Panama is not a tax haven. Panama is not a tax haven. Panama is not a tax haven.
That is the mantra of President Juan Carlos Varela as he tours the globe in a damage control campaign for his Central American nation’s reputation as the next installment of the so-called Panama Papers looms. The leak of 11 million documents from Panama law firm Mossack Fonseca revealed the links of powerful world leaders to offshore tax shelters and led to the resignation of Iceland’s Prime Minister Sigmundur David Gunnlaugsson and protests against British Prime Minister David Cameron.
The Panamanians are asking what they did wrong. Varela has traveled from Tokyo to Washington to defend Panama’s name in what he calls a “diplomatic offensive.” He penned a New York Times op-ed after France put Panama back on its tax haven blacklist. He even created a committee with names like by Nobel-laureate economist Joseph Stiglitz to evaluate Panama’s financial system. Most important, Varela has continued to resist pressure from the Organisation of Economic Co-operation and Development to automatically share bank account information with tax authorities in other countries, even as such measures have been embraced, at least in principle, by such other offshore locales as Switzerland, Bermuda, and the scandal-tinged British Virgin Islands, where Mossack Fonseca incorporated most of its shell companies.
“Panama's success does not depend on irregular flows of money into our financial system,” Varela told U.S. officials an event in Washington on May 3, which was attended by U.S. Secretary of State John Kerry. Panama doesn't have the staff to implement multilateral automatic exchange of information, he said, and is instead focusing on bilateral agreements.
The Panama Papers, which Mossack Fonseca says were hacked and then leaked by the International Center for Investigative Journalism, have provided a glimpse into decades of deals by a major creator of offshore companies. In a poll by local research group Dichter & Neira, most Panamanians said fear that fallout from the scandal will deal a blow to their personal finances and the country’s economy, which is already slowing from double-digit growth. Some Panamanian Twitter users have even tried—and failed—to wipe the country’s name from the scandal by rebranding it as #mossackfonsecapapers. Far from outrage at the corrupt financial system, the initial reaction by Panamanians was a nationalist outburst that united even the most acerbic of enemies.
“It should be called the Mossack Fonseca Papers, not the Panama Papers,” said ex-President Ricardo Martinelli. The bitter political rival of Varela since the former allies had a falling out spoke in a phone interview from Miami. “It’s going to hurt Panama. These people who are looking to hide money, they don’t want these problems. It’s an attack on Panama.”
What was left unsaid in Varela’s speech in Washington is that the U.S. also hasn’t signed up for automatic exchange—an important sticking point for many wealthy corporate lawyers, who are unusually influential in Panama. President Barack Obama said Thursday he will close loopholes used by foreigners in the US and call on Congress to pass legislation to crack down on international tax evasion.
Mossack Fonseca is just one of many firms whose partners took big profits from the sale of shell companies while holding political sway. Ramon Fonseca, a partner in the firm, was until recently an adviser to Varela and to the president of the ruling party. Eduardo Morgan, chairman of a Panama City-based law firm with offices in 17 jurisdictions and double the workforce of Mossack Fonseca, is a former justice minister and ambassador to Washington. His father opened in 1923 one of the first firms for incorporating offshore companies here, though the 100 lawyers at Morgan & Morgan now focus largely on litigation.
Morgan has assumed the role of unofficial spokesman for Panama’s law firms, appearing on local TV and talking with foreign press. “The OECD wants to govern the world,” he said during a recent interview in his top floor of the Panama City skyscraper, days before the leak of the Panama Papers. Morgan, who studied law at Yale, also has a stake in Bahamas-based bank with $2.5 billion in assets. He used his black cane to hobble past a golden piece of lobby art that brought together the yen, euro, and dollar signs in affirmation: ¥€$. “The OECD says Panama has to sign, but the U.S. didn’t sign.”
Varela’s New York Times editorial echoed Morgan: His country's removal from a grey list of nations with weak enforcement against money laundering shows the practice is becoming a thing of the past in Panama; “know your client” rules have forced local firms to boost due diligence; the nation ranks better than Japan, Germany, and the U.S. in a financial transparency ranking by the Tax Justice Network advocacy group.
Morgan keeps on his desk political science scholar J.C. Sharman’s book, The Money Laundry: Regulating Criminal Finance in the Global Economy, which he taps frequently, as a preacher would a Bible. The author’s experiment in setting up shell companies found it easier to open one in the U.S. and other developed countries without proof of identity than in developing locales such as Panama.
Morgan says that Panama is just one of many players in the offshore industry—and he’s right. Chambers and Partners, a trade publication for law firms, even lists top firms that create offshores: Appleby, merged from firms in Bermuda, Cayman Islands, and Jersey; Walkers, functional in nine jurisdictions; Harneys, which can even advise you on law in Anguilla and Cyprus. The list goes on.
Mossack Fonseca isn’t the only company whose offshores have ended up being linked to political leaders. A search in Panama’s company registry shows two offshore companies with ties to Eduardo Paes, the mayor overseeing Rio de Janeiro’s Olympic Games. The shell companies on which his family members are directors have largely flown under the radar because they weren’t part of the Mossack Fonseca leak. Paes says he has no involvement in the companies, which were set up by his father, a lawyer. He said his father complies with tax laws and reports income to relevant authorities.
The registered agent of the offshore companies? Panama City-based Morgan & Morgan.