- ``The cat's out of the bag,'' says lawyer Jurgen Mossack
- Panama firm is at center of report on use of shell companies
For decades now, Jurgen Mossack and Ramon Fonseca have been the go-to guys in Panama for international investors looking to put their money in far-flung places.
But even before the world learned their names Sunday -- in reports that alleged their firm played a critical role in helping political leaders around the world move money offshore -- the lawyers knew their lucrative partnership had begun to fray.
During a four-hour interview last week, Mossack and Fonseca sounded like two men in retreat: the go-go days of cranking out shell companies en masse for clients were over; the firm’s been considering scaling back its international franchising; and Mossack was expressing frustration about how Fonseca’s political ambitions were earning them unwelcome scrutiny from regulators and the media. Just days earlier, Fonseca had stepped down as a special adviser to President Juan Carlos Varela, saying he wanted to focus his attention instead on the business.
“We are going to make ourselves the right size -- smaller,” Fonseca said. For the co-head of a firm that over the past few decades has helped revolutionize the way companies and wealthy individuals structure their investments across the globe -- and popularized the British Virgin Islands as a hub -- the statement marks a big drop in ambition.
Many of the details of Mossack Fonseca’s operations were revealed in a documents leak that the International Consortium of Investigative Journalists says showed how scores of celebrities and world leaders have been shuffling billions of dollars through banks and shell companies. (Bloomberg News is not part of the ICIJ consortium and was unaware of the leak when the interview was conducted on March 29.)
Among those who the ICIJ says used the firm’s services to help them stash money overseas are Argentine President Mauricio Macri, Ukrainian President Petro Poroshenko and associates of Russian President Vladimir Putin. Officials from those countries denied any wrongdoing, as did the law firm, which said in a statement over the weekend that it “does not foster or promote illegal acts.” It also refused to comment on any of the clients named in the reports.
On Monday, Mossack said in a phone interview that the leak stemmed from the hacking of the firm’s computers and that an outside sleuth had been hired to investigate. Fonseca told the Financial Times that he didn’t expect one legal case to arise from the reports.
‘da Vinci Man’
Of the two, it is Mossack, a 68-year-old man of German descent, who displays a keen mastery of the nuts and bolts of the business. He did most of the talking during the interview in their Panama City headquarters. The building is sleek, with a distinctive glass-facade, but looks diminutive amid the skyscrapers that dominate the financial district. Across the street is the iconic F&F Tower, a helix-shaped building that helped give the booming city its nickname “Dubai of the Americas.” As the two men spoke that morning, they were flanked by their legal director and two consultants. In all, the firm employs some 500 people in Panama and across the globe.
If Mossack is the nitty-gritty guy, Fonseca, 63, is the self-proclaimed dreamer.
He boasts that his friends have labeled him “a da Vinci man” for his interests in politics, law, business, letters and philanthropy. He’s penned a half-dozen novels over the years, and for a while as a young man had considered becoming a priest.
It was during his time as a bureaucrat at the United Nations in Geneva, where he was surrounded by international lawyers, that Fonseca said he was lured by the mysterious world of offshore businesses. “One day it occurred to me that I could do it too,” he said. “I created my little office and left the UN and started with one secretary to create and sell companies.” He’d join up with Mossack soon thereafter.
Like Selling Cars
Setting up offshore vehicles has become routine for corporations, investment funds, family offices and billionaires. Low- or no-tax jurisdictions offer places to base a company or to send and park cash, company shares, art and other assets. Establishing a structure for them typically costs just a few thousand dollars. Once those fees are handed over to shops like Mossack Fonseca, the organizational and operational framework for the entity is drafted and registered in the local jurisdiction. Annual fees are then charged to maintain the company.
While offshore holdings are usually legal, they can also be used to hide wealth. Since the 2008 financial crisis, Western governments have sought to shed greater light on offshore banking centers, arguing they can be used to avoid taxes or hide illicit funds.
In addressing the legality question, Mossack is fond of drawing an analogy to the auto industry. When you create hundreds of thousands of offshore companies, he says, some are bound to end up in the hands of rotten characters: It’s just the nature of the business and isn’t the fault of the manufacturer. He makes a reference to Volkswagen AG recalling some of its cars before one of the firm’s consultants suggests that isn’t the most appropriate parallel. The scrutiny that the partners are under, Mossack says, stems in part from all the success they’ve had over the years.
How Panama came to be a key stop in the offshore investing business is a story that dates back almost a century, to the years right after construction of the inter-oceanic canal was finished.
The Central American country was already becoming the flag of choice for ship-owners looking to avoid stricter labor and fiscal rules back home when Panamanian officials based their requirements for company incorporation on the laws of Delaware, a U.S. state that protects information on ownership. Panama doesn’t charge foreigners taxes on income earned abroad.
While the Financial Action Task Force recently commended efforts to clamp down on money laundering, the Organization of Economic Cooperation and Development calls Panama the "last major holdout that continues to allow funds to be hidden offshore from tax and law enforcement authorities." Panama’s presidential office said in a statement that it has zero tolerance for any legal or financial operations that aren’t managed with the highest levels of transparency.
Whether the new regulations are up to the OECD’s standards or not, the industry is feeling the squeeze, according to Mossack and Fonseca. A law implemented in 2011 required Panama-registered agents to provide client information when requested on all new incorporations, and the British Virgin Islands has adopted restrictions on due diligence.
The flow of business today is a far cry from the boom years, when Mossack said he and Fonseca used to keep a vast inventory of “shelf companies” on hand because banks would request as many as a hundred at a time. Like its peers in Panama, the firm is now seeking to diversify its business and push into other legal-service areas as well as asset management. This weekend’s document leak won’t help that effort.
"The cat’s out of the bag,” Mossack said. “So now we have to deal with the aftermath.”