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The Paradise Papers Hacking and the Consequences of Privacy

Last month, the international law firm Appleby announced it had been the victim of a hacking and that information on its clients was in the hands of the International Consortium of Investigative Journalists, the news gathering organization that broke the story of the Panama Papers in April 2016.

On Sunday, material from that hacking became public. The Paradise Papers exposed the hidden financial dealings of Commerce Secretary Wilbur Ross, Queen Elizabeth and the athletic apparel company Nike, among many others. As revelations about tax-dodging airplane purchases and secret Russian ownership in tech companies came to light, Appleby declared that it takes its clients’ confidentiality seriously and billed itself as “not the subject of a leak but of a serious criminal act.”

In an age in which personal consumer data is routinely plundered for profit, it’s smart public relations for law firms like Appleby and the tax havens in which their clients hide their assets to present themselves as victims of a global crime epidemic. There is also genuine belief operating here. Jürgen Mossack and Ramón Fonseca, the founders of the law firm whose hacked files formed the heart of the Panama Papers, described their work as safeguarding their clients’ fundamental right to privacy in their financial affairs. Mr. Mossack and Mr. Fonseca insisted that when their customers asked them to set up hundreds of thousands of anonymous companies, trusts and foundations, it too was in the interest of privacy.

However, in the world of offshore finance, privacy long ago became a corrosive secrecy.

Appleby is a major player in a global offshore industry that helps multinational corporations and the mega-wealthy legally move money beyond the reach of the taxman through a network of tax havens and secret financial centers. As a lawyer at Mossack Fonseca candidly wrote in a confidential internal memorandum, “95 percent of our work” is “selling vehicles to avoid paying taxes.”

The amounts involved are staggering. An estimated 8 percent of household financial wealth is held offshore, representing a loss in annual global tax revenue of about $190 billion. But this pales in comparison to the tax avoidance and tax evasion by the large multinational companies that use this system. All told, more than $7.6 trillion may well be hidden in tax havens around the world, according to Gabriel Zucman, an economist at the University of California, Berkeley, who studies the issue.

In Congress, Republicans promote lower tax rates for American corporations even as companies employ the offshore system to pay little tax on billions of dollars in profit. This uncomfortable reality is not the focus of the tax debate in part because firms like Appleby help keep these activities secret. The public is simply unaware.

Meanwhile, there is the torrent of illegal cash that washes through tax havens and secret bank accounts — cash that is often put to illicit use, from bribing public officials to arms trafficking. The research and advocacy organization Global Financial Integrity has estimated that transnational criminal activities account for $1.6 trillion to $2.2 trillion annually. And laundered money represents 2 percent to 5 percent of global G.D.P., according to a recent report by the European Parliament.

The right of privacy keeps this underground river of money secret, but its existence has real-world consequences. Tax avoidance robs governments of funds to pay for education, health care and infrastructure. Prices for homes in New York, Miami, Los Angeles, London and other cities have spiraled beyond the reach of most residents because the global elite, often hiding behind anonymous companies, parks cash in them. And the corruption it enables is a major factor in the persistence of dire poverty in resource-rich regions like Africa.

Last week, the special counsel Robert Mueller indicted Paul Manafort, the former chairman of Donald Trump’s presidential campaign, on money laundering charges. The indictment charges that Mr. Manafort used offshore Cypriot companies and overseas bank accounts to disguise payments from a foreign government and bring the money into the United States. Even after scrutiny by one of the most high-powered teams of prosecutors and investigators ever assembled, it’s still not clear how many millions of dollars passed through these various channels. “Manafort’s financial holdings are substantial, if difficult to quantify precisely because of his varying representations,” Mr. Mueller stated in one legal filing.

With the offshore world so expansive and so in need of transparency, it often falls to journalists and those with access to leaked data to shine light on these secret dealings. Privacy is not an absolute right when the public interest is at stake. And so, journalists must face a difficult question before seeking to publish information that comes from hackers or other unauthorized leaks: Does this information directly affect the well-being of society?

When it comes to the secrecy world, which caters to the moneyed elite and the politically powerful, the answer is often yes. Still, the Mossack Fonseca documents in the Panama Papers were full of confidential information about people who broke no laws. The exposure of this information did not meet a public interest test. Despite complaints by WikiLeaks and other advocacy groups that the International Consortium of Investigative Journalists should have posted all the Panama Papers material online, the organization never seriously contemplated such a move.

What it has done instead is create the world’s most extensive online database of offshore company names, directors and shareholders. This database is about to grow significantly thanks to the Paradise Papers revelations, which include information from 19 corporate registries held by tax havens. The consortium has created a resource that shines a light on shadowy activities that undermine the rule of law and the norms of public responsibility. In this way, a flag has been planted on the boundary between privacy and secrecy.

Op-ed published in the New York Times on Nov. 7, 2017

Jake Bernstein, a senior reporter for the International Consortium of Investigative Journalists in the Panama Papers investigation, is the author of “Secrecy World: Inside the Panama Papers Investigation of Illicit Money Networks and the Global Elite.

EU Committee Report on Panama Papers

It’s worth a quick revisit to the recent work on the secrecy world by a European parliamentary committee. Formed in the wake of the Panama Papers revelations, the committee approved its final report after an 18-month investigation.

A vote on the report by the full European Parliament in Strasbourg will come in December. The conclusions won’t change but the recommendations are likely to be weakened. There are simply too many powerful interests that favor the status quo.

Nonetheless, the battle lines are drawn.

The report by the Committee of Inquiry into Money Laundering, Tax Avoidance and Tax Evasion (PANA) is damning. It concludes that $2.6 trillion of financial private wealth in Europe is held offshore, leading to tax revenue losses of $78 billion annually. The report also estimates that money laundering accounts for around 2% to 5% of GDP worldwide.

There is plenty of blame to go around for the prevalence of tax evasion and money laundering from lawyers to accountants to company incorporators and tax officials. The list of malefactors is a lengthy one. But the committee was especially truculent toward European member states that have openly flouted EU rules for decades.

EU member states that received a special mention for failing to implement money laundering regulations were the United Kingdom, Luxembourg, Malta and Cyprus. It’s notable that Malta, Denmark and Hungary didn’t even bother to respond to the committee’s inquiries.

Luxembourg in particular was taken to task for prosecuting the whistleblowers behind the Lux Leaks investigation but doing nothing to punish the multinational accounting firms that orchestrated tax schemes to rob the public treasuries of its neighbors.

Shortly after the Panama Papers investigation was published, President Barack Obama gave a press conference. Obama noted that the true scandal of the secrecy world lay with what was legal. The EU parliamentary report points out that legislation around money laundering and who is behind company ownership in the United States, while less ambitious than in the EU, is more effectively enforced.

The committee report paints a picture of legal arbitrage where states benefit from the European Union while they actively sabotage fellow members. It details a number of loopholes that have hobbled European action. Member states fail to report tax information to their neighbors. Despite obligations to create registries of beneficial owners of companies, not all member states have complied nor made this information available to the financial investigative units of EU members.

Tax evasion in many member states is still not a precursor crime for money laundering.

“In many Member states, lawyers cannot be sanctioned for advising non-residents on how to evade tax or launder money in another jurisdiction,” the report notes.

It will be interesting to see if the committee’s more commonsense recommendations such as creating definitions for tax havens, tax evasion and tax avoidance and implementing the anti-money laundering laws already on the books will prosper.

What the report makes abundantly clear is that Europe has a long way to go before it gets a handle on its money laundering and tax evasion problem. What is less certain is whether the political will exists to change that reality.