By Parth Parikh and Keerthana Raghavan

Edited by Anjana Bhatia


At some point or the other, we must have come across this palindrome “A Man A Plan A Canal Panama”. Little did we realise then that this innocuous looking palindrome would be related to a place responsible for hiding wealth and properties to the tune of billions of dollars. So what is the Panama leak all about and how did such enormous amount of wealth go unnoticed for so many years? How did the leak happen and what is the impacts of such leak on the world economics going forward? Staying true to the anagram, there were “Men”, there was a “Plan” which was shelled out through a law firm based in Panama. We wish to delve deeper into the entire issue through a series of Q&A.

What are Panama Papers?

Panama papers are over 11.5 million documents leaked from the offices of Mossack Fonseca which is a law based firm in Panama. These documents contain the names of many rich people around the world who took help from the law firm Mossack Fonseca to create shell companies in offshore tax havens. The list includes the names of many current and former leaders like Hosni Mubarak, Muammar Gaddafi, Xi Jing Ping etc. There also 500 Indian names in the list including Amitabh Bachchan, Aishwarya Rai and Kushal Pal Singh.

How did the leak take place?

An anonymous source leaked encrypted internal papers from the Mossack Fonseca database to a German-based Newspaper named Sueddeutsche Zeitung who shared them with the International Consortium of Investigative Journalists which is a body of various media house like the Indian Express.

What is the rationale behind the incorporation of
shell companies?

Shell companies do not have any significant assets or operations. They exist only on paper to serve as a conduit for other business transactions. Incorporating shell companies can help in evading taxes and launder money. This is because shell companies provide anonymity and its ultimate ownership is difficult to trace. It has to be noted that all shell companies are not illegal in itself but they can be used for illegitimate business purposes. These companies are set up in offshore tax havens like Panama, Bahamas, Seychelles, British Virgin Islands etc. This is because tax havens have low or zero taxes on income generated and also provide banking secrecy.

What does an offshore law firm like Mossack Fonseca do?

An offshore law firm sells anonymous offshore companies around the world. They are shell companies which allow their promoters to hide their business deals. They have many offices all over the world. Their job is to start, sell and manage thousands of companies and thus making huge profits and helping others to make their black money into white and thus evade taxes. These companies make it easy for others to start companies, by selling its shell companies in cities across the world. They provide different facilities at the cheaper rate, from buying an anonymous company for as little as $1,000 (nearly Rs 66,290), to providing them with a fake director, to holding board meetings. And if the clients desire, it conceals the company’s true shareholding pattern. In short, the company is into the business of withholding the true identity of the offshore company’s owner.

What is the legal position on the creation of such offshore firms?

The remittance of money abroad has been tightly controlled by the RBI. Till 2004, all investments made abroad required prior permission from RBI. It was made easier in 2004 by the introduction of the Liberalized Remittance Scheme (LRS). As per the scheme, the amount of money that can be remitted without approval has been increased by 10 times to $250,000 from $25,000. Before 2004, Indians could not incorporate companies outside India because remittances to foreign countries were not allowed. In 2004, RBI introduced a scheme called Liberalized remittances scheme (LRS) which permitted individuals to remit up to $25000 per year outside India. It was increased to $250000 in phases. The remittances could be for various purposes like medical, gifting, buying shares etc. But, RBI did not allow individuals to specifically set up a company. There was a lot of confusion amongst the people. So, RBI came up with a notification in the year 2010 that though LRS allows for buying shares, it specifically prohibits setting up of companies abroad by individuals. But, chartered accountants took a technical view of this notice. That, though an individual cannot incorporate a new company, it can acquire/ take over an existing company. It meant that a company incorporated by Mossack Fonseca can be bought from them off the shelf. RBI came up with another notice in 2013, in which it allowed resident Indians to invest directly in Joint ventures and through the Overseas Direct Investment (ODI) route. So, setting up a company overseas by Indian can be considered legal only if it was done after the year 2013.

For what activities is remitting money allowed under LRS?

Under the LRS scheme, all resident individuals (including minors), can remit up to $250,000 for any permissible current account (such as medical treatment and education) or capital account transactions (like buying of property abroad and holding shares in an overseas company) in a financial year without prior RBI permission. According to the notice dated 15th June from the RBI, the permissible capital account transactions can include purchasing property abroad; making other investments abroad like setting up wholly owned subsidiaries and joint ventures. One can also extend loans to NRI relatives. However, money can’t be remitted for certain purposes under LRS. This includes buying overseas lottery tickets, sweep stakes and the purchase of foreign currency convertible bonds (FCCBs) issued by Indian firms abroad.

What are the gray areas about holding shares in an overseas company or setting up of a company abroad?

Buying shares of overseas companies are allowed since 2004 but there is a gray area if an Indian resident is allowed to set up a company. In the RBI notice on September 17, 2010, it is mentioned that LRS does not permit remittance by an individual for setting up a company overseas. Representations were made to the RBI after which the RBI’s issued a further notification on March 5, 2013, which clarified that an overseas company can be set up by an Indian resident. The notification also mentioned that joint venture or wholly owned subsidiary to be acquired or set up by an individual should be only an operating entity. This means the overseas company cannot further act as an investment company and acquire or setup another subsidiary. This leaves a gray area between the period 2010-2013 where the legality of setting up a company abroad is blurred.

Tax evasion or tax avoidance?

Although both terms look similar, there is a considerable difference between the two. Tax evasion is the difference between the amount of income that should be reported to the tax authorities and what is actually reported by us. Tax avoidance, on the other hand is somewhat legal and it implies the use of tax laws to reduce our tax burden.

Although both are seen as a means of dodging the taxes the legal definition of the difference between the two has been decreasing across the years. Hiding huge amounts of money is convenient for the rich to stay rich and by avoiding the taxes the ultimate loss is to the poor or the citizens of the country. There are many big firms that avoid tax legally, they have complicated tax structure which works to their advantage. Starbucks, for example, had sales of 400 m last year but was saved from paying corporation tax. What it did was to transfer some money to its sister company in royalty payments and bought coffee beans from Switzerland. So, in a nutshell, what corporates do is, move the money within the company, to its off-shore branches or subsidiary companies which are located in areas where taxes are less, which can reduce profits and hence you end up paying lesser taxes. This is what Starbucks also did, it also paid high interest rates to borrow from other parts of the business in addition to moving money to its Dutch subsidiary.

But many big firms do it and it is deemed legal. They call it tax planning and get away with it. Even though the wealth management would involve means and ways of helping ultra-high net worth individuals by helping them evade taxes, debts and legal judgments, Panama papers which feature some popular personalities is a clear cut case of tax evasion because many cases of political corruption has come to limelight. These include hidden assets of Vladimir Putin, David Cameron among other famous political personalities. Some Indians have set up offshore entities when it is clearly not legal and the laws did not allow them to do so.

So, is this a fraud case? (From an Indian perspective)

In a way, it is. It all depends when they have invested and also if they have informed the authorities about their assets/earnings in abroad in past. As discussed earlier, if a person has invested before 2004, then he is in violation of the law. And, as per RBI, those setting up or buying companies before 2013 are in ‘technical’ violation of the act. If individuals have kept the government informed of their investments/ earnings abroad through these companies, then there is a weak case. But if the authorities were not informed of the assets held abroad then there are various acts that are triggered, such as the money laundering act and foreign exchange management act (FEMA), among others & they should/ will be prosecuted.

How did the transfer of wealth take place?

For any money laundering case, it involves three stages –

1. Placement: Getting the black money or the surplus money into the financial system

2. Layering: Involves international movement of funds basically to separate the money from its source

3. Integration: The money comes back to the person and the money becomes legal having passed through a couple of transactions. In case of Panama, the transfer of wealth took place in a similar manner.

1.Clients :

The firm, Mossack fosenca, acts as an agent to about 2000000 companies. These companies were used to hold property and bank accounts.The Figure 1 below shows the companies that were its clients.


2.The intermediaries:

The firm was in touch with an array of intermediaries such as lawyers, accountants and banks (who help avoid taxes) and act on their instructions. The Figure 2 below shows its intermediaries that are concentrated across the globe.



The real owners hide their identity behind nominees and people with no real control. China and Russia top the list. Figure 3 highlights the major owners.


Was the Indian Government not aware about these companies before?

They were aware. Indian Governments have approached Panama Government & Mossack Fonseca before to share information about those who have invested in their companies. Everyone knows about such firms/ companies, these are not difficult to track. But, these companies don’t share information about their clients, as their whole business is based on this and people invest in them because they have very strong policies to maintain secrecy. So, yes the Indian Government knew about them, just like they know about Swiss Bank, but couldn’t do anything for years due to the lack of a concrete proof.

Have tax disclosure norms been strengthened?

Yes. Since the financial year 2011-12, resident individuals now have show details of foreign assets for tax returns, which includes the details of bank accounts held in foreign countries and also for the purchase of immovable properties abroad. The disclosure details have been strengthened with the income-tax returns for the financial year 2014-15 asking for disclosures of foreign trusts. The punishments for incorrect disclosures include a penalty of up to Rs 10 lakh and imprisonment of up to seven years.


Panama leaks is touted to be one of the biggest leaks in the recent times. With around approximately 11.5 million documents, totaling 2.6 terabytes (TB) of data, the scale of this leak is higher than the combined data of the Wikileaks, Offshore Leaks and the Swiss Leaks.

In this backdrop, it is not surprising that there are two parallel financial systems running in this globalized world. One is for the majority taxpayers of the 7.3 billion people alive today and the other is for the rest who do not wish to share their riches (as taxes). The bottom line is if the persons accused in the Panama Papers prove themselves legal with a valid reason, they’ll get away. Others who don’t may be charged with a severe penalty.


•Tara Golshan (2016, April 4). The 8 most important things to read to under-
stand the Panama Papers document leak . Retrieved from: http://www.vox.com/2016/
•Luke Harding (2016, April 5). What are the Panama Papers? A guide to
history’s biggest data leak Retrieved from : http://www.theguardian.com/news/2016/
•Jason Silverstein (2016, April 4). What you need to know about the massive
offshore accounts leak . Retrieved from: http://www.nydailynews.com/news/world/
•William Maulding (2016, April 5). AT A GLANCE – The ‘Panama Papers’
Scandal . Retrieved from: AT A GLANCE – The ‘Panama Papers’ Scandal

About authors:

ParthThe author is a student of PGDM finance of batch 2015-17 at TAPMI. He is an avid follower of financial markets and his core interests include studying about various buying opportunities in equity markets. His strengths lie in finding potential multi-bagger stocks in the mid-cap space. He also likes to read and write about current financial happenings across the globe. You can contact him at parikh.17@tapmi.edu.in


The author is a student of PGDM finance of batch 2015-17 at TAPMI. She likes reading financial news and interested in the current happenings in the economy and the banking sector. She is also a follower of capital markets and hopes to become a financial consultant. You can contact her at keerthana.17@tapmi.edu.in

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