Post 9: What are Panama Papers?

A beginner’s guide to the mankind’s biggest information leak. By big we mean 11.2 million documents big, which is larger than the US diplomatic cables released by WikiLeaks in 2010, and the secret intelligence documents given to journalists by Edward Snowden in 2013.


First let’s start by acknowledging the fact that everyone in the world is required to pay some amount of tax to their respective governments, which is calculated on the amount of assets they have,  larger the assets, larger is the amount of money your government will take from your bank accounts.

What are shelf companies?

A shelf corporation, shelf company, or aged corporation is a company or corporation that has had no activity. It was created and left with no activity – metaphorically put on the “shelf” to “age”. In other words, a shelf company is just a company for namesake with no activity or business whatsoever.

Why create shelf companies?

There are many reasons to create shelf companies, creating shelf companies in itself is not illegal. But, many a times wealthy people create shelf companies to hide their assets, in order to avoid taxes, this is illegal.

How do shelf companies hide a person’s assets?

In order to understand this, we must first know what are tax havens, tax havens are countries where these shelf companies are incorporated (hence, “offshore” shelf companies). A tax haven country’s laws help in avoiding taxes, The Organization of Economic Cooperation and Development (OECD) – a Paris-based group of 30 developed countries – uses three key attributes for identifying whether a jurisdiction is a tax haven. viz. First and foremost, tax havens impose no or only nominal taxes. But this attribute alone is insufficient to identify a tax haven. Many well-regulated countries offer tax incentives for attracting outside investment but are not classified as tax havens. Which leads to the second, and most important, attribute of a tax haven. Protection of personal financial information. Most tax havens have formal law or administrative practices that prevent scrutiny by foreign tax authorities. There is no or minimal sharing of information with foreign tax authorities. Lastly, lack of transparency. If you want to read more about tax havens click here.

Now that we know what tax havens are let’s learn how exactly are assets hidden via offshore shelf companies. Say for eg Mr. A has 10 Billion US dollars, Mr A will find someone he trusts but isn’t related to, let’s say his best friend, Mr B. Mr A will transfer 2 Billion to Mr. B, Mr. B will approach a law firm that helps create offshore shelf companies, the firm will create a shelf company with Mr B as its director in a tax haven , this company’s assets will be roughly 2 billion less commissions, and since it’s been incorporated in a tax haven there is no need to pay taxes on those 2 billion dollars. Assuming tax rate is 25% in Mr A’s country, Ta Da! He just saved 500 million dollars!

But how will Mr A use this money, if it doesn’t belong to him?

Say for eg Mr A wants to buy a penthouse in Manhattan, Mr A can’t pay for it, but his best friend’s company can, can’t it? The penthouse is sold to the company, the company transfers it to Mr A. sly ain’t it?

Finally, The Panama Papers.

Since you already know everything now, only thing left to do is fit proper nouns and you’ll know what the Panama Papers is.

An anonymous person hacked into the database of the world’s fourth biggest offshore law firm, Mossack Fonseca (firm that helps create offshore shelf companies and is situated in Panama), eventually the data was handed over to the International Consortium of Investigative Journalists (ICIJ). On scrutiny, the Mr A’s of the world turned out to be the wealthiest, most powerful people of the world which included Russian president Vladimir Putin; Nawaz Sharif, Pakistan’s prime minister; Ayad Allawi, ex-interim prime minister and former vice-president of Iraq; Petro Poroshenko, president of Ukraine; Alaa Mubarak, son of Egypt’s former president; and the prime minister of Iceland, Sigmundur Davíð Gunnlaugsson.

So, will all the people whose names have been found in the panama papers face penalties?

No, as I said in the beginning, creating offshore shelf companies is not illegal, hiding assets to avoid taxes is.

What’s next?

Now, all the governments will start negotiations to access the papers, set up special committees to act on them, and start international talks to address the problem of tax havens.

If you have any questions feel free to write to me at

Read on and Suave It Mate!

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“What are Panama Papers?” by Ayush Agrawal is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
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Image credits: International Consortium of Investigative Journalists