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Panama Papers

When I was first hired by my current company, Panama Papers was the international sensation.
Everybody I know came to ask me if I'm going to help my clients evade taxes, just like all the other fund management companies do. My parents were among the last who ask, hesitantly, if I'm doing the same.

Being new and unaware of what exactly I got myself into, I went to search for the answer.
Well, my finding is that the answer isn't a straightforward no.

Panama Papers describes how Mossack Fonseca (the law firm) creates offshore investment vehicles (aka companies) to help their wealthy clients keep their money overseas to evade tax. It is a normal practice in private equity to create offshore companies - not to avoid tax, however, but to avoid contamination of assets into different investments. The side effect is that these investment vehicles allow for more tax savings, simply due to the legal form of the investment vehicles, tax regulations and bilateral treaties between countries. More on that in detail in subsequent posts.

All of the giants in the world has offshore companies/subsidiaries: Amazon, Starbucks, Apple, Facebook, etc. Some of them were even admitted to court and questioned on their morality for not paying taxes accordingly (they still pay tax, only much, much lesser). To be fair, their tax avoidance method is legal under the law. In addition, companies, by its nature, is to seek profit as much as possible with as little cost (aka tax) as possible. Yeah? As long as they comply with the regulations, to be honest, what is the issue here?

In the eyes of the lay people, the whole scheme seems to be for the purpose of money laundering.
But the key that causes the whole scheme to be defined as a money laundering mainly relies on the source of funds - when PEP (Politically Exposed Person) or other high-risk individuals is involved (which we as public wouldn't know whether these money come legitimately or illegitimately). This is what the regulators, i.e. FATF (Financial Action Task Force) have been after since almost 2 decades ago, and this is what lay people are mostly not aware of. It is not the offshore investment vehicles which makes the whole thing seems illegal, it is the source of funds and the purpose of the investment (i.e. money laundering) which makes the whole scheme illegal.

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