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PROFspectives: Panama Papers

News Story

Off-shore accounts and tax evasion come to light as 11.5 million private documents and 2.6 terabytes of data revealed themselves to the public on April 3. This issue of PROFspectives takes a look at the implications of the Panama Papers.

On April 3 it was announced that more than 11.5 million private documents and 2.6 terabytes of data had been leaked to journalists, detailing how billions of tax dollars had been evaded by private companies and wealthy individuals through a Panama-based law firm and corporate service provider called Mossack Fonseca. “Off-shore accounts,” as they are more commonly known, have long been a thing of speculation. But with the publication of the Panama Papers, truth has been brought to light in a way that has never been seen before.

An anonymous source, referred to a John Doe, first contacted German newspaper Süddeutsche Zeitung with batches of the information showing that about $2 trillion had been passed through the company by international clients as a means of hiding funds. Overwhelmed with the magnitude of information, the newspaper sought assistance from the International Consortium of Investigative Journalists (ICIJ). Together, 400 journalists, more than 100 media organizations, and more than 75 countries simultaneously broke the story on April 3.

Though neither entirely illegal nor entirely legal, this gray area of tax and finance law has seen profound repercussions thanks to the Panama Papers. Many European Union leaders have been implicated, the Prime Minister of Iceland Sigmundur Davíð Gunnlaugsson has resigned, and more is sure to come with the ICIJ’s release on May 9 of a searchable database with information regarding more than 200,000 entities implicated in the Panama Papers.

In this issue of PROFsepectives, we’ve asked professors in economics, cybersecurity, political science, and criminal justice and security to weigh in on the breaking subject.

Ganz Auction and Investigative Reporting

Farrokh Hormozi, PhD, economics professor

The world of investigative espionage has come to a new height by publication of the so-called Panama Papers, which reveal the intricacies of the off shore financial domain and its relation to the art world. The report is a fascinating one, not only reporting on the London dealer—“who reportedly, acting for a mystery Middle Eastern client,” paid $31.9 million for a canvas acquired 40 years earlier for $7,000 and more than $170 million for a Picasso piece—but also in the intricate business models they use for robbing people and avoiding taxes due to their countries or municipalities. This portion of the report concentrates on one instance—an auction of, and named after, a collector’s family collection, the Ganz family, where the Picasso deal was made. According to Todd Levin, director of a New York-based art advisory firm called the Levin Art Group, “All of a sudden the game was afoot with the Ganz sale in a way that hadn’t happened before.” He then concluded that “it was like a steroid injection to the market.” Further, it is revealed that the Ganz auction was regarded, even at the time, as a milestone. “It marked the moment when art became a global commodity, an investment alternative to property and stock markets, at least for those at the top of the money tree.”

It is a story of global significance and something to keep an eye on. However, there are questions of apparent urgency confronting government officials, and educational institutions. The Panama Papers have disclosed detailed elaborate systems to avoid taxes that have involved three prime ministers and countless high income individuals. The question is how to deal with an issue of such historic significance; how to combat international tax avoidance and evasion, and how to prevent auction houses from manipulation of the transaction for the benefits of a few. The latter is difficult because of the economics underlying the process; supply and demand for these items are significantly inelastic, so the equilibrium price may skyrocket, as it has been in this case. Also, the former is extraordinarily difficult and will require global cooperation. On April 15, 2016, the G-20 Finance Ministers issued a statement saying they will ask the Organization for Economic Cooperation and Development (OECD) to develop criteria to identify jurisdictions that do not provide adequate detailed information about tax entities. The OECD and the G-20 had already agreed on a standard, whereby countries automatically provide information to facilitate tax compliance. Sixty countries have adopted the standard and the G-20 want more countries to do so. (Mayeda and Deen, 2016) Social activists groups want even more vigorous efforts.

Given the intricacy of the issues discussed above, and the fact that supply and demand of high quality art pieces are insensitive to market forces, it seems an impossible act to control the process on legal ground. However, considering that international decision-making and action is increasingly shifting away from national governments and towards global governance institutions, the burden of solution may fall on educational institutions. Providing global governance degrees addressing global issues, such as tax evasion and high price robbery, may reduce the frequency of occurrence…just an opinion.

Why Accountants should worry about the Panama Papers

Susanne O’Callaghan, Lubin School of Business, Pace University; John Walker, Queens College, CUNY; and Catherine Dwyer, Siedenberg School of Computer Science and Information Systems, Pace University

The Panama Papers involved data leaks of over 11 million private records of clients over many months.  Confidential information in digital form being loosely managed has made these leaks more common. The Panama Papers leak is a prime example of the type of cyber risk associated with doing business and especially accounting in today’s computer environment. Cyber risk can involve cyber-hacking, cyber-espionage and cyber-terrorism. And there is little control over these risks.

Accounting faces the risk of at least two types of cyber attacks: 1) obtaining earnings results prior to public disclosure (insider trading), and 2) data manipulation of records by competitors and hedge fund managers who may attempt to produce accounting reports that deceive management into making decisions favorable to the competition or hedge fund manager.

Most business transactions are conducted through computers connected to the internet or through the “clouds”. Because we operate in this risky environment, it is like putting your general journal, general ledger and checkbook on Broadway and 42nd Street overnight, expecting nothing will be gone in the morning.  The “Panama Papers” event can happen to any accounting system on a computer connected to the internet.

The Panama Papers Leak Reminds Us that there is No Privacy in a Digital World

Darren Hayes, DPS, director of the cybersecurity program at Pace University

The Panama Papers leak has left high-profile leaders, across the world, scrambling to prevent their reputation from being sullied. From the United Kingdom’s Prime Minister, David Cameron, to Russian Premier, Vladimir Putin, reputations have tarnished. More than 214,000 offshore companies, associated with the Panamanian law firm, Mossack Fonseca, have been exposed. While the number of accounts disclosed and the names associated with those accounts is rather breath-taking, the fallout has not been as great as one might have expected; we certainly haven’t seen any political administrations topple since the news broke.

The Guardian has described this breach as the biggest leak ever but I beg to differ. The Office of Personnel Management (OPM) breach is the breach of the century, given that millions of government employees, including the identities of many clandestine operatives, were stolen. The breath of the information stolen in that breach is incomparable; the personal questions asked while applying for a government position, the names and personal information of family members, and fingerprints. The latter biometrics certainly cannot be replaced.

Ironically, this breach is potentially one of the few breaches that may benefit the general public. Similar to the recent Swiss bank leaks, this leak has provided transparency for the general public about how ethical the world’s political and business leaders have been and how much they can be trusted. An additional benefit is that the IRS, and other foreign taxation departments, are now focusing on these offshore accounts and the breach could result in a financial windfall for these agencies.

This breach should teach us that everything in digital format can be breached today so be careful about all of your communications and financialsit’s not just about protecting your social media profile. We should also be reminded that law firms are fertile ground for hackers given that they are enormous repositories for intellectual property associated with civil litigation. The recent breach of Cravath Swaine & Moore LLP and Weil Gotshal & Manges LLP, which represent Wall Street banks and Fortune 500 companies, is a clear indication of how vulnerable law firms are today. Moreover, law firms generally have inferior network securityespecially when compared to defense contractors and are therefore quite vulnerable to attack.

Death May Be Certain For All, but Taxes Are Not Guaranteed For the Elite

James F. Albrecht, PhD, professor of Criminal Justice and Security

We have often been reminded that only two things are certain in life: death and taxes. While death awaits us all, there are some who have devised methods for avoiding or reducing their tax liabilities. Some do so through legal manipulations, while others have been forced to become creative in hiding income procured through not so noble means. A perfect example has been revealed within the “Panama Papers,” a surprisingly covert investigation conducted by the International Consortium of Investigative Journalists.  This endeavor has revealed that many global leaders and corporate executives have concealed revenue by transferring funds through offshore accounts coordinated by Panamanian law firm Mossack Fonseca. 

Many of the names associated with these accounts were not surprising: China’s Xi Jinping, Russia’s Vladimir Putin, Syria’s President Bashar Assad, and even Ukraine’s new President Petro Poroshenko, who had been elected to root out government corruption.  Iceland’s Prime Minister and Spain’s Minister of Industry have already stepped down in disgrace, while Pakistan’s Prime Minister has fled the country.  Quite startling, however, has been the absence of prominent officials from the United States. 

The games involving money laundering and tax shelters are easy to play. Why deposit money in high profile countries like Switzerland, Luxembourg and the Cayman Islands, when Panama, Belize, and Seychelles provide less obvious alternatives? And add a law firm like Mossack Fonseca that will conduct the necessary research and take the risks for you and the game commences.  All an individual has left to do is to identify a relative or associate who will place their names on the account to set this scheme in motion.

It is imperative that these impressive efforts by the media at uncovering such widespread corruption and fraud result in effective change.  Ultimately, there are two key questions that must be answered. Now that the names and mechanisms have been identified, what steps will society at large take to put an end to this criminal conspiracy that apparently impacts most citizens across the globe? And what has been the basis for the obvious hesitance in American involvement in this long standing and generally successful scheme, as this may provide insight into measures that should be implemented at the international level to deter these devious plans from developing. 

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