The Island of the blessed — Cameron and the Panama papers

The Island of the blessed — Cameron and the Panama papers

Cameron has to beat tax evasion charges following the leak of the Panama Papers if he is to maintain credibility ahead of the Brexit referendum.

Since the Panama Papers started circulating throughout world publications on 9 April, Mr. Cameron has been one of the leaders under popular pressure due to his name being found on the list of tax evaders. However, the Prime Minister has so far avoided the destiny of Iceland’s leader, who resigned shortly after the revelation.

This is mainly because his units in his father’s Bahamas-based fund, which were sold six years ago, are not exactly of the same nature. Downing Street has claimed Cameron did not hold any assets in offshore funds or trusts, but only in Blairmore, and thus the incident falls into the legitimate side of the “legit-to-dodgy” scale of reasons to use an offshore shell company (see chart below).

Blairmore surfaces

Set up by Ian Cameron in 1982, Blairmore was not an illegal tax-evasion vehicle, but rather more of an administrative convenience, or legal tax avoidance circuit, taking advantage of the lifting of exchange rate controls in 1979.

It was based in a jurisdiction with a zero tax rate to ensure that investors from multiple jurisdictions were not exposed to extra layers of tax, but it relied on investors to pay tax on their profits from the fund in their home countries, which the Camerons apparently did.

The real issue has been Cameron’s uncomfortable attitude and dodgy communication regarding the affair. Changing versions several times (in order to protect his family, as the PM claims) to finally admit to the revelation has politically wounded the leader, as public frustration has escalated on the issue and some protesters have started calling for his resignation.

Publishing his tax details in a probe in order to move on from the scandal won’t be enough for the leader. His government will now have to unveil solutions which will ensure such scandals cannot emerge in the future.

The island of the blessed

Britain has long been considered a major player in tax evasion networks around the world, partly starting from the fall of its empire. However, retaining control in overseas territories were lawyers and bankers who were adept at exploiting global loopholes.

Out of 215,000 companies identified in the Mossack Fonseca documents, over half were incorporated in the Virgin Islands, an overseas British territory located in the Caribbean, and other overseas territories like the Caymans also top the list for fiscal accommodation.

British banks were also ubiquitous in the list of banks that frequently asked Mossack Fonseca to hide their clients’ finances. The City has been instrumental in helping rich clients hide their money, with HSBC for instance, setting up 2,300 offshore companies according to the leaked documents.

More troubling, there seems to have been evident complicity of the British government in safeguarding the City’s special privileges. The matter appeared back in 2013, when the EU attempted to open up trusts to full scrutiny in a drive to tackle fiscal evasion.

Cameron resisted — in a letter to the European Council — claiming that trusts were widely used for inheritance planning in Britain and thus should be exempted from the bill – he himself received £200,000 (about $285,000) after his father’s death in 2010.

Back then, Cameron had clashed with France and Austria over its double standard in the fight against tax avoidance, with his opponents fearing the exemption would create a loophole. The then Austrian finance minister Maria Fekter called Britain “the island of the blessed for tax evasion and money laundering”.

The state of British complicity can be explained by the overwhelming input of the financial sector in the country’s economy, with the sector contributing £3.2bn to the economy, according to 2014 estimates from the British Bankers’ Association. However, the popular pressure after the Panama Papers is now growing and Cameron had to introduce measures to tackle the issue.

Legislative response

Since Cameron made his tax probe public, a wave of transparency has taken hold in British politics. On 11 April, senior politicians like Labour leader Jeremy Corbyn, London mayor Boris Johnson, and Chancellor of the Exchequer Georges Osborne have all published their tax returns.  However, some MPs still resist the idea of making the publication of tax returns mandatory for elected officials, and Cameron already came out saying he did not think they should follow suit.

Instead, the PM has introduced a new law that would force overseas territories and Crown Dependencies to provide British tax agencies full access to information on beneficial ownership of companies located there. Another bill — already announced in March 2015 but delayed until 2020 –would make it a criminal offence for companies if they fail to stop employees from instructing clients in ways of evading tax.

In the short-term, such measures could increase the risk burden on firms doing business in Britain — bankers and lawyers have already warned the government of the disadvantage this would create for the financial sector — at a time when investment is already falling because of uncertainty ahead of the Brexit referendum on 23 June.

Potential political backlash

Elites using offshore accounts and companies to launder money, dodge sanctions, and avoid tax can have a true impact on the final vote next June. This would happen if voters start associating those free-riders with the political establishment and economic elites who defend Britain’s membership in the European Union.

Cameron was not the only politician tainted by the Panama Papers, with the largest UKIP donor Arron Banks also involved in the scandal. However, the PM’s authority has suffered in the affair, and his popularity is dropping (58% support, the lowest since 2013).

After the drama over cuts to disability benefits last month and the mishandling of the steel crisis in the past few weeks, the leader will have to set the bar highif he is to win the campaign. Transparency and ambitious measures to tackle tax evasion should be a start, however unpopular it might be for the Tories and the financial sector.


Categories: Europe, Politics

About Author

Julien Freund

Julien is an analyst with a focus on Europe. He has worked as a lobbyist in Paris and Brussels and has written extensively on the rise of nationalist parties. He holds two master's degrees in geopolitics and international relations and in European relations, and received his BA in economics and social sciences from the Catholic Institute of Paris.