Dirty Little Secrets

One April morning in 2014, Jurgen Mossack, the tall, German-born co-founder of the prominent Panama City law firm Mossack Fonseca, shot off an agitated email with the subject line “Serious Matter URGENT” to three top members of his staff. There was trouble brewing in the British Virgin Islands, a “secrecy jurisdiction” whose white-sand beaches and blue Caribbean waters conceal a barely-regulated haven for people who wish to create shell corporations. Many of those people employ Mossack Fonseca to perform precisely this service.

“Swindled investors call the office constantly. We need to resign from this company immediately,” Mossack wrote. “At any moment, the police arrive, and we end up in the newspapers.”

As a “registered agent,” Mossack Fonseca provides the paperwork, signatures, and mailing addresses that breathe life into shell companies established in tax havens around the world -- holding companies that often create nothing and sell nothing, but shelter assets with maximum concealment and a minimum of fuss.

Jurgen wanted to pull the plug on representing one such firm that was raising red flags. For weeks, investors in an entity called Swiss Group Corporation had been contacting Mossack Fonseca, wondering why their annuity payments had suddenly stopped, why they had received only vague emails, whether they had been a victim of a fraud.

“SWISS GROUP CORP has shown no transparency in their processes,” one woman wrote from Colombia on March 31, 2014, “and now, I am worried about the investment I made 5 years ago, which is my only means of living.”

Mossack instructed his underlings to “Please do what you have to do,” – and then, he added: “Use the telephone!”

Weeks after Jurgen issued his stern orders, queries continued to pour in from investors -- including one woman who identified herself as a U.S. citizen, and others from Colombia and Bolivia. They were still groping in the dark, searching for shreds of information in the same black hole of offshore finance that routinely stumps tax authorities, law enforcement officials, and asset-tracers across the globe. By one estimate -- based on data from the World Bank, IMF, UN, and central banks of 139 countries -- between $21 and $32 trillion is hiding in tax havens, more than the United States’ national debt. That study didn’t even attempt to count money from fraud, drug trafficking and other criminal transactions whose perpetrators gravitate toward the same secret hideouts.

Mossack and his business partner Ramon Fonseca, a powerful political leader and best-selling author in Panama, are captains in an offshore industry that has had a major impact on the world’s finances since the 1970s. As their business has grown to encompass more than 500 employees and collaborators, they’ve expanded into jurisdictions around the world – including parts of the United States.

Offshore finance is an opaque world, generally hidden to all but those who profit from it.

But a new trove of secret information is shining unprecedented light on this dark corner of the global economy. Fusion analyzed an archive containing 11.5 million internal documents from Mossack Fonseca’s files, including corporate records, financial filings, emails, and more, extending from the firm's inception in 1977 to December 2015. The documents were obtained by the German newspaper Süddeutsche Zeitung and shared with Fusion and over 100 other media outlets by the International Consortium of Investigative Journalists (ICIJ) as part of the Panama Papers investigation. The massive leak is estimated to be 100 times bigger than Wikileaks. It's believed to be the largest global investigation in history.

In recent years, government investigations have centered on how major banks are used to move, hide, and launder money by the wealthy. But the new Panama Papers trove shows the role of often-overlooked lawyers and incorporation agents in the process. The results of the yearlong investigation encompass 214,488 corporate entities – among them companies, trusts, and foundations –controlled by everyone from heads of state, politicians, Forbes-listed billionaires, to drug lords, businesses blacklisted by the US government, scammers, and FIFA officials. There’s a common thread between members of Vladimir Putin’s inner circle, the man who laundered money from a record-setting robbery in the U.K., and a drug trafficker convicted of killing a U.S. DEA agent: They have all used companies created by Mossack Fonseca.

“If there is a vehicle that is allowing for the criminal to get away now, that vehicle is the shadow financial system and the ability to go to anonymous companies to launder your money,” says Porter McConnell, director of the Financial Transparency Coalition, speaking broadly about the role of shell companies in funnelling illicit financial flows from what she calls “the three C’s”: corporate tax avoidance and evasion, government corruption, and criminal activity.

In response to questions from ICIJ and its media partners about its incorporation activities, Mossack Fonseca said that “our company does not foster or promote unlawful acts.” Mossack Fonseca declined to comment to the ICIJ on specific cases, citing obligations to maintain client confidentiality, and did not answer questions about Swiss Group Corporation.

“We regret any misuse of companies that we incorporate or the services we provide and take steps wherever possible to uncover and stop such use,” the firm said. “Your allegations that we provide shareholders with structures supposedly designed to hide the identity of the real owners, are completely unsupported and false,” the firm said, adding that there are a number of legitimate purposes served by establishing entities in different jurisdictions, including for estate planning reasons, conducting cross-border mergers and acquisitions, and pooling investment capital from investors residing in different locations and who seek “a neutral legal and tax regime.”

In the case of Swiss Group Corporation, within weeks of receiving emails from worried investors, records indicate that the firm did submit a suspicious activity report about the company to regulatory authorities in the British Virgin Islands that April. By mid-May, a senior employee was putting worried investors in touch with a lawyer who represented the owner of Swiss Group Corporation. “We have taken note of your comments and uncertainty, however, we only offered the service of Registered Agent to Swiss Group Corporation,” a senior compliance staffer wrote to at least 10 investors who’d contacted the firm.

But at the same time, in order to avoid potential regulatory fines, Mossack Fonseca scrambled to compile due diligence documents it did not have on file about Swiss Group, the emails show. On April 10, 2014, that same senior compliance staffer wrote to the Panama City law firm that helped the owner of Swiss Group Corporation register the company, and one other one, with Mossack Fonseca. “[N]ot maintaining such records to date will result in high administrative and legal fines,” she wrote, “so we have to work together in updating the files for these companies.”

In the scramble, firm employees realized that Swiss Group had been subject to previous inquiries from authorities. Mossack Fonseca resigned from serving as registered agent for the company.

Later that same year, in September 2014, the Central Bank of Uruguay canceled the license and ordered the liquidation of an investment firm called OpenWorld Sociedad de Bolsa, citing securities violations in its offering of “Swiss Group” investment products. Multiple sources told FUSION that OpenWorld is facing a criminal investigation in Uruguay; a Uruguayan court approved an arrest warrant for the investment firm’s former majority shareholder, Pedro Orlando Magenties, last year, but he had already left the country, according to Nicolas Pereyra, an attorney for investors who say OpenWorld defrauded them. Court records show Magenties denied the allegations against him.

Numerous attempts by FUSION to contact Swiss Group Corporation’s representatives were not successful.

Pereyra says that losses in Uruguay alone amount to $4 million, and that many investors were middle-class. Attorneys for investors say they have identified multiple shell corporations associated with OpenWorld and Swiss Group, and Pereyra says those shells played an important role in the alleged fraud. “They have an appearance. You trusted Swiss Group. You saw a brand, you saw a logo,” he explains. “They tried to create a trust in investors that did not exist. It did not exist because it was a false corporation. It was nothing. Empty.”

Just as the Panama Canal is smaller than you’d think, the offshore problem is closer to us than you might realize. The U.S. has become a major hotspot for corporate secrecy, considered one of the worst offenders by advocacy groups like the Tax Justice Network, whose Financial Secrecy Index ranks the U.S. at No. 3. In the vast majority of states, companies aren’t required to disclose the names of their beneficial owners, and registered agents have no obligation to ask about this. It’s one of the best (or worst) forms of secrecy, experts say, because when law enforcement officers attempt to seek out the name of the true beneficiaries, there is simply no information to give.

“While we [in the U.S. talk] about offshore accounts in other countries, I think we have a lot of room for improvement here to promote transparency,” says Patrick Fallon, Washington-based head of the FBI’s financial crimes section, speaking to Fusion in an interview generally about shell companies, and not specifically about the Panama Papers. In addition to enabling money laundering, secrecy abets public corruption and insider trading – all sorts of financial crimes, really. “It is a significant impediment to our investigations when we can’t determine who the true owner is of a company,” Fallon says.

Finding potential witnesses and real live people to talk to “becomes more difficult when it’s just a paper company with no names associated with it.”

We decided to see how easy it would be to set up a “paper company” for our ourselves. Two hours due north of FBI headquarters, Delaware – aka our nation’s “First State” – has more companies than state residents on its books. More than 60 percent of Fortune 500 companies call Delaware their corporate home (on paper, at least). Last year, the state incorporated some 170,000 companies. This past winter, Transparency International listed Delaware on a Top 9 list of “Grand Corruption” cases around the world. Attorneys in Uruguay for the OpenWorld investors say they discovered a Swiss Group shell company registered in Delaware.

Naturally, we had to go.

A very nice couple, Nancy and Stephen Wolf – owners of Advantage Delaware LLC, an incorporation agency – agreed to help us establish a company called She Sells Sea Shells LLC. Before we arrived, Nancy was very clear: we would need no photo ID in order to form the company. The discussion reminded me of some high school-era chats with friends in advance of our senior year “Beach Week” trip to Bethany Beach, also in Delaware. I still have the Absolut bottle I bought off a classmate, no ID required.

Only this transaction was, you know, perfectly legal. On a very cold, but sunny winter day, my Fusion colleagues and I arrived at Advantage Delaware, set in an office park where all the businesses occupy what look to be little houses with pitched roofs and manicured shrubbery. A pond out front was frozen over. Inside, they collected mail for clients in one room, and they formed the companies on Nancy’s computer in the room next door. Stephen studied design in college, and Nancy is an accountant by training. During their first decade in business, they rarely got requests to do Delaware company formations for individuals, but then demand picked up. A top selling point is the privacy the state affords, Stephen said.

“Many times we don’t know who our clients are,” Nancy said.

“They sign up for our services at our website, we get their name and address. We know the LLC name or corporate name, but we don’t know what they’re doing or what kind of business they have.”

In the middle of our appointment, as if on cue, came a loud knock at the door. Without waiting for an answer, in walked a woman in blue jeans and boots, carrying a clipboard. She was a process server. “I have a subpoena,” the woman said. A company for whom Advantage Delaware served as the registered agent was being sued.

“This doesn’t happen every day,” Nancy said. She looked at the name of the entity. “Let me see if I have anything on these guys,” Nancy said, and went to her computer to verify the client was, indeed, theirs.

“So are we the registered agent?” Stephen asked when she came out.

“Yeah, they’re in Mexico,” Nancy said, matter of fact. “And we have good information on them,” she added. She signed the papers and the process server left. As far as the contact info went that Nancy had on file, she told us, “they might be the managers. They might be the owners. I really don’t know.”

When we asked Nancy and Stephen about whether they are responsible for monitoring shady clients, they told us they wouldn't necessarily know if their clients were acting outside the law. "We don’t get involved at all. We just serve as the registered agent," said Stephen. Stephen did say, however, that if for some reason their client was acting suspiciously, he would cut ties immediately.

For a decade, a fight has dragged on over whether states should have to scale back their secrecy provisions and collect the name of the true owner at the moment a company is formed. In 2009, a Department of Justice official testified to Congress that, some years, billions of dollars in suspect funds move through US shell companies on annual basis, frustrating investigations. “There’s no excuse for this,” says retired Sen. Carl Levin, who championed pro-transparency reforms for years. “It’s very, very simple to add one line to the articles of incorporation to put down who are the real owners, the so-called beneficial owners of this corporation?”

Yet such proposals have met fierce opposition from lobbying groups, particularly the National Association of Secretaries of State. They have consistently argued that such a requirement would place too heavy a burden on the state offices that are responsible for registering companies.

“The idea that… we’re gonna turn every division of corporations in the country into essentially a division of motor vehicles, where before you can form an entity, you must have physical appearance -- it’s just not gonna happen,” says Richard Geisenberger, Delaware’s chief deputy secretary of state. “I mean that’s not how secretaries of state’s offices are staffed, it’s not how they’re built.”

Incorporating companies is big business in Delaware.

All of those filings translate to ample state fee revenues: $1.2 billion a year, according to Geisenberger.

Asked if states were concerned that collecting information about an owner’s identity would cut into those revenue streams, Geisenberger said that the main concern is about maintaining the security of that information. “I do think that people would have very legitimate privacy concerns about the ability of 50 different state jurisdictions to maintain and protect, you know, what is pretty fundamental privacy information for legal entities,” he says. Instead, he advocates a proposal contained in President Obama’s proposed budget, to collect “responsible party” information for all entities through the IRS.“ I think that the federal government is already well equipped to do that, because they already collect it.” The National Association of Secretaries of State told Fusion that it agrees with this proposal as well.

But Heather Lowe, director of government affairs at Global Financial Integrity, says this “responsible party” definition still doesn’t necessarily capture who is controlling a company. She also argues that an ID requirement at a state level is so basic, that many people already have to provide it when they apply for a library card. "The fact that a state doesn't think it's important to know who owns or controls the companies it creates is truly frightening,” says Lowe, whose group is lobbying in support of the latest bill in Congress to require that beneficial owners be identified when they form a company in a given state. “It's also completely irresponsible."

Attendees of the 5th Annual Offshore Investment Conference at Panama City’s Hilton Hotel were greeted by the bright lights of the Star Bay casino downstairs before making their way to a second-floor meeting room. At one of end of the hall, overlooking the lobby, floor to ceiling windows showed the bay in panorama: the thinnest of waves rippling toward land and tiny ships stationary in the distance. At the opposite end of the corridor, past meeting rooms named for Vegas landmarks, the set-up for the conference was discreet: one table lined with brochures for a company called Trust Services S.A.., and another table, covered in a brown tablecloth, lined with nametags.

A woman with blondish hair and a British accent presided over the table with the nametags. Fusion's TV correspondent, Natasha del Toro, and producer Alice Brennan approached the table. When del Toro picked up a conference program, and identified herself as a journalist, the woman snatched the program out of her hands, telling her reporters could not attend the event. (Fortunately, the program was freely available online; it indicated that Ramses Owens, a former Mossack Fonseca attorney who now heads his own firm, was scheduled to speak that morning.) A few minutes later, as del Toro narrated the program-snatching incident for the camera, a man with a British accent came bellowing and told her to leave. “You are not going to do this,” he said. “This is wrong.”

The offshore industry is huge, and Mossack Fonseca has not only grown with the industry, but has shaped its very geography in ways big and small, as it competes against other “company formation agents,” vies for the business of big banks and law firms, and courts entire governments. Ever heard of the Island of Niue? It’s a speck in the Pacific that sought Mossack Fonseca’s help to bring shell-company revenues to the island. The firm “wrote legislation for the Niuean parliament, and then marketed the new product and ran the business from Panama City,” according to the book Global Shell Games: Experiments in Transnational Relations, Crime, and Terrorism. In 2005, the island decided to shut down the industry after allegations of rampant money laundering. Mossack Fonseca didn’t necessarily lose out: The firm was able to register departing Niuean entities in the island nation of Samoa, internal documents show.

Indeed, a crackdown within, or against, one secrecy jurisdiction can open new frontiers in another. In 2000, the Organization for Economic Cooperation and Development and the Financial Action Task Force intensified efforts to identify tax havens and countries that fail to combat money laundering, leading to blacklisting of certain jurisdictions, including several countries where Mossack Fonseca offered products. The firm sought fresh opportunity in – where else? – the United States. “These blacklists were a setback for the offshore industry as a whole, and in particular affected our firm as all four jurisdictions which we offered were listed,” goes the voice-over narration in Mossack’s 35th anniversary video, posted to YouTube in January 2013. “In order to mitigate this situation Mossack Fonseca took action, and in only two years broadened its product offerings to include new jurisdictions, such as Seychelles, Uruguay, Hong Kong and Nevada.”

Just as the firm has expanded its reach in the secrecy marketplace, it has gone to great lengths on at least one occasion to shield its business from scrutiny.

In 2013, an Argentine prosecutor’s report linked Nevada-incorporated shell companies involved in a major corruption scandal to Mossack Fonseca. When those shell companies became the subject of a federal court battle in Nevada, the leaked files show, Mossack Fonseca employees took steps to remove paper records and to wipe computer files and phone logs at its Las Vegas office. One employee even traveled from Central America to Nevada to bring back files. “When Andrés came to Nevada he cleaned up everything and brought all documents to Panama,” according to an email dated Sept. 24, 2014.

Mossack Fonseca said it “categorically” denies hiding or destroying documents in its statement to the ICIJ: “Let us be clear that it is not our policy to hide or destroy documentation that may be of use in any ongoing investigation or proceeding.”

The leaked records also contradict sworn testimony by Jurgen Mossack, who told the federal district court that his firm was separate from “MF Nevada,” its office in Las Vegas, and had no control over it. Mossack Fonseca “has never maintained an office, establishment or principal place of business in Nevada,” Mossack testified in July 2015. But, according to the ICIJ investigation, internal documents show the opposite, indicating that the firm’s Panama City headquarters controlled MF Nevada’s bank account, and that the firm’s co-founders and one other official with the company owned 100 percent of MF Nevada.

More recently, in January, prosecutors in Brazil investigating the country’s own major corruption scandal, dubbed Lava Jato, or “Operation Car Wash,” alleged that Mossack Fonseca is a “big money launderer.” The investigation centers on alleged kickbacks to political leaders in return for state-granted contracts.

Brazil authorities have said they gathered preliminary evidence that several Mossack Fonseca employees helped people to hide ill-gotten assets through offshore entities, in connection with the money laundering scandal. The firm has denied any wrongdoing there.

As Miguel Antonio Bernal, a professor of constitutional law at the University of Panama, reminded us one evening, the power of Panama’s big law firms extends into the highest echelons of government. For that reason, “not too many people… want to take any risk, talking or discussing about these matters,” said Bernal, himself a vociferous critic of money laundering and corruption in Panama. “Because you can have some kind of problems.” Ramon Fonseca, he pointed out, “is a very important person in the government... he is the most important advisor of [President] Varela.”

On a Thursday afternoon last month, seven television crews from six different countries gathered in a Panama City cafe that sells trucker hats alongside its coffee display. Their cameras rolling, they deployed into the parking lot, and then up a side street of low buildings and lush trees, passing a bridal boutique, a youth hostel, a restaurant, another bridal boutique, and an awning that advertised a crafts business. Then they arrived at a building of dark mirrored glass, where a sign in the front yard displayed the name of a dental clinic occupying the ground floor and, taking up the three floors above it, the offices of Mossack Fonseca. Gerardo Reyes, an investigative reporter for Univision (one of Fusion’s parent companies) who had most recently been covering the capture of El Chapo, approached the guard stationed in a vestibule under a covered entryway.

I hung back from the crews and watched Reyes in discussion with the guard. In the week leading up to this, ICIJ had sent Mossack Fonseca a series of questions, and the crews had also requested interviews that morning. “I want to know who told you they’re not going to meet with us,” he said to the guard in Spanish. “Which person? You don’t know?”

Then we waited. Motorcycles and cars streamed by on the narrow two-lane road. A security guard dressed in blue fatigues, standing in the parking lot, spoke into his radio. People coming in and out of the dental clinic wondered what was going on. It was impossible to see inside the building. The dark glass only reflected the neighboring skyline back to us.

Twenty minutes or so went by until we began to get a response. First, a three-page statement on Mossack Fonseca letterhead appeared, and the crews started to circulate it. A few minutes later, del Toro called out to Reyes, “Gerardo, somebody’s coming.” The crews crowded around the vestibule, and a tall man in a light blue shirt emerged to address us. It was Carlos Sousa, the head of public relations for the firm. He seemed calm, genial, and spoke briefly.

“We don’t launder any money, we don’t accept any money or take any money, and that’s the only thing I can say to you,” Sousa told us. And then he disappeared back inside the vestibule.

The next day, Ramon Fonseca requested a leave of absence from his adviser position to the president, citing the need to defend his firm’s reputation in the wake of the allegations in Brazil. I read the news at the hotel on my phone. “We were only registered agents, and there is nothing bad in that,” he told the newspaper La Estrella de Panama. In a video statement, posted on YouTube, Fonseca said he asked for the leave of absence “to defend my honor, my firm, and my country.”

Last week, on the other side of the world, a spokesman for the Kremlin told reporters that the ICIJ was preparing an “information attack” on President Putin, according to Bloomberg, and said that Russia has “available the full arsenal of legal means in the national and international arena to protect the honor and dignity of our president.” The Kremlin did not answer questions from the ICIJ about the offshore holdings of his close associates discovered in the files.

Last week, as I spoke with Nicolas Pereyra, one of the attorneys representing investors who bought into Swiss Group products, he said there may have once been a legitimate purpose for the creation of shell companies. But that’s not what he sees these days. “They are very dangerous instruments,” he said.

This story has been updated to clarify that the FBI's Patrick Fallon spoke to Fusion generally about shell companies, and not specifically about the Panama Papers.