Five Panama Papers takeaways

Political leaders across the globe are on defense after the release of the Panama Papers, which shed new light on tax havens used by the powerful to shield vast wealth.

An unknown source leaked 11.5 million documents from a Panama law firm linking over 200,000 shell companies and 14,000 clients to the use of tax havens.

{mosads}Fallout has been decidedly muted in the United States — so far. But that could change.

Here’s five ways the scandal might play out in the U.S.

1. U.S. politicians and citizens may still be implicated.

Speculation is rife as to why the initial reporting based on the documents has named few Americans.

The documents were exfiltrated from the prominent Panamanian firm Mossack Fonseca, which specializes in helping overseas clients set up international shell companies to protect their financial assets.

Some tax experts have suggested that because there are a handful of states — like Nevada, Wyoming and Delaware — that have permissive corporate secrecy rules, U.S. citizens who wish to create shell companies can do so domestically.

Those states “ask virtually no questions,” said Ellen Zimiles, currently the leader of the Financial Services Advisory & Compliance segment at Navigant Consulting and a former assistant U.S. attorney in New York.  

“You can do this same activity being questioned in Panama in the United States as well,” she said.

But the journalists behind the publication of the Panama Papers — the International Consortium of Investigative Journalists (ICIJ) — are still digging through the files. Fusion, one of the publications with access to the documents, said this week that ICIJ has only been able to identify 211 people with U.S. addresses who own companies in the data.

“We don’t know if those 211 people are necessarily U.S. citizens,” Fusion wrote. “And that figure covers only data from recent years available on a Mossack Fonseca internal database — not all 11.5 million files from the leak.”

2. Pressure will grow on U.S. regulators to watch for tax avoidance and corruption.

Some lawmakers are already leaning on the Treasury Department to investigate allegations that Mossack Fonseca operations may have facilitated money laundering or terrorist financing.

“As the primary agency charged with protecting the integrity of the U.S. financial system and enforcing our laws against money laundering and terrorist financing, we strongly urge the Treasury Department to conduct its own inquiry into Mossack Fonseca’s activities and its clients,” Sens. Sherrod Brown (D-Ohio) — the ranking member of the Senate Banking Committee — and Elizabeth Warren (D-Mass.) said in a statement this week.

Shell companies are commonly used for legitimate purposes, but the leak also highlighted the extent to which wealthy individuals are taking advantage of overseas tax shelters. Some argue that the documents exposed a global financial system that unfairly benefits the ultra-wealthy.

But many onlookers say the U.S. has been cracking down on tax avoidance for years. A 2010 bill called the Foreign Account Tax Compliance Act (FACTA) was designed to deter tax evasion by tightening up reporting requirements for both individuals and financial institutions.

3. Banks are scouring their customer records for any connection to the breached Panamanian law firm.

Thanks to the 2001 Patriot Act, banks are required to verify the identity of their clients, a practice called “Know your customer.”

With many of the entities implicated in the Mossack Fonseca breach are under suspicion of corruption, experts say banks are combing through their records to make sure none of their clients are connected to the beleaguered law firm.

“The banks are very nervous,” Zimiles.

4. The Obama administration probably won’t raise the issue with foreign governments.

Policy experts say that because the kind of activity exposed by the leak was already a “well-known secret,” it’s likely the administration won’t press other countries on it — even those with prominent politicians implicated, such as Russia.

“I kind of see this story blowing over because, at least where I sit, these are things that people suspected,” said Colin Clarke, an associate political scientist at the RAND Corporation who teaches classes on international organized crime and threat finance at the University of Pittsburgh.

“I don’t know if it’s worth it for us to press countries on things we already know are happening,” he continued, suggesting that other political considerations will likely take a front seat to fallout from Panama.

The countries where U.S. diplomatic relationships are robust enough to withstand added pressure, he said, are likely the kinds of Western democracies that are likely to take action on their own.

5. The leak may become an issue on the 2016 campaign trail.

Sen. Bernie Sanders (I-Vt.) has already linked the revelations to his anti-trade platform, arguing that a 2011 free trade agreement with Panama opened the door to more tax evasion by Americans and forestalled investigations.

Supporters of the deal argue that Sanders has his facts wrong, noting that Congress used the negotiations to force Panama to sign a tax information exchange agreement to stem the tide of U.S. taxpayers trying to avoid paying their tax bills.

Trade agreements have been a potent issue on the 2016 trail, with candidates from both sides responding to antipathy from voters who question how globalization has helped them.