For wealthy Americans trying to conceal their cash, stashing millions of dollars away in secret offshore shell companies is not as simple as it used to be.
International laws, whistleblower bounties and embarrassing data breaches such as the one being dubbed the Panama Papers have made the lives of would-be U.S. tax cheats increasingly perilous, according to tax lawyers and former government prosecutors and investigators.
“If you are someone with serious money and you want to hide it from the government, you have a good reason to be nervous,” said Daniel Reeves, who founded the offshore compliance division of the Internal Revenue Service and now works as a tax compliance consultant. “Today, there are many different ways people can find out about your activities. It’s not the same world of secrecy.”
Reeves and other offshore experts say they are not surprised by the paucity of Americans in the massive data leak of 11.5 million records that has unmasked accounts belonging to world leaders and a rogues’ gallery of international criminals.
Panama, the base of operations for the law firm at the center of the unfolding financial scandal, has never been a favorite place for Americans to hide their money. The nation’s reputation for bank fraud and drug smuggling has prompted U.S. citizens to send their money to more stable shores and nations, including the Isle of Man, the Cayman Islands and Switzerland, according to the offshore experts.
One of the founders of the Panamanian law firm, Mossack Fonseca & Co., had another explanation for the dearth of U.S. names in the data leak. He and his business partner have never courted U.S. clients.
“My partner is German, and I lived in Europe, and our focus has always been the European and Latin American market,” Ramon Fonseca told the Daily Mail in London on Thursday.
Mossack Fonseca said in a statement issued to The Washington Post that the firm has not violated the law. “Nothing in this illegally obtained cache of documents suggests we’ve done anything wrong or illegal, and that’s very much in keeping with the global reputation we’ve worked hard to build over the past 40 years of doing business the right way,” the company said in its statement.
The massive data leak from Mossack Fonseca has revealed the existence of 214,488 secret offshore entities, based on financial spreadsheets, copies of passports, emails and corporate records from 1977 to 2015. The leak to the German newspaper Süddeutsche Zeitung and the International Consortium of Investigative Journalists has prompted the prime minister of Iceland to tender his resignation and forced British Prime Minister David Cameron to acknowledge that he financially benefited from shares in an offshore account set up by his father.
The embarrassing revelations have not touched prominent U.S. citizens, corporate executives or politicians. The Washington Post does not have access to the documents, but the McClatchy group of newspapers and Fusion, a Miami-based cable station, have been poring over the records as the U.S. partners in the international reporting consortium.
They have uncovered 211 scanned U.S. passports and about 3,500 shareholders in offshore accounts with U.S. addresses.
On Thursday, McClatchy reported that a Hollywood mogul, a Hyatt hotel heiress and a relative of a family that founded the Campbell Soup Company appear in the Mossack Fonseca documents. The individuals denied wrongdoing and said the accounts were created in accordance with U.S. law.
Offshore experts said they doubt that many prominent U.S. citizens and politicians will turn up in the data.
“U.S. politicians are smart enough not to get involved in this kind of thing because they know the exposure would be the end of their careers,” said Jack Blum, a veteran U.S. Senate investigator who has spent his career examining the offshore world. “If Americans are going to take their money offshore, they’re probably not going to use this firm and instead go to companies and countries that are far safer.”
Reporters working for the news organizations said it was difficult to determine just how many Americans are in the data because of the complexity of the corporate shell structures set up by the Panamanian company and based in places such as the British Virgin Islands.
They said they have identified 140 politicians or public officeholders from around the world with direct holdings in shell companies or connected to offshore financial transactions, including kings, presidents and current and former politicians.
None of them are Americans.
“There might be more Americans, but there are companies that we just can’t tell who the beneficial owners are,” said Michael Hudson, one of the lead reporters for the International Consortium of Investigative Journalists, a nonprofit organization based in Washington, D.C. “But Americans who want to hide their money have always felt more comfortable going to places like Switzerland, which have been far safer than Panama.”
Many people use the offshore world for legitimate purposes, to set up legal tax shelters, shield money from their spouses or business partners or clear the way for international business deals. U.S. citizens are allowed to move money offshore, but they must report the account information to the IRS. Mitt Romney’s offshore accounts became an issue during the 2012 presidential campaign, but they were legal. Disclosure laws vary around the world.
In recent years, Americans have been slowly running out of places to conceal their cash from the federal government, offshore experts say. In 2007, the veil of secrecy was shattered by a whistleblower named Bradley Birkenfeld, who disclosed that 19,000 U.S. citizens were hiding an estimated $20 billion in Swiss accounts held by the bank, UBS.
Through a federal whistleblower reward program, Birkenfeld received $104 million and UBS was fined $780 million in a tax-avoidance case brought by the U.S. Justice Department.
That case sent a chill through the offshore world. Congress also passed legislation making it easier for whistleblowers to collect money by revealing tax-haven holdings by U.S. citizens. The IRS has offered an amnesty program to U.S. citizens with unreported offshore holdings. So far, more than 50,000 American citizens and companies have turned themselves in. Their identities have been kept secret, and they will not be prosecuted under the terms of the program.
“U.S. citizens who have engaged in illegal offshore banking have to rethink whether they want to stay in the business,” said Stephen M. Kohn, one of the lawyers for Birkenfeld. Kohn now represents several offshore whistleblowers with information about accounts kept in 15 banks in Europe and Hong Kong belonging to 35,000 U.S. clients.
“Once the risk of detection became evident and once the banks started to discourage U.S. clients from opening accounts, Americans now have no other choice but to go deeper into obstruction or go into the amnesty program,” he said. “No one wants to open an account with a U.S. passport, because the person on the other end of the phone can call the IRS and make a million bucks.”
Whistleblowers who participate in the IRS program can receive between 15 and 30 percent of the amount of the fraud. The IRS says it has recovered hundreds of millions of dollars under the program and has tens of thousands of cases pending.
In 2010, the U.S. government created another weapon to uncover U.S. money in offshore accounts. Under the Foreign Account Tax Compliance Act, also known as FATCA, foreign financial institutions are required to report U.S. clients they suspect of trying to conceal assets.
Offshore experts say Americans continue to hide vast sums of money in tax havens, but they are becoming increasingly sophisticated. Offshore entities, as well as onshore entities set up in places such as Wyoming and Nevada, can be created in ways that make it virtually impossible to figure out who is behind the structure because there are so many corporate layers.
Investing in the offshore world has never been riskier, tax experts say.
“People are scared, for good reason,” said Dean Zerbe, who helped to expand the IRS whistleblower law as senior counsel to the Senate Finance Committee and later represented Birkenfeld.
Zerbe, a partner in the Arlington, Va., office of a Houston law firm that specializes in whistleblower cases and tax litigation, said he has more than a dozen clients who have come forward with information that could expose the existence of thousands of offshore accounts. He said the IRS could do more to track down cases and that the whistleblower office is understaffed and underfunded. But the existence of the whistleblower program, the creation of FATCA and the leaks of personal data might prompt potential tax cheats to think twice.
“It changes the calculation immeasurably,” Zerbe said. “And if you had an account in Panama as an American taxpayer, your digestion cannot be going smoothly right now.”
Correction: An earlier version of this report incorrectly said that the Panama Papers leak prompted Iceland’s president to tender his resignation. It was the prime minister who resigned.