The clandestine transaction set-up on which thrive the world’s rich and powerful

The clandestine transaction set-up on which thrive the world's rich and powerful

One thing the Panama Papers have made very clear is that there is a large system for concealing and moving money into and out of the country, and this system is used more by businesses and high net worth individuals than it is by public figures. Of the 259 Pakistani names revealed thus far in the second release of the data, only a fraction are political figures. The rest are all connected with business.

Why do so many people in the world of business feel the need to maintain an offshore company? There are numerous answers, and not all of them involve wrongdoing, says Ali Rahim of Baker Tilly, a chartered accountancy firm in Karachi. “The reasons can be tax avoidance, which isn’t illegal,” he says. “Or it can be outright tax evasion, or even laundering ill-gotten gains.”

Read: Probing ‘Panamagate’

Some businessmen named have given other reasons. “The company was especially incorporated to invest in KEZ,” says Nazim Haji when asked why he felt the need to incorporate a company in the British Virgin Islands whose existence was ultimately revealed in the Panama Papers. The three individuals named in the papers as owners “are attorneys, and not the beneficiary owners”, he added.

In 2009, an investment trust incorporated in Mauritius, Suroor Investments, bought out three Pakistani banks in a transaction that was structured by Mehmood Mandviwala, the lawyer who told the Senate recently that there were no laws under which movement of foreign currency out of the country could be investigated.

Usefulness of offshore companies

But offshore companies are useful mainly when you are a high net worth individual and need to accumulate assets abroad, and to operate bank accounts in places where those assets are held without having to declare them.

The catch here is that Pakistani law requires all citizens to declare earnings made abroad as well as assets.

For example, the country’s external account data shows trade and investment transactions with various countries that are well known secrecy jurisdictions.

These transactions occur in short bursts, where many months show a zero value while some show millions of dollars in imports, exports or direct investment coming and going from these countries.

The most favoured secrecy jurisdiction, according to Mossack Fonseca, is the British Virgin Islands. It accounts for almost 50pc of all entities in the database that forms the basis of the Panama Papers. Data on the State Bank website shows imports from the Virgin Islands ranging from zero to $9 million per month over a two-year period, with large fluctuations in between.

Likewise, the export data varies between zero and tens of thousands dollars per month over the same period.

Direct investment is reported under a heading “other” if it is below a certain quantum, but even here small amounts are shown coming and going from all sorts of jurisdictions in amounts of a few million dollars per month.

The stock market sees daily inflow and outflow of funds, sometimes in thousands of dollars and sometimes in millions, coming and going from jurisdictions like the British Virgin Islands, the Bahamas, Bermuda, the Cayman Islands, and larger amounts from Mauritius.

What are these small, irregular transactions? Some of them may well be bona fide trade or investment transactions. But it’s difficult to consider what kind of an import could be coming from a place like St Kitts-Nevis, or what kind of equity investment from Mauritius or export to Bermuda, considering that these countries, except for banking, have tiny economies.

But if you’re a businessman who has accumulated a large amount of money abroad through mis-declaration of goods, for instance, and one day you decide to create a housing colony and need to bring one million dollars back into the country, how will you do it?

One way could be to purchase a fictitious service from your own company abroad whose beneficiary owners are concealed. This will register in the data as an import. Another could be to funnel that money into the stock market through a broker, then withdraw it as “profit” from another investment made with the same broker.

Yet another could be to sell a fictitious product to your own company abroad, like software for instance, and receive the funds as a payment.

The simplest way would be to receive the funds as a “home remittance”, such as our prime minister has been doing for years now, showing Rs200m coming as a remittance from his son.

But home remittances cannot be sent from a company account, or from an account in your own name. Even receiving large remittances on a regular basis from a total stranger could trigger questions. The easiest way would be to open your foreign accounts in the name of family members.

A large apparatus for moving funds around clandestinely has been revealed in the Panama Papers, and when seen in conjunction with the types of transactions that we see occurring routinely around us, they provide a glimpse into a large world of wealthy individuals who have built a system for accumulating and enjoying wealth beyond the reach of the regulatory and tax authorities.

But today a murmur of consternation is travelling through this comfortable world as the prospects of a large-scale investigation threatens to rip the veils behind which it has grown.


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