Panama Papers: Mossack Fonseca Was a Tax Shelter Nobody

Just a little experiment for the insatiably curious: Google "top law firms for offshore tax shelters." See anything?

Probably not. You won't even see the law firm at the heart of the Panama Papers, an also-ran outfit few had ever heard of until last week, when it found itself at the center of one of the greatest data leaks ever, comprising around 11.5 million documents.

The leak, first revealed on April 3 by Munich-based newspaper Süddeutsche Zeitung and around 400 journalists working through the International Consortium of Investigative Journalists, a nonprofit group in Washington, D.C., is thought to be the largest of its kind in history. But the Panama law firm behind it, Mossack Fonseca, serves as only a dingy backroom to a much larger and glitzier colossus that hides trillions in tax shelters.

"There is something very simple that people are missing about the Panama Papers leak," says James Henry, managing director at Sag Harbor Group, a consultancy that specializes in economic, legal and tax strategies in Sag Harbor, New York. "And that is that Mossack Fonseca was a gritty little law firm in Panama doing grunt work, with dingy little storefronts all over the world. The wealthiest clients are going to the world's top investment banks, all the names you've heard of—all the banks that got bailed out in 2008."

While it has been well-known for years which countries and territories house upward of $20 trillion in financial assets for the world's crème de la crème in tax shelters (psst, Switzerland, Hong Kong and the U.S. are at the very top of the list, in that order), there is scant information about the players that make up the inner circle catering to the planet's wealthiest.

One of the only places that have attempted to pull back the veil is the Tax Justice Network (TJN), a U.K.-based nonprofit that investigates global tax shelters (and where Henry, formerly the chief economist at New York financial consultancy McKinsey & Company, is also is an adviser).

TJN estimated that nearly 75 percent of all offshore private wealth is either directly or indirectly concentrated in the hands of the world's top 50 private banks, particularly around 20 banks that each have private cross-border assets under management of $100 billion each, based on reports from the banks themselves and interviews with industry analysts and private bankers.

From 2005 to 2010, these banks included, according to the report, UBS, Credit Suisse, Citigroup, Morgan Stanley, Deutsche Bank, Bank of America, Merrill Lynch, JPMorgan Chase, BNP Paribas, HSBC, Goldman Sachs, ABN Amro, Societe General and Barclays. Their total private assets under management came to $12.2 trillion, Henry says, and have likely gone up since then.

"In many ways, Mossack Fonseca is the least interesting part of the tax shelter industry," he says. "These are just the lawyers, the order takers, the shipping clerks. They are doing the grimy work of the much bigger players—mainly the big banks, who have private wealth divisions that advise the top-level clients." Mossack Fonseca has vehemently denied any wrongdoing.

The biggest cities for tax shelters? New York, London and Geneva, Henry says. "But people need to understand that this is a very widely distributed network. Tax shelters are all over the world, and they're both onshore and offshore."

For those unfamiliar with how tax shelters work, they are usually legal vehicles—for instance, a 401(k) is technically a tax shelter. But because they tend to shield financial activities from view, they may conceal more illegal behavior, such as bribery, serious financial crimes or tax dodging.

While many global big banks do not openly advertise advisory services for "tax shelters" per se, they do advertise financial planning that includes these services, with some recently finding themselves drawn into legal tussles, including one in 2012 where a U.S. businessman blamed UBS for giving him poor legal advice that resulted, he claimed, in his pleading guilty to tax evasion.

The massive cache of documents in the Panama Papers—most of them emails—has already resulted in the resignation of Icelandic Prime Minister Sigmundur David Gunnlaugsson last week. And it has embroiled British Prime Minister David Cameron, who admitted late last week to personally profiting from tax shelters set up by his family.

The revelations have also have rocked Asian, Middle Eastern and South American nations. Most recently, Peruvian officials raided the Lima offices of Mossack Fonseca on Tuesday against the backdrop of a hotly contested presidential election, in which two of the candidates facing off in June have been implicated.

"Until now, no one has really invested any journalistic resources in this issue, particularly in places like Switzerland, which thrives on financial secrecy and where you can end up in jail for reporting on it because it has laws against financial whistleblowing," Henry says.