Secrecy World Page 2

  Mossack studied to become a lawyer at a small private Catholic university in Panama. In his practice, he became an expert in maritime law. By the early twentieth century, Panama began to offer itself as a place to register foreign ships. With the Panamanian flag on their vessels, shipowners could avoid taxation and circumvent regulations such as labor protections and boat safety standards that their native countries demanded. The extractive industries (petroleum, minerals, precious metals) were first to discover these benefits, with Standard Oil registering its fleet of tankers in Panama in 1919.

  After graduating law school in 1973, Mossack went to work for one of Panama’s top firms, Arosemena, Noriega & Castro, helping to establish its London office. After only a couple of years, he quit, frustrated with the firm’s refusal to recognize his contributions and pay him accordingly. Mossack returned to Panama in 1977 and gambled on his own ambition, opening a law office as a sole practitioner. “It was a real nail-biting time,” Mossack recalls. “I never knew if I would make enough to provide for my family.”

  In those early days, Ramón Fonseca, a recent law graduate himself, stopped by to wish him luck.

  To this day, Fonseca idolizes Mossack for his vision, toughness, and organizational ability. He admits that his older partner, who stands six foot three and sports a perpetually dour expression, looks forbidding, but he insists Mossack is really just “a big teddy bear.” Others who know Mossack echo the sentiment, saying that under the gruff exterior beats “a heart of gold.”

  When they first met, the two men didn’t immediately recognize how much they shared in common. Both were outsiders, yet close enough to Panama’s small circle of wealth and power to feel the distance that much more acutely. Each felt he was smarter than those he envied. Each harbored a similar drive to make his mark. Years later, Fonseca would explain in an interview that his greatest desire when starting out was not to be a sheep like everyone else. The sheep are not happy, he said, they never travel the world.

  Fonseca always dreamed expansively, pursuing overlapping careers as a businessman, fiction writer, and politician. Born in 1952, Ramón Enrique Fonseca Mora, known to childhood friends as “Yike” (pronounced YEE-kay, short for Enrique), is the grandson of Costa Rica’s first ambassador to Panama on his father’s side and a dentist-turned-insurrectionist on his mother’s. He proudly claims a family history of passionate political activism, often directed at the United States, with which Panama has a long and complicated history. It dates back to the country’s separation from Colombia in 1903, in a “revolution” instigated by the United States, which was eager to secure favorable terms for building a canal across the isthmus. The resulting treaty turned the new Panamanian republic into a de facto protectorate of the United States, giving America absolute control over the future canal and the right to intervene in Panama’s domestic affairs, while paying a pittance for the privilege. This arrangement became a focal point for Panamanian grievances: Non-Americans couldn’t travel freely inside the Canal Zone. Local workers received lower pay. Outside the Canal Zone, Americans held top positions in the Panamanian government and English encroached on Spanish as the favored language.

  Fonseca’s maternal grandfather, Ramón Mora, was among those who rebelled against this second-class status in their own country. Mora had attended Swarthmore College and then studied dentistry at the University of Pennsylvania. His 1921 graduation photo shows a bespectacled youth, head framed by jug ears, thickset lips pursed and unsmiling as he gazes solemnly into the camera. Back in Panama, still in his early twenties, Mora helped found an anticorruption, anti-Yankee organization called Community Action. When not at his dentistry, he also ran an opposition newspaper and built a successful rum distillery.

  In 1931, Mora, revolver in hand, was among a small group of young men who staged a successful coup against the Panamanian government of Florencio Arosemena. To keep the peace, the United States made minor concessions. Mora became agricultural and public works secretary. He lasted nine months before Community Action’s pick for the presidency, Harmodio Arias Madrid, removed him. The dentist watched from the sidelines as Arias, and then his brother Arnulfo, both of whom had participated in the coup, assumed control. They pursued a populist agenda: Women received the vote, a social security system was created, antiforeigner rhetoric escalated. In 1940, Arnulfo Arias, who openly sympathized with the Nazis and Mussolini, won the presidency. A year after his election, the National Police (under the approving eye of the United States) deposed him.

  The pattern repeated itself over the next forty years, with Arias winning three presidential elections, only to see the armed forces depose him each time. After a victory in 1968, he and his Panamañista Party served only eleven days before the National Guard stepped in. The coup gave rise to General Omar Torrijos, a charismatic populist who espoused a “dictatorship with a heart.”

  At the time of the coup, the sixteen-year-old Fonseca was a budding activist who later entertained thoughts of becoming a priest and “saving the world.” There had been a priest in almost every generation of the Mora family going back centuries. Fonseca dropped out of university after a year, attracted by the reformist zeal of the Jesuits. The priests were secretly running workshops where university students could connect with other members of civil society interested in social reform. Through the Jesuits, Fonseca met Father Héctor Gallego, a charismatic thirty-year-old Catholic cleric from Colombia. Gallego practiced liberation theology, which taught that the Church’s responsibility to the poor included helping them to improve their economic and political situation.

  Gallego worked in an isolated rural parish called Santa Fé in the Panamanian province of Veraguas. Today, it can be reached from Panama City by road in about four and half hours. In the early seventies, it was an all-day bone-jarring journey on a jeep donated by the Americans. The isolated farmers in Santa Fé lived in feudal conditions, toiling for large landowners. Most of the population had no clean water, and the Catholic Church estimated that 50 percent of the children suffered from malnutrition. At Gallego’s invitation, Fonseca moved to Santa Fé, where the priest put him to work on several projects, including burying the babies who had died from hunger and poor sanitation.

  Relations between the local landowners and the radical priest soured after Gallego helped the farmers form a cooperative. The landowners and the military launched a campaign of harassment, which culminated at about midnight on June 9, 1971, when two soldiers from the local army base kidnapped Gallego.

  The story of what happened next took on the power of myth. Soldiers hustled Gallego onto a helicopter. Hovering above the jungle over the island of Coiba, sixteen miles off Panama’s Pacific coast, they pushed him out. The gentle priest fell from the sky and vanished into the dense canopy, martyred for helping the poor.

  Father Gallego’s disappearance had a profound impact on Fonseca. The archbishop of Panama, Mark McGrath, urged him to study for the priesthood as a way to keep Gallego’s message alive. Fonseca agreed, then gave up when he realized his appetite for women proved an insurmountable obstacle. Instead, he returned to university to study law but continued his activism. Panamanian students had long led protests against American control of the canal, which American soldiers sometimes met with violence. After the coup, students also demonstrated against the dictatorship. Fonseca joined the protests, becoming a student leader. His grandmother kept a ladder against the garden wall behind her house in case the police came calling and her grandson needed a speedy exit.

  Yet even deep into adulthood, Gallego’s death haunted Fonseca. “When somebody disappears it’s worse than burying him; it’s not finished,” he says. “I have been looking for him my whole life.”

  In 1988, Seymour Hersh reported in the New York Times that Gallego had survived the fall, at least for a few days. Intercepted communications purportedly revealed the chief of army intelligence, General Manuel Noriega, joking how he’d learned it was better to kill your victim before tossing him from a helicopter
. Almost ten years later, a former soldier approached Church authorities with information about a clandestine grave where several people including Gallego had allegedly been dumped. An exhumation recovered a jumbled collection of bones but a DNA test proved inconclusive.

  Fonseca, by now a successful lawyer, offered to have a private DNA test performed. While one missing man was positively identified, the priest was not. For years, Fonseca kept a box of mixed human remains under his office desk at Mossack Fonseca, the suspected bones of his former mentor resting by his feet. In 2015, the public ministry took them back. They still await a proper examination and burial.

  A year before he died, an ailing Noriega told Gallego’s sister another version of what had occurred in 1971. The death-by-helicopter story that had transfixed the world was a lie. Noriega’s final account was more prosaic, although no less brutal. After his kidnapping, the priest was driven to Panama City, with the goal of sending him into exile. Along the way, he jumped out of the moving jeep and punctured a lung. His captors then beat him severely. By the time he arrived in Panama City, Gallego was barely alive. After several agonizing days, he died and his body was dumped into a mass grave. Fonseca suspects that the possible remains of his old mentor have yet to receive a new DNA test because those connected to the original crime continue to maintain influence in Panama.

  Upon completion of his law degree in 1976, Fonseca left Panama to attend classes at the London School of Economics. The United Nations recruited him before he could complete his studies. They needed Central American lawyers to fill their quota system. In the UN, Fonseca envisioned an opportunity to save the world on a good salary. He accepted a position with the United Nations Conference on Trade and Development in Geneva, but within a few years he had soured on his employer.

  “I lost my idealism inside the UN bureaucracy,” he says. Fonseca watched in dismay as those around him hijacked the organization’s global mission in order to enrich themselves. Bosses turned official business trips into junkets. Salvation came in the guise of a Geneva attorney. In a meeting, she kept staring at him.

  “Are you Panamanian?” she asked excitedly during a break. “Tell me you are a Panamanian lawyer!”

  The attorney had been searching for someone to create Panamanian companies for her clients. In Fonseca, she found her man.

  According to Panama’s corporate statutes, only a Panamanian lawyer could register a Panamanian company, but the lawyer could do so on behalf of anybody. Since 1927, Panama had allowed foreigners to buy anonymous companies in the country and did not require the names of the owners or shareholders to be made public. Companies did not need to file annual financial reports. While the companies had to have directors, who were publicly listed, these directors were not required to be the companies’ owners. The registration fee was minimal, and a company could be created in as little as a week. The government did not take an interest in what these foreigners did with their Panamanian companies, which paid no tax as long as they made their money outside of Panama. The 1927 law turned the country into one of the world’s first “offshore” jurisdictions—a place where foreigners could take advantage of low or no taxes with minimal regulation.

  Panama’s corporation law was based on American corporate legislation from Delaware, New Jersey, and Arkansas. It was the state of Delaware, in fact, that created the template for most of the tax havens that followed. In the nineteenth century, Delaware was torn between a desire to compete for business with the corporation creation laws of neighboring states, particularly New Jersey, and concern over the corruption that might follow. Corporations were already seen in America as a source of financial instability and unchecked power, because they allowed individuals to engage in speculation and escape accountability for their misdeeds.

  At first, Delaware permitted only certain local industries, such as fruit production, to create companies, and their monetary size was capped. By 1875, company formation in Delaware was limited to an act of the state legislature or approval by a judge who determined whether the entity was lawful and would not harm the community. This attempt to tamp down on corruption instead drove incorporation practices in a different direction. A cabal of lobbyists formed. For a fee, they guaranteed they could round up enough votes in the Delaware legislature for clients who wanted to create a new company. In 1899, Delaware passed a General Corporation Law patterned on New Jersey’s but offering a lower tax rate to entice businesses to incorporate there. Gone were the state legislature and the judges. The new law also protected Delaware-based companies from liability and empowered them to conduct business in any state or place in the world. They only needed to avoid business activity in Delaware itself.

  The Geneva attorney was Fonseca’s doorway into the secrecy world, acting as his sponsor and making introductions. She called the companies “chickens.” The business was simple—hatch the chickens in Panama and collect the annual fee as the registered agent. Fonseca says that while employed by the UN, he referred the work to a cousin in Panama, who agreed to give the companies back to Fonseca if he returned home.

  The final blow to Fonseca’s career at the United Nations came from a seemingly innocuous offer. He was notified that he had become eligible for burial in a section of a Geneva cemetery reserved for the UN. As a perk to employees, the UN helped defray the costs. Fonseca suddenly saw his whole life play out as a bureaucrat, right up until the moment they shoveled the dirt over his casket.

  In 1982, after six years at the UN, he quit and moved back to Panama to open his own law practice, retrieving from his cousin the companies created during his UN years. Fonseca created a Panamanian holding company, Michiana International, to handle the registration business. His new clientele included one of the richest men in the world: Adnan Khashoggi, the Saudi billionaire arms dealer. (The Geneva attorney had helped Fonseca land Khashoggi as a client.)

  Khashoggi embraced the benefits of offshore tax havens, particularly as places to register his yachts, floating pleasure palaces where he entertained friends and influenced business prospects. Fonseca’s Michiana International registered at least three of Khashoggi’s boats, including his most opulent creation, the Nabila.

  Named after Khashoggi’s daughter, the Nabila cost around $85 million (roughly $250 million in today’s dollars) to build and outfit. The 292-foot yacht could travel eighty-five hundred miles without refueling and store three months of food for one hundred people. It had a hair salon, a surgery, and a patisserie on board. Tucked away among the five levels and one hundred rooms were quarters for a crew of fifty-two. Movie stars, musicians, and the megawealthy danced in its disco. Bathrooms were hewn from single pieces of onyx. Khashoggi’s personal suite had a tortoiseshell ceiling and featured a ten-foot-wide bed, behind which lay a secret passageway for paramours. Portly, short, and balding, Khashoggi kept a bevy of high-end prostitutes on call. The yacht was a self-contained mobile world, ideal for a hyper-controlling, reality-bending, glam-loving billionaire. When creditors repossessed the Nabila in 1988, Donald Trump bought it.

  All that sizzle was in service of the sale. Khashoggi acted as a middleman for arms deals and commodities trades, taking a healthy commission on each transaction. Inside the Nabila’s staterooms, Middle Eastern royalty, Fortune 500 company executives, Swiss bankers, and government functionaries wheeled and dealed. When necessary, the yacht motored into international waters to complete contracts free of government constraint such as tax obligations.

  A few years after Fonseca returned to Panama, a transaction involving another Khashoggi yacht brought Ramón Fonseca and Jürgen Mossack together as lawyers for the first time. As Fonseca tells it, Khashoggi had sold a yacht to a sheikh who was Mossack’s client. As part of the deal, the sheikh wanted a helipad on the boat. The two lawyers worked out the details. In the process, they established a rapport.

  Khashoggi had an unsavory reputation, but neither Panamanian lawyer appeared to show any hesitation in working with him. In the mid-1970s, U.S. congressional he
arings had exposed Khashoggi’s involvement in a massive multicountry corporate bribery scheme orchestrated by the defense contractor Northrop, which had poured tens of millions of dollars into the bank accounts of foreign officials to win contracts. Northrop had paid Khashoggi $106 million as a consultant between 1970 and 1975. The hearings showed that at least $450,000 of that found its way into bribes for two Saudi generals.

  In Panama, moral flexibility was a professional selling point. The country’s lawyers and bankers had made Panama a destination for the criminal class. Torrijos’s regime had grown increasingly corrupt, transforming the country into an offshore banking hub. By law, Panamanian banks could not release any information about account holders, even to the government. This blanket of company and bank secrecy attracted the unscrupulous. Then in 1981, in what many believe was a political assassination, Torrijos perished when his airplane crashed in western Panama. With him went the stability of the country.

  Manuel Noriega, who had been head of intelligence for Torrijos, quickly maneuvered his way into power. Noriega accelerated the turn toward corruption, transforming Panama into a one-stop financial service provider for the Colombian drug cartels. Billions of dollars from cocaine shipments to the United States and Europe were stashed and laundered through Panama City. International condemnation followed.

  Fonseca joined a civil society movement full of Rotarians and Lions Club members opposed to Noriega. He and Mossack began to discuss combining their law offices to protect themselves from pressure that might come from the dictator. The merger also made sense from a business perspective. They conducted similar practices. Combined, they had about five thousand companies under registration. This provided a steady income through annual fees.

  “It was more ideal to have a single, stronger firm to be able to resist any political difficulties,” says Mossack, “and a single practitioner could never aspire to have big clients, unless you were a firm.”