The Panama Papers: Shadow Networks and How They Operate

Mon, Apr 11, 2016 - 8:07am

The revelation by the Panama Papers that some of the worlds rich and powerful hide money and assets abroad is not a new one. The extent to which they do it, the level of systematization and its unexpected connection to some of the poorest, conflict-ridden regions of the world is baffling.

In the largest leak of confidential material ever, the so-called Panama Papers have exposed the scale of shadow networks and how they help hide wealth in tax havens such as Panama.

Using law firms like Mossack Fonesca to set up off-shore shell companies, private corporations and individuals, including heads of state and organized crime syndicates, have concealed money and assets from governments and revenue services.

The fact that some countries are laundering money to circumvent sanctions and embargoes is no big surprise, but the troubling underlying mechanism is the so-called ‘shadow networks.’ They allow for the flow of illicit goods and services across borders and are crucial in circumventing taxation and regulation.

They allow states or key government actors to hide money abroad or create shell companies for money laundering or to sidestep sanctions against themselves or their nation. They are inherently well suited for criminal purposes because they shy away from public scrutiny, and off-shore banking is instrumental in this.

The illicit flows of shadow networks require a sophisticated system of secret bank accounts and fake companies to evade taxes or hide war profiteering. By setting up accounts in remote jurisdictions, they create a parallel financial system for all sorts of illegal activities.

Providing Support to Authoritarian Regimes

Besides helping the rich and famous avoiding the taxman, off-shore bank accounts are instrumental in perpetuating authoritarian governments. They enable leaders of poor but resource-rich countries to engage in secret resource extraction deals, with the profits being hidden away in offshore bank accounts.

This allows leaders and their inner circle to dispense patronage and wealth to loyal clients, thus securing their hold on power. Examples range from African nations to pre-civil war Syria where a range of public assets was controlled by Al-Assad’s immediate family.

In sub-Saharan Africa, the DR Congo’s wealth of resources has notoriously been pilfered by the ruling class and rebel groups, who all use shadow networks and off-shore bank accounts to hide profits stained by the ongoing conflict.

The Congolese president’s twin sister, Jaynet, is named in the papers as having substantial off-shore holdings.

A former chief of Rwandan intelligence has also been named, supporting the claims that the Rwandese intelligence apparatus has been funneling Congolese minerals through Rwanda for its gain and fueling the long-standing conflict in eastern DRC.

High-ranking officials in Angola and Nigeria have also been implicated in the papers, with the Guardian reporting multiple undisclosed London properties in the name of offshore companies belonging to Nigerian officials.

A Problem for Resource-Rich Developing Countries

The takeaway for keen observers and investors is that, by hiding copious wealth abroad, leaders of resource-rich developing countries are stealing public goods for private gain. This ensures empty state coffers and a systemic inability to build sound institutions, which countries rely upon to maintain infrastructure, security, healthcare, and education and more.

The connection to conflict follows. When a state apparatus is weak and corrupt, it is less capable of fighting off threats. When national armies are only loyal to their patrons, they are more likely to instigate coups or engage in corrupt practices. Off-shore tax havens and bank accounts allow for these practices to be hidden away and evidence of impropriety harder to find, as well as further fueling the corruption of the state.

The Panama Papers shine a light on how big corporations and powerful individuals use legal means to conduct questionable business dealings. In some instances, they may even use this legal instrument to obscure profiting from war and fueling conflicts.

As such, businesses should be aware of a major public backlash and demands that businesses practices be more transparent. Investors should heed calls to pay a fair share of taxes lest they suffer penalties from customers and governments alike.

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