WHO? WHAT? WHERE?

Two Sundays ago, the Washington, DC-based International Consortium of Investigative Journalists (the “ICIJ”) released the Kraken – 2.6 terabytes of data revealing an intricate web of asset holdings and possible links to cross-border corruption and crime. Dubbed the “Panama Papers”, the cache of 11.5 million documents dating back to 1977 comprise shareholder registers, bank statements, emails, contracts and passport scans, and involves more than 214,000 offshore entities.

An anonymous whistleblower had passed documents stolen from Mossack Fonseca, a Panamanian law firm, to a German newspaper, Süddeutsche Zeitung, which then shared them with the ICIJ, whose track record includes the recent Luxembourg and Swiss Leaks.

The tentacles of the Panama Papers reportedly extend to 12 current and former world leaders and 128 more politicians and public officials around the world. Russian President Vladimir Putin (through his close associates) reportedly lies at the heart of a network of secret offshore deals and loans worth US$2 billion. Iceland’s Prime Minister, Sigmundur Gunnlaugsson, accused of concealing millions of dollars in inherited money in an offshore company, has stepped down. Calls for the resignation of British Prime Minister, David Cameron, have started trending on social media (#resigncameron), as accusations of hypocrisy over his earlier campaigns for financial transparency have forced him to publicly disclose his tax returns. The Panama Papers showed that Ian Cameron, the PM’s late father, may have dodged taxes for 30 years through a Bahamas-based investment fund. A-listers in Hollywood and Bollywood have also been targeted, with Jackie Chan and Amitabh Bachchan among those named.

(The ICIJ website lists some “Power Players” that include China, Cambodia, India and, closer to home, Malaysia (https://panamapapers.icij.org/the_power_players/). Singapore is not listed.)

WHY?

You would think, from the huge media and public outcry, that the ICIJ report had exposed a worldwide conspiracy to re-establish the Nazi party, and the funds held in offshore Panamanian entities are intended to arm its disciples with nuclear weapons.

In fact, what the papers have disclosed thus far is that quite a lot of people, some of them well-known and in positions of high influence, own assets through offshore vehicles. Quite a lot of assets, it’s true, but that’s pretty much it.

The papers have not indicated if these assets were improperly obtained, although one must ask how an ex-KGB officer (no matter how hardworking), now the President of Russia, could have gotten involved in billions in assets just from his day job.

Let’s be clear: using offshore entities is not illegal. People set up BVI companies, establish Bermuda-based funds and hold ships through Panama-incorporated entitles all the time. Very often, these are for tax reasons. Tax avoidance (ie. the proper planning of your affairs to reduce corporate tax and estate duty, for example) has a long and unmolested history; it is the unlawful evasion of taxes that is an offence.

Until the Global Financial Crisis, when the common taxpayer had to bail out banks that were Too Big to Fail, and the world discovered just how much some of these banks’ top executives were being paid, no one thought twice about the tax planning. Since the Lehman crisis and the baying for transparency across the globe, large corporates like Amazon, Google and Starbucks have been taken to task for siting much of their business activity offshore to minimise taxes. Politicians have jumped onto the bandwagon, scoring popularity points by ranting against these companies. Some of these same politicians are now among those named in the Panama Papers leak.

WHAT NOW?

It is perhaps not so much the fact that monies were being held through offshore vehicles that is causing consternation; the real impact of the Panama Papers leak is the disclosure of the sheer scale of these offshore “hidden” holdings.

Quite apart from whether there has been any wrongdoing (for instance, if any of the monies were wrongfully obtained, or if any of the assets should have been publicly disclosed), which still remains to be seen, perhaps the real reason for the Panama Papers uproar is that the organisation of capital in tax havens perpetuates one of the key challenges of our time – income inequality.

It has been widely reported that the top 1% of the world’s richest individuals control as much wealth as the rest of the world combined. It was also recently estimated that US$7.6 trillion of individual wealth, more than the combined GDP of the United Kingdom and Germany, is currently held offshore. As Reserve Bank of India governor Raghuram Rajan noted at the recent Singapore Symposium 2016, where a whole section of people feel that they do not have the same opportunities, the focus turns to those who do and the legitimacy of such wealth stashed in offshore tax havens. Could an argument be made against offshore financial activity from a perspective of fairness and equality?

Celebrated French economist, Thomas Piketty, argues that tax evasion persists because of the “illusion that the problem will be resolved on a voluntary basis, by politely requesting tax havens to stop behaving badly”. He pushes for the imposition of heavy sanctions on non-compliant jurisdictions.

But not all tax friendly jurisdictions are non-compliant. Singapore could not have developed into a fund management and private wealth hub without offering a suite of sophisticated financial solutions. But we are rightfully also credited with being a squeaky clean economy where transparency is prized. It is perhaps our nation state’s willingness to embrace innovation in financial products, while rigorously pursuing enforcement, that has brought about this success.

Tax planning is a fundamental pillar of the capitalist economy. The rational and efficient investor should be able to deploy his assets in a way that minimises his tax burden. If the Panama Papers leak has taught us anything, let it be this: Vilifying offshore vehicles is a red herring exercise; the real villains here are corporates who understate the amount of value-added work done to their products in tax-generating states to evade tax, rogue nations whose opaque laws encourage such wrongdoing, and politicians who score points with their tirades while happily pocketing the financial benefits of the very schemes they decry.