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Fallout from Panama Papers continues

The so-called "Panama Papers" have continued to spell trouble not only for the Panamanian law firm alleged to have created illegal tax havens for clients to shield assets from American tax liability, but also for the countless law-abiding expatriates, foreign nationals and U.S. citizens with international banking accounts.

The scandal has forced the hand of banking authorities, who, as we discussed in an earlier post, finally took the step of codifying the Financial Crimes Enforcement Network's years-old recommendation that financial institutions around the world must verify the identity of the owners of shell companies. There is also legislation in the works that would significantly beef up the possible penalties for those found guilty of tax evasion, money laundering and other financial crimes.

How did the tax evasion scheme work?

With the fallout from the Panama Papers being so widespread, affecting some of the world's most influential people, including high-ranking government officials from several countries, a question being asked by many is: how did the tax evasion scheme allegedly perpetrated by that Panamanian law office work?

That isn't a simple question, however, and it doesn't have a simple answer.

One allegation is that the firm would take funds from clients (that the clients either reported as lost in bad investment deals or through falsified receipts for goods and purchases) and deposit them into the account of a shell corporation owned by the firm. The firm would then establish a private foundation with the money - taking advantage of Panama's generous tax shelters and lax requirements for such charitable endeavors - and name employees of the firm being as officers of the foundation. The client who contributed the funds doesn't appear to have any legal control over the foundation.

In some examples, the firm secretly named the client as the sole beneficiary of the funds of the foundation, even though that information isn't available in public documents and the client appears to be hands-off from the entire endeavor. The firm employees named as having control of the funds could then transfer money to client accounts in notoriously private banks in such locales as Andorra, Panama and the British Virgin Isles or make extravagant purchases with it that would then be "gifted" to family members of the client who originally supplied the funds. This could allow the client to skirt tax obligations on interest payments, dividends, capital gains or limitations placed by the government on tax-free gifts.

It is almost certain that, as more information comes out about the infamous "Panama Papers," the reaches of this scandal will be more widespread than anyone realized. Stay tuned here for more information about what this could mean for offshore account holders and tax litigation both now and into the future.

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