The Economic Impact of the Panama Papers Scandal

The “Panama Papers” scandal that broke this week involving the Panamanian legal and business services provider Mossack Fonseca could prove to be the largest tax and money laundering scandal in world history.  Given the scale of the scandal and the notoriety of many of the political and business leaders that appear to be involved in this scandal, it is possible that it will have a major impact on the global economy in the coming months, as governments scramble to ensure their citizens that they are doing everything they can to crack down on tax avoidance and money laundering.  Moreover, much more information regarding the businesses and politicians that used Mossack Fonseca to hide their wealth in shell companies and tax havens is likely to be released in the coming weeks, meaning that this scandal will remain in the headlines for some time to come.

The “Panama Papers” scandal involves more than eleven million documents that were leaked from the offices of Mossack Fonseca.  Most of these documents have been made public by the International Consortium of Investigative Journalists (ICIJ), the same organization that released the “Luxleaks” papers in 2014 that detailed how the government of Luxembourg helped multinational companies to avoid paying higher taxes in their home countries.  It is estimated that the leaked data contains information on at least 215,000 companies in 21 different offshore jurisdictions, as well as information on more than 14,000 banks and law firms that worked with Mossack Fonseca.  Moreover, a number of high profile world leaders and their families appear to be implicated in this scandal, including Russian President Vladimir Putin, Chinese President Xi Jinping, Pakistani Prime Minister Nawaz Sharif and Ukrainian President Petro Poroshenko.  Already, Iceland’s Prime Minister David Gunnlaugsson has been forced to resign after his efforts to hide his ownership of offshore assets were exposed in this leak.

While the scale of the offshore industry surprises no one, the fact that so many high profile political leaders and businesses are exposed by the “Panama Papers” means that there could be major repercussions from this scandal.  Already, many governments are moving to crackdown on offshoring and tax havens, with the recent decision by the Obama Administration to crack down on the practice of inversions highlighting the growing interest in fighting tax avoidance.  Moreover, with voters angry at the growing wealth disparities around the world, cracking down on small tax havens is an easy target for political leaders in search of votes.  As more information regarding Mossack Fonseca’s practices goes public, more governments are likely to step up their fights against tax avoidance and evasion, threatening the prosperity and growth of the world’s leading tax havens.  However, the past has shown that, scandals involving tax havens often end up serving as strong marketing tools for those very tax havens.  As such, without a coordinated global effort to eliminate the practice of tax avoidance, there is no doubt that political, business and investment leaders will simply find new ways of avoiding taxes in their home countries.  Nevertheless, the scale of this scandal must just provide the impetus that is needed to launch such a global fight against tax avoidance.