This Week in Markets and Democracy: Panama Papers, Curbing Tax Evasion, U.S. Cuts Tanzania Aid

Panama Papers Expose Weak Regulations

The “Panama Papers” are an unprecedented leak of 11.5 million files revealing a complex global network of hidden wealth. For four decades, Panamanian law firm Mossack Fonseca helped to set up over 200,000 shell companies—a favored tool for laundering money, stashing ill-gotten resources, and evading taxes—for tens of thousands of clients in over fifty countries, with current and former heads of state among the 143 politicians and cronies named. So far the revelations have forced Iceland’s prime minister and the president of Transparency International’s Chile branch to resign, and upped support for a Brexit given British Prime Minister David Cameron’s involvement. The Panama Papers further expose weaknesses in global financial regulation. More than half of the leaked shell companies are based in UK  territories—100,000 in the British Virgin Islands alone—where Cameron has tried to end such anonymity by legally mandating a public registry of companies’ owners. European banks HSBC, Credit Suisse, and UBS are among the ten institutions that worked most frequently with the Panamanian firm to create offshore accounts for clients. Since the leak, countries including the United States and Germany have proposed new legislation to increase transparency around offshore companies.

Curbing Tax Evasion: OECD and the United States Diverge

The hundreds of thousands of accounts revealed in the Panama Papers provide a glimpse into the vast efforts made to avoid taxes globally, and call into question the efficacy of current rules and regulations. The best seem to be standards set by the Organisation for Economic Co-operation and Development (OECD), in which 132 countries allow participants to check on their citizens’ assets abroad. Next year this process will become more automated, as ninety-six of these countries will routinely share the financial data they collect on non-residents with foreign tax authorities, making it harder to avoid taxes. The United States has not signed on, preferring instead to share information bilaterally under the Foreign Account Tax Compliance Act (FATCA), its own anti-tax evasion program. Under FATCA the United States can refuse to share information on foreign nationals, enhancing its own status as a tax safe haven.

United States Cuts Aid to Tanzania Over Election

In a show of U.S. support for democracy, the Millennium Challenge Corporation (MCC) suspended $470 million in aid to Tanzania. The move came after the government nullified election results in semi-autonomous Zanzibar and cracked down on free speech using a draconian cybercrime law. MCC says these actions violate its strict eligibility criteria, requiring that countries score highly on political rights, civil liberties, control of corruption, and other indicators in order to qualify for aid dollars. While the decision will not affect $600 million in additional healthcare, education, and assistance the United States provides as Tanzania’s largest bilateral donor, it sends a clear message that MCC’s good governance standards are non-negotiable.