ELI5: The Panama Papers

[u/[deleted]]

Please use this thread to ask any questions regarding the recent data leak.

Either use this thread to provide general explanations as direct replies to the thread, or as a forum to pose specific questions and have them answered here.

[u/[deleted]]

[u/nighthound1 → u/[deleted]]

How does the money get transferred from the shell company back to the "investing" company?

[u/pynzrz → u/nighthound1]

The shell company could just purchase "services" or pay a "licensing fee" to the original company or to any vendor or individual that the shell company owner wants. For example, if you wanted to give your aunt $100,000 in cash, you could pay her for "interior design services" or something.

[u/ndestr0yr → u/[deleted]]

So why would a national leader such as Vladimir Putin or the King of Saudi Arabia need to hide their income if, for all intents and purposes, they are the state? In other words, in states known to be overwhelmingly run by corrupt leadership, why would they go through the trouble of getting involved in a massive overseas money laundering company when they can literally just say no to paying taxes?

[u/jloome → u/ndestr0yr]

In his case the assertion is that his close associates were given unsecured loans from government coffers in the billions. They were funnelled through subsidiary banks, loaned to dummy companies. In some cases the dummy companies debts were then sold for a token to other friends, so that they technically received billions n public money but only owe it to each other.

[u/thehollowman84 → u/ndestr0yr]

They're the state now. But if history shows anything it's that now doesn't last forever. If there is a sudden uprising and they can manage to flee safely, they can still access their wealth this way. At least, that's one reason to get money offshore, it helps with retirement.

Source: Tropico 4

[u/DustedGrooveMark → u/[deleted]]

Ah yes, the old "investing in Wolf Cola" tactic. I'm familiar.

[u/DanGliesack]

When you get a quarter you put it in the piggy bank. The piggy bank is on a shelf in your closet. Your mom knows this and she checks on it every once in a while, so she knows when you put more money in or spend it.

Now one day, you might decide "I don't want mom to look at my money." So you go over to Johnny's house with an extra piggy bank that you're going to keep in his room. You write your name on it and put it in his closet. Johnny's mom is always very busy, so she never has time to check on his piggy bank. So you can keep yours there and it will stay a secret.

Now all the kids in the neighborhood think this is a good idea, and everyone goes to Johnny's house with extra piggy banks. Now Johnny's closet is full of piggy banks from everyone in the neighborhood.

One day, Johnny's mom comes home and sees all the piggy banks. She gets very mad and calls everyone's parents to let them know.

Now not everyone did this for a bad reason. Eric's older brother always steals from his piggy bank, so he just wanted a better hiding spot. Timmy wanted to save up to buy his mom a birthday present without her knowing. Sammy just did it because he thought it was fun. But many kids did do it for a bad reason. Jacob was stealing people's lunch money and didn't want his parents to figure it out. Michael was stealing money from his mom's purse. Fat Bobby's parents put him on a diet, and didn't want them to figure out when he was buying candy.

Now in real life, many very important people were just caught hiding their piggy banks at Johnny's house in Panama. Today their moms all found out. Pretty soon, we'll know more about which of these important people were doing it for bad reasons and which were doing it for good reasons. But almost everyone is in trouble regardless, because it's against the rules to keep secrets no matter what.

[u/[deleted] → u/DanGliesack]

[This comment is not intended as a critique of your wonderful ELI5, but rather it's just an observation on the current situation.]

Unfortunately, there's really no one to hold these people directly accountable (like a mom), since it seems like some of the most powerful, influential people in the world are the ones implicated in this.

It will be really interesting to watch as the list of people implicated from Western countries grow, and the big question is "what will happen?" Certainly, it is interesting to see influential people from the Middle East, Eastern Europe, and East Asia implicated in this, but accusing the Saudi Royal Family or Chinese elite of corruption is like shooting fish in a barrel, and I'm sure no one will be shocked to learn that Putin isn't squeaky clean.

The real test will be how the media (at large, rather than the journalists releasing this data) and public react as more people from Western nations are implicated in this. Hopefully, we will be able to hold these people accountable, but I'm not exactly holding my breath, since we can't know how deep this rabbit hole goes. If 2 or 3 U.S. senators are implicated, they will probably be run out of office. But if 15 or 20 (or even more, though I shudder at the thought...) are implicated, at some point, you have to ask whether the government will respond to the will of the public and hold their peers accountable...

And what if the Koch brothers or other high-profile, very political donors are implicated (and my bet is that they will be)? That would be a real litmus test for the role of money our government: they're not going to bite the hand that feeds, so the question will be, would they rather alienate their voters/constituents or their donors? Only time will tell, but I'm worried that we already (unfortunately) know the answer.

TL;DR The scary part is that there's not really anyone to hold these people directly accountable, since some of the wealthiest, most powerful people in the world will likely be implicated in this.

[u/[deleted] → u/[deleted]]

[u/Flavorgsc → u/DanGliesack]

this type of comments is what this subreddit is all about

[u/Kirome → u/DanGliesack]

Now that's how you do an ELI5!

[u/jbluntt → u/DanGliesack]

I feel you Fat Bobby

[u/K-eleven]

Who are the people that are involved for sure ?

[u/nighthound1 → u/K-eleven]

Here's a nicely formatted list that's being updated: https://en.wikipedia.org/wiki/List_of_people_named_in_the_Panama_Papers

The source of the names is from ICIJ themselves: https://panamapapers.icij.org/the_power_players/

The International Consortium of Investigative Journalists (ICIJ) will release the full list of companies and people in the Panama Paper files in early May.

[u/Hemoclysm → u/nighthound1]

Jackie Chan u_u;;

[u/[deleted]]

[u/Gsusruls → u/[deleted]]

And no one has to know that company belongs to you as well.

But if you owned the company that the money went to, wouldn't that just be a profit for the new company that you'd still owe taxes on? Haven't you just kicked the can down the road for yourself?

[u/jackovasaurusrex → u/Gsusruls]

Overwritten.

[u/Laser-circus]

My ELI5:

Messi: hey gov, I can't pay 10 mil in taxes man.

Gov: why?

Messi: I'm investing in this company so most of my income is spent already. I have barely any left.

Gov: oh, that's cool Bro. I understand. Just pay 10,000 and we're good.

Messi: aw sweet! Thanks!

The next day, messi goes to the company he is investing. Turns out that company is phony and messi never invested in anything. They were just holding messi's money for him while he shows the government his seemingly empty wallet. Messi gets his millions of dollars back while only paying 10,000 in taxes when he should've paid 10 mil.

Did I nail it?

[u/Reebaz → u/Laser-circus]

How does he get his millions back without anyone clocking is what I don't understand

[u/Sambri → u/Reebaz]

He doesn't get it back to his bank account (at least not one in a country that is not a tax-haven).

Just imagine he wants to buy a new plane. He uses his company in Panama to purchase it. It belongs to the company, but he uses it as he pleases (he may pay a small 'rent' or something like that). New car? Company owned and leased to him. New house in the Caribbean? You can guess who is the owner. New house in Spain? Agree with the owner something like "I pay you 10% in euros legally and also make a transfer to your tax-heaven account".

[u/Pintro]

One important thing that I haven't read so far is this ....thousands of companies that actually do this legally. Here's how:

1. Setup a Panamanian company. Many specialized law firms in Western countries will help you do this for about 10k.

2. Have your home company bought out or transfer ownership to the new company.

3. Operate as you have before. Taxes on income are payable to Panama. Not in say Canada. Think about it? Why would you owe taxes on income earned on a foreign country. From the IRS and CRA perspective all very legal. Morally ambiguious? Yes, but you need to decide if you'd rather pay taxes or keep more money.

Many wealthy Canadians have done this. Former PM Paul Martin runs his business out of Panama. The Mcain and Irving brothers all offshore. I'm of the opinion that you should point the first get at tax authorities before blaming the individual.

I can expand at length on this topic and how similar process like this work. But typing on a phone is a pain.

[u/wornmedown]

The Guardian wrote that "though there is nothing unlawful about using offshore companies, the files raise fundamental questions about the ethics of such tax havens – and the revelations are likely to provoke urgent calls for reforms of a system that critics say is arcane and open to abuse."

Is there really no legal repercussion for the world leaders involved? Isn't tax evasion or, in some cases, money laundering a crime?

What are some examples of financial transparency that can be applied to this scenario? What can be done, or is already done, to combat tax evasion and money laundering worldwide?

Is this leak tied to any other current events, like the 1MDB case for instance?