Pandora papers: how to cut off the water from letterbox companies

Once again, journalists have uncovered illegal financial flows through shell companies. This begs the question: hasn’t anything happened since the last data leak scandal??

Symbol picture letterbox company

It’s about shell companies again, about offshore accounts, about illegal deals worth billions of dollars. This time they were brought out of the shadows into the light by the so-called Pandora Papers.

Using a mailbox company is usually not illegal, as Christoph Trautvetter of the Tax Justice Network explains. Mistrust is nevertheless appropriate, because after all people invest here much money and time, in order to hide their possessions in such letter box companies.

"There are very few legal reasons, much less legitimate ones, to use a letterbox company,", says Trautvetter. "We have, for example, the intelligence service from Germany that is trying to support the opposition in Syria and is using letterbox societies to do so. Or, conversely, opposition members who organize resistance from Syria or countries where it is not possible to carry out such activities under their own name. But these are very rare cases", says Trautvetter. Actually, it’s almost always about obfuscating, remaining anonymous, and most often about circumventing laws in some way, he said.

What are the Pandora Papers? (Video in English)

Post-Panama Papers measures

For years, politicians have been working to stop or at least uncover illegal financial flows. Some countries have introduced so-called transparency registers to record the true owners of companies. "This has existed EU-wide since 2017", according to Trautvetter. In Germany, it would therefore be possible to look up the beneficial owner in the transparency register for every company that has its registered office here, and also for every company that wants to buy real estate in Germany.

In addition, more than 100 countries have agreed with each other on the automatic exchange of information for financial accounts. This means that banks in these countries must automatically report the true owners of accounts to their home countries. So if a German has an account in Switzerland through a Caribbean shell company, the Swiss bank automatically reports this to the German tax authorities. Some countries have even banned politicians from buying offshore companies by law.

So far, this sounds good.

What’s the flaw?

Something seems to be going wrong, however, if financial flows are still flowing into illegal uses and are only discovered selectively through data leaks. One problem is: "Not all tax havens changed the rules of the game to the same extent and not all rules were implemented consistently", complains Benedikt Strunz. He is one of the 600 journalists who analyzed the Pandora Papers.

Christoph Trautvetter also thinks that the implementation of the rules is the main problem. For example, there is a 25 percent limit for the transparency register. This means that if someone splits his shares across several companies and thus does not own 25 percent in one company, he can escape the reporting obligations in the transparency register.

Double standards

And then there’s the matter of international exchange of information for financial accounts. On the one hand, the EU does not act in a particularly exemplary manner when it comes to drying up tax havens. While it did produce a list of countries that encourage abusive tax practices and undermine member states’ corporate tax revenues back in 2017. In this way, it wants to ensure that EU countries can jointly exert pressure for reform. But: EU tax havens like Malta, Ireland or Cyprus do not appear on the list.

Paradise Papers | Tax Havens: The marina in Valetta, Malta

Officially, Malta has a tax rate of 35 percent, but thanks to refunds to shareholders, the bottom line is only a five percent tax burden

The other big player in the financial market, the USA, is also not behaving impeccably. In 2013, they were the ones who pushed for the international automatic exchange of information, especially with regard to Swiss banks. Following the threat from the U.S. to withhold penalty interest on all U.S. transactions from Swiss banks if they do not route account information across the Atlantic, Swiss banks relented.

As a result, the OECD was able to set up such an automatic exchange of information on a global level. "However, the U.S. has not yet reciprocated to this day", Trautvetter criticizes. This means that while all countries in the world now report information about U.S. citizens and their accounts to the United States, they only report information about foreign citizens in the U.S. and their accounts and company property to other countries in a very limited form.

It’s no wonder that the U.S. in particular, for example South Dakota, has become a popular location for shell companies. A flight movement that Trautvetter had already suspected, because it has become much more risky and problematic to operate shell companies in the Caribbean.

No business with "unknowns

As far as the purchase of real estate is concerned, a lot has already happened in Germany. Since 2021, for example, it has no longer been possible to buy real estate in Germany via shell companies without registering the true owner of this shell company in Germany. But that’s not enough, because wealthy people can still use shell companies to buy other companies, which in turn own property.

Therefore Gerhard Schick from the Citizen movement financial turnaround: "We should generally prohibit companies where the real owners are not known from doing business in Germany." In addition, if with real estates the owner is not comprehensible, the real estate should be able to be seized.

In addition, banks should also be targeted and held accountable, as they handle the majority of transactions. A study by the European Fiscal Observatory examined 36 major financial institutions and found: On average, they make 20 billion euros in profits per year in tax havens. That corresponds to around 14 percent of their total pre-tax profits, he says. Overall, according to the study, the activity of banks in tax havens remained constant between 2014 and 2020. "As far as anti-money laundering is concerned, it has been felt in recent years that there should be a bit more momentum on the part of the financial regulator", says Schick.

Exchange of financial information is not enough

Trautvetter also advocates that not only information about financial accounts be exchanged, but also information about the owners of real estate and yachts and other valuables.

Above all, moreover, transactions that have already been made should not be safe. Schick believes it would make sense to seize assets from illegal sources much more frequently.

Monaco I luxury boats during the Monaco Yacht Show

If a shell company owns a yacht or real estate, the information has not been exchanged so far, i.e. it has not been passed on to German tax authorities either

To even find out where action is needed, Germany would have to do a lot more monitoring, says Trautvetter. What is needed, he says, are specialized teams of police, tax authorities and public prosecutors to investigate such complex international corporate structures, identify the real owners and then punish the service providers and banks that have not reported properly.

Maybe the Pandora Papers will now give another push to enforce stricter rules internationally. Schick emphasizes: "It is very important – and this has to be said on a day like today – to have good, independent journalism that cooperates internationally. It is helpful in providing transparency. I am extremely grateful that it has once again been possible to show the public what is going wrong and thus also to put pressure on individual politicians who use such mailbox companies."

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