Panama Papers — Are You in the Clear?
One week ago today, I typed a series of names into an online database of intensely private information. I was shocked by what I found … including the financial affairs of people I know personally.
Thanks to unaccountable decisions made by a number of individuals and organizations around the world — none of whom, presumably, have a direct stake in this information — the dealings of anyone who has worked with a certain Panamanian law firm are now a matter of public record.
Are you one of them? You may well be…
Is This You?
Sometime late last year, someone stole the records of one of the largest law firms in Panama — Mossack Fonseca. The firm was an “incorporator” — a specialist in creating companies for clients. The German newspaper Süddeutsche Zeitung obtained the 11.5 million files and shared them with a U.S.-based group of investigative journalists. This became known as the Panama Papers. The leak has already snared a number of politicians, businesspeople and celebrities.
The online database I mentioned above contains:
- The names and addresses of more than 200,000 offshore companies formed by Mossack Fonseca over the last 40-odd years.
- The name of anyone listed as a director or shareholder of those companies.
- The identities of intermediaries who helped set up and run those offshore structures.
Some people implicated in the Panama Papers paid lawyers or financial advisers in Panama and other countries to act as the nominal owner of an offshore company. These nominees opened offshore bank accounts in the name of these companies. But the money deposited into those bank accounts actually belonged to the person who paid the lawyer or adviser to act as a front. (Most such companies and bank accounts were not in Panama, by the way.)
Like it or not, that is a tax violation in practically every country in the world, including Panama.
If you knowingly used an offshore front to hide money from the IRS in this way, you are in deep trouble. The U.S. government is going to make examples of a few people in order to get other Americans to voluntarily disclose their illegal offshore tax activities.
They’ll fine them mercilessly, perhaps even jail them, then parade them around like medieval witches. It’s a marketing campaign.
But what if you did everything by the book — or thought you were doing so? The vast majority of people who operate offshore are doing legitimate, ordinary business.
There are many reasons to set up an offshore structure; after all, one of my specialties is explaining why and how this can be done.
But you could still end up in the Panama Papers. If you or your lawyer or tax planner hired an offshore incorporation company who, in turn, used Mossack Fonseca as a resident agent for your Panamanian company for service of process, you’re probably in the database.
If you have a company in Panama, therefore, you should urgently ask whoever set it up to give you details on everyone with whom they worked to find out whether Mossack Fonseca was involved in any way. Of course, you should also search that database.
Before you reach for the digitalis, though, bear this in mind.
If you’ve been filing your U.S. tax forms and reporting your offshore affairs accurately, you have nothing to worry about. The Panama Papers has compromised your privacy, but nothing more.
It probably won’t even increase your risk of an audit. At most, the IRS will compare your filing to the database, find that you are in compliance and that will be the end of it. After all, considering that your offshore bank is reporting your transactions to the IRS under the Foreign Account Tax Compliance Act (FATCA), your slice of the Panama Papers won’t be news to the IRS.
They Know Who’s Been Naughty or Nice
On the other hand, if you have an unreported account or company that was created via Mossack Fonseca — even indirectly — you should know that the IRS is mining the database to find you. This is especially true if you’ve used nominee shareholders or signatories on an offshore bank account to avoid FATCA. The IRS will consider this “willful” and come after you with a vengeance.
What should you do if you fall into this category? If you sign up for one of the IRS’s Voluntary Disclosure Initiatives before they contact you about your tax affairs, you may pay only interest and penalties — but face no jail time.
There are a number of Offshore Voluntary Disclosure options. They require that you file eight years of amended tax returns and FBARs, and pay taxes, interest, a 20% penalty on whatever you owe and a 27.5% penalty on your highest offshore account balance. In some cases, that penalty may be as much as 50% if the bank where your account is located was already under investigation when you apply.
If They Knew Then What They Know Now…
The Panama Papers has been deeply unfair to that country, which has done a great deal to comply with the tax grinches of the world. For example, under Panamanian law, the agent, shareholder or director of a Panamanian company must be disclosed and registered. That’s what made the Mossack Fonseca leak so damaging — the leaked data links such agents to the ultimate beneficial owner.
But it’s possible to keep your identity as a beneficial owner of a Panamanian company private without using an agent. For example, you can incorporate a limited liability company (LLC) in a jurisdiction like Nevis, and use that company as the shareholder of a Panamanian entity. Nevis doesn’t disclose the owners of LLCs — yet — so there’s no way to tie you to the Panamanian entity.
This is a perfectly legitimate and legal way to protect your privacy in a way that would have made you safe from the Panama Papers. Just don’t use it to break the law.
If you did, I guarantee you that the risk of doing nothing far outweighs the cost of coming clean now.
Editor, The Bauman Letter