Do the Panama Papers dwarf the Panama Canal?

The Panama Canal was launched in 1914 and has helped trade grow. But over the last few years, law firm Mossack Fonseca may have helped built another canal via Panama, one that's punctured the global response to shadow financing and tax evasion. This one needs to be plugged. Photo credit: Cnet

Until a few weeks ago, the Panama Canal was the only thing that defined the country for a lot of people, but today people are likely to know more about it – unfortunately not so much about it’s beaches or music, but a lot more about Mossack Fonseca, a law firm based in Panama, and its murky deals. This firm seems to have drawn a lot of inspiration from the canal as it built another kind of a canal through which it helped many rich and powerful people hide money (read tax evasion) and also contributed to and shielded the world of shadow financing. Here’s a game to show how easy they made tax evasion appear. There goes a lot of your not-there-yet soft power Panama!

So, Panama Papers! Why is this important now? Haven’t we known that these activities have been happening? Here are some thoughts on why the leak, the thorough investigation and the timing may well be a game-changer. And here’s more information from the direct source. All put together, it helps deconstruct the (secret) global phenomena of shell companies, tax evasion and war financing and to then publicly construct and prove the links between them.

Proof is Power: Well, yes we have known about the existence of shadow financing, but we’ve never had so much data and information about who these people are, who is helping them and how is the money trail being developed. Knowing something exists and having proof about its existence are two different things, and without the latter, the former cannot translate into sustainable impact. It’s significant because not only does it again blow the lid off on the world of shadow financing and tax evasion, but also because it helps build strong legal cases to nail culprits.

Another Wake-up Call: It’s also another warning that the current domestic and global system are not really working well. It’s a reminder to push for further domestic tax reforms and for greater global collaboration on exchange of related information. It’s a strong nudge towards signing more treaties on tax transparency and enforcing them because the existing institutions for information exchange are caught up in too much of red tape as well. Perhaps, the bureaucracy is what’s adding to the inefficiency. Also, it’s reminder that secrecy is far more valued in monetary terms than transparency – that capitalism tends to side with secrecy until regulated.

Tip of the Iceberg: There’s a graph that’s popular on social media. This is what it looks like.

So clearly, while this revelation is big, we’d do better not to forget that it’s just be the tip of the iceberg. Economist Gabril Zucman estimates that tax losses due to shadow financing and offshore banking and investments total up to be about $200 billion per year, that’s almost four times Panama’s national income. "We may only be scratching the surface then," as Zucman puts it.

It’s an Industry: Another thing the size of the leak – over 2,600 GB of data – confirms is that this isn’t about malpractice by a firm, but it’s about the hidden industry of shadow finance and tax evasion. This is an industry that now, like many others, is global. Technology has made things easier for it and law has just not kept up. It’s an industry that draws large capital too and this makes states also reluctant to take active and immediate steps to block it. Political will is not that easy to garner when it comes to cutting off a serious flow of money. That’s one reason why big states like the US too have not acted as fast on the issue – that’s why Delaware has more registered companies than residents. It thrives on secrecy and the more data that goes public about it, the better. That’s how you beat secrecy, right? Go public with all the information. Of course, validate that information too as you take on the industry. That’s why this investigation by the International Consortium of Investigative Journalists in collaboration with so many other publications around the world has taken over eight months. Great work ICIJ! A clear sign that there needs to be planned and collaborative response to the industry.

A Big Link to Peace: There’s been lots of talk about stopping financing to warring sides, terrorist organisations and rogue militant outfits. Well, not all of that has succeeded despite some firms linked to transferring money to major stakeholders in the Syrian conflict for instance being blacklisted. Why? Well the Panama Papers also describe that money trail. It’s all through shadow financing that money gets delivered to these banned, dangerous entities. It’s a big-big link then to peace and to ensuring that you hold power when negotiating peace treaties. With more data going public, more governments can be pressurised to act on those companies and more governments can come together to block these money trails and to dry those treasuries. War is an industry and this is where some of its exchequer is filled. Again, the Panama Papers may provide the missing evidences that can help legally tie the financiers, the middlemen and the final culprits to bring them to justice and to curb organised war and violence.

The Iron is Hot: This may well be one of the most important part about the Panama Papers revelation – its timing. About 15-20 years ago, this may not have created enough noise, but this time perhaps, there’s hope that it can grow into a silent revolution that forces reform. What’s changed? Well, since the late 2000s we’ve never really in totality gotten out of the financial crises. From the US sub-prime collapse to the PIGS economic downturn that’s still on, there’s more economic inequality in the world today, then there was before. But now, we have the Internet as a medium to get information out to people and to mobilise over issues.

This time around, there’s bound to be greater public interest in the revelations because they care – while many are affected by this economic inequality, others are losing patience with not insufficient action against tax evaders. In India there’s the case of Vijay Mallya who’s fled the country and is wanted for not paying loans worth billions. Elsewhere, there’s interest because other big players are involved and black money is a vital issue in all places, especially with elections in the US this year and poll promises of fighting corruption in other countries by national leaders like Indian Prime Minister Narendra Modi and Chinese leader Xi Jinping. They are being pushed to deliver and the boundaries of the discourse are being widened. This time around, we could certainly see some real impact because tax evasion has become a real subject in politics.

That’s why these revelations matter and why the work done by the consortium and other journalists is highly commendable. If there’s a whistleblower involved, well thank you. You’ve all helped deconstruct and publicly construct again the world of shadow financing. It’s a big nudge towards further reform and action, and this time around, with greater public interest, this may well change the balance, bit-by-bit and this Panama Canal may be plugged. But how the others are exposed and handled is another big challenge.