Wednesday, April 6, 2016

Panama Papers And Greece

400 journalists belonging to the International Consortium of Investigative Journalists (ICIJ) are reviewing 2,6 terabytes of data to track billions held in shell companies over almost 40 years. Every first and last name showing up among the data is automatically criminalized. Sensational news have already come out such as: the clique around President Putin is not perfectly flawless; Russian oligarchs have not necessarily built up all their wealth in an honest way; a FIFA executive may have been involved in corrupt deals; etc.

I have written extensively about anonymous offshore companies with regard to Greece. One such article is here. Mossfon, the Panamanian company whose records were hacked, is only one of very many players in the market for shell companies in tax havens. This article from The Economist of April 7, 2012 gives a rather good overview.

As one might surmise, there are shell companies and there are shell companies. There is hardly an Annual Report of an international corporation which doesn't list several shell companies under the section "ownership in subsidiaries". At the same time, there is probably not one single shady politician or businessman in the entire world who does not own a shell company somewhere.

I asked a friend of mine, an oil & gas lawyer in Texas, for his views on shell companies because he has extensive experience with them: virtually every project he manages is housed in one (or more) shell companies. And yet - they are all legitimate business ventures (saving taxes in a legal way is legitimate!). Here is his reply:

* Using offshore entities is the only intelligent way to invest abroad.
* First, you want to ring fence. If I have two concessions in Colombia, I set up two different Cayman Island entities. Each will hold a concession, either directly, or through a Colombian wholly owned entity. If I get in trouble with the Colombian government on one concession, I don’t want that trouble to bleed over to the other one.
* Many countries, like the U.S., have a tax imposed on the gain on the sale of stock.  If I sell the stock of my Colombian company to Exxon, I pay Colombian tax on any gain. If I sell the shares of my Cayman Island company, I pay no such tax.
* I may want to give my key employees incentives and bonus. If I do that through the Colombian entities, they have to pay tax on the income.
* Another reason is that no one likes the U.S. or U.K. law. I had a client who had a Delaware entity own its portion of two supergiant offshore Indonesian fields. After 30 years he decided to sell it, and the purchaser was English. The purchaser was scared to death of owning a U.S. company with all the chance of litigation and taxation in the U.S. even though the asset had nothing to do with the U.S. So a nanosecond after the purchase was done, the U.S. entity was redomiciled to the British Virgin Islands.
* To open up an entity is extremely expensive and time consuming. Our law firm went through all the traps. I had to give my passport, driver’s license, bar card, and utility statements. And then they checked the databanks to be sure that I was whom I thought. They had a local law firm come out to meet me in person to compare my picture to what I was giving them. Of course, once you go through that, you wouldn’t change law firms for the cost of going through that again.
* My client was a U.S. hedge fund. They checked out the principals up side and center. And anyone that was a director or had signing authority had to go through the same process I did.
* The law firm we used was U.K. based. My contact was an Eton and Oxford lawyer. He was out of Dubai (where I met him once) and he handled Cayman Islands accounts. 
* And when we opened a bank account, it was in the U.S. or London. We had to go through all the Patriot Act protocol to establish the source of funds.
* There was no tax advantage to this. When a U.S. company owns more than 50 percent of an offshore entity, the U.S. regards the entity as a controlled foreign corporation.
* Other countries don’t tax income earned outside the country. So a Bulgarian can own a Colombian entity and not pay Bulgarian tax on any income – or on income on interest on fund legally held abroad. So for them, having it a Cayman Islands entity rather than a Bulgarian entity makes sense.

As a lawyer, I’m furious that a hacker can take 2.3 terabytes of data, give it to one newspaper, which in turn spreads it around 100 newspapers, each of whom has lots of folks looking at it – all with impunity. My social security number, my passport, my driver’s license, my picture – everything that an identity thief needs – would be in front of those people. And I have no recourse. Is that supposed to be legal as well? I never opened an account with Mossack Fonseca. But if I had and I came across one of the Suddeutsche Zeitung reporters who had my data, I’d take out my gun and ...

So much for shell companies which are used in the context of legitimate businesses. For example, I would be surprised if any Greek shipowner owned a ship which is not housed in a shell company somewhere. Does that make it illegitimate? Absolutely not! Only when the beneficial owners of shell companies take pains to hide their identity can one assume that there is a likelihood of something illegitimate in the shell company.

It is perfectly legitimate for a Greek to transfer his assets abroad, particularly if he is worried about political stability in Greece and/or currency devaluation. The two questions are: is the source of this wealth legitimate and is the revenue on it taxed properly? My understanding is that Greek tax laws are rather clear about this: Greeks have to declare all their world-wide assets on the tax return as well as the income earned on them. If the purpose of the shell company is to hide one of the two (or rather: both), then one is safe to assume that there is something illegitimate.

As a matter of rule: no one takes major steps to hide something if it is legitimate.


  1. "But if I had and I came across one of the Suddeutsche Zeitung reporters who had my data, I’d take out my gun ..."

    tsk tsk. That would be illegal. Have Mr. Obermair and Obermeyer broken any german laws? Probably not. Can they claim a "public interest" defence? Absolutely.

    Were they in Panama, they presumably would be in trouble. They're not.

    I believe the well-connected Wealth Manager refers to this approach as "jurisdictional arbitrage".

    And it works both ways. Your friend gets no sympathy from me.

  2. As a general principle, lawyers should be treated with as much respect as one would a hardened non-violent criminal. Your friend, on the other hand, hints that he would be prepared to engage in violence to protect his dubious financial privacy. In such a case, he gets the same respect from me as I would accord a convict with a record of violence. Precisely none.

  3. Panama Papers And Austrian Banking System

    Ooh! All these "saints" and "untouchables" bankers of ...civilized countries and advanced economies (AAA)

    What's your comment on this? Do you know him?

    Austrian bank's CEO quits after Panama Papers reports

    And here...
    Παραιτήθηκε Αυστριακός τραπεζίτης στη σκιά των Panama Papers

  4. Panama Papers And Austria

    Any comment on Raiffeisen Bank International?
    Another Austrian bank mentioned in the Panama Papers reports...

    Austrian banks caught up in Panama Papers leak

    The bank is said to have dealt with a $115 million credit (€131 million) in an offshore account in the British Virgin Islands connected to Poroschenko's confectionery empire Roshen.

    The Ukrainian president is one of 12 current or former world leaders among the 140 politicians exposed in the report.

  5. Have you got any relation with this bank?

    Raiffeisenlandesbank Oberösterreich AG

    Klaus Kastner's professional experience

    5 years
    10 months
    07/2010 - present
    (This company name is only visible to logged-in members.)
    9 years
    07/2001 - 06/2010
    Direktor, Leiter Zweigniederlassung Süddeutschland
    Raiffeisenlandesbank Oberösterreich Aktiengesellschaft
    9 years
    10 months
    09/1991 - 06/2001
    Landesdirektor Salzburg
    Creditanstalt AG
    All 4 career entries are only visible to logged-in members.

  6. Retiree bankers goes to ...
    The Federation of Austrian Industries?

    A phenomenon which is the same in Greece...
    (e.g. Alpha Bank to SEV-Hellenic Federation of Enterprises)

  7. There seems to be confusion about the legality of shell companies. Shell companies per se are perfectly legal. What matters is the kind of business which is housed in shell companies and who that business is done with.

    There are 2 levels of anonymity. The owners of the shell company - through various constructions - may be anonymous and the banks which have accounts for shell companies may not know who those owners are.

    The EU has issued various Directives governing money laundering. The member countries are required to convert those Directives into national law. One such Directive stipulates that banks must know their customers.

    In Austria, like I would suspect in most other EU countries, the national law stipulates that banks must know the personal identity of the beneficial owner of an account. Not complying with that law is a criminal offense. If a Panama shell company wants to open an account with an Austrian bank, it has to reveal its beneficial owner. Typically, one shell company is owned by another one and so forth, so the bank needs to build a 'corporate family tree' which eventually must lead to natural persons with first and last names. Determining the beneficial owner is only part of the process. The next steps are to verify the sources and applications of funds going through the account. Mind you, at this point we are talking about money laundering and not tax evasion, and when it comes to money laundering the banks which handle the accounts and facilitate it are fully liable, too.

    Tax evasion is a matter at the level of the shell company and not at the level of banks. If the former PM of Iceland declared the assets and incomes of his Panamanian shell company to Icelandic tax authorities, then his dealings were perfectly legal (unless Icelandic law prohibits the ownership of such shell companies).

    The requirement for banks to exercise 'due diligence' with their customers is beyond doubt. Where there is uncertainty is whether the same due diligence is also required (and performed!) at the level of the shell company. Mossack Fonceca claim that they have performed such due diligence in all cases but the fact that they seem to have quite a few well known criminals among their customers would seem to contradict that. As always, there are undoubtedly serious managers of shell companies and the other ones as well.

    For the criminal to be successful, he needs to cross 2 bridges. First, he has to succeed to open a shell company somewhere and pass any due diligence there. And, secondly, the shell company needs to succeed in opening a bank account and, above all, to transact business through that account without catching anyone's attention.

    1. Klaus, I basically agree with you and your friend. The singling out of some players but not others felt a bit like a modern pillory, first time I stumbled across it. Not least if it is all solidly inside law. ... Besides, I guess there are a multitude of legal/economical tools that may or may not be used for matters beyond tax reduction only. Sometimes without the lawyer being fully informed, I would assume.

      Concerning the "PM of Iceland" not sure if there isn't a serious self-interest issue. Besides he is a public figure and thus has less protection according to our laws in media. Only an ethical moral issue connected to his office? Not completely sure in this case.

      Wikipedia: "Sigmundur Davíð did not disclose his fifty percent share of Wintris when he entered parliament in 2009. Eight months later, he sold his share to his wife for one US dollar.[16][17]"

      Another interesting tool no doubt are these types of sales figures, although yes not really among husband and wife. But recurring pattern too. Could they be used for legitimate sales to move assets. No doubt. Sometimes it made me wonder exactly if the specific leverage capital enterprise may have simply avoided the lime lights this way, somewhat parked to be returned later. ... The specific name and the business accounts were it surfaced no doubt was curious. ... Supposedly it was sold back with a huge loss, but overall I somewhat doubt. I really discovered this account only via allusions to a rather obscure business family. It was a random check, and there it was.

      His rise to prominence is no doubt interesting. I wouldn't have expected him to be a progressive:


      That said, I have watched an "ordinary" player with quite a bit of criminal energy not only in an obviously fraudulent case of bankruptcy, really. Had that been the case I wouldn't have stumbled across the Marbeilla Connection. In the larger context it felt legitimate and gray zone businesss somewhat merged.

      He was lucky enough to belong into the larger criminal network, it felt. Earlier the administrative clerks dealing with his business papers apparently were soundly asleep. He had sold his company twice first via the connection to be buried in Spain, then via an empty shell filled with the stroke of a pe using a different certifying notary to an earlier business partner.

      The two courts that handled matters hardly could spend too much time on every single actor. All he needed really was the former partner to testify he had not paid anything for the second sale. ... Besides on the surface at the time of the trial he was dependent on social security and could show the contract of a room where he never really lived. I seriously doubt even his lawyer knew all there was to know, although maybe he advised him early on, and he never really was in Spain as he claimed.

      Panama once again. Accident really, I didn't realize: