 "Amitabh Bachchan")
In an incredible work of co-ordinated investigative journalism, The Investigative Consortium of Investigative Journalists (ICIJ) and The Indian Express newspaper have unravelled the world of offshore accounts.
More than 11.5 million documents totalling 2.6 terabytes of data were obtained by ICIJ — emails, bank accounts and client records — which represent the inner workings of Mossack Fonseca, the Panama-based law firm which specialises in hard-to-trace offshore companies for clients around the world who, in most cases, do not want their entity to be revealed.
The data that was scanned was for a period of forty years – from 1977 to December 2015. It reveals the offshore holdings of individuals and companies from more than 200 countries and territories.
So what do the Panama Papers reveal and is there a case of fraud or money laundering involved? We take a stepwise approach in trying to understand the Panama papers.
The Firm: Mossack Fonseca
A Panama-based legal firm, which ICIJ likes to describe as gatekeeper to the secrets of its clients, even those who are crooks, mafioso, drug dealers, corrupt politicians and tax evaders. Mossack Fonseca is considered one of world’s five biggest wholesalers of offshore secrecy. It has more than 500 employees and collaborators in more than 40 offices around the world, including three in Switzerland and eight in China.
Modus Operandi
The law firm helped clients clandestinely create a maze of accounts and front entities to prevent a trace for the money they want to hold in tax havens. It helped clients respond swiftly to changes in laws, shifting business from one secret jurisdiction to another. Mossack Fonseca has been accused of providing structures designed to hide the identity of the owners.
According to ICIJ, the real owners of bank accounts that appear under the name of anonymous offshore companies registered by Mossack Fonseca may be hidden behind so-called nominee directors — stand-in directors supplied by Mossack Fonseca — who provide cover for the real owners.
Depending on how much a client pays, more than one jurisdiction and more than one anonymous company can be involved, adding to the frustration of authorities if they try to trace the real owners.
In Panama, Mossack Fonseca’s products include private foundations, which are not subject to taxes in Panama and operate under a law that does not require the names of the founders or beneficiaries to be revealed.
Other activities found in the files by ICIJ include Mossack Fonseca changing and backdating documents when a client is in trouble and allowing customers to hide their assets by setting up foundations in Panama that initially list non-profits such as the World Wildlife Fund as the beneficiary but allow the customer to change the beneficiary at will.
The Indian angle
Among the many personalities involved worldwide more than 500 Indian names have also been featured in the list of people who have taken the services of the law firm. Among them are Bollywood superstar Amitabh Bachchan and his daughter-in-law Aishwarya Rai Bachchan; real estate mogul K P Singh, promoter of DLF; two politicians – Shishir Bajoria and Anurag Kejriwal; and the erstwhile don Iqbal Mirchi.
Around 36,000 files were filtered out from the 11.5 million documents by The Indian Express team which contain 500 Indian names on the firm’s list of offshore companies, foundations and trusts. There are also 234 Indian passports details that were handed over as part of the incorporation process which the journalists extracted.
Need for offshore entities
Because of the high tax structure in India, some Indians who earned foreign income preferred to keep their money abroad. But individual Indians were not allowed to convert their rupee to foreign currency and invest abroad prior to 2004 as per RBI guidelines. Companies however, were not bound by this rule and were able to buy out companies abroad after taking requisite permissions from the central banker and the government.
Since individual Indians were not legally allowed to open bank accounts abroad or buy assets they needed a structure to do so, where the money or the asset is not under their name but is held by some other ‘trusted’ person holding a power of attorney (POA). The law firm Mossack Fonseca provided the ‘trust’ element on account of its size and standing in the market, being among the top five in the business.
How RBI’s lack of clear guidelines resulted in mushrooming of offshore entities
RBI guidelines till 2004 were very clear: no individual could convert money and invest abroad. Since RBI did not allow individual Indian to take their money out of the country or invest in assets abroad till 2004, anyone who has opened an account in any of the tax haven prior to that is prima facie in violation of the law as defined at that time.
However, in February 2004 RBI allowed $25,000 (steadily increased to $250,000 presently) a year to be taken outside India under the Liberalised Remittance Scheme (LRS) by those going abroad, but it did not specify the purpose where it ‘cannot’ be used. RBI said that the money can be used for medical expenses, donation, college fees and even buying and selling shares.
An Indian Express explainer video says that the confusion arises when buying of shares was interpreted as buying in shell companies which are used as investment vehicles. Mossack Fonseca was in the business of selling shares of shell companies.
It took six years for the central banker to issue a clarification which came in September 2010 when it clearly said that Indian individuals cannot set up companies abroad. This was interpreted by ‘experts’ who advised the individuals that though you cannot set up companies abroad, you are allowed to take over companies. Mossack Fonseca’s services again came in handy as it had a product where it sells shell companies off the shelf.
Finally, in 2013, the RBI came out with a notification allowing a window for setting up a 100% subsidiary or allowing to enter into a joint venture through an overseas direct investment (ODI) window.
The Indian Express video says that a RBI notification says that those individuals who set up companies abroad prior to 2013 were in ‘technical’ violation of the rules of LRS.
The fraud angle
What is clear is that anyone investing before 2004 is in violation of the act. As per RBI notification, those setting up or buying companies before 2013 are in ‘technical’ violation of the act.
However, the key to the entire Panama Papers is the disclosure element. If individuals have kept the central banker and the government of their investments abroad through these companies, then there is a weak case. But if the authorities were not informed of the assets held abroad then there are various acts that are triggered, such as the money laundering act and FEMA, among others.
Indian individuals earning income abroad too need to disclose it to Indian government authorities. If they have used the vehicles provided by law firms like Mossack Fonseca to hide their earnings they are clearly evading taxes and should be prosecuted.
The important point going forward is to look out for those individuals whose names have been provided by ICIJ and The Indian Express is to find out if they have disclosed their assets to the government. If not, then we have a tax evader.
