05 April 2016

Tax Havens Considered In Light Of The Panama Papers

In the biggest leak of confidential law firm information since a junior employee leaked confidential information from tobacco tort defense firms that went on to devastate the industry, papers leaked from the records of Panamanian law firm Mossack Fonsecca have revealed a treasure trove of information about tax haven bank accounts of prominent international figures across the globe. Tyler Cohen collects some other related links to the economic issues related to the scandal at Marginal Revolution.

Few Americans are implicated because they prefer venues of common law legal traditions like Bermuda, the British Virgin Islands, the Cayman Islands, St. Nevis and St. Kitts, as well as domestic asset protection venues.  The Swiss, who invented the tax haven industry, have been out of favor for many years among both Europeans and Americans after having caved to pressure from foreign authorities to crack down on tax haven abuses.

Maintaining a Panamanian bank account is itself perfectly legal in most of the world.  

But, combined with shell companies and disregard for domestic tax laws that is impossible to detect without an improper leak of documents like this one, Panamanian bank accounts have been a global go to source for money laundering, tax fraud, fraudulent concealment of assets to hide the fruits of government corruption by top officials, to conceal assets from soon to be ex-spouses and creditors, and to hide patterns of influence.  

Simply put, it is a pain to have a foreign bank account, and typically, only people with illicit reasons or a tax evasion motive use them.  People with legitimate international financial interests usually establish accounts in non-tax haven jurisdictions where they do business or in legitimate major international financial centers like London or New York or Tokyo.

The dicey thing about tax haven/asset protection jurisdictions is that for the most part, these opportunities exist as a result of loopholed in domestic laws that permit them to be beneficial.  Tax havens typically have little economic activity of their own, and both the source of the funds and the places that they invest the funds are typically the countries that are the victims of these legal loopholes and have ample power to collectively punish tax havens if they wish to do so.  Indeed, there have been a couple of times in U.S. history when the U.S. military has intervened when countries in the greater Gulf of Mexico tried to stiff U.S. creditors.

In this respect, tax havens bear a great deal of resemblance to the Islamic fundamentalist Salafist movement that has in turn given rise to Islamic terrorism, which is funded almost entirely from the oil wealth provided by the Western countries these movements have sometimes targeted. Terrorist organizations, however, tend to be less sophisticated and traditional, than the corrupt international financial networks that are the lifeblood of international tax havens like Panama.

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