‘Is my Cyprus company name in the Panama Papers’ is the question that thousands of local and international corporate shareholders and individuals woke up to on May 9th, when the International Consortium of Investigative Journalists (ICIJ) released the full database on its website.

Click here to see the searchable Panama Papers database.

Over 6000 Cypriot entities connected to thousands more offshore companies have been revealed, making for a possible gold mine for anti-money-laundering and tax authorities.

It is the largest-ever release of information about offshore companies and the people behind them. This includes, when available, the names of the real owners of those opaque structures, said the ICIJ.

Owning an offshore company is not illegal, but the main points of concern for journalists and the public are that:

• the proceeds of political corruption or other criminal activities are being channeled abroad;
• and that tax evasion is being carried out on a massive scale - to the extent that average taxpayers are being made into utter fools.

At this point, the database raises many more questions than it answers. Some of the companies are well-known in local business circles but since it’s their work to set up companies for their clients on an international basis, the trail for journalists without access to further files stops there and will have to be taken up by the authorities with the resources to track down any wrongdoing.

In addition, there are many more names of unknown and well-known Cypriot individuals on the lists, the main questions being - are they connected with politicians or civil servants? And can it be proved that they are channeling the proceeds of corruption abroad into their offshore companies or bank accounts? Again, it seems that only speculation is possible at this stage, and the authorities will have to look further into any possible wrongdoing.

Authorities investigate

The Panama Papers money-laundering and conflict-of-interest scandal has triggered an investigation into multinational companies’ tax evasion; tax advice firms and tax havens, according to TAXE II, a European Parliament committee formed to fight tax scams in the EU.

During a recent visit to Cyprus, the committee said that the island had made a lot of progress in shifting to more transparent taxation practices, but that more progress is needed. Taxation firms that offer advice to the government, while also structuring multi-national companies’ tax systems, are exploiting the weakness in national tax systems, it said.

Cyprus’ help in identifying tax havens is also required, said the committee.

By the end of the year, there should be an agreement on a common consolidated tax regime within the EU, removing the ‘windows’ used by massive multi-national companies to avoid taxation on their profits. The plan is to continue allowing member states to establish their own VAT and income tax rates, while introducing common tax rates across the EU on specific profits, like those on R&D or intellectual property. This would prevent multi-nationals from moving profits through subsidiaries into countries that don’t tax those specific profits.

There is no ‘exit’ tax in Cyprus and this may change if the European Parliament has its way. Exit taxes are charged on companies that leave the jurisdiction and are intended to keep company profits within the country where the company is registered.

Fallout

Members of the European Parliament (MEPs) have called for a tax haven blacklist and penalties on companies that use them in the wake of the Panama Papers scandal. The prime ministers of Spain and Iceland have already resigned after the Panama Papers showed they held offshore accounts while they were in office.

The European Parliament is debating the latest financial scandal, which makes a mockery of the drive towards greater transparency and accountability within the European tax and financial sectors. MEPs are discussing whether the existing measures are good enough to combat tax evasion and money laundering, or whether more needs to be done.

There are thousands of Cyprus-linked companies and 142 final beneficiaries in offshore companies that are implicated in the Panama Papers; an investigation by the International Consortium of Investigative Journalists (ICIJ) covering 11.5 million offshore company documents from Panamanian law firm Mossack Fonseca.

The ICIJ also released LuxLeaks, exposing 548 multinational’s tax rulings in Luxembourg, and alerting European tax authorities to the identity of companies which are avoiding taxes in their registered countries – and the auditors/advisors who are setting up these structures.

What’s a tax haven?

Cyprus is not a tax haven, its oversight is much tighter than Panama, British Virgin Islands (BVI) or the Caymans, and unlike the zero percent tax in such countries, it has a 12.5 percent tax rate. However, the financial system – in particular the banks – have been criticised for failing to take the right risk management and anti-money-laundering measures. In recent years, the Central Bank has become stricter on the banking system, in one example, it revoked the banking license of the Federal Bank of the Middle East (FBME) because of a money-laundering investigation by US authorities which alleges that the bank was involved in funding terrorism and drug-trafficking operations. In the Panama Papers case, the central bank has asked for all banking records up to 2015, with a focus on law firms and accounting firms which act for other companies.

The Cyprus Central Bank is assessing the Panama Papers information as concerns the Cypriot banking system and will take appropriate action where necessary, it said. The Anti-Money-Laundering Authority MOKAS said it can and will investigate any suspicious transactions after they’ve been notified to do so by other entities (like the Central Bank, banks, European Parliament or the Auditor-General).

President Nicos Anastasiades says that the Cypriot authorities will investigate the allegations.

Bracing for more scandals

Just ahead of parliamentary elections in May, the financial and political sectors are bracing for yet another scandal after the ICIJ released their investigation exposing the offshore holdings of 140 prominent world leaders and politicians, including Russian President Vladimir Putin, and the prime ministers and leading businessmen of Ukraine, Pakistan and Iceland.

The source of the leaked information is the Panamanian law firm Mossack Fonseca, which used to have a branch in Cyprus. More than 370 journalists from 76 countries worked on the investigation, which alleges that Fonseca is in the business of using shell companies and tax havens to hide billions of dollars in undeclared, hidden revenues channelled abroad by elite politicians. The company said it was hacked in a smear campaign against the right to ‘privacy’ – although in the case of public figures with a huge conflict of interest, this is obviously not going to hold legal water.

Cyprus is once again in the centre of this latest investigation, that follows the ICIJ’s story on secret Swiss bank accounts at HSBC Bank, which revealed 204 Cypriot companies and individuals allegedly holding 647 million Euros in these accounts, with of them now under investigation for tax dodging on an epic scale. The Greeks and Cypriots on what became known as the Lagarde List are now facing national tax audits and – in Cyprus – they are possibly part of criminal investigations into the financial collapse in 2013.

Tracking the source of the money

The ICIJ highlights one example involving Cyprus, in which BVI company Sandalwood Continental Ltd loaned 200 million US Dollars to Cyprus-registered company Horwich Trading Ltd, then sold the debt for $1 to another BVI company OVE Financial Corp.

The same day, OVE sold the debt for $1 to International Media Overseas. The paper trail shows that Sandalwood Continental was set up by Bank Rossiya, the owner of which is dubbed Putin’s ‘cashier’. International Media is owned by Sergey Roldulgin, Putin’s eldest daughter’s godfather, says the ICIJ. The 200 million USD appears to have originated from a bank in Cyprus controlled by Russian state bank VTB Bank, according to the information released by the ICIJ.

A spokesman for the Russian president said that Putin’s honour would be defended with all legal means and refused to answer questions about the allegations.

Full transparency

The ICIJ released all the documents online at the beginning of May in the name of full transparency.

Politically-exposed persons (PEPs) are either politicians or those who are close to politicians – like friends or family. By definition, they have access to public funds and are extremely influential. When PEPs apply to open offshore accounts they have to be subjected to due diligence by any law firm or bank that is handling their business, but Fonseca claims that it knew very little about most of its clients. The main problem is that PEPs may try to launder money they made by using their political influence in unethical or corrupt ways. Shell companies in tax havens are a common – if glaringly obvious – way to do this.

Already, the Panama Papers have put pressure on Iceland’s Prime Minister Gunnlaugsson to resign because his wife owns a BVI offshore entity which – in a clear conflict of interest for him – allegedly owns millions in Icelandic bank bonds stemming from the country’s financial crash. He sold his shares in the company to his wife for $1 in 2009. The prime minister has resigned in the wake of the scandal.