Container ships being unloaded at the Port of Oakland on March
As the world leafs through the latest Panama Papers, learning which important people used Mossack Fonseca to help them hide investments or skirt regulations in their home countries, it’s worth remembering that this isn’t the first time Panama has found itself in the middle of efforts to avoid regulatory oversight.
Statement from OECD Secretary-General Angel Gurría on the “Panama Papers”
04/04/2016 - The “Panama Papers” revelations have shone the light on Panama’s culture and practice of secrecy. Panama is the last major holdout that continues to allow funds to be hidden offshore from tax and law enforcement authorities. The OECD has been leading a global crackdown on these practices since 2009, working hand-in-hand with the G20. Through the Global Forum on Transparency and Exchange of Information, we have constantly and consistently warned of the risks of countries like Panama failing to comply with the international tax transparency standards. Just a few weeks ago, we told G20 Finance Ministers that Panama was back-tracking on its commitment to automatic exchange of financial account information. The consequences of Panama’s failure to meet the international tax transparency standards are now out there in full public view. Panama must put its house in order, by immediately implementing these standards.
While the “Panama Papers” data expose nefarious activities, they also show a decline in the use of offshore companies and bearer share companies, which is a testament to the incredible transformation effected in the last 7 years to establish robust international standards on tax transparency, including on beneficial ownership: 132 jurisdictions have committed to the standard on exchange of information ‘on request.’ Of those, 96 jurisdictions will introduce automatic exchange of financial account information within the next 2 years. Almost 100 jurisdictions have joined the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. As a result of our in-depth peer review process, the use of bearer share companies is close to being eliminated across the world, and the beneficial ownership rules have been strengthened to ensure that information is now available to tax authorities when they need it.
Establishing global standards and making commitments are just the start though. Effective implementation is the key to lifting the veil of secrecy once and for all and eradicating tax evasion. The time has come to make sure that no jurisdiction can benefit from failing to meet their commitments. In the run-up to September’s G20 Leaders Summit in Hangzhou, we must use every opportunity to deliver. The next G20 Finance Ministers meetings and the Global Anti-Corruption summit taking place in London in May will be critical.
 The Global Forum on Transparency and Exchange of Information for Tax Purposes monitors the standards on tax transparency: tax information exchange ‘on request’ (EOIR), and automatic exchange of information (AEOI). Both of these standards can be effectively implemented through the multilateral Convention on Mutual Administrative Assistance in Tax Matters. Further information is available at http://www.oecd.org/tax/transparency/
For further OECD reactions to the "Panama Papers", read a Q&A
In addition to hosting countless shell companies, Panama is also the world’s largest shipping registry, offering what has come to be known as a “flag of convenience.” Ships have a nationality the same way that people do. That nationality determines which domestic and international laws they are subject to, and what taxes their owners must pay. A ship registered in Panama is legally considered to be a Panamanian ship even if the owner is American, and even if it never sails to Panama, and the only rules it needs to follow are those that Panama imposes.
Traditionally, a ship had the nationality of its owner, and countries required citizenship in order to register a ship. But beginning in the mid-20th century some countries realized there were economic advantages to opening their ship registries to anyone willing to pay a fee to register a ship. Those fees would accrue to the registry state, and any taxes collected would also provide revenue for the registry state. States realized that to lure ships to register in their locations they had to make registration attractive for owners, so they kept fees and taxes relatively low, and didn’t require many of the safety, labor, and environmental protections the ship would have had to uphold if registered in a traditional maritime state.
Once such convenient flags were offered, owners raced to register their ships in these locations. The environmental, safety, and labor standards required of the global fleet decreased dramatically, and traditional maritime states lost tax revenue as well as regulatory control over large numbers of ships owned by their nationals. More and more states have created opens registries.
Why are the Panama Papers important?
Leaked documents exposed allies of Vladimir Putin, along with the president of Ukraine and Iceland’s prime minister.
In 1993 Panama became the world’s largest registry, followed by Liberia, and the Marshall Islands. By 1998 the majority of the world’s shipping tonnage was registered in flags of convenience. These states profited: Panama earns half a billion dollars annually from its registry. Liberia, during its civil war, earned up to 70 percent of its revenue from its ship registry, and between 5 and 10 percent annually since then.
What ships do matters. Nearly 95 percent (as measured by weight), or two-thirds (as measured by value) of the world’s trade is transported on the ocean by ships. Ships need only follow the wage rates and labor standards of their flag state, and labor standards followed on flag-of-convenience ships are often unconscionable. Ships are only required to follow the international safety and environmental rules of their registry countries, and ships registered in the lowest-standard flags are more likely to be the cause of oil spills or dangerous accidents at sea.
Why is such a system allowed to persist? Though traditional maritime states decry the flag-of-convenience system, they fail to do anything meaningful to end it because they ultimately benefit from the system of cheap transport it enables. Goods and people can be moved globally at lower cost because ships can register in places that don’t place high regulatory or financial demands on them.
Likewise, the business activities that the Panama Papers expose may represent lost tax revenue for wealthy states. But these same states realize that to truly clamp down on this behavior would constrain capital flows and harm powerful businesses and companies. Global economic activity and the prosperity of wealthy states benefit from the ability of ships and money to travel freely and mostly unfettered around the globe.
Mossack Fonseca built its business helping its clients find shady, but often technically legal, ways to avoid taxes or hide revenue. Flags of convenience offer the same just-barely-legal method of getting around the rules. But the most important thing to realize is that these ways to skirt the rules and avoid fees and oversight exist because the powerful countries of the world condone their existence. As the Panama Papers demonstrate, even the leaders of these countries sometimes make use of these opportunities themselves.
As the world combs through the Panama Papers, we are certain to continue to see individuals face the sorts of consequences that befell the (now former) prime minister of Iceland. But actually addressing the underlying problems of the shadow world of offshore shell companies and flags of convenience is not about consequences for individuals who took advantage of the loopholes central to the way regulation operates. It requires fundamentally changing the way international regulation works, and increasing the willingness of the most powerful states in the system to forego the concentrated benefits of regulatory havens for the broader good of effective global regulation.