The Panama Papers: Risks and opportunities

The Panama Papers: Risks and opportunities

Fallout from the Panama Papers began the moment the 11.5 million financial and legal documents were leaked from offshore law firm, Mossack Fonseca. Issues of tax evasion and havens, secrecy and rigged markets have trickled into mainstream conversation since the 2008 financial crisis, but the Panama Papers appear to be the straw that broke the camel’s back.

The scandal and its projected consequences have garnered a great deal of attention as it implicates many high-profile public officials, business leaders and celebrities. Reactions have been more severe in certain cases than others, especially given that public tolerance of leaders’ corruption is arguably lower in the West than elsewhere.

Among the effects we can anticipate, those related to political risk and opportunity are manifold. Perhaps the most consequential upshot is a surge in both national and international scrutiny of tax evasion and havens. This means greater regulatory scrutiny as well as greater examination of foreign banks by US prosecutors; the latter has already begun.

With renewed momentum in large part due to increased popular interest, we can expect changes in legislation and the intensification of prior attempts at international coordination. Needless to say, new and tighter regulations are sources of risk and opportunity alike.

This past January, the European Commission proposed new measures, known as the Anti-Tax Avoidance Packageto fight corporate tax avoidance as part of a campaign for fair, efficient and growth-friendly taxation. The reforms include legally binding regulations that challenge common methods companies use to bypass taxes plus efforts to hinder aggressive tax planning and boost transparency.

The Panama Papers are helping these efforts gain traction and have added further impetus to implement some form of these measures, fueled by public support within member states. The original proposals forced MNCs to publish their earnings but with these revelations, the Commission may well force companies to disclose subsidiaries in tax havens too.

EU Tax and Economics commissioner Pierre Moscovici has voiced his commitment to building upon the momentum of this affair; “Politically,” he said, “I consider this leak to be good news.” He has called for the formation of an EU blacklist of tax havens within the next 6 months (which is controversial) and also the use of sanctions against these nations.

Perhaps on the other side, there will be conditional incentives offered as well. This raises the question of just how appealing the offers must be in order to incentivize tax havens to cooperate in the effort. Could incentive programs also present opportunities for private sector actors?

It is not just firms using questionable practices that face increased risk. Elevated risk extends to firms doing business in— or with firms based in— these blacklisted countries. These countries face not just increased scrutiny but possible economic repercussions from sanctions. Firms should consider how the effects of sanctions might reverberate back onto their business and make them suffer as a result. Moreover, the consequences of the Panama Papers may even seep into the consumer space as new or stricter laws could raise production costs and by extension, the prices of goods.

In the same vein, uncertainty stemming from political volatility within involved countries, including leadership changes, will have far-reaching effects. Iceland serves as a compelling case study: Prime Minister Sigmundur David Gunnlaugsson stepped aside following revelations he owned an undeclared offshore company, weakening his parliamentary coalition’s position relative to the rival Pirate Party.

Investigation into this leak might yield legislation that is even transferable to nations that are not involved.

Specifically, further inquiry will shed light on tax loopholes that many companies take advantage of, so corporations should begin strategizing how to deal with this scrutiny; forming back-up plans to compensate for the changes they may have to make if legislation does address loopholes they are accustomed to.

Another potential source of risk for businesses is forced disclosure to the public of business practices. Markus Beyer, Director General of the pan-European employers’ association BusinessEurope worries about the potential for “misguided interpretation” by the public. Transparency International’s Elena Gaita has countered this: “Banks are already disclosing this information and haven’t had any problems with it.”

If there were ever a time that sweeping reforms were most likely, now seems to be that moment. Businesses and investors should start analyzing and building strategies for how best to harness the opportunities and navigate the risks emerging out of the Panama Papers scandal.

Categories: Finance, International

About Author

Eileen Filmus

Eileen has worked in the US Congress, conducted research on terrorism and human rights, worked in the private sector and at NGOs. She specialises in the relationship between technology and geopolitical threat management. She has a Masters degree from University of Chicago, where she focused on security, politics, and diplomacy.