Secrecy World Page 3

  In July 1986, Mossack and Fonseca held a cocktail soiree at the Union Club in Panama City as the firm’s coming-out party. Long a watering hole of the Panamanian oligarchy, Fonseca was a member of the club because of his ambassador grandfather. “We were connected to the elite but without the money,” he says, laughing at the memory.

  The thirty-fifth-anniversary video features a photo of the two men at the party, dressed in suits, drinks raised in salutes to each other. Fonseca beams. Even Mossack is smiling into the camera as they toast to the future.

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  TROPICAL PARADISES

  The ferry from Saint Thomas passes verdant islands, skimming over turquoise waters where pirates plied their trade. After about an hour, it crosses Sir Francis Drake Channel and reaches Road Town on the island of Tortola. Ramón Fonseca didn’t know what awaited him when he took the ride in the autumn of 1986.

  Shortly after joining forces, Mossack and Fonseca began to look for a new base for their companies. Panama was in turmoil. General strikes roiled the country, and the U.S. intelligence services publicly denounced Noriega’s cooperation with drug cartels. It seemed likely the government would default on its International Monetary Fund and World Bank loans, isolating Panama internationally. The unrest tainted the new firm’s main product, Panamanian companies.

  “You have CNN showing demonstrations in the streets, the camera focusing on burning tires, it was not good for business,” recalls Mossack.

  The two lawyers studied a map of the world looking for a jurisdiction in which to launch their enterprise. They needed a place that offered company incorporations, with low or no taxes on foreign holdings, government-enforced secrecy, a stable political system, and minimal competition from other providers. It had to be close to Panama for ease of travel and efficient enough to produce tens of thousands of companies.

  In other words, they needed a tax haven. Power to create a corporation stems from the government. Without the complicity of a tax haven, firms like Mossack Fonseca cannot exist. The best tax havens from the perspective of offshore providers have similar qualities: They feature a business-friendly political culture, functioning legal systems, and limited economic competition. The offshore industry provides much-needed revenue for the government through the assessment of registration and other fees related to company incorporations. In exchange, the industry receives state support and protection.

  As usual, Delaware offered the model. The state is a staunch defender of its revenue from company incorporations, which accounts for a sizable proportion of its budget. While actual industry practitioners in Delaware are few, they have an outsize control over the political process, writing the legislation that governs the industry and protecting its prerogatives in Congress.

  Fonseca was fighting off a bad cold as his boat approached Tortola, too sick to contemplate those who had preceded him. Christopher Columbus stumbled upon the archipelago in 1493, naming the islands “Saint Ursula and her 11,000 Virgins,” later abridged to the Virgin Islands. According to Catholic legend, Saint Ursula was a princess who, with her virginal handmaidens, set out on a pilgrimage to the Hun-besieged town of Cologne. They were not welcome. The Huns beheaded the virgins, and their leader killed Ursula with a bow and arrow.

  At twenty-one square miles, Tortola is the largest and most populated of the more than forty volcanic outcroppings the English acquired in 1662, known today as the British Virgin Islands, and, in financial circles, the BVI. Beyond importing slaves and planting crops for export, the British did little to develop this territorial backwater on the outer edges of the empire. Demands for independence began in 1949 and culminated almost twenty years later with a constitution establishing a two-tiered government. Locals, called “Belongers,” elect a legislative council, who in turn select a chief minister. The Belongers oversee domestic laws, keep the peace, and raise revenue. The British Crown appoints a governor to monitor affairs and handle foreign policy. Queen Elizabeth’s name graces bridges and parks, and her image is hung in schools and government buildings. When the Queen visited in 1966, she was chauffeured around in a Lincoln convertible that for years afterward was on display at the Smuggler’s Cove Beach Bar.

  The BVI’s origins as a tax haven date to the mid-1970s, when Paul Butler, a Wall Street tax attorney, contacted Harney Westwood & Riegels, then the only practicing law office in the territory. Butler was an expert on double tax treaties, which are designed to avoid taxing the same income in multiple jurisdictions. He creatively employed one such treaty between the United States and the Netherlands Antilles on behalf of his clients. Under the double tax treaty, the United States did not tax companies based in the Antilles. In turn, the Antilles did not tax foreign investments. U.S. companies with subsidiaries in the Antilles could thus avoid being taxed by either government. Still, Butler found the Dutch language barrier formidable.

  The BVI enjoyed a similar arrangement with the United States. As a member of the United Kingdom, it fell under a 1945 double tax treaty created to boost the American and British postwar economies. The BVI also had a functioning government and a literate population. It operated under common law appealable all the way to the Privy Council in London. And the islanders spoke English.

  With a phone call, Butler discovered the locals were all too happy to help his clients take advantage of the treaty to avoid taxes in their homelands. Tax avoidance is what a government authority sanctions as appropriate, usually after a corporation, lawyer, or accountant pushes the boundaries of what’s acceptable. Tax evasion occurs when the activity violates the law, either blatantly or after a ruling by a court or governmental entity. The difference between tax avoidance and tax evasion, it has been said, “is the thickness of a prison wall.”

  A cottage industry began. Butler’s biggest customer was Citicorp. In 1978, he created Citicorp Overseas Finance Corporation, based in the BVI. The subsidiary raised money in Europe and then lent it tax-free to Citicorp in the United States. Butler also established a BVI corporation for two wealthy Saudis so they could escape paying hefty taxes on the dividends from hundreds of millions of dollars of stock in U.S. companies.

  But Butler’s schemes proved too successful. U.S. Treasury officials objected to the revenue loss. Despite Butler’s pleas as the island’s unpaid lobbyist in Washington, the United States rescinded the tax treaty in 1982.

  By then, the BVI was addicted to the income. There was little else available. Limited rainfall restricted agriculture on the islands. Many Belongers commuted to Saint Thomas, in the U.S. Virgin Islands, for work. A fledgling tourist trade yielded a bit more than $42 million in 1985, around 50 percent of the gross domestic product that year. The only other significant economic activity came from drug trafficking, which could not be taxed. Butler’s innovative schemes had brought a small measure of prosperity. But now, with one stroke of the pen, the United States had eliminated the equivalent of the country’s education budget.

  “Something had to be done to replenish the coffers,” said Lewis Hunte, attorney general of the BVI at the time.

  Butler suggested a new route. Together with Hunte and the Harneys lawyers—subsequently known as the “Gang of Five”—he crafted legislation to permit the BVI to mint “international business companies” as the Panamanians did.

  Mindful of its competition, the BVI added improvements to the Delaware template. As with Delaware, the BVI did not collect information on who owned the companies. Its public registry featured the company name and the name of the firm that registered it. The BVI company had to issue shares and have at least one company director, as in Panama. However, unlike Panama, there was no public registry of directors, making the identity of the company owners even more secret. And nonlawyers could create companies as long as they had a General Trust License from the BVI.

  The BVI law passed in 1984. The Gang of Five had built the perfect company formation machine. It was primed and ready to pump out companies to nourish trade and connect communities throughout the world. B
ut when they flipped the switch, nothing much happened. No flood of company incorporations followed. The law went largely unused, until Ramón Fonseca arrived in Road Town two years later.

  As he stepped onto Tortola, Fonseca saw a sparsely developed village. Only one taxi was parked at the ferry dock. There were no traffic lights, Fonseca remembers, instead a roundabout with a tractor tire in the middle.

  Fonseca’s prospecting trip had come at the suggestion of the Trident Trust Company, an American financial firm based in Saint Thomas. Trident suggested that Fonseca contact Richard Peters, a member of the Gang of Five, to learn more about the BVI’s new company creation law. Fonseca instructed the taxi driver to take him to the center of town. It was a short trip. The taxi deposited him on a narrow two-way street. Chickens and goats wandered the cobblestones. Rough wooden dwellings lined the roadway.

  * * *

  IN 1986, THERE were slightly more than twelve thousand people in all of the British Virgin Islands—and around nine thousand of them on Tortola. The bonds of kinship on a small island are iron-strong. In the BVI, the wise never speak ill of their neighbors, lest it get back to them. Road Town was a close-knit community that viewed outsiders with suspicion, and so Fonseca needed a way to win the trust of the Belongers. Once they experienced the benefits of working with Mossack Fonseca, their loyalty would follow.

  Tax havens are remarkably cohesive communities. The financial services industry dominates. Local elites follow the cash, joining the industry or servicing it in other ways. Business interests and the political establishment become intertwined. Once the industry is established, the social controls that already exist in small, isolated communities activate on behalf of the industry. Locals accept a certain degree of corruption in the interest of keeping the money flowing. Those who resist are cowed into silence, ostracized, and—if they persist—sometimes imprisoned or exiled.

  The BVI forms part of a system of British tax havens. These vestiges of the British Empire include the BVI, the Cayman Islands, Bermuda, the Channel Islands, and Turks and Caicos. Farther afield but part of the same tax haven family are former English possessions like the Bahamas, Belize, Cyprus, Singapore, and the Seychelles.

  Among these jurisdictions, one of the oldest and most venerable is Jersey, an island off the coast of Normandy in the English Channel, less than an hour’s plane ride from London. Jürgen Mossack remembers visiting the island for conferences to learn about the offshore industry during his residence in the UK in the 1970s. Jersey operates as an extension of the City of London’s financial district.

  John Christensen was an economic adviser to Jersey in the early 1990s. Raised in a local upper-crust family, he cooperated with a Wall Street Journal exposé of a banking scandal that implicated the island’s most powerful politician. Parliamentary committees opened investigations into Christensen’s department, he believes, to drown him in work and destroy his reputation. Friends and family abandoned him. An older brother, who worked in a Jersey trust company, refused to speak with him for nearly twenty years.

  The saying on Jersey, Christensen recalls, was, “If you don’t like it here, there’s a boat in the morning.”

  * * *

  FONSECA FOUND RICHARD Peters, the lawyer Trident recommended, in his office on Tortola’s main street. Peters directed him to Cyril B. Romney, the BVI’s chief minister, to inquire about a business license to create companies. Romney had sponsored the 1984 company incorporation law, and, after listening to Fonseca, he promised to review the matter and get back to him.

  After his meeting with Romney, Fonseca encountered Keith Flax, a local jeweler who was also speaker of the legislative council and a close friend of both Romney and Peters. It didn’t take long for the Panamanian and the Belonger to recognize they shared a special bond. Both were members of the ancient order of Freemasons. Dating to the Industrial Revolution in England, Freemasonry appropriated the symbols of craft guilds like the stonemasons to forge a fraternal order kept alive through esoteric rituals and Masonic lodges.

  Fonseca had tapped into an underground network—a secret society within a secret society—that exists in tax havens, particularly the British ones. Knowledge of Freemasonry, its signs, symbols, and rites, often serves as a doorway into closed cultures. It provides instant solidarity and an opportunity for government and business interests to network privately. John Christensen says he was approached multiple times on Jersey to join one lodge or another. He always declined the offer. Holding no particular animus toward Freemasonry or the elite hobnobbing in the lodges, Christensen nonetheless viewed it all as slightly creepy.

  Flax invited Fonseca to a meeting at the Saint Ursula Masonic Lodge. Fonseca remembers traveling deep into the jungle to get there. At last they arrived at a clearing where he encountered one of the most beautiful Masonic temples he had ever seen. As he watched the gathering, Fonseca’s cold asserted itself. He began to cough uncontrollably. Mortified, he tried to stifle the hacking. Seemingly out of nowhere, Cyril Romney appeared by his side. He patted Fonseca on the back. “I know you’re nervous,” the chief minister said. “Don’t worry, you’re getting the license.”

  The firm soon hired Keith Flax’s wife, Rosemarie, to run the Tortola office. She had experience working for a trust company. More important, she was well connected among her fellow Belongers. When Keith Flax built a three-story building, he rented the top floor to Mossack Fonseca, which was becoming known as “Mossfon,” for short. Flax named the sky blue building “aKaRa,” a mash-up of the couple’s first initials and those of their three daughters.

  In the beginning, Mossfon sold companies in the BVI for as little as $750. The business was simple: The person buying the company was usually an intermediary—a lawyer, accountant, or banker—who acted on behalf of the actual customer, known as the “ultimate beneficial owner.” Sometimes the buyer wanted to purchase a preexisting company. An older vintage company conferred respectability, making it look as if it had a history. Mossfon kept a stock of these “shelf companies” available for an additional fee.

  The beneficial owner now had decisions to make. Who would be the shareholder of the company? As an added layer of secrecy, many jurisdictions, including Panama and the BVI, allowed companies to issue “bearer shares.” These share certificates were pieces of paper and whoever physically possessed them owned the company. Bearer shares could be used to transfer assets completely anonymously. They were favorite tools of money launderers and one of Mossfon’s more popular offerings.

  Finally, the owner needed to choose directors. For an extra $100, Mossfon provided another layer of secrecy by arranging for the services of a company director. These stand-ins, known in the trade as “nominees,” appeared on paper as corporate officers who controlled the company. In reality, they served only to hide the identity of the beneficial owner, who often covertly controlled the company through a secret power-of-attorney agreement. Nominee directors are a corporate compliance charade commonly practiced throughout the offshore industry.

  The nominee directors created new opportunities for Mossfon to profit. When the company wanted to perform an act—open a bank account, move money, sign a contract, make a purchase—the nominee directors had to hold a meeting (usually only on paper) and provide their signatures to make it official. Every signature was another $45 in the Mossfon coffers.

  In the early days, Mossack and Fonseca, members of their small staff, and even their relatives served as nominee directors for the companies they registered. Before the partners quit acting as nominees themselves, they served as directors for thousands of companies. Later, as the Mossfon company-creation factory cranked up, the firm required scores of nominees. While the service was lucrative for the firm, Mossfon paid the employees who performed it poorly. Mossfon’s most prolific directors were corporate officers for tens of thousands of companies. Some even worked for multiple registered agents. Adelina Mercedes Chavarria de Estribi was a director of over one hundred Mossfon companies and more than tw
enty-seven thousand Panamanian registered companies overall.

  As part of their job, the nominees signed hundreds of blank forms. These blanks became legal corporate documents and resolutions. Mossfon provided the signed blanks to their offices around the world. The signatures were in different places on the empty page, depending on what the document would ultimately become—for example, on the bottom for a share certificate or in the middle to resign from a company. It was of no consequence that the nominees never saw the filled-in documents to which their signatures were affixed. They exercised no real authority over the company. For the fiction of an active company officer to work as a business concept, it had to be efficient—hence the signed blanks.

  “The signed blank documents allow [clients] to open bank accounts and carry out business transactions without the need to wait one or two weeks for documents to arrive,” Fonseca explained to a Mossfon employee in Europe. “All our competitors do the same thing in Geneva and therefore, we are obliged to do so.”

  Once Mossfon created the company, it went into a file, forgotten, until a year passed and it was time to send an invoice to renew the registration. In 1985, the annual reregistration fee was $150.

  There were any number of ways an offshore company could be used legally, even to avoid taxes. Corporations had been doing it for generations. Companies based in a tax haven allowed for the efficient operation of a business that crossed multiple jurisdictions, reducing levies and liabilities. Individuals wanted the same service for the same reasons. Anonymous companies also shield assets, allowing a businessman or politician to hide a mistress and minimize unwelcome attention from covetous relatives and potential kidnappers. From the perspective of Mossack and Fonseca, the service they offered was one of selling privacy. BVI companies also proved irresistible to the criminal class. An anonymous company was the perfect vehicle to move or conceal the proceeds of illegal activity.