Explaining the biggest data leak in history
by Luis Gómez
If there were ever a moment where journalists should congratulate themselves, the Panama Papers prove no better moment. The documents leaked from Mossack Fonseca, a Panamenian law firm, comprise the world's largest document leak ever. The documents themselves link shell company purchases to celebrities, corporate leaders, and even heads of state around the world. This story is big. Too big for any one writer, or news agency. So, let's break it down. Who is Mossack Fonseca? What were they doing? How did these leaks happen?
Founded in 1977 by German lawyer Jürgen Mossackm the firm partnered with Panamenian novelist/lawyer Ramón Fonseca in 1986. They eventually added a third director, a Swiss lawyer named Christoph Zollinger, but he wasn't cool enough to get his name on the company or something. The firm specializes commercial law, trust services, investor advisory, and international business structures, as well as international property and maritime law services. Basically, there was nothing on paper that Mossack Fonseca wasn't doing. Off-paper, they were being really shady. A leaked memo from one of the firm's partners stated that "Ninety-five per cent of our work...consists in selling vehicles to avoid taxes." Mossack Fonseca was also no stranger to international controversy. They were implicated in an Argentine money laundering scheme, the German Commerzbank money laundering & tax evasion charges, and supposedly had a hand in the ongoing Petrobras scandal in Brazil.
So, with regard to the information contained within the Panama Papers, what exactly was Mossack Fonseca doing? Welcome to the wonderful world of extra-super-rich people and corporate finance.
Here's the deal. When a company makes a profit, they have to pay taxes on that profit. However, money that's reinvested into the company (for building new facilities or research & development, for example) isn't taxed. So, when a company or individual has made a boatload of profit, they will sometimes buy a shell company to invest that money into, in order to lower their tax obligations. From a legal perspective, this is all perfectly fine. There's no law that says you aren't allowed to own a shell company for the purpose of avoiding taxes. The problem, however, lies in the fact that a) the line between tax avoidance (legal) and tax evasion (illegal) is often very thin and b) ethical concerns are incredibly easy to come up with. Plus, the ownership of these companies is often completely anonymous, meaning that someone could conduct seriously shady business dealings without anyone ever knowing. Until now, of course.
Leaks of any significant magnitude usually have a central person somewhere: think Julian Assange, Chelsea Manning, or Edward Snowden. However, the Panama Papers were leaked by a consortium of journalists. Initially, the German newspaper Süddeutsche Zeitung (SZ) was contacted by a John Doe offering them information. When all was said and done, the information provided amounted to 2.6 Terabytes of encrypted email, memos, images, and other documents. 2.6 Terabytes. Really let that amount of information sink in. By comparison the Wikileaks document trove was 1.7 Gigabytes. That's nearly 1500 times smaller.
After SZ was approached by their anonymous source, they quickly realized that the scope of their leak was far too large for one organization. They enlisted the help of the International Consortium of International Journalists (ICIJ) to help analyze the data. This analysis involved, according to SZ, "around 400 journalists from more than 100 media organizations in over 80 countries...[including] teams from the Guardian and the BBC in England, Le Monde in France, and La Nación in Argentina." Journalists met in Washington DC, Munich, London, and the Norwegian town of Lillehammer to initially map out their research approach.
The impact of this data is massive. Mossack Fonseca had clients all over the world, and thousands have been implicated in the leaks. World renown-soccer star Lionel Messi is in there. So is Simon Cowell. Even Stanley Kubrick hows up. A member of FIFA heading up an important ethics committee is in there, too.
What's more are the astounding number of world leaders that are named within the leaks' files. The most notable: Icelandic prime minister Sigmundur Davíð Gunnlaugsson, Pakistan’s prime minister Nawaz Sharif, Ukranian president Petro Poroshenko, Argentine
president Mauricio Macri, King Salaman of Saudi Arabia, and United Arab Emirates’ President Khalifa bin Zayed Al Nahyan. Others include a personal friend of Vladimir Putin’s, Columbian singer Juanes, and Jackie Chan. All told, nearly 14,000 clients and over 214,000 companies have been listed. Now, what does this mean? Well, for the moment, lots and lots of denials of any wrongdoing. Nearly everyone who currently is listed in the Papers, including Mossack Fonseca itself, has confessed to doing nothing actually wrong, and from a legal perspective they might be right. The Atlantic points out that “Some of the activity uncovered in the Panama Papers will turn out to be illegal. But if past is prologue, then the majority of what we learn from the leak will merely be embarrassing for those exposed—showing them to be opportunistic and perhaps unethical, but not criminal.” Essentially, the firm’s main service was providing their clients with the ability to defy the spirit of tax laws without actually defying the written word of law. Most of those implicated will never see the inside of a courtroom, and those who do may have enough on their side to eventually be declared innocent.
So where does everything go from here? A few different directions are likely. Because most of those implicated in the papers will likely not face charges, this will become an embarrassing moment in their lives that they can move on from. For the few that will lose their jobs, their political office, or be convicted, the consequences are much steeper. Furthermore, legislation is now being introduced across the globe to address the kind of tax avoidance strategies employed by Mossack Fonseca’s clients. The Panama Papers have revealed an exploitable loophole. Now, that loophole looks to be closing.