Panama’s Revolving Door Shows Global Challenge of Offshore Reform

Panama’s leaders were defiant after the Panama Papers scandal broke open April 3 via hundreds of news stories circling the globe.

President Juan Carlos Varela’s chief of staff, Álvaro Alemán, called the disclosures about suspect dealings inside the country’s offshore financial industry a “campaign against Panama.”

“We will not allow Panama to be used as a scapegoat,” Alemán told a news conference.

Some of Panama’s anger was focused on the OECD, a Paris-based, multinational coalition that has been a key protagonist in the war over cross-border tax evasion. On April 4, the Organization for Economic Cooperation and Development’s secretary general, Angel Gurría, called out Panama as a “holdout” amid the world’s progress toward financial transparency.

Luis Miguel Hincapié, Panama’s deputy foreign minister, responded with a letter blasting Gurría for making “allegations and insinuations whose falsity is easily demonstrated.” He said the Panama Papers were being used to “distort the facts and tarnish the reputation of the country.”

As pressure grew from media and governments around the world, Panamanian officials shifted to a more conciliatory stance.

On April 19, President Varela announced Panama was willing to join an OECD-sponsored initiative that encourages members to share information with other nations trying to track offshore tax dodging. Hincapié headed to Paris in May to discuss the details.

The OECD praised the deal as a sign Panama was stepping up to join the fight against offshore-fueled corruption.

But in a country where top-drawer lawyers move freely between high government posts and law firms selling secrecy-cloaked shell companies, bringing lasting change to the offshore industry is a challenge. The revolving door between Panama’s government and its shadow economy has prompted some critics to refer to President Varela’s top advisers as his “offshore cabinet.”

Before they joined the government, for example, Alemán and Hincapié were attorneys at law firms that specialize in setting up offshore structures. In turn, current partners at Panama’s top offshore law firms include former ambassadors, government ministers and banking regulators.

Like Mossack Fonseca, the Panama-headquartered law firm at the center of the Panama Papers affair, other Panamanian law firms that help clients set up offshore companies have also become snared in political and financial scandals.

Before becoming Panama’s deputy foreign minister, Hincapié had served as the registered agent for two Panamanian companies that were used to shift millions of dollars as part of an “extraordinarily complex and multi-layered” Ponzi scheme, according to a 2012 lawsuit in U.S. federal court in Connecticut.

Alemán’s former law firm has come under scrutiny in Argentina’s “K Money Trail” affair, a money laundering investigation targeting a businessman close to former Argentine presidents Néstor Kirchner and Cristina Fernández de Kirchner. The law firm set up a secretive Panamanian entity, the Kinsky Foundation, that Argentine authorities say was used to shuffle $25 million through a Swiss account and then to two companies owned by the presidents’ associate.

Hincapié, Alemán and their law firms haven’t been accused of wrongdoing in these cases. But these episodes highlight questions about how well offshore middlemen screen their clients, and how political and financial schemers take advantage of the cover provided by shell companies and other opaque structures created in Panama and other tax havens.

Hincapié didn’t directly answer a question from ICIJ about the two companies linked to the Ponzi scheme, but said that as a registered agent he wouldn’t have had any role in their operations. He said he has always followed “the highest ethical standards, both as a matter of company policy and of personal training and conviction.”

Alemán did not reply to questions about the Argentine case and the Kinsky Foundation. His former law firm, Icaza, González-Ruiz & Alemán, said it followed the law in creating the foundation.

A spokesperson for Panama’s government said calling President Varela’s aides his “offshore cabinet” is a “cynical way” of trying to dismiss the progress that the country has made in fighting the flow of dirty money. Lawyers and bankers working in government know that if they don’t embrace financial transparency, they “cannot remain in this Administration,” the spokesperson said.

The facade

Panama is a case study in the challenges facing activists and officials who want to end offshore secrecy. The nation of nearly 4 million people isn’t alone in wrestling with economic and political conflicts of interest that warp the way nations and global organizations deal with the offshore system.

The Panama Papers disclosures by the International Consortium of Investigative Journalists, German daily Süddeutsche Zeitung and other media partners forced then-U.K. Prime Minister David Cameron to acknowledge he’d benefited from an offshore investment fund run by his father through the Bahamas. Delaware and other American states that harvest income by serving as corporate secrecy havens have resisted pressure to gather the identities of the real owners of limited liability companies. The OECD’s own members include Switzerland and other prominent tax havens.

The result over the past two decades has been a series of half-measures that do little to change offshore refuges’ status as hideaways for politicians, fraudsters and others who want to keep their financial dealings under cover.

Interviews, court documents and files within the Panama Papers reveal how adept offshore operatives are at inventing new financial wrinkles that thwart regulatory crackdowns – and how Panama’s government has worked for more than a decade to help its offshore industry deflect attacks on its practices.

“It has been ‘Let’s give the facade we are negotiating and complying.’ But there has been no enforcement,” Ramon Ricardo Arias, an attorney and president of Panama’s chapter of Transparency International, said. “We haven’t been serious about compliance.”

Anti-corruption groups argue that the tax-info initiative that Panama committed to in April doesn’t come close to matching the comprehensive reforms needed to end offshore abuses. The initiative isn’t a global solution, they say, because Panama and other members can choose to exchange information with any of the other 100-plus members – or not.

Max Heywood, a program coordinator for Transparency International’s Americas Department, argues that little progress will be made unless tax information is shared on a truly multinational basis and Panama, the U.S. and other countries establish public registries that document the real owners of companies established within their borders.

In an opinion article in The New York Times soon after the Panama Papers were exposed, President Varela argued that his country “does not deserve to be singled out on an issue that plagues many countries.”

“Contrary to media reports,” he said, “Panama does not make special allowances for ‘offshore’ structures.”

He said his country’s ranking on the Financial Secrecy Index, an authoritative analysis by the reform group Tax Justice Network, has “steadily improved since 2013, and we now rank well ahead of Japan, Germany and the United States.”

The progress Varela referred to involved moving from 11th worst in 2013 to 13th worst in the group’s 2015 rankings of more than 90 “financial secrecy jurisdictions.”

The rankings consider jurisdictions’ level of financial secrecy as well as their share of the global market for offshore financial services. Panama’s “secrecy score” on the group’s 100-point scale inched down from 73 to 72 over that two-year span – still leaving it among the murkier offshore jurisdictions in the world and rating it as more secretive than the U.S. (60), Japan (58) and Germany (56). Those countries rank worse on the overall index because their market share is larger.

Alex Cobham, Tax Justice Network’s chief executive, said Panama “remains a jurisdiction of concern. . . . This is not a jurisdiction, or a government, that is ready to give up financial secrecy.”

Varela has tried to distance his nation from negative attention by arguing that because the leaked documents behind the recent scandal “came from a single law firm based in Panama,” it was unfair for ICIJ and other media partners to call them “the Panama Papers.”

The president didn’t mention in his New York Times essay that Mossack Fonseca is one of several large law firms in Panama that make money by setting up shell companies for clients who want to stay in the shadows.

He also didn’t mention his own links to Mossack Fonseca. Until just before the Panama Papers affair broke, the law firm’s co-founder, Ramón Fonseca, had been one of Varela’s top advisers.

Emails, file notes and other confidential records from within the Panama Papers show Mossack Fonseca was far from an outsider in its home country. The law firm had considerable dealings with the government, other top law firms and even some members of a government commission appointed to respond to the fallout from the Panama Papers.

In Panama and other lands where financial secrecy thrives, the melding of politics and offshore has proven to be a potent force.

The chase

In June 2000, the OECD announced a blacklist of 35 “non-cooperative” jurisdictions – including Liechtenstein, the Bahamas and Panama – that were helping corporations and individuals sidestep taxes.

If they didn’t change their ways, the OECD promised, sanctions would follow. Some observers predicted “the death of tax havens.”

Things didn’t turn out that way. With European nations squabbling and George W. Bush’s administration withdrawing U.S. support for the effort, the OECD’s fight against tax havens dissolved, as Tax Notes newsletter put it, “into a series of toothless pronouncements, a mixture of cheerleading and scorekeeping.”

By 2002, Panama was in the clear – one of 28 countries that had made promises and passed laws that allowed them to escape the list.

Organizations and nations continued to roll out blacklists and “gray lists” designed to crimp offshore hideaways. The offshore system kept humming along, because offshore centers and their supporters are skilled at finding loopholes and hiding their activities.

“Bad guys tend to innovate faster than good guys do,” said Steve Lee, a private financial crime investigator in Los Angeles whose cases frequently involve the offshore system. “That’s a problem.”

One offshore middleman who frequently did business with Mossack Fonseca described how his firm, based in the British Channel Islands, had helped high earners frustrate U.K. tax laws by helping their employers set up tax dodges called “employee benefit trusts,” according to a memo in Mossack Fonseca’s files. Under one common form of such schemes, employers put money into offshore trusts and then gave employees interest-free “loans” with money from the trusts. Because the payments were dressed up as loans, the employees didn’t have to pay income taxes.

Employee benefit trusts were popular in Britain until the government banned the practice in 2011.

The Channel Islands go-between said the offshore industry had become “a chase.” When new tax laws are put on the books, he said, tax advisors quickly dream up a new product that allows clients to get around the new requirements. “This product is then quickly sold until it is banned next year,” the memo explained.

As middlemen obsessed over how to keep clients ahead of the law, government officials and offshore players in Panama worked together to respond more broadly to efforts to attack offshore secrecy, the Panama Papers show.

One of the movers in this effort, the records indicate, was Panama’s Association of International Lawyers, which frequently huddled on email and in person to work out how to deal with the OECD and other threats to the country’s offshore sector. One idea the lawyers group discussed, the records show, was pressing the government to enforce a “law of retaliation” – making sure that countries that slapped Panama onto tax evasion and money laundering blacklists would face economic reprisals.

Ramón Fonseca and Jürgen Mossack, the founders of the law firm later exposed by the Panama Papers, were active as members of the association. Other players in the association included Hincapié, the future deputy foreign minister. Alemán, the future presidential chief of staff, served as the group’s president in 2006 and 2007 as the association and Panama’s government worked to respond to increasing demands by the OECD and European governments that Panama reform its financial secrecy laws.

In an email exchange in March 2007, for example, Alemán and the country’s top tax official – Gisela Álvarez de Porras, the director general of revenue – conferred about the possibility of the lawyers association hiring a lobbyist to help make Panama’s case in its battle with the OECD.

Amid these behind-the-scenes efforts, Panama worked to calm critics by passing new rules and signing information-exchange agreements with other countries. But Tax Justice Network’s Financial Secrecy Index indicates that Panama lagged behind similar secrecy jurisdictions – such as the British Virgin Islands – in embracing safeguards against cross-border money laundering and tax evasion.

As a British overseas territory, the BVI responded to pressure from U.K. authorities by investigating companies involved in suspect activities and improving its score on the index’s secrecy gauge from 92 in 2009 to 60 in 2015.

This provided an opening for the BVI’s competitors. In the offshore world, when one territory tightens its rules, others see it is a marketing opportunity.

In December 2012, Mossack Fonseca sent its clients a note about another new law stiffening transparency requirements for companies incorporated in the BVI.

In a follow up teleconference, an offshore go-between from Cyprus said he worried the new rules had made the BVI “unworkable” for his clients.

What if, he wondered, things in the BVI reached an “Armageddon scenario” of too much light shined on his customers’ offshore holdings?

Where could he move them?

According to the law firm’s file notes, a Mossack Fonseca official mentioned British Anguilla as a possibility, then quickly dismissed idea, because, as a U.K.-flagged haven, Anguilla was “very likely to come under same type of pressure” as the BVI.

There was a better alternative, the Mossack Fonseca man said, a place where client confidentiality still prevailed: Panama.

The door

One of the biggest stories to come out of the Panama Papers was the exposure of a network of people, close to Russian President Vladimir Putin, that secretly shuffled at least $2 billion through banks and offshore companies. Mossack Fonseca registered many of the companies and helped administer the network’s holdings in the British Virgin Islands and other havens.

Lost amid the rush of news about well-connected Russians’ offshore dealings was the fact that Mossack Fonseca wasn’t the only Panamanian law firm that provided offshore services to the network.

The Panama Papers show that another Panama City-based law firm, Morgan & Morgan, served as registered agent for Ove Financial, a British Virgin Islands company that was involved in a series of transactions with Sandalwood Continental Limited, a company that served as linchpin in the Putin associates’ money-shuffling circle. Mossack Fonseca’s files show that in 2012 Sandalwood assigned dozens of loans to Ove, sometimes in amounts involving hundreds of millions of dollars.

Public records in the British Virgin Islands show that Morgan & Morgan’s BVI office quietly moved to resign as Ove’s registered agent two days after ICIJ and its media partners began releasing stories about the Putin circle – including a story that briefly noted Morgan & Morgan’s connection to Ove.

Penelope Hughes, Morgan & Morgan’s compliance manager, said the law firm wasn’t aware of concerns about Ove until they were brought to light by the news stories. She said the law firm followed the BVI’s anti-money-laundering laws in all its dealings with the company.

Morgan & Morgan’s brush with the covert network shows that Mossack Fonseca is far from the only law firm in Panama involved in the offshore business – and not the only one that has done business with questionable clients.

Morgan & Morgan is one of the big players in Panama’s offshore industry. It is one of the law firms that make up the revolving-door system connecting government and offshore.

Morgan & Morgan senior partner Eduardo Morgan Jr. was Panama’s ambassador to the U.S. from 1996 to 1998. Morgan & Morgan officials now serving in President Varela’s administration include Hincapié, one of the government’s negotiators with other nations concerned about Panama’s status as tax haven.

The Panama Papers show that Hincapié and Morgan & Morgan maintained a professional relationship with Mossack Fonseca for more than a decade. The two firms worked together to settle clients’ bills and to pass administration of offshore companies back and forth between themselves. A review by Connectas, an ICIJ media partner based in Colombia, found that Hincapié had been involved in email exchanges relating to more than 100 companies set up or administered by Mossack Fonseca.

A lawsuit in U.S. District Court in Connecticut named two companies for which Hincapié served as a registered agent as key cogs in a Ponzi scheme involving more than $230 million that ended up in offshore accounts.

In July, a federal judge approved a default judgment against one of the companies, Hermitage Consultants Inc., ordering it to cough up more than $14 million in “fraudulent transfers” between the Hermitage and other companies.

The Ponzi’s mastermind, Connecticut hedge fund manager Francisco Illarramendi, was sentenced in 2015 to 13 years in prison for fraud and obstruction of justice.

Hughes, Morgan & Morgan’s compliance chief, said the law firm was never “connected in any way” to Illarramendi. In it all its dealings as registered agent for the two Panama companies, she said, the law firm “merely acted on instructions” from a trusted offshore intermediary.

The brothers

Two other law firms with deep roots in Panama’s offshore sector – and a history of ties to controversial characters – bear the names of one of Panama’s prominent political clans.

Jaime Alemán, a partner at Alemán, Cordero, Galindo & Lee, grew up the son of an ambassador to the U.S., then followed his father’s path, taking a break from his law practice to serve as Panama’s top diplomat in Washington from 2009 to 2011.

His brother Álvaro Alemán, the current presidential chief of staff, has been a partner at Icaza, González-Ruiz & Alemán between other stints in government. Latin Lawyer magazine calls Álvaro Alemán’s law firm a “strong offshore player with growing onshore strength.”

In September, the judge and the prosecutor leading Argentina’s “K Money Trail” investigation filed a request with Panamanian authorities for help tracking down information about the Kinsky Foundation, the Panama-based entity created in 2011 by Icaza, González-Ruiz & Alemán.

The central figure in the case is Lázaro Báez, a businessman with ties to former Presidents Cristina Fernández de Kirchner and her husband Néstor Kirchner. Báez has been charged with embezzlement and money laundering and Fernández is now under investigation in the case, prosecutors have confirmed. Báez and Fernández deny wrongdoing.

The legal request prepared by the Argentine justice officials said the “final beneficiaries” of the foundation – its true owners – were Lázaro Báez’s four adult children. The document says that the foundation was used to channel $25 million through a Swiss account and then on to two Argentine companies controlled by the father.

In a statement to ICIJ, Icaza, González-Ruiz & Alemán said it set up the foundation “in accordance with the laws of the Republic of Panama” in response to “instructions received from a highly regulated Swiss banking entity.”

The law firm co-founded by Álvaro Alemán’s brother Jaime gave a similar response after it was caught up in another offshore muddle linked to a former Latin American president.

Court records in Chile show that, in the 1990s, Alemán, Cordero, Galindo & Lee set up at least five offshore companies that were ultimately used by Augusto Pinochet, Chile’s dictator from the 1970s into the 1990s. At the time of his death in 2006, Pinochet faced charges of crimes against humanity and looting tens of millions of dollars in government wealth.

In court filings, Jaime Alemán acknowledged that his law firm had set up companies tied to Pinochet, but said he wasn’t aware at the time that they were connected to the strongman. When his firm discovered the Pinochet connection in 2004, he said, it moved to resign as the companies’ registered agent. In the court statement, he said his firm has “a very clear policy of not providing services to companies that are possibly linked to illicit activities.”

In an email interview with ICIJ, Jaime Alemán said the companies “allegedly owned by Pinochet were in fact requested to us by the office of Barclays Bank in Miami.” The owner of the companies was a Chilean lawyer who was acting on behalf of Pinochet “without revealing this information to the bank or to us,” Alemán said.

Alemán says that, as an ambassador and as a private citizen, he has been “fervent and outspoken advocate” for financial transparency. Two days after the Panama Papers hit the news, he published an opinion piece urging the government to join the tax-information effort pushed by the OECD.

He wrote that Panama had been misled by “a small group of lawyers and bankers” whose “unfounded” arguments had prevented the nation from making changes that “would allow us to clean up our image and attract new investments.”

Two weeks later Panamanian officials put their criticism of the OECD behind them and declared that the country was open to joining the tax-information initiative. Jaime Alemán’s wife, María Del Pilar Arosemena de Alemán, Panama’s ambassador to France, signed an agreement in October ratifying the arrangement.

Jaime Alemán said his law firm has no “direct connection” to the current government.

He adds, though, that “the U.S. government normally appoints a lot of Wall Street bankers and lawyers to important positions” and “the same applies to Panama, where the banking and legal fields play an important role.”

Many of the bankers and lawyers who go into government in Panama, he said, “are well prepared and competent to represent the country.”

The committee

In April, as the storm over the Panama Papers grew, President Varela made a move that seemed to have a chance at reducing the uproar.

He announced the appointment of a seven-member Committee of Independent Experts that would investigate Panama’s offshore industry and recommend reforms. It included four members from Panama and three from outside Panama. Including an American scholar, Nobel Prize-winning economist Joseph Stiglitz, provided the panel an aura of credibility.

What Stiglitz didn’t know was that – as is often the case in Panama – the lines between the government initiative and the offshore industry had been blurred. At least three of the Panamanian members of the panel had had business dealings with Mossack Fonseca, a review of the Panama Papers shows.

One of them, Nicolás Ardito Barletta, Panama’s president from 1984 to 1985, was listed as the president and co-director of a British Virgin Islands company set up by Mossack Fonseca in 2000.

Another panel member, Domingo Latorraca, a partner at the advisory firm Deloitte and a former vice minister of economics, had discussions with Mossack Fonseca about whether Deloitte could act as financial advisor on a proposed sustainable energy project. The project never materialized.

The Panama Papers also show Latorraca was included in an email from his country’s foreign ministry inviting Jürgen Mossack and other members of the Association of International Attorneys to “exchange opinions regarding the current situation of Panama against the OECD and lists of tax havens.”

A third member of the experts panel, Gisela Alvarez de Porras, is the former government official who asked the attorneys group about bankrolling a lobbyist to help respond to the OECD’s demands for greater transparency. Both before and after serving as Panama’s chief tax officer, she worked at elite law firms and was involved in administrative tasks relating to offshore companies, the Panama Papers show. Her name appears in Mossack Fonseca’s files on documents relating to 22 offshore companies between 1990 to 1996 and between 2011 and 2014.

Latorraca and Porras told ICIJ that their business contacts with Mossack Fonseca had no effect on their service on the experts panel. Both say they favor greater financial transparency.

As the committee’s work began, though, it became clear that Stiglitz and many other members of the panel had different visions for how the report should be handled. In August, Stiglitz and Swiss anti-corruption expert Mark Pieth resigned from the group. They said they were concerned Panama’s government would not grant the panel full independence over how the report was written and released.

In the end, the two factions issued competing reports.

The five remaining committee members released a 23-page document in November that called for more regulation of Panama’s offshore industry. It urged the government to execute “a wide campaign of awareness about the risk involved in the handling of illicit flows of any kind in Panama or through organizations registered in Panama.”

Anti-corruption groups said the experts’ report suggested modest steps toward transparency. The panel talked about reforming the offshore system. Stiglitz and Pieth talked about ending it.

Stiglitz and Pieth said the U.S. and the European Union had the power to force Panama and other nations to give up offshore secrecy by simply threatening to cut off access to their financial systems.

“Secrecy has to be attacked globally,” their report said. There should be “no places to hide.”

One area where the two reports clearly differed was on the issue of tracking the real owners of companies, trusts and foundations.

The experts panel recommended Panama’s government take steps to make sure that registered agents like Mossack Fonseca and Morgan & Morgan collect information about the true “beneficiaries” behind corporate structures.

Stiglitz and Pieth urged that Panama, the U.S. and every other nation establish searchable public registries that identify the actual owners of all corporate structures – eliminating the use of front men and other smokescreens that mask the people behind companies and other entities.

Opponents of public registries say they would put wealthy people in Latin America and elsewhere at risk for blackmail and kidnapping. Supporters of full transparency counter that criminals already know the identities of wealthy people in their countries – and that keeping the owners of offshore companies under wraps puts the public at greater risk by enabling political graft and organized crime.

During an anti-corruption conference held by Transparency International in Panama in early December, Latorraca defended the work he and other panel members had done on their report, highlighting its recommendations for better information exchange and the creation of a permanent advisory body on offshore issues.

Still, he acknowledged the report wasn’t done in a vacuum.

“There are recommendations for Panama adjusted to the Panamanian reality,” he said.

Contributors to this story: Frederik Obermaier, Daniel Santoro, Alberto Arellano, Hugo Alconada Mon and Ryan Chittum.