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Panama Papers: Beware of guilt by insinuation

Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He writes on this and many other matters, from the perspective of individual liberty and free markets.

Many, perhaps most, of the offshore shell companies revealed in the Panama Papers leak from law firm Mossack Fonseca exist for legitimate purposes. Broad disclosures of private and confidential information raises the risk that reputations will be tarnished unjustly.

Just being mentioned in the Panama Papers is enough to smear a name in the public eye. The automatic assumption is that your target is somehow implicated in tax evasion or fraud. That certainty is not moderated by the awareness of how little the general public really understands about offshore investing, tax havens and shell companies.

True, many of the high-profile names that have been disclosed to date really are implicated in dodgy dealings. Public officials in particular ought to be under close scrutiny, because they handle public money and are often tempted to engage in bribery, or to tuck away little nest eggs for themselves that they’re not entitled to. So certainly, the offshore activities of prominent political leaders ought to be under public scrutiny, and the anonymous whistleblower in the Panama Papers case deserves our thanks for revealing suspect behaviour.

The same is true for records connected with allegations of private sector fraud, corruption or other crime. For example, a company linked to Fifa executives that are under suspicion of bribery also turns out to have a connection to the new Fifa president, Gianni Infantino, who was installed in an effort to clean up the international football association’s image. If it turns out that he played a role in the organisation’s corrupt shenanigans all along, this is something authorities and the public absolutely ought to know.

However, not all rich people play with other people’s money. Are the private financial affairs of sports stars, celebrities or businesspeople really our business?

The publishers of the leak, the Süddeutsche Zeitung in collaboration with the International Consortium of Investigative Journalists, appear to be keen to exert close editorial control over what gets published. The whistleblower site Wikileaks, however, true to its cavalier nature, is demanding that the full 11.5-million records on 214,000 companies be made public.

This difference in approach is similar to the difference in how Wikileaks handled the Embassy Cables, compared to how Edward Snowden handled the NSA leak. Wikileaks simply dumped everything online, with little regard for the material’s sensitivity, valid claims to confidentiality or secrecy, or practical repercussions. Snowden revealed only those documents that firmly supported allegations of unlawful or unethical behaviour on the part of US government agents. Snowden was responsible about his disclosures. Wikileaks was not. At the time, I argued that Wikileaks had the potential to cause great harm, and followed it up with an attempt to trace a sensible middle path between impenetrable secrecy and full disclosure.

If Wikileaks gets its way, it would be similar to a hacker disclosing all of a bank’s customer records and account details, rather than disclosing only the details of people connected to alleged corruption, fraud or money laundering. People are entitled to financial privacy for a host of reasons, and this principle is well-established in law.

Offshore shell companies are not much different, in this respect. In many cases, establishing a shell company – which has few assets and conducts no business operations of its own – is perfectly legitimate.

Among the good reasons to establish a shell company are:

  • To act as a holding company for global operations when each country operation may be subject to different regulatory requirements and restrictions;
  • To separate lines of business that might compromise each other’s markets, such as medical devices and sex toys;
  • To enter into contracts without risking price-gouging against wealthy companies with well-known brands;
  • To conceal trade secrets or R&D from competitors;
  • To conduct charitable operations without revealing the identity of donors;
  • Or to establish anonymity to reduce the risk of kidnapping for high-profile government officials or business executives.

More questionable purposes of a shell company could be to shield assets from those who might have an interest in them, such as business or marriage partners. An interesting use of shell companies is to avoid punitive taxes and bribery in the world’s more corrupt, business-unfriendly regimes. Though technically illegal, who gets to decide when such actions are morally legitimate because they go against immoral laws?

It is with tax dodging like this that things begin to get questionable. Shielding assets from tax can obviously mask unlawful tax evasion, and government authorities – even in corrupt or oppressive regimes – have every right to demand that their wealthy elite play by the same rules as the rest of their citizens. Bankruptcy law, likewise, is premised on the notion that a person’s assets can be liquidated in favour of their lawful creditors, rather than being squirrelled away in an offshore shelter.

But moving assets or companies offshore can also involve lawful tax avoidance. Why should anyone be forced to reside or do business in an unfavourable high-tax jurisdiction, when they are able and willing to move to a low-tax alternative? To eliminate tax jurisdiction shopping, an international body would have to take the extraordinary step of violating national sovereignty to harmonise tax regimes.

This would not appear to be such a problem in cases of typical tax havens like the British Virgin Islands or the Bahamas, but what about the rights of a country like Estonia? Its entire post-Soviet economic reconstruction is premised on attracting people and business by cutting red tape and taxes. Estonia ranks top in the entire OECD on tax competitiveness, resulting in comparatively strong growth rates and high levels of foreign direct investment.

Should it be forced to reverse what has been an extraordinarily successful economic policy, and raise taxes to fall in line with less competitive countries? Should businesses or people be prohibited from investing in or relocating to Estonia, if they so choose?

If this question cannot be answered convincingly for Estonia, then by what right would anyone claim that other small countries do not have the sovereign right to run their economies and tax regimes as they see fit? The case against tax havens is far from clear-cut, and in most cases, opposition to them is based on emotion, rather than moral principle.

Yes, the Panama Papers will reveal a great deal of corruption and crime. This is why whistleblowers need protection and the media needs to be free to report even on confidential or secret documents. To the extent that the Panama Papers do so, we should celebrate the leak.

However, they also contain a great deal of personal, private information that nobody has any right to see or disclose. Those who support the Wikileaks view – dump the entire lot online – ought to be okay with having all their own financial data published for the world to see. And even if they are, it would still be wrong to expose sensitive financial information about innocent people.

Besides privacy concerns, there is a very real risk of tarnishing reputations unjustly. Simply because someone’s name appears in the Panama Papers, or they operate an offshore shell company, or they choose to avoid high taxes in some country or another, does not mean they’re criminals. We all, both as the media and the public, ought to be careful that we do not unfairly drag names through the mud by mere association and insinuation. Lives have been ruined by less. DM


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