Panama PapersAround the world of international business, the conversation about the use of shell companies has been ongoing. The perception of business or individuals that create international shell companies is that their purpose is to avoid disclosure and evade taxes. The positives and negatives, legality and ethics, and regulations and secrecy have been argued for years. But recently, the bombshell known as the Panama Papers gave people a peek behind that veil of secrecy of offshore shell companies.

The Panama Papers: A Picture is Worth a Thousand Words

The Panama Papers was the data leak heard traveling around the world. In April 2016, 2,600 gigabytes of Mossack Fonseca confidential client information was leaked by a confidential informant. Mossack Fonseca is a Panamanian law firm known for incorporating companies offshore while maintaining client confidentiality. This leak exposed details on foreign businesses held by politicians, world leaders, professional athletes, and everyday business owners alike.

The outrage associated with information that was revealed was universal. Clients were furious that the intricacies of their business dealings were publicized, and the public was concerned about the legality of these dealings. Meanwhile, Mossack Fonseca was frustratingly devastated that their confidentially was shattered. The leak has re-opened the debate regarding the formation of international shell entities and the secrecy that they provide.

Governments Respond by Expanding “Borders” of Regulation

Each country has different levels of requirement related to disclosure of business incorporation information. Without universally required disclosures, regulators may not even know that the shell companies exist offshore. Law firms like Mossack know the regulations and claim to operate within them, even if their clients choose to operate outside of the regulation. The Panama Papers revealed those disclosure loopholes, and countries have been scrambling to respond. With the massive Panama Papers publicity, governments will likely expand their efforts to reign in the perceived abuses.

The International Businesses Axis: Legal or Illegal Purposes

One of the biggest surprises gleaned from the Panama Paper leak is that many of the companies revealed were operating legally. For certain investments, creating shell companies to operate offshore is the sensible choice. For example, if a U.S. citizen is looking to diversify their portfolio internationally, they may be required in certain countries to create a shell company and domestic board of directors to invest in that country. Creation of these shell companies for this legitimate purpose of complying with international law is expected to continue with some potential additional disclosure requirements.

On the flipside, using offshore companies to shield taxpayer money from the taxing authorities is considered tax evasion. It is illegal to incorporate offshore in order to hide ownership of assets and avoid taxes that would be owed on those assets in the businesses or individual’s home country. For people attempting to skirt the laws by using shell companies, they should be prepared for the onerous consequences if they are caught.

Lost in Translation

The Panama Papers has highlighted the international disclosures that are required of businesses and individuals. It is important to understand how to follow U.S. reporting requirements when you invest internationally, as the penalties for nondisclosure are substantial.

The foreign disclosure rules apply to the seasoned business with offshore shell entities, as well as the individual owning a simple savings account at a Swiss bank. CRI will be continuing with a series of international articles on some of the U.S. disclosures of international assets. Contact us if you need help translating how these disclosures might impact you.