This week, I’d like to begin examining the Panama Papers, a leaked set of over 11 million confidential documents that describe the activities of 210,000 corporate entities overseen by the Panamanian law firm Mossack Fonseca. Although only a handful of US citizens were named in the papers, this case offers an opportunity to evaluate a truly impressive example of outright tax fraud and willfully noncompliant behavior.
Internal Revenue Manual 126.96.36.199.5.1 states that the test for willfulness is “whether there was a voluntary, intentional violation of a known legal duty, which is demonstrated “by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements.” Examples of willful behavior include filing an FBAR but omitting one of several foreign bank accounts, filing the FBAR in earlier years but failing to file the FBAR in subsequent years when required to do so, and failing to file the FBAR after being sent a warning letter explaining the FBAR filing requirement. Evidence of a willful violation is rarely direct, because willfulness is a state of mind, but is instead established by drawing reasonable inferences from available facts.
However, in the Panama Papers case, Mossack Fonseca engaged in extremely willful tax evasion, constructing some of the elaborate shell companies yet discovered. These companies, which boasted intricate, multi-level, and multi-national corporate structures, enabled clients to “operate behind an often impenetrable wall of secrecy.” To best accomplish this, Mossack Fonseca would move from jurisdiction to jurisdiction when incorporating its shell companies, abandoning those jurisdictions that had taken steps to become more compliant with international standards regarding these entities. They preferred to incorporate in jurisdictions with minimal to nonexistent rules regarding disclosure, and they tried to perform as little due diligence in these jurisdictions as possible.
Half of Mossack Fonseca’s shell companies were incorporated in the British Virgin Islands, a jurisdiction noted for its particularly lax tax regime. Setting up companies in this and other loosely-regulated locales is a simple process, requiring the payment of a fee and the description of the purpose of the company (usually “investment” and “wealth management” are specified). Estimates place the amount of wealth “offshored” in this manner at between $21 and $32 trillion dollars, with tax havens like the BVI accounting for a staggering 50 percent of all world trade.
Some have attributed the lack of US citizens among Mossack Fonseca clients to be the result of the effectiveness of the Foreign Account Tax Compliance Act (FATCA), FBAR, and other stiffened offshore reporting requirements. That said, jurisdictions such as Panama and the BVI may always remain havens for willful non-compliance with reporting regulations, and may have to be dealt with more harshly, such as via sanctions, to further discourage this behavior.
For a free consultation regarding the FBAR or other tax matters, please contact the Law Office of Aaron P Richter, a Bethesda-based law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.