Panama Papers reveal how world's wealthy hide their cash

The world’s rich and famous have two choices when it comes to their overflowing wealth: Leave the money at home where it’s subject to local taxes, or start an offshore company where the money can change hands or accumulate in secret.

According to the investigative journalism project now known as the Panama Papers, which resulted from a huge data leak to German newspaper Süddeutsche Zeitung, the latter is commonplace among global leaders, as well as terrorist financiers and drug cartel bosses.

Countries around the world, such as Switzerland, the British Virgin Isles, and Panama, serve as “tax havens,” where people can stash their cash with anonymity and little tax liability. Panamanian law firm Mossack Fonseca, at the heart of the Panama Papers scandal, is one conduit for offshore shell companies, sometimes setting them up for as little as $1,000. Findings from the leaked data now link Russian President Vladimir Putin, Chinese officials, the president of Azerbaijan, the prime minister of Iceland, and others to clandestine offshore companies.

Condemnation and outrage has been swift.

French Finance Minister Michel Sapin announced his country would again blacklist Panama for its tax haven activities. Amid angry protests in the capital city of Reykjavik, Iceland’s prime minister, Signumder Gunnlaugsson, stepped down. But the man featured most prominently in the data leak shrugged off the revelations as an unwarranted personal attack: Putin’s spokesman called the Panama papers “nothing else but a reflection of an overwhelmed Putiniphobia disease.”

Mossack Fonseca has denied claims it helps hide ill-gotten gains, calling those accusations “mischaracterizations” by media relying on a lack of public knowledge about the company.

“We are responsible members of the global financial and business community,” company officials said in a statement. “Our due diligence procedures require us to update the information that we have on clients and to periodically verify that no negative results exist in regards to the companies we incorporate and the individuals behind them.”

But 400 journalists from around the world, who spent more than a year poring over 11.5 million leaked documents, determined secrecy was the main goal of most company owners doing business with Mossack Fonseca.

More than a year ago, an anonymous source calling himself “John Doe” reached out to Süddeutsche Zeitung in an encrypted chat message asking if the paper was “interested in data.” When asked why he was offering the documents, the source responded, “I want to make these crimes public.”

The internal Mossack Fonsecka emails, PDF and photo files, database excerpts, and other files amounted to about 2.6 terabytes of information. By comparison, the offshore leaks of 2013 that pointed fingers at Chinese President Xi Jinping, a major bank in Denmark, the Finnish postal service, and even movie star Paul Hogan, reached only 260 gigabytes—one-tenth the amount of information. The 2010 United States diplomatic leak known as Cablegate totaled 1.7 gigabytes.

Overwhelmed, Süddeutsche Zeitung enlisted the help of the International Consortium of Investigative Journalists (ICIJ). Soon, teams from the Guardian, the BBC, Le Monde, La Nación and McClatchy joined the effort to tackle the project.

Lead journalist Bastian Obermayer said the data from Mossack Fonseca contained a folder for each of 240,000 companies.

“And you basically have to look at every single folder,” he said. “But that’s impossible because it takes too long.”

Instead, the researchers did general searches.

“We’re looking for topics, and we’re looking for people that we’re interested in who might be a topic themselves because they’re in the public eye or hold public office,” Obermayer said. “Or because they’re important executives.”

If a name like Putin came up dry, the researchers looked for hits on first, second, and third-tier associates. Classical Russian cellist Sergey Roldugin, a personal friend of Putin, appeared in the documents as owner of offshore companies worth millions of dollars. One of his companies allegedly captured a large portion of a Russian truck manufacturer, while another held majority shares in Russia’s TV advertising industry.

“He’s a normal, unassuming musician,” said another lead journalist, Frederik Obermaier. “But this normal, unassuming musician, who apparently isn’t involved in business, and especially not in business that Putin is any part of, is suddenly linked to transactions worth hundreds of millions. And that’s where we need to ask ourselves: How does a musician end up with so much money?”

Sometimes a world leader’s name did appear, as in the case of Iceland’s Gunnlaugsson. Understanding his resignation requires the backdrop of the Nordic island’s financial collapse in 2008, following the default of three of its leading banks. Empowered by offshore shell companies set up in part by Mossack Fonseca, the banks gave each other paper loans worth hundreds of millions of dollars to boost their stock prices.

“Without these shell companies, the fraudulent dealings that inflated the bubble could probably have immediately been exposed,” according to a report by Obermaier and Obermayer.

The financial collapse that followed wracked the nation: The stock market fell 90 percent and unemployment rose by a factor of nine. Iceland’s parliament enacted a new regulation requiring members to disclose company shareholdings of more than 25 percent.

Gunnlaugsson broke regulations and Icelanders’ trust by keeping his own offshore company, Wintris Inc., a secret. Set up by Mossack Fonsecka, the company is worth millions of dollars. In 2009, he sold his 50 percent share to his now wife, Anna Pálsdóttir, for a dollar. Pálsdóttir claims she manages the offshore company, but that didn’t stop 22,000 protesters from flocking to the capital city demanding a new election.

Some 33 offshore companies set up by Mossack Fonseca are owned by individuals or groups blacklisted by the United States Office of Foreign Assets Control, according to ICIJ. Three of those companies apparently supplied fuel for air raids orchestrated by Bashar al-Assad’s Syrian regime, killing thousands of civilians.

Other Mossack Fonseca companies fund drug cartels in Mexico, Guatemala, and Eastern Europe. Others fund nuclear activity in Iran and North Korea and supply arms in southern Africa.

Prominent Americans are conspicuously absent from the list of names gathered from the Panama Papers. The 200 Americans who appear in the data leak include low-profile Ponzi-schemers, large-scale investors, and real estate moguls.

One U.S. citizen, Benjamin Wey, was indicted last year for securities fraud. The former president of New York Global Group allegedly used Mossak Fonseca shell companies to hide his transactions.

“Victim shareholders were left holding the bill,” an FBI official said at the time.

But the Panama Paper revelations are far from over. Süddeutsche Zeitung and ICIJ plan to continue releasing stories based on findings from the documents.