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The Panama Problem

by Ejaz Haider
File Photo. Adem Altan—AFP

File Photo. Adem Altan—AFP

Sometimes it is not law, but probity.

Let me begin with a disclaimer: I have no head for business. I know next-to-thing about finance and accounting, establishing companies, onshore or offshore, shell or the real ones. And while I know what an SUV is, I have no idea what SPVs or SPEs are.

I have biases, though, like everyone else. There are people, entities and things I like and there are people, entities and things I don’t like. As biases work, I am inclined to take as true that which supports my predispositions whether for or against. That’s a danger I have to constantly guard against and also fight.

The history of ideas, fortunately, disabused me somewhat early in life of grand ideas of reform and goodness. It revealed to me the paradox that governs human affairs, how, so often in human history, goodness has led to much evil and revolutions to much death and destruction—how, to put it simply, heterodoxies settle down into orthodoxies, recreating the same structures they once fought to bring down and how solutions throw up their own problems.

That study has had a salutary impact. I chuckle silently when I see enthused crowds and hear declarations of history in the making. The problem with history is that it has seen all already. It is jaded and cynical, lacking in all enthusiasm, Eliot’s Tiresias that perceives the scene and foretells the rest.

Now, to the subject at hand: the #PanamaPapers.

As the story goes, the law firm Mossack Fonseca, for nearly four decades, helped people around the globe to hide wealth. Indeed, it specialized in it. This is how The Economist put it: “Clients may want to keep money away from soon-to-be ex-wives, dodge sanctions, launder money or evade taxes. The main tools for doing so are anonymous shell companies (which exist only on paper) and offshore accounts in tax havens (which often come with perks such as banking secrecy and low to no taxes). These structures obscure the identity of the true owner of money parked in or routed through jurisdictions such as Panama.”

The 2.6 terabytes of data, we are told, “contain information about 214,500 companies in 21 offshore jurisdictions and name over 14,000 middlemen (such as banks and law firms)”. Phew! That’s a lot of data. Somewhere in there is also the name of the Sharif family, from which two happen to be the prime minister and chief minister of Pakistan and the Punjab, respectively.

Biases take over. Social media, especially Twitter, are abuzz with the news. Reactions differ, depending on whether you like or dislike the Sharifs. It does not matter that most “commentators”, like this writer, know nothing about how these things work, what is legal or illegal. If they did, they would probably not be commenting but wondering if the documents contain their names too. The mega-rich live in the secretive files of Mossack Fonseca. Others merely comment.

I went to a dear friend to get a sense of what this is about. He knows this stuff and I don’t like to comment until I have some idea of what I have to comment on: Are offshore companies illegal? Are tax havens outside the law, some grey area? Do the Panama Papers reveal if the wealth was ill-gotten or is the focus on the wealth being stashed abroad? What’s going on?

“It is not illegal. 90% of Fortune 500 companies have offshore companies,” said my friend. “Everything is done within the ambit of the law. Where it gets tricky is for shareholders and individuals pulling cash out of said entities and not declaring. Until the cash is held by the business it is totally legal. Google, Apple, Coke et cetera, all of them use offshore banking and entities to optimize taxation.”

“You wrote—‘Where it gets tricky is for shareholder and individuals pulling cash out of said entities and not declaring.’ How is/can that, if at all, be prevented? Also, would you agree that it becomes an issue of probity, more than law, for political leaders, as opposed to companies?”

“So, if a business gives a dividend to shareholders, it’s the shareholders’ duty to pay taxes. That dividend has to hit a bank account and taxes are paid in that jurisdiction. And yes it is problematic for the account holder to be a public official and if they are also businesspersons, it gets trickier.”

I then shared with my friend statements by Hussain Nawaz and asked him how he would quiz the prime minister’s son.

“I’d ask the prime minister why this isn’t on his tax return. Though he is not on the ownership structure, his children are. So, the question to them [Sharifs] would be, why haven’t they declared it. If they are paying tax in another jurisdiction how much? Do those jurisdictions have a tax treaty with Pakistan? What was the capitalization of those companies and how was it funded? If funds came from a Pakistani entity, did they have State Bank of Pakistan approval? If from a foreign entity, what was the source of the funds?”

My friend said that many other questions can be raised depending on where the investigations go. Forensic accounting, he said, is a science and numbers game, leaving little wiggle room for anyone.

I still do not understand much of this. But one thing is fairly clear to me: even if no laws were broken and technicalities met, for the prime minister of a country that can’t manage its economy, the problem goes beyond the issue of law. It lands in the domain of probity. You don’t do certain things not because doing them will break any laws, but because it will be bad form. Eating cake isn’t illegal but eating it in full sight of a man scrapping the bottom of a waste bin for leftovers would be terribly unbecoming.

Of course, we don’t know if any laws have been broken. I can’t comment on that because I neither have that information nor the expertise to do so. But an investigation is definitely in order. India has already ordered one. Meanwhile, it will do the prime minister well to leash his minions from declaring this to be a global conspiracy against the PMLN government. That is just laughable and makes it worse for him.

Haider is editor of national-security affairs at Capital TV. He was a Ford Scholar at the Program in Arms Control, Disarmament and International Security at the University of Illinois at Urbana-Champaign and a Visiting Fellow at the Brookings Institution, Washington, D.C. He tweets @ejazhaider

The opinions expressed in this column are the author’s own and do not necessarily reflect, in part or whole, those held by Newsweek Pakistan.

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