Offshore Havens

Panama Leaks Spark Reform Calls

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Panama City has grown into an international hub for offshore finance. Thanks to a booming business providing legal but opaque shell-companies to international investors, the city has grown -- and with it the gap between rich and poor.
  • Why it matters

    Why it matters

    The German government said it would press for new legal restrictions on anonymous off-shore banking in the wake of the Panama Papers disclosures. Meanwhile, two German banks named in the report defended their actions in helping clients set up shell companies in the Central American tax haven.

  • Facts

    Facts

    • German government officials said they wanted to create a “national transparency register” that listed the true owners of offshore firms to help thwart illegal money-laundering and tax evasion.
    • Deutsche Bank and Berenberg Bank, the two German banks listed in the Panama data disclosed by a Munich newspaper, defended their customers’ offshore businesses as legal and fully monitored by authorities.
    • An unnamed former Siemens executive reportedly controlled up to €40 million in corporate money in Panamanian shell companies used to pay illegal bribes to win engineering contracts. When the bribery scandal was exposed in 2006, almost €3 million of the money in Panama was not returned to Siemens, the Panama Papers leak revealed.
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The release of the “Panama Papers” has prompted German politicians to renew calls to crack down on international tax evasion and money laundering by creating a “national transparency register” for offshore shell companies. But German banks named in the papers, including Deutsche Bank and Berenberg Bank, defended their actions. They say dealings with offshore transactions are above board and tightly monitored.

The Munich-based newspaper Süddeutsche Zeitung gained access to what it said was a trove of documents relating to a Panamanian law firm that specialized in setting up anonymous offshore financial deals. The data was shared with the International Consortium of Investigative Journalists, and media outlets worldwide published the findings on Sunday.

The information haul, which the newspaper said had been leaked by an unknown source, contains 11.5 million documents, some dating back nearly 40 years, and details the activities of 214,000 offshore firms set up in Panama.

Among the individuals named in the documents are associates of Russian president Vladimir Putin, the prime ministers of Iceland and the Ukraine, global sports stars and senior members of FIFA, soccer’s governing body.

With 2.6 terabytes of data, the leak is far larger than comparable releases by Wikileaks in 2010, or the 2014 LuxLeaks revelations about Luxembourg’s tax policy.

“We hope the debate following the Panama Papers will turn up the heat.”

Martin Jäger, Spokesman for the German Finance Ministry

Reacting to the release, the German government said it planned to amend its laws to force offshore companies to disclose their true owners, instead of the nominal local owners appointed in Panama and elsewhere as local representatives. Speaking to the Süddeutsche Zeitung, the German federal justice minister Heiko Maas said: “The culture of secrecy has to end.”

Mr. Maas, who is a member of the center-left Social Democratic party, said transparency was “an important element of the fight against tax evasion and the financing of terrorism.”

Finance Minister Wolfgang Schäuble, a member of the center-right Christian Democrats, has long pressed for a crackdown on shadowy financial transactions. Mr. Schäuble’s spokesman, Martin Jäger, said he “hoped the current debate will turn up the heat” on the issue.

The German government plans to raise the issue at meetings of the International Monetary Fund and the World Bank, Mr. Jäger said. He characterized recent progress as good: “More has happened in the last three years than in 30 years previously.”

 

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Deutsche Bank and Berenberg Bank, a private bank based in Hamburg, were both named in the Panama Papers as helping clients set up offshore accounts. The banks both defended their actions in Panama, a notorious tax haven seen here at dusk, saying their customers used the accounts for legal purposes. Source: Getty Images

 

Sigmar Gabriel, the head of Germany’s Social Democrats and the country’s vice chancellor, condemned the culture of financial secrecy in strong terms.

“We have to outlaw shell companies worldwide,” he said.

Speaking to Süddeutsche Zeitung, he condemned the “greed of the super rich and the unscrupulousness of the banking and financial sectors.” It was also a question of security, Mr. Gabriel said, adding the Panama disclosures showed how U.N. sanctions and anti-terrorist laws can be easily circumvented.

In an interview with Handelsblatt, Norbert Walter-Borjans, the finance minister of the state of North-Rhine Westphalia, which has pioneered the purchase of leaked banking and financial data to identify and prosecute tax evaders, said E.U. states need to do more to combat fraud. He called on the British Virgin Islands, a British territory famous for its anonymous financial arrangements, to make good on its promise to reform its ways.

Mr. Walter-Borjans called for more international and European cooperation to combat fraud.

“My impression is that investigative journalists have had more effective international cooperation than states have,” he said. New E.U. rules will establish a central registry of offshore companies, including the names of real owners, known as “beneficiary owners.” But this will not come into effect until June 2017.

But some in Germany warned against a knee-jerk reaction to the treasure trover of data. Clemens Fuest, head of the Munich based Ifo research institute, told Handelsblatt that offshore firms, as murky as the subject may be, do have their uses.

“To ban offshore firms generally I would consider counterproductive. There are good economic reasons to use such firms, for example to avoid double taxation,” Mr. Fuest told Handelsblatt, noting that even state-backed banks like the European Investment Bank have taken advantage of offshore platforms for their investment projects. “They don’t have an interest in tax evasion.”

Instead of an outright ban, much of the talk about legal reforms has focused on transparency. Attention also focused on the role of German banks in setting up anonymous shell companies overseas.

As well as German subsidiaries of some Swiss banks, two German banks – Deutsche Bank and Berenberg, a private bank, were named in the Panama documents. Deutsche Bank said it had helped customers set up offshore companies and will continue to do so. But a bank spokesman said it “was fully aware of the significance of this matter” and the institution’s internal protocols had been tightened to ensure laws were obeyed.

Berenberg, which is based in Hamburg, said the offshore services it offers are legal. The bank conducts the business through a Swiss subsidiary. Berenberg said it knew the beneficial owners of accounts it helped set up. “Economic beneficiaries and their agents were constantly monitored, via dedicated compliance databases,” the bank said in a statement.

“My impression is that investigative journalists have shown more effective international cooperation than states have.”

Norbert Walter-Borjans, Finance Minister, North-Rhine Westphalia

In recent years, German banks such as Commerzbank, Hypo-Vereinsbank, a Munich unit of Italy’s UniCredit, and HSH Nordbank, were all forced to pay millions of euros in fines for helping customers set up offshore accounts, which were used to evade German income tax.

Landesbank Baden-Württemburg, the biggest of six state-owned German regional banks, has also been investigated because of the activities of a former Luxemburg subsidiary. The company issued a statement Monday saying it had passed all the information it had to the German authorities, and that “any action against the letter or the spirit of the tax laws” by its customers was unacceptable.

The bank “had no dealings with customers who contravene this principle,” the bank’s statement asserted. But news reports in Austria raised questions about money transfers through Vorarlberg Hypo, which is partly owned by LBBW, under which Russian money was moved to Panamanian shell companies.

Siemens is the most prominent German non-banking business named in the Panama Papers so far.

Mossack Fonseca, the Panamanian law firm at the center of the scandal, was involved in administering Siemens bank accounts used in a bribery scandal that came to light in 2006. Siemens had been using a slush fund network of accounts containing up to €40 million to pay illegal bribes to to win engineering contracts. The affair cost the company more than €2 billion in fines and legal costs, and many senior management figures were forced out.

It is well known that Siemens once had Panamanian accounts, but the new leaks seem to indicate that not all the money was returned to the company. Bastian Obermayer, a Süddeutsche Zeitung reporter familiar with the leaked data, told an Austrian journal Falter it appeared that “some of the money, at least, was siphoned off.”

According to the Süddeutsche Zeitung, nearly €3 million of the €40 million was siphoned off to private bank accounts and not returned to Siemens after the bribery scandal became public. Siemens will investigate and could take action against some former managers, one person at the company who was not named told the newspaper.

 

Donata Riedel, Katharina Slodczyk, Michael Brächer, Volker Votsmeier and Axel Höpner are Handelsblatt editors who cover international finance, taxation, companies and financial regulations, among other topics. Ruth Berschens is Handelblatt’s correspondent in Brussels. To reach the authors: riedel@handelsblatt.com, slodczyk@handelsblatt.combraecher@handelsblatt.com, votsmeier@handelsblatt.com and hoepner@handelsblatt.com.

 

 

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