How Offshore Companies Enable Crime & Tax Evasion

How do mega corporations pay so little taxes while raking in billions? How do criminals launder illegal money?

Ahh yes… we have heard it a million times, “They are ripping us off.” “They don’t pay a dime in taxes.” “How do they make so much profit yet pay so little taxes?”

Or perhaps we watched Money Heist and wondered how criminals actually launder vast sums of gold and money. It is estimated that there is anywhere from 7 trillion to 32 trillion dollars of potentially dirty money. How could such vast sums of money escape the watchful eyes of authority you ask?

Well, perhaps both of these questions can be answered by looking into the topic of discussion today: offshore companies. We are going to understand how companies like Apple, Microsoft, General Electric, etc) pay so little taxes when they consistently rake in huge amounts of profits? How wealthy individuals use said companies to hide their wealth and launder money. How does such a scheme work, and how has it gone undeterred for so long?

In 2016, 12 million documents from a Panamanian-based law firm – Mossack Fonseca – leaked. Commonly referred to as the Panama leak, the leak opened the eyes of many people, including me, to the underground system of tax evasion, fraud, money laundering, and much more.

Let’s understand the basics of how this scheme works. Shell companies, operating by front men, are incorporated in tax havens such as Panama, Bermuda, or the British Virgin Islands. These are the visible portions of the scheme. Law firms such as Mossack Fonseca helped in the incorporation of these shell companies – hence why there was so much data when the company’s data was revealed to the public. Money can then be transferred by other shell companies into these companies. The whole scheme operates completely underground and undetected by authorities.

As a result of their confidentiality, these shell companies have become a popular tool for criminals, human traffickers, and drug lords. They have also become a popular tool for individuals seeking to evade taxes. According to ICIJ, the Panama data leak has revealed over 140 high-ranking politicians who were utilizing these shell companies for illegal purposes. Among these include former prime ministers of Argentina, Australia, Qatar, Georgia, Mongolia, etc.

If you would like to explore more about the politicians and high-ranking officials exposed in the Panama Papers, visit https://www.icij.org/investigations/panama-papers/the-power-players/

These shell companies were not only capable of helping people to evade taxes, but also enabled high net worth individuals to hold massive wealths of money in these anonymous holding companies. This allowed them to avoid having authorities poke around their money and questioning its sources.

It is important to note that the process of setting up a shell company overseas is not illegal at all. What is illegal, however, is to purposefully evade taxes, or to launder dirty money into these shell companies. Shell companies typically do not operate independently either. Part of the opaqueness comes from the layers upon layers of shell companies that hold other shell companies. For example, company A is held by company B, which in turn is held by C. So on and so forth. It does not help that each of these companies are likely to be incorporated in different tax havens, each with regulations and different DTAs (dual tax agreements) which makes tracing effectively impossible.

Yet this also beckons another question? It seems clear to me that these tax havens countries are aware that their country is actively helping criminals, tax evaders, human traffickers etc. Was it really the case that the authorities of these countries were unaware of what was going on? Was it that they knew what was going on, but couldn’t be bothered? Or were they actively colluding with law firms such as Mossack Fonseca?

According to the International Consortium of Investigative Journalist (ICIJ), former prime minister of Panama, Juan Carlos Varela, used illegally laundered money to fund his political campaign. So not only was he aware of the existence of dirty money in his country, but he was an active user of this scheme.

Well it is difficult to know for sure the scale of the underground market, it is safe to say that these shell companies are responsible for the many suspicious financial activities. And unless more of these underground networks are revealed, this will continue to be an issue that will likely go unresolved.

Share with me your thoughts on this subject!