PANAMA CITY – Panama has been widely criticised for failing to do enough to clean up its financial system in the wake of what has been described as the ‘world’s biggest leak’. President Juan Carlos Varela announced that Panama will set up an investigation panel of national and international experts to tackle the black market financial system and improve transparency.

Panama has long been known as a tax haven and it remains to be seen if the Panamanian government is actually willing to improve regulations given that much of their economy is reliant on foreign money. Even if Panama is willing to change, will they actually be capable of making improvements?

Often such commissions can become little more than a talkfest and it can take considerable time to report back. Effectively restructuring and implementing more transparent standards may prove a tough task, particularly when you consider the globalised nature of the problem. Whilst the leaks originated in Panama, it is an international problem that could prove particularly difficult to tackle considering the sheer amount of different legal jurisdictions as well as the many tax and financial systems involved.

There is no case study or model for authorities to follow that has effectively dealt with transparency and secrecy across a global scale. Whilst some countries may have cleaned up their act, the world as a whole has not. Even if Panama is successful in cleaning up through regulation, it is easy to imagine how illegal and quasi-legal financial practices would simply move to another part of the world to conduct their business.

Many other nations – some that you would not expect, also have issues with transparency and secrecy. The Corruption Perceptions index of 2015 released by NGO Transparency International reported that even in the so called ‘clean’ countries of Europe, many still have questionable records when it comes to corrupt financial activities outside of their borders. The most recent Financial Secrecy Index released by The Tax Justice Network ranked Switzerland and the United States as having some of the worst financial secrecy in the world, which facilitates tax dodging and money laundering.

Importantly, it should be noted that moving funds for tax minimisation purposes is a completely legal practice. It is often common practice by large companies and indeed intelligent accountants. However, the legality of similar practices becomes greyer for those who purposefully avoid tax to the other side of the spectrum where people purposefully and illegally evade tax.  So called ‘shell companies’, are legal, yet have been used to hold money in illegal ways and are extremely hard to trace.

Whilst many practices are technically within the law, it does not mean that they don’t create harm or could not be considered unethical practices. Many of these sentiments were echoed by President Obama in a recent address:

“It’s not that they’re breaking the laws, it’s that the laws are so poorly designed that they allow people, if they’ve got enough lawyers and enough accountants, to wiggle out of responsibilities that ordinary citizens are having to abide by.”

The Tax Justice Network estimates that a staggering $32 Trillion is hidden, untaxed or minimally taxed. Each year $1 Trillion is thought to illegally flow across borders, with Africa historically being the hardest hit from ‘capital flight’.

It seems a simple solution to make all regulations tighter and criminalise more of the activities on the grey side of the spectrum. But simple solutions cannot always address complex problems. Whatever regulations are changed, there will always be those that will legally or illegally seek to take advantage of loopholes in the system.

Governments and regulators will always have an interest in keeping regulations straightforward to cut bureaucratic tape so as not to stifle economic efficiency. Yet major scandals like the Panama Papers create more pressure from the wider public for more equitable regulations, something it seems at the moments governments cannot ignore, especially when we take into account how many political figures have been implicated in the leak. Overall, governments and regulators make compromises between the pro-business and pro-regulation standpoints and indeed will need to make regulatory compromises across different jurisdictions internationally to adequately address the problem.

– Michael McDermott, Correspondent (Politics)

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