Policy Alert: Panama Papers Leak Proves Taxing for Rising Powers
On April 3, an international coalition of journalists released information on thousands of tax shelters created by the Panama-based firm Mossack Fonseca. Global reactions to the leak of over 11 million documents, also known as the Panama Papers, have been swift with condemnations directed at individuals named as shareholders and directors of the shell companies, including politicians, business leaders, athletes, and celebrities in more than 200 countries. Among them are 12 national leaders, such as the prime ministers of Iceland, the United Kingdom, and Pakistan, the presidents of Argentina and Ukraine, and the king of Saudi Arabia. The list also links to individuals with connections to Russian President Vladimir Putin and Chinese President Xi Jinping.
While the use of these offshore companies to avoid taxes at home is not illegal, they remain controversial to many who consider the practice as cheating taxpayers and creating opportunities for fraud, money laundering, and drug trafficking. Several countries in Eurasia were identified as hubs for this type of financial activity or saw their political leadership included in the allegations. This Policy Alert highlights reactions in China, India, Russia, Japan, and South Korea to the emerging global shell game.
After the Panama Papers cited at least eight current and former Chinese top-ranking officials of having links to Mossack Fonseca, the Communist party ordered the country’s media outlets to censor all references to the story. Foreign Affairs Ministry spokesperson Hong Lei refused to comment on “groundless accusations” when pressed by journalists. Chinese law does not prohibit its citizens from creating overseas entities, but according to Chun Han Wong in the Wall Street Journal, party leaders are sensitive to allegations, including some directed at relatives of President Xi Jingping, that may “add fuel to perceptions of double standards in Beijing’s efforts to fight graft.”
Hong Kong was said to be home to the most active and highest number – over 2,000 – of the shell corporations set up through Mossack Fonseca. Zhang Xiaodong, named as the firm’s primary contact on the island, pushed his clients to set up offshore accounts to purchase stocks abroad due to “overseas countries’ hostility to the rising Chinese economic power.” When a media outlet did cover the leaks, its criticism was directed at foreign powers. The Global Times questioned the real motives behind the leak, which the paper said has “basic political targets,” and how the information is being spun by “the Western media” to minimize information negative to the United States and give “extra spin” to the “exposure of non-Western leaders, such as Putin.”
In response to The Indian Express’s reporting on 500 Indians named in the Panama Papers, Prime Minister Narendra Modi ordered the formation of a multi-agency group to investigate. Modi had previously established a Special Investigation Team (SIT) on Black Money to explore how wealth is held overseas away from Indian tax collectors, but investigators are pessimistic about their chances at finding the over $505 billion in lost tax revenue that left India from 2004-2013. Justice M.B. Shah, chairman of the SIT, said if the Panama Papers accusation were true, “then the persons cannot easily avoid punishment under the Black Money Act of 2015.”
Many commentators and media outlets focused on how the use of tax havens and the information contained in the leaks were negatively affecting India’s economy and political leadership.
- The Hindu noted the problem of overseas tax havens remains an issue for India despite the Reserve Bank of India’s attempts to provide guidelines deterring the practice. The papers called on leaders – not just in India – to coordinate a global response to increase transparency and set “a zero tolerance approach to illegal transfers.”
- The Economic Times demanded India “strengthen its ability to digest the data yielded by such increasingly frequent leaks and take appropriate action” in coordination with global partners to “revamp the tax system.”
- The Times of India praised Modi for seizing the leak’s opportunity to set up the multi-agency probe and fight against black money.
- On the other hand, N Sundaresha Subramanian, associate editor at Business Standard, criticized the BJP government for failing to make progress on its campaign promise to reign in these money stashing schemes.
- The leaks prove tax havens are “used overwhelmingly for secrecy and dissimulation” and not legitimate purposes, according to Dikshit Sengupta with National Institute of Public Finance and Policy, New Delhi. He highlighted similar practices in the country of Mauritius where many Indian businesses and wealthy individuals shield their assets and end up eroding India’s tax base.
- A.S. Panneerselvan, journalist and Executive Director of Panos South Asia, saw the impact of the Panama Papers leak as extending beyond the financial realm into an “inevitable way to reboot the news media” through an unprecedented level of collaboration between international media organizations.
Several political parties and pundits discussed how the Panama Papers are being used as a political weapon in India.
- Opposition parties such as the Congress Party and the Aam Aadmi Party urged the ruling BJP leadership to avoid becoming involved in tax haven investigations due to their closeness to people named in the leaks, including sports promoter Lokesh Sharma. BJP officials refuted the allegations, however, and called the Congress Party “singularly responsible” for the existence of tax loopholes in India.
- One of India’s most prominent actors with a potential political role, Amitabh Bachchan, was named in the Panama Papers leak. While he denied having money in offshore accounts, it has raised questions about his future in politics.
- Prashant Bhushan, founder of the political organization Swaraj Abhiyan, said the country needed “to see swift and visible action on the Panama Papers” to undo the damage to Prime Minister Modi’s credibility on financial reforms.
- Pratap Bhanu Mehta, president of the Centre for Policy Research in New Delhi, predicted the rise of “angry populism” in many liberal democracies in response to the news. However, Mehta expected a “muted” reaction in India due to elites giving each other a “free pass” on their respective financial dealings and because the Indian tax base is small and unlikely to feel cheated by these revelations.
Not everyone in India, however, was upset about the leaks with several defending the use of tax havens for economic growth.
- Raghuram Rajan, Governor of the Reserve Bank of India, advised the public against attacking the “entrepreneurial wealth of self-made people,” a “dangerous” trend he believed could harm economic growth. Rajan promised his agency, which the government appointed to lead an investigation into the Panama Papers’ claims, will discover what really happened and provide opportunities for people to determine the legitimacy of wealth earned through these financial setups.
- Dinesh Kanabar, CEO of Dhruva Advisors, traced the rise in India of overseas money to the country’s formerly high tax rates, a historical lack of income accounting, and previous “difficulties faced by Indians in sending money abroad.” However, Kanabar argued these drivers no longer exist in India and pressed his readers to better understand the legitimate uses of offshore accounts and the troubling fact massive amounts of financial data was breached and leaked.
- The Daily Pioneer encouraged readers to avoid moving to “tar the reputation of people” named in the leaks until an investigation concluded.
- Naushad Forbes, president of the Confederation of Indian Industry, thought it was wise to take advantage of legal tax loopholes since those incentives were created to attract investment and economic activity. Forbes believed there were already laws on the books for India to “deter corporate wrongdoing.”
- Professor Illa Patnaik of the National Institute of Public Finance and Policy maintained there was a distinction between illegal tax evasion and more legitimate tax avoidance strategies even as both methods employ tax havens. She argued India needed a simpler “tax regime with lower compliance costs” to sort out the thin line between legal and illegal activities.
Vladimir Putin has been accused of hiding $2 billion in offshore accounts. A cellist named Sergei Roldugin, reportedly a close friend of Putin, is viewed as being at the center of the tax evasion scheme. Twelve other Russian politicians and businessmen with close ties to the president are also listed in the leak.
- Putin flatly denied the allegation, calling it “an attempt to shake the situation [in Russia] from within, make us more compliant, and tar us the way they want.”
- Presidential spokesman Dmitry Peskov said “Putinophobia” in the West “reached a point where to speak well about Russia, or about some of its actions and successes is impossible…While Putin does not appear anywhere backed by any facts, it is obvious to us that the main target behind such ‘leaks’ has been and still is our president, especially in the context of the upcoming parliamentary and… the presidential election in two years’ time.”
- The spokesman of Russia’s Prosecutor-General’s Office, Alexander Kurennoi, said the office will check information on Russians with offshore accounts, although he added the revelation “wasn’t a story about Russia. It was a story about the offshore world.”
- Russian bank officials and politicians, including VTB Bank CEO Andrey Kostin and Minister of Economic Development Alexei Ulyukayev, have denied any involvement in the scandal.
Some liberal opposition newspapers, such as Novaya Gazeta and Kommersant, ran investigative stories that covered the Panama Papers. In contrast, state-owned media characterized the story as “anti-Russian” and dismissed allegations against Putin, shifting the focus to Ukrainian President Petro Poroshenko and his Panamanian company.
- Russia Times editorialized in defense against “mainstream media’s latest attacks” that its coverage of the Panama Papers “hasn’t been primarily focused on Vladimir Putin.”
- Russia’s Channel One emphasized “no cases of wrongdoing have been confirmed. The administration of the Russian president has no illusions about the real purpose of this information attack.”
- State Duma opposition deputy Dmitry Gudkov criticized the lack of Russian media coverage, saying “it is paradoxical that major Russia mass media channels do not have a reaction and report on the event exclusively with regard to foreign politicians or don’t report it at all.” According to Gudkov, the Panama Papers send a signal to Kremlin that if “they continue to escalate, there will be more consequences. When these things are revealed, they can be investigated by security services in the United States or other countries.”
Unlike Iceland, where thousands of protesters gathered in front of the parliament and forced the prime minister to resign, there have been no major protests in Russia, except two people who decided to demonstrate in front of parliament before being detained.
- Natalya Zorkaya, a leading scientific collaborator for the department of social-political investigations at the Levada Center pollster, explained “there have been many corruption scandals in Russia – with the prosecutor general, the defense minister. Many things happened that one would think would have offended the people. But this does not push our people onto the streets because we don’t have the inclusiveness that exists in European democracies, in those where society understands that mass demonstrations can have an effect. Unfortunately we still haven’t reached this state.”
- The Russians “do not expect formal rules to be real or facts to be unequivocally true,” posited Maxim Trudolyubov, Senior Fellow at the Kennan Institute and the Editor-at-Large of Vedomosti, an independent Russian daily. They understand “business is always murky and politics is always dirty,” and “do not believe… they would be able to exert any real influence on the country’s policies.”
The Panama Papers contained 24 companies and 360 shareholders in Japan, raising concerns offshore tax havens are being used for criminal activities. There is no evidence politicians or public officials have been involved, although some doctors and businessmen reportedly attempted to acquire offshore accounts.
Japanese media outlets unanimously voiced criticism.
- Tax avoidance by political leaders are a “betrayal of people’s trust” and “shakes the foundation of democracy,” claimed Mainichi Shimbun. The editorial posited the revelation by the Panama Papers will only exacerbate the public anger that has been fueling since the 2008 financial crisis and the subsequent public attention to inequality. Asahi Shimbun agreed, criticizing these leaders for failing to fulfill their “moral responsibility” as elected officials.
- Sankei Shimbun also condemned the use of tax havens by politicians, calling it a hindrance to the international efforts to regulate such offshore accounts for preventing money laundering by criminals and terrorists.
- The editorials by Yomiuri Shimbun and Nikkei Shimbun called for further international efforts to eliminate the use of tax havens, citing as an example the multilateral framework of bank account information sharing recently proposed by the OECD and approved by the G-20 summit. The articles urged the participation of tax haven countries, including Panama, which has yet to join the framework.
- “It is tempting to dismiss all shell companies as vehicles for tax avoidance, money laundering, or drug trafficking. But those businesses can also be used to shield assets from corrupt governments, where the rule of law is not enshrined and private property is not protected,” cautioned The Japan Times. “Shell companies not only protect against extortion, but also against attempts by authoritarian governments to strip their opponents of assets through the court system.”
Roh Jae-heon, the eldest son of South Korea’s former President Roh Tae-woo, was found to be running three paper companies in a tax haven region. Newstapa, the only South Korean media agency involved in the ICIJ’s investigation, first reported the story and wrote “we have yet to ascertain the flow of money, but considering that Roh Jae-heon was at risk of having to make his assets public in divorce proceedings, these companies appear to be linked to an attempt to conceal Roh Tae-woo’s slush fund.”
- In a statement, Roh rebutted all allegations, saying “I set up the companies for business in China but it was not carried out as planned. I did not open any bank accounts either. I am ready to explain (everything) if relevant authorities ask. They have nothing to do with tax evasion or creating a slush fund.”
- South Korea’s National Tax Service and Financial Supervisory Service announced they will investigate the 195 individuals mentioned in the Panama Papers, including Roh Jae-heon.
Korean newspapers called for vigorous official investigations.
- Dong-A Ilbo argued the government “should realize taxation justice by opening the ICIJ data to the public and conducting strong investigation against the individuals and businesses in the list.”
- The Panama Papers “should give a timely boost” to the tax authorities’ “war on offshore tax evasion,” said The Korea Herald.
- The “195 cheaters are just the tip of an iceberg,” claimed Joong-Ang Ilbo, noting the fact the National Tax Service collected $1.12 billion-the largest amount ever-from 223 offshore tax evaders last year. The Korea Times shared a similar view, urging the tax authorities to “vigorously” crack down on the “rampant” offshore tax evasion by the Koreans.