Matt Nippert is a business investigations journalist.

Panama Papers: Q&A

Panama City - home of lawfirm Mossack Fonseca. Photo / iStock
Panama City - home of lawfirm Mossack Fonseca. Photo / iStock

What are the Panama Papers?

A law firm based in Panama, Mossack Fonseca, had more than 11 million internal documents leaked to the International Consortium of Investigative Journalists. The documents outlined hundreds of thousands of offshore companies and trusts set up by the firm and who they set them up for.

What the big deal?

Often of the main selling point of these entities is an accompanying veil of secrecy, which has now been rudely drawn back.

So who actually uses these offshore companies?

If you live and work and only invest in one country, there would appear to be little need. Once you reside elsewhere, or you or your company earn income from multiple countries, or you have a lot of money you're worried about losing, things can become a lot more complicated.

What do people need them for?

Offshore companies and trusts are routinely used for entirely legal purposes, and Mossack Fonseca has maintained that it has always complied with international protocols.

A reference to a person or entity in connection with the Panama Papers is not therefore in any way indicative of any wrongdoing or impropriety. But the spectrum of potential uses ranges from the benign best-case to the worst-case of outright criminality. Companies may want to pool earnings from many countries, safeguard their intellectual property, or take advantage of cheaper tax rates elsewhere. Individuals may want to set up inheritance planning trusts to keep family assets safe from creditors or what they see as unfair taxes or nationalisations.

And in the worst-case scenarios?

Conmen may use them to manufacture legitimate-sounding enterprises, or set up international bank accounts which are much more difficult to freeze. Druglords and gun-runners can also use them to disguise the source of their illicit income or stash assets away from the prying eyes proceeds-of-crime-seizures of authorities.

Does this really happen?

In 2009 a New Zealand shell company, ostensibly directed by a cook who worked at Burger King on Queen Street, was found to have hired a plane packed with tonnes of guns and explosives to fly from Iran to North Korea.

What's a shell company?

Entities set up to intentionally hide who the real owner is. In New Zealand the real beneficiaries of foreign trusts don't need to be disclosed, and the directors or shareholders of our shell companies can be nominees acting for the true owners. Often they'll be set up in different countries from where they do business in order to make untangling their affairs even more difficult.

And how does New Zealand fit into the Panama Papers?

Mossack Fonseca registered a number of New Zealand entities for their clients, and also ran an office here from 2013 creating hundreds of foreign trusts. The person who leaked the Panama Papers, in a statement justifying their actions, also called out Prime Minister John Key for being "curiously quiet" about New Zealand's "role in enabling the financial fraud Mecca that is the Cook Islands".

The Cook Islands?

Our Pacific neighbours, whose residents are all New Zealand citizens and which uses the New Zealand Dollar, has gained an international reputation out-havening the tax havens of the Cayman and British Virgin Islands. A New York Times article from 2013 says part of the appeal of using structures in the Cook Islands is that they "generally disregard foreign court orders" and have laws making it illegal to break their anonymity.

What exactly is a tax haven?

A territory that charges low or no tax rates to those who move their money there.

Is New Zealand one?

That's up for debate. John Key says we share tax information with other countries to ensure everyone here is compliant, so we're not.
Opposition parties and international transparency organisations say the proliferation of zero-taxed foreign trusts, as revealed in the Panama Papers, says we are. Inland Revenue rejects the tag, but internal documents show perceptions are growing that we are and reputation matters: Our trading partners don't tend to look kindly on territories they believe are facilitating tax avoidance.

So is this a big problem for the country or the government?

Aside from risks to our reputation, the scale of the problem is difficult to gauge. While New Zealand shell companies are now less in demand by dubious characters as they've been required since last year to have a local resident as a director, exactly how much of other structures are abused - or even exist - is unknown. Inland Revenue has acknowledged while it's aware of close to 12,000 foreign trusts registered here, there are likely thousands more which they know nothing about because they've been set up to defeat disclosure requirements. Similar uncertainties exist around our limited partnerships regime, which has long slipped under the radar. These structures, also advertised by Mossack Fonseca, attract no tax and can be set up without registering a single person as being as responsible for their operations.

Are we closer to getting a grip on the size of this problem?

Slowly. Tomorrow the ICIJ releases a database of more than 200,000 entities set up by Mossack Fonseca. Hundreds of New Zealand-registered companies and trusts are expected to be amongst this list, although how much this'll tell us about their use or misuse is as yet an open question.

- NZ Herald

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