KARACHI: The eye-popping trove of 11.5 million documents leaked by an unidentified whistle-blower from the closet of Panama-based law firm Mossack Fonseca has rightly raised a storm, mostly in the corridors of power worldwide.
Politicians and the rulers from Russian President Vladimir Putin to Pakistan Prime Minister Nawaz Sharif — the latter’s children having been caught in controversy over the use of offshore companies to buy London real estate — have been visibly perturbed. But the naming and shaming of Pakistani business and financial tycoons has scarcely gone to give anyone a sleepless night.
The leaked documents identify 214,000 shell companies — ones with no offices, no work and no employees (paper companies) — incorporated in Republic of Panama with the help of Mossack Fonseca. The alleged objective was to obscure the ultimate ‘beneficial owners’ in a bid to hide billions of dollars.
A lawyer in Karachi endorsed the view that unless involved in “criminal activities”, the formation of offshore shell companies was legally correct. “It is the hiding of ultimate beneficiaries that is illegal”.
According to the 2015 audit report of Mossack Fonseca, the law firm knew the identities of real owners of just 204 of the 14,086 companies it had incorporated in Republic of Seychelles — a tax haven.
Relating to Pakistan, the leaked documents identify 200 individuals — including lawyers and politicians — who in some way are linked to the offshore companies. However, the largest number is those of business tycoons, engaged in hotelling, textile, real estate and cement sectors.
The names that have grabbed the spotlight are only the fewest of possible wrongdoers and they must be kicking themselves for failing to place a ‘proxy’ or a front man. “There are always the means to hide the identity of ultimate beneficiaries,” said a source at the local stock market.
The existence of shell companies has never been a secret in such places as British Virgin Islands, Channel Islands, the Bahamas, Panama and Seychelles. A few companies with registered office in one of those destinations are also quoted on the local equity market.
The list of Pakistani politicians, ex-servicemen, businessmen, bankers and real estate tycoons who have forever been suspected for secret financial dealings could go on and on. “The thousands who have been fortunate not to be caught up in the leaked documents would be chuckling to themselves for misfortune of those who have been identified,” said a lawmaker. “And mind you, that which has been revealed is only the leaked portion of documents with just one law firm in one such safe tax haven.”
The intricate maize of shell companies, stock holdings and property ownerships by the alleged Pakistani offenders boggles the mind.
For most of the world the major crime in involvement in offshore shell companies is the “wilful failure to disclose overseas accounts, concealment of income and tax evasion”. Those charges are not of much moment in the Pakistani context since no-one questions a measly five-figure yearly income and three-digit income tax filed in their tax returns by rich politicians and ruling elite.
“There are ways to find a way around the law. For instance, a Pakistani who lives abroad for 183 days in a year need not disclose assets and income he earned abroad, they fall in the bracket of non-residents,” said an auditor-income tax expert. The prime minister’s son, Hussain Nawaz, has made his case based on that law, affirming no wrongdoing.
Two years ago on May 10, 2014, Finance Minister Ishaq Dar staggered the National Assembly when he revealed that at least $200 billion of Pakistani money was stashed away in Swiss banks. He also expressed helplessness in its recovery.
The local cheats, however, do not have to go through all the hassle of forming offshore shell companies to shuffle wealth. They only to wait for a while until the next “amnesty scheme” is announced.
Perish the previous schemes, in January 2013, the chief regulator Securities and Exchange Commission of Pakistan got the government’s approval to its request to ask the taxmen not to question the origin or source of funds that are invested in the country’s stock market.
The scheme remained in place until June 2014, resulting in enormous amount of undocumented wealth entering the capital market. No wonder that year, the then Karachi Stock Exchange was declared the second-best performing market in the world.
This year, the government has launched a two-year Voluntary Tax Compliance Scheme, which lets tax evaders whiten their illegal wealth by paying a token one per cent tax on assets of up to Rs50m.
Many believe that the mention of 200 Pakistanis in the Panama Papers has the significance of a ‘footnote’. And save for the Sharif family’s discomfiture, the documents would have been scarcely more than of academic interest.
Published in Dawn, April 7th, 2016