It was during his time as a bureaucrat at the United Nations in Geneva, where he was surrounded by international lawyers, that Fonseca said he was lured by the mysterious world of offshore businesses. “One day it occurred to me that I could do it too,” he said. “I created my little office and left the UN and started with one secretary to create and sell companies.” He’d join up with Mossack soon thereafter.
Like Selling Cars
Setting up offshore vehicles has become routine for corporations, investment funds, family offices and billionaires. Low- or no-tax jurisdictions offer places to base a company or to send and park cash, company shares, art and other assets. Establishing a structure for them typically costs just a few thousand dollars. Once those fees are handed over to shops like Mossack Fonseca, the organizational and operational framework for the entity is drafted and registered in the local jurisdiction. Annual fees are then charged to maintain the company.
While offshore holdings are usually legal, they can also be used to hide wealth. Since the 2008 financial crisis, Western governments have sought to shed greater light on offshore banking centers, arguing they can be used to avoid taxes or hide illicit funds.
In addressing the legality question, Mossack is fond of drawing an analogy to the auto industry. When you create hundreds of thousands of offshore companies, he says, some are bound to end up in the hands of rotten characters: It’s just the nature of the business and isn’t the fault of the manufacturer. He makes a reference to Volkswagen AG recalling some of its cars before one of the firm’s consultants suggests that isn’t the most appropriate parallel. The scrutiny that the partners are under, Mossack says, stems in part from all the success they’ve had over the years.
Shipping-Industry Roots
How Panama came to be a key stop in the offshore investing business is a story that dates back almost a century, to the years right after construction of the inter-oceanic canal was finished.
The Central American country was already becoming the flag of choice for ship-owners looking to avoid stricter labor and fiscal rules back home when Panamanian officials based their requirements for company incorporation on the laws of Delaware, a U.S. state that protects information on ownership. Panama doesn’t charge foreigners taxes on income earned abroad.
While the Financial Action Task Force recently commended efforts to clamp down on money laundering, the Organization of Economic Cooperation and Development calls Panama the "last major holdout that continues to allow funds to be hidden offshore from tax and law enforcement authorities." Panama’s presidential office said in a statement that it has zero tolerance for any legal or financial operations that aren’t managed with the highest levels of transparency.
Whether the new regulations are up to the OECD’s standards or not, the industry is feeling the squeeze, according to Mossack and Fonseca. A law implemented in 2011 required Panama-registered agents to provide client information when requested on all new incorporations, and the British Virgin Islands has adopted restrictions on due diligence.