Revelations of shady people stashing money and financial assets in sunny tax havens are nothing new. But few such disclosures have been of a scope and scale as that of the so-called Panama papers. The documents from Panamanian law firm Mossack Fonseca now in the hands of a German newspaper represent one of the largest data leaks ever, bigger even than the US diplomatic cables released by Wikileaks in 2010. So large was the information dump - some 11.5 million documents and 2.6 terabytes of information - that Suddeutsche Zeitung took nearly a year to sort through it, with the help of the International Consortium of Investigative Journalists.
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Reaction to the first instalment of the papers last Sunday was incendiary. When it was revealed that Iceland's Prime Minister, Sigmundur David Gunnlaugsson, had set up a company in 2007 in the British Virgin Islands with Mossack Fonseca's help - and that he'd sold it to his wife for $1 just hours before a new law came into effect requiring him to declare his ownership to parliament - large demonstrations erupted in Reykjavik. Mr Gunnlaugsson was forced resign on Tuesday.
British Prime Minister David Cameron, whose late father set up an offshore company in Panama which paid no tax in Britain for 30 years, also had the political blowtorch applied to him by his Labour Party opponents. Other figures implicated in the leaks include Chinese president Xi Jinping, Russian president Vladimir Putin, Prime Minister Nawaz Sharif of Pakistan, and President Petro O. Poroshenko of Ukraine, as well as celebrities and sports figures.
Mossack Fonseca has staggering 14,153 clients (many of them in Australia), and with Suddeutsche Zeitung and the ICIJ planning to release more information next month, the fallout is certain to continue.
Establishing companies offshore is not in itself illegal; indeed it is essential for firms conducting international transactions, particularly in countries where the rule of law is tenuous. The effective movement of capital between the branches of an international business is another practise that requires offshore companies. As such, not all those named in the Panama Papers can be presumed to have broken national or international laws. Indeed, that very point has been put forward quite convincingly by certain commentators, some no doubt acting on behalf of the financial services industry which has a vested interest in maintaining the handsome profits that flow from facilitating offshore banking and other financial activities.
However, it is also clear that the secrecy provided by tax havens and by intermediaries such as Mossack Fonseca is attractive to individuals wanting to hide ill-gotten gains or to evade taxes in their home countries. Usually, such people are rich and powerful, although as the Panama Papers indicate, quite a few are merely well off. They include many politicians and government officials (such as Cameron) who have talked about the need for greater transparency in the international financial system and for tax havens to be shut down.
Yet the yawning gulf between what politicians and governments say about offshore financial dealings intended to avoid tax obligations and what they actually do about it is illustrative of the improbability of change. Conflicts of interest abound. Britain could well shut down the tax havens that have sprung up in its overseas territories, but won't because it benefits financially. Indeed, it encouraged certain of these territories to set up shop as tax havens as a way of absolving itself of the need to fund their continued administration.
That so many public-office holders have been implicated in the Panama Papers - at a time of growing income inequality and stagnant or declining government service standards - is certain to exacerbate the populist anger that's currently being manifested towards the political elites, particularly in the US and Europe.
However, the extraordinary influence that business elites can bring to bear in situations where they believe their wealth and power may be under threat has often proved the equal of public sentiment. Witness the largely successful efforts by corporate America to stymie efforts by Barack Obama to increase regulatory oversight of Wall Street after the 2008 global financial crisis.
Nevertheless, with an estimated 8 per cent of global wealth (roughly $7.6 trillion) held offshore and out of the reach of taxation authorities, governments need to focus on increasing the transparency of the international financial system, and on ensuring their corporate regulators have the resources to chase down firms like Mossack Fonseca. Otherwise public anger may boil over, as it did in Iceland.
