- [Narrator] In 2016, 11.5 million files were leaked
from Mossack Fonseca, the world's fourth largest
offshore law firm.
These were called the Panama Papers.
Hundreds of thousands of offshore entities
and shell companies connected to over 200 countries
and territories appear in the papers.
Prominent world leaders, politicians, business people
and the super wealthy were exposed to have been using
offshore accounts for tax avoidance and other purposes.
So, why should you care?
Every year, about 70 billion dollars
that the US could be using for infrastructure,
law enforcement, healthcare or education is missing.
It's hidden deep within shell companies
and anonymous entities
in places like the British Virgin Islands.
Now, let's back up.
What exactly is a shell company anyway?
- Setting up a shell company is really quite easy.
You can go to a place like Panama
or the British Virgin Islands or Delaware or Nevada
and usually the places where you're doing it
have tough laws where they will not reveal
who the beneficial owner is and they just layer on
different aspects of anonymity.
So for example, you could have fake directors
where you pay a little bit extra and someone pretends
to be the public face of this company.
Just because you have a shell company does not mean
necessarily that you're doing anything illegal.
Say for example, you wanna have some business activities
but you don't want certain business partners to know
what you're doing.
The more normal one is some form of legal tax avoidance.
I think that a lot of people in the US
think that tax evasion and tax avoidance is something
that happens in a far off place with palm trees
and ocean breezes.
And the reality is it's a big deal here.
The US Treasury estimates
that something like 300 billion dollars a year
is laundered through the United States.
Foreigners are coming in and buying up property
with anonymous shell companies
and some of that is perfectly legitimate
but some of it is clearly money laundering
and corrupt officials and other people using their cash
to park it in property and making it impossible
for the people who live there to afford it.
And our government is claiming
that it doesn't have enough money for infrastructure
or for healthcare or for police or for education
and at the same time, there's just huge amounts
of tax avoidance and tax evasion going on
through this secrecy world.
Worldwide tax authorities have collected
more than a half a billion dollars
based on the Panama Papers leak.
- [Narrator] Of the 214,000 entities identified
in the Panama Papers, about one half of them are located
in the British Virgin Islands.
How did this tiny area become such a huge tax haven?
Mossack Fonseca is a Panama based law firm founded in 1977.
After instability in Panama was pushing clients away
during the '80s, the firm discovered
the British Virgin Islands were ripe new territory
for anonymous shell companies.
- Their vision was to be McDonald's
of the offshore system, right?
It was high volume, low cost
and so they were going to pump out
these anonymous shell companies and make them available
to a wider audience.
In the beginning, that's a great business model, right,
because all you're doing is
you create this anonymous shell company, you give it a name,
you don't care who actually is behind it and you stick it
in a folder and you forget about it
until a year passes and it's time to invoice
for the renewal.
Later on, there's more vetting.
Governments start to realize that these are being used
by criminals and money launderers and things like that
and so they say, "We need more information."
And I asked Jurgen Mossack, "Did you ever see that wonderful
"I Love Lucy episode where she's in the chocolate factory
"and she's trying to keep up with the conveyor belt
"and it's going faster and faster?"
And he said, "Yes."
It was very much like that at a certain point.
- [Narrator] So we know it's a big problem
but how is this still happening?
- There's a lot of bureaucratic inertia and timidity
in the IRS for sure.
But another big part of it is that Congress has eviscerated
the IRS and they've starved it of funds, there's been a lot
of retirements and so you've deliberately hobbled the IRS
and made it impossible for them to go after this kind
of tax evasion.
A lot of this information is being held in banks
and in jurisdictions where they do not cooperate
with US authorities easily.
The only way that the IRS can really figure out
what's going on is through these leaks.
And it's really these leaks in recent years
that have allowed the IRS and the rest of the public
to really get a vision of how this system works
and how big it is, how all-encompassing.
It's gonna take people being aware
that the reality is we don't have to accept the austerity
that is being forced on us.
The Europeans are ahead of us on this because they got hit
very hard after the financial crisis.
There were major cutbacks in multiple countries.
And so when these leak investigations started coming out
and they found out that the mega wealthy amongst them
were not paying their fair share, people got very upset
about that and it really hasn't penetrated
in the United States quite as much
but I suspect that it will in the future.