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Henry Farrell Shares Primer on Panama Papers Leak

April 07, 2016 by Andrew Young

This week Network member Henry Farrell provided a rundown of “what you need to know” about the Panama Papers scandal for _The Washington Post’s _Monkey Cage blog. The International Consortium of Investigative Journalists is in the process of releasing 11.5 million documents from Mossack Fonseca, a law firm based in Panama that “specializes in setting up shell corporations that can be used, for example, by people looking to hide their money from the taxman.”

Although Panama has become a “notoriously friendly jurisdiction toward dubious tax-avoidance strategies,” Farrell notes that the reality of where tax havens operate and how is more complicated:

“As political scientists Ronen Palan, Richard Murphy and Christian Chavagneux document in their comprehensive ‘ Tax Havens: How Globalization Really Works,’ tax havens — countries such as Panama that make it easy for people to avoid taxes — are an “integral part of modern business practice.” However, over the past two decades, the United States has done a lot to make life difficult for tax havens. The United States was the main actor pushing a set of OECD principles and an associated effort to ‘blacklist’ countries that refused to adopt them. It also helped set up the Financial Action Task Force which adopted a similar approach to blacklisting. Finally, the United States has taken unilateral action against, for example, Swiss banks to encourage the government to change its rules.”

“Even though the United States pushed the OECD principles, it has not itself adopted them. Instead, it adopted its own legislation, which resembles the principles except in one crucial respect — it does not provide automatic reciprocity in providing information. This has led to a booming new business in the United States — wealth management businesses and law firms, who are advising foreign clients to put assets in the United States, where they can hide them from their own governments.” He concludes: “Life may be becoming a little more difficult for tax evaders. However, it won’t be nearly as difficult as it ought to be until rich countries such as the United States start complying with the rules that they demand that other countries adopt.”