The Panama Papers leak sheds some light on the intricate ways in which the wealthy can exploit secretive offshore tax regimes. As well as charging minimal or no tax to residents and non-residents, the main characteristics of tax havens are their lack of transparency and effective information exchange.

As the leaked files of Panama-based law firm Mossack Fonseca show, these havens are used by individuals and companies to stash their cash, away from the prying eyes of civilians or investigators. This is not necessarily because their money has been obtained illegally. In the case of public figures such as politicians, for example, they may want to keep the size of their wealth a secret or hide from their electorates that they or their relatives are legally minimising their tax. To do so, they hide their identity using a number of complex legal mechanisms.

Whether it is a wealthy entrepreneur or a drug trafficker, the tricks used to make their affairs hard to trace are pretty similar. It all starts by incorporating a “shell company” (or a “letterbox company”) in an offshore tax jurisdiction, using the services of a law firm such as Mossack Fonseca. These companies have the outward appearance of being a legitimate business but in reality are just empty shells. They manage the money they receive and hide who owns it. The management is made up of lawyers and accountants, whose only role is to sign documents and allow their names to appear on the company’s letterhead.

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