, and no office. A single office building in the Cayman Islands, for example, is home to 19 000 shell companies. Rules differ, but the actual owners of many shells are not disclosed in incorporation documents. Some use the term “shell company” and “offshore company” interchangeably.
Why are they called ‘shell’ companies?
Because, like an empty shell, there is nothing inside. A shell company exists, legally, only on paper.
What are shell companies used for?
Legal and illegal purposes. Shell companies can hold money, luxury homes, intellectual property, businesses and other assets. They also play a vital role in facilitating the flow of illicit money around the globe.
Who uses tax havens and why?
Rich but otherwise “average” folk, including dentists and at least one Alabama greengrocer, use shell companies for reasons that may include making it harder for potential creditors – including former spouses, displeased business partners or tax inspectors – to identify and recoup monies allegedly owed.
Investments made through tax shelters can be especially lucrative, owing to the significant tax savings offshore companies may enjoy.
Bob Geldof, Madonna and US Commerce Secretary Wilbur Ross are among the bold-faced names that ICIJ has linked to shell companies. Some, like Queen Elizabeth II, say they don’t even know they have invested offshore.
Politicians, like Iceland’s former prime minister, Sigmundur David Gunnlaugsson, and Nigeria’s former senate president, Bukola Saraki, have concealed investments or luxury homes with the help of shell companies. So have their children. Notables include the son and daughter of former Pakistan prime minister Nawaz Sharif, and Isabel dos Santos, the billionaire daughter of former Angolan strongman president, Jose Eduardo dos Santos.
Drug lords and ladies, bank robbers and arms traffickers, mafia kingpins and queens and bribe takers and makers also use shell companies to obscure their identities and conceal money, assets and illicit activities.
Is owning or using a shell company illegal?
The short answer is no. The longer answer is that it depends on how it is used and where the shell company is created or incorporated. Hiding stolen assets abroad is clearly illegal, but buying a luxury yacht with a shell company may not be. (Hello Microsoft’s Paul Allen and Saudi prince Mohammed bin Salman Al Saud!). Lawyers and accountants are very good at proposing technically legal ways to spend or stash cash offshore.
How do companies benefit from tax havens?
Businesses, especially those that transact across borders, can enjoy massive tax savings by routing payments, profits or investments through subsidiaries in offshore financial centres.
A big pharmaceutical company, for example, might set up a new entity in Bermuda or the Netherlands, and “sell” that entity a patent for a profitable drug. The parent company might then pay a big licensing fee to the offshore company, which in turn would allow it to record lower profits at home — and pay a lower tax bill. Drug companies have avoided billions of dollars in taxes this way, according to Oxfam.
Each year, companies avoid paying more than $500-billion in taxes using methods like these. Some pay little or no taxes at all in their home countries.
Notable corporate tax avoiders include Apple, Johnson and Johnson and Skype.
Companies often say shell companies encourage foreign investment and get deals done that wouldn’t otherwise. They also incorporate offshore, many say, to avoid paying taxes twice on the same pot of money. Experts say that such defenses are either overblown or mythical.
Want to know more? Watch our reporter Simon Bowers give a TED Talk about uncovering the tax secrets of Nike and Apple in the Paradise Papers.
What does it mean when a company says it pays the taxes it owes, where they are owed?
Experts refer to this as the “tax mantra.” It allows corporations to appear to be good corporate citizens but does not contradict the fact that many of these companies use loopholes (some of which are subsequently found to be illegal) to avoid paying taxes.
How do you set up a shell company?
In most cases, it is as simple as an email or phone call. You don’t even have to leave your house. In most cases seen by ICIJ, individuals pay someone else to do it for them. There’s a cottage industry of offshore specialists — including Mossack Fonseca (now defunct), Appleby and Asiaciti, as we’ve reported previously — eager to make that phone call or write that email on your behalf (for a fee) to set up a shell company.
Rules differ by jurisdiction, but you will usually have to provide a form of identification and answer questions about how you made your money, and the purpose of the new business. Offshore specialists regularly fail to ask these questions.
In the aftermath of the Panama Papers investigation, for example, lawyers around the globe scrambled to try to figure out the identity of their own clients.
Some reporters have gone so far as to set up a shell company for themselves. Listen to NPR’s Planet Money do that here. ICIJ partners at Univision’s Fusion opened a Delaware shell company … for a cat.
Who else helps make shell companies work?
Consultants, wealth managers and tax lawyers, who advise on how best to avoid taxes and hide money from authorities. Accountants, who sign off on shell company audits.
How much does it cost to start a shell company?
Costs depend on where you create your shell company and who helps you do it. Some lawyers, including Mossack Fonseca from the Panama Papers, charged $350 to incorporate a company. Other law firms, including Appleby from the Paradise Papers, charged a flat fee of almost $2 000 in one popular tax haven, the Isle of Man, and $2 700 in Bermuda.
Contributed to DocumentCloud by Will Fitzgibbon of International Consortium of Investigative Journalists • View document
What are the different kinds of shell companies?
Shell companies, corporations or ‘entities’ come in different forms. While companies and corporations are the most common offshore tool (in Delaware, the British Virgin Islands, Bahamas and Niue), other offshore entities include trusts (Jersey) and foundations (Panama). Each has a different rule, according to a tax haven’s domestic laws. Trusts are particularly open to abuse because they use ancient legal principles to avoid declaring or defining an owner. Trusts split possible ownership into three: the legal owner of the assets, the person who controls the assets and the person who can enjoy or use the asset.
Confused yet? That’s the point. Complex structures confound tax officials, law enforcement and investigative journalists. Here is one example of a complex structure set up for Abbott Labs from our Lux Leaks investigation.
Page 45 of Abbott Laboratories 2009 Tax Ruling
Contributed to DocumentCloud by Will Fitzgibbon of International Consortium of Investigative Journalists • View document
What is a nominee director and what do they do?
A nominee director can be a person or a company paid to appear on official documents. Shell companies can use nominees, also known as dummies, instead of the company’s true owner (or owners) as directors to avoid public disclosure. Nominees perform administrative tasks, including signing minutes of company meetings, but have no real or legal power or control over the shell company. One recent example of a dummy nominee company was the use of Regula by Deutsche Bank.
What is the difference between tax avoidance and tax evasion?
According to the traditional definitions, tax evasion is illegal (a crime) but tax avoidance uses legal loopholes to reduce or avoid paying taxes. Increasingly, experts argue that the distinction is blurry; a lot (but not all) of what gets called “tax avoidance” could be criminalised or overturned if there were a court challenge but much of it remains secret. This grey area has led to the term “tax avoision.”
What is a beneficial owner?
The person or company who ultimately owns the shell company, no matter how many nominee directors or subsidiary companies are placed in between him or her and the shell company.
How can my government find out if I own a shell company?
It depends where you live. As a general rule, keeping offshore secrets is no longer as easy as it once was. Many governments, including the US, can receive information automatically from tax havens and other countries about foreign bank accounts of their own citizens. Other countries, especially developing countries, must make individual requests to tax havens for information. Many jurisdictions, including the US state of Delaware, refuse to make public registers that would show the beneficial owners of shell companies.
What is a “bearer share” and what does it do?
A bearer share allows whoever holds the physical document (the “share”) to be its legal owner, which can make someone the owner of a shell company. The bearer share is not registered under the name of any person, which means ownership is never recorded. Bearer shares have been banned in many countries because criminals have used the lack of ownership registration to hide crimes and assets.
What is transfer pricing?
Transfer pricing occurs when two companies from the same group transact with each other. This happens, for example, when Facebook Ireland sells a service or an asset to Facebook USA. Transfer mispricing is when companies (allegedly including Facebook) avoid or evade taxes by artificially inflating or deflating the value of internally sold services or assets.
How much money is stashed offshore?
It’s impossible to know for sure (that’s part of the point: it’s secret). French economist Gabriel Zucman estimates that the equivalent 10% of global GDP is held offshore – about $5.6-trillion. US economist James Henry estimates as much as $32-trillion.
What ICIJ investigations have exposed tax havens, and those who use them?
Panama Papers, first published in 2016, is probably the best known ICIJ investigation into tax havens. It was the biggest journalism collaboration in history, at the time, and led to the resignation of world leaders, criminal convictions and more than $1-billion in recouped money. It built on the work of our previous investigations, Offshore Leaks, Swiss Leaks and Lux Leaks. We returned with Paradise Papers, West Africa Leaks, Mauritius Leaks, and in 2020, with Luanda Leaks.
Why isn’t there a big crackdown on offshore companies?
One reason: some of the most powerful countries in the world are major players. Offshore money flows through overseas territories of the UK; the US states of Delaware, Wyoming, Nevada and South Dakota; and through Switzerland and the Netherlands.
However, since the Panama Papers was first published, there has been a push in the US to eliminate corporate secrecy. Some experts are optimistic about reform; last year, the US House of Representatives passed the Corporate Transparency Act.
Has an obscure British punk band recorded a reggae track about offshore banking, based on the experience of a member who had worked in private banking at Coutts, now part of Royal Bank of Scotland?
Well, yeah.
I would like to read more about the offshore industry and tax havens, do you have suggestions?
Books:
- The Panama Papers: Breaking the Story of How the Rich and Powerful Hide Their Money, by Bastian Obermayer and Frederick Obermaier.
- Capital Without Borders by Brooke Harrington
- The Hidden Wealth of Nations: The Scourge of Tax Havens by Gabriel Zucman
- Academic work by Gabriel Zucman
- Treasure Islands by Nicholas Shaxson
- Moneyland by Oliver Bullough
- Lucifer’s Banker: The Untold Story of How I Destroyed Swiss Bank Secrecy by whistleblower Bradley C. Birkenfeld
- Financial Exposure by Elise Bean
- Secrecy World by Jake Bernstein (the movie The Laundromat is based on this book)
- La clef by Fabrice Lhomme and Gérard Davet (journalists behind Swiss Leaks) (French)
- Where Money Is by Maxime Renahy (French)
- Financing Africa by Attiya Waris
- Il paradiso dei ricchi by Leo Sisti (ICIJ member) (Italian)
- Dumping fiscal. Enquête sur un chantage qui ruine nos états by Eric Walravens (French)
- Panama Papers books published by ICIJ partners in Argentina, India, Egypt, Finland, Panama and again here, Nigeria, Spain, Japan, Venezuela,
Documentaries:
- Panama Papers by Alex Winter
- A Leak in Paradise by David Leloup
Movies:
The Laundromat directed by Steven Soderbergh and written by Scott Z. Burns
