A Critical Analysis from the Criminal Justice System Perspective

Introduction

Panama Papers investigation is considered to be the biggest investigation in collaborative journalism of the Twenty First century, with the investigations revealing links between political actors across the globe, tax havens, money laundering, and other financial crimes. The Panama Papers also led to ethical concerns about journalism, including relating to data security and rights of privacy. In this essay, a critical discussion on the criminal justice system perspective of Panama Papers is undertaken. The essay critically discusses ethical issues involved in the investigation into the Panama Papers and the perspectives of the victims.

Panama Papers: Background

The term Panama Papers refers to an investigation and expose of how the rich and powerful people in the world hide their money (Obermayer & Obermaier, 2016). Panama Papers reveal the commission of certain financial crimes. The term financial crime is in the nature of an umbrella term, which can be used to describe variety of activities that form part of “multifaceted business or industry with a global reach and is commonly associated with

illegal drugs, human trafficking, organized criminals and terrorism and includes money laundering” (Ryder, 2011, p. 1).

Much of the investigation into the Panama Papers involved data leaks; indeed, the 2016 Panama Papers investigation represents the largest data to have ever happened till date (O’Donovan, Wagner, & Zeume, 2019 , p. 4118). The Panama Papers were revealed in a news media story that broke on April 3, 2016, in which the business activities of Mossack Fonseca & Co. were leaked. This was a Panama-based law firm and offshore service provider (thus the term Panama Papers), and the leaks into the activities of this firm suggested that there were approximately 214,000 shell companies incorporated in tax havens incorporated in different countries. These shell companies were used to operate secret offshore vehicles that were exploited by a number of public listed companies as well as politicians from different countries in the world (O’Donovan, Wagner, & Zeume, 2019 ). The purposes for these secret offshore vehicles included financial activities that amount to crimes in a number of countries around the world, including the UK; these activities included bribe payments and tax evasion (O’Donovan, Wagner, & Zeume, 2019 ). Much of the investigation dealt with the creation of shell companies around the world for the purpose of hiding money of politicians and businessmen from different countries of the world (Obermayer & Obermaier, 2016, p. 11). According to one study, the Panama Papers represent one of the biggest data leaks through which the researchers were able to identify 338 listed firms that had used secret offshore vehicles for the purpose of financing corruption, avoiding taxes, and expropriating shareholders (O’Donovan, Wagner, & Zeume, 2019 ). The data uncovered in this research study have led the researchers to estimate conservatively that one in seven firms have offshore secrets (O’Donovan, Wagner, & Zeume, 2019 ).

There are specific criminal justice aspects to the Panama Papers, some of which were discussed by De Sanctis (2017). One of the aspects of criminal justice system and the Panama Papers relates to money laundering, which is an offence in many countries. Money laundering is a white collar crime, which has links to serious and grave crimes like drug trafficking, human trafficking, and even terrorism (De Sanctis, 2017, p. 36). A Brazilian investigation called Car Wash Operation, revealed how money launderors were using offshore accounts in tax havens; in Brazil the investigation revealed that construction companies like Norberto Orebrecht and Andrade Gutierrez were using shell companies based in Panama to control accounts used for bribery to some directors and managers of Brazilian oil company called Petrobras (De Sanctis, 2017, p. 56). Mossack Fonseca & Co. of the Panama Papers leak were specifically implicated in the Brazilian investigation as there was some evidence to show that the directors linked to Petrobras had used this company to help it launder money (De Sanctis, 2017). One of the matter of concern in this Brazilian investigation was that Petrobras had both private equity as well as government ownership and the bribing of the directors of this company was also a matter of public concern for the Brazilian investigators (De Sanctis, 2017).

Panama Papers investigation revealed that there were significant gaps in the anti-money laundering regulations in many countries of the world as the politicians and the businessmen from these countries had been able to launder money using the international banking system itself. The timeline of these financial activities spanned more than four decades, which means that for this time these activities went undetected within the criminal justice system despite there being anti-money laundering laws in most countries whose nationals were involved in these activities (De Sanctis, 2017, p. 64).

Criminal justice, ethical issues, perspectives of the victims

The crimes that are revealed by the Panama Papers investigation include tax evasion, money laundering and bribery. The UK investigating and prosecuting authorities have found financial investigations challenging because these generally involve tracing of assets located in foreign jurisdictions as revealed by a study involving interviews with investigating officers, financial investigators and Crown Prosecution Service representatives (Brown & Gillespie, 2015). The study also reported that of the sixty cases related to money laundering, thirty six cases involved tracing of assets in foreign jurisdictions, which proved to be challenging (Brown & Gillespie, 2015). Therefore, one of the challenges for the criminal justice system as revealed in research conducted by Brown and Gillespie (2015) as well as the Panama Papers investigation is related to the transnational nature of these crimes and the difficulties involved in tracing assets in foreign locations.

Money laundering in itself is now considered to be a global crime, with the UN Convention on Transnational Organised Crime 2000 also responding to this crime by recognising it as an offence to participate in, conspire in, or associate with money laundering activities. The international community has taken a number of steps to counter the problem of money laundering, including establishment of the Financial Action Task Force (FATF) within the auspices of the Organisation for Economic Cooperation and Development (OECD). The FATF can blacklist countries that have failed to take appropriate measures within their criminal justice system against the crime of money laundering (Moodley, 2008). As money laundering is in itself a serious financial crime and is linked to other serious crimes, the Panama Papers presents an important case study in the context of the criminal justice system. It may be pointed out that for states to respond to the crime of money laundering, they have to take effective mechanisms for investigation and prosecution of individuals and organisations that are involved in the offence of money laundering and related financial criminal activities (Moodley, 2008). The Panama Papers reveal that such effective mechanisms were either missing or were ineffective even in countries like the UK and the USA.

Money laundering has been found to be linked to terrorism and trafficking, which makes it important for the criminal justice system to be able to identify money laundering activities (Moodley, 2008). Responses through criminal justice system have been considered to be the most important deterrent methods for responding to money laundering (Moodley, 2008). At the same time, the crime of money laundering is often difficult to investigate because as a financial crime, there is a need for such crimes to be investigated through financial investigations that are impeded due to the lack of availability of public information on databases, and avoidance of tax forms and disclosures by individuals, corporates and even public officials (Kruty, 2011). All these challenges for the criminal justice system are seen in the Panama Papers. The individuals and organisations involved in these activities have managed to escape detection and prosecution for decades because the criminal justice system and the investigators were unable to locate that such crimes were taking place and were unable to respond to these crimes.

One of the serious statements on the ethical failures within the criminal justice system including the legal profession itself came from John Doe, the person who finally leaked the information that led to the Panama Papers expose:

“The legal profession has failed. . . . Lawyers have become so deeply corrupt that it is imperative for major changes in the profession to take place . . . . The term ‘legal ethics,’ . . . has become an oxymoron. Mossack Fonseca did not work in a vacuum—despite repeated fines and documented regulatory violations, it found allies and clients at major law firms in virtually every nation” (ICIJ, 2016).

The statement indicates that there were failures within the legal profession, with legal professionals themselves indulging in unethical practices that led to the regulatory violations (Field, 2017). In the case of law firms, including those in the UK and the US, there were ethical concerns about referring the clients from these countries to the services of Mossack Fonseca & Co. in Panama. Mossack Fonseca has explained that many of the referrals to his services came from reputed law firms (Field, 2017). One of the aspects revealed by the Panama Papers about the gaps in the criminal justice system is that there is no specific law that prevents lawyers and banks from referring their clients to services like Panama Papers indicate and that some banks like HSBC and Credit Suisse that did refer their clients to these services have denied any wrongdoing based on the fact that there is no law that prevents companies from setting up offshore structures for a variety of legitimate reasons (Field, 2017, p. 39). However, even if these actions were not legally improper, there were definite ethical concerns which are manifested in the resignations of many political figures once their actions came to light; these prominent figures include Iceland’s Prime Minister and Spain’s Minister of Industry (Field, 2017, p. 39).

Within the context of the criminal justice system, it would be pertinent to note that there is a

regulatory mechanism in the UK, such as the Financial Conduct Authority, the key regulatory body established under the Financial Services Act 2012 (Kirk, 2018). The Financial Conduct Authority aims at developing ‘credible deterrence’ to deal with actions violating the integrity of financial markets through regulatory action and criminal prosecution (Kirk, 2018). At the same time, there are other steps that are taken by the UK government to respond to financial crimes, including the Fraud Act 2006, Money Laundering (Proceeds of Crime Act) 2002, the Money Laundering Regulations 2007, and Bribery Act 2010. However, many of these steps were taken before the 2016 Panama Papers leak and despite these measures taken within the criminal justice system to respond to financial crimes, these steps did not prevent the financial crimes committed by actors based out of the UK. Kirk (2018) has critiqued the existing regulatory mechanisms and laws responding to financial crimes in the UK by saying that it is difficult to assess the impact of the regulatory changes in the financial sector (Kirk, 2018). In the light of the revelations made by the Panama Papers, Kirk (2018) appears to make a relevant critique of the criminal justice system response to financial crimes.

Jallow (2016) mentions three important precepts of ethical financial obligations, all of which are seen to be breached in the Panama Papers, these being tax governance, accountability and transparency. Jallow (2016) reported that the Panama Papers suggest strongly that there is a need for a more robust tax administration and compliance risk management strategies in order to make individuals more responsive to tax administration and compliance. Another important finding is that there is a need for global tax administrations from the developed, developing and transitional economies to work closely and share information in order to better mitigate the scourge of aggressive tax avoidance schemes and tax evasion practices.

As Panama Papers represent a crime that is categorised as a white collar crime, its victims are not directly identifiable. However, Panama Papers has also been termed as a “financial genocide” because it relates to the tax evasions that led to national governments being denied of due tax revenues, which also had an impact on the growth and development of communities in those countries (Jallow, 2016). The unethical financial transactions of those who evaded taxes means that the victims of these crimes were national governments who were deprived of taxes as well as citizens who rely on the services provided by the governments through the tax collected by them (Jallow, 2016).

At this point it will be useful to mention how white collar crime and corporate crimes, such as, Panama Papers, can have far reaching consequences for poor and emerging economies because the evasion of taxes can lead to implications for the development of such economies(Lau et al., 2013). Therefore, while the ethical issue that is involved in the evasion of tax relates to wealth creation of individuals through unethical means, an issue linked to victimology is that of the denial of lawful taxes to national governments. The gravity of money laundering and the effects of the crime of money laundering has been researched by Unger and Busuioc (2007), who explore the ways in which money laundering can impact the direct and indirect victims of the crimes. These impacts include effects on the real sector, related to production and consumption, impacts on business activities and employment, increase in crime due to the corruption and bribing of public servants and impacts on the political life of a nation (Unger & Busuioc, 2007, p. 110). There are specific impacts of such financial crimes as are revealed through the Panama Papers on the economy, crime and social life of a nation (Ashforth, Gioia, Robinson, & Trevino, 2008). As the finance related white collar crimes involve unethical practices within the corporate and banking world, it has also been observed that the extent of the unethical practices within these sectors are difficult to identify and respond to from the criminal justice perspective because if sharp practice and unethical conduct is included “in the mix, the numbers would increase exponentially, but the extent of deliberate and dishonest criminal misconduct is less easy to identify” (Kirk, 2018, p. 1).

With respect to the banking sector in particular it has been noted that “many of the major banks engaged in benchmark manipulation over a lengthy period of time is that the banking sector is fundamentally lacking in proper standards of honesty and integrity” (Kirk, 2018, p. 1). Panama Papers investigations reveal that there was an intersection between white collar crimes and corporate corruption as many corporations were involved in the creation of shell companies for the purpose of tax evasion. Corporate corruption is distinguished from white collar crime as while the latter involves individual actions, corporate crimes are structural forms of corruptions at organisational level (Tillman, 2009). Moreover, unlike white collar crime, corporate corruption does not necessarily violate criminal statutes, but may involve unethical acts (Tillman, 2009). Nevertheless, as the Panama Papers investigation indicates, corporate bodies are involved in unethical practices for the purpose of evading taxes and in many cases the actions amount to lack of disclosure. This is also noted by Ashforth, et al. (2008) who write that “reasonable observer of the modern organizational landscape could be forgiven for concluding that an inordinate number of organizations, along with their leaders and their agents, appear to have failed the most elemental of all ethics tests—the disclosure rule” (Ashforth, et al., 2008, p. 670). While white collar crimes may be difficult to identify because of the complex paper trails and lack of clear proof (Strader, 2002, p. 1), the changing nature of technology used for financial transactions and internationalisation of transactions also create evidentiary problems for the investigators (Levi, 2002 ). The Panama Paper investigation shows how difficult it is to locate such activity for the investigators and prosecutors and the inability of the criminal justice system to respond to these challenges. Dig deeper into Situational Crime Prevention with our selection of articles.

Conclusion

Panama Papers investigations expose the links between shell companies established in foreign locations and politicians, businessmen, and corporations in different countries of the world, where the shell companies were used for the purpose of diverting money for the purpose of tax evasion and money laundering. The Panama Papers also reveal the gaps in the criminal justice system, which failed to respond to these illegal and unethical activities. Despite anti-money laundering laws in countries like the UK, and regulatory mechanisms created for the purpose of checking such activities, there was a failure on the part of the investigative agencies and regulatory bodies to identify that such actions were taking place. Furthermore, even when some money laundering cases were identified, the challenges in the transnational financial investigations were such that the agencies were not able to successfully trace the assets in foreign locations. These gaps still persist in the criminal justice system. The Panama Papers reveal ethical concerns about how some law firms and banks referred their clients to Panama for the purpose of evasion of taxes in their own countries; while these actions did not in themselves violate laws, there was a violation of ethical norms. The Panama Papers also reveal how national governments lost significant amounts of taxes when citizens of these countries diverted their money for the purpose of tax evasion. Developing and poorer economies in particular were victimised by these actions as their development was impacted due to the loss of tax moneys. The biggest revelation is the failure of the criminal justice system to respond to the issue of money laundering despite there being laws as well as regulatory mechanisms. UK provides an example of this as the laws were there, but they seem to have failed to respond to the issue of money laundering and tax evasions. Non disclosure by corporations is also revealed in the Panama Papers. To conclude, there is a need to create better collaborative investigation system for tackling money laundering because transnational financial crimes are involved.

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