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When Bastian Obermeyer of Munich's Suddeutsche Zeitung (SZ) received his e-mail from John Doe, he thought it was a prank.

He reacted based on experience. Journalists receive dubious tips from would-be sources, frequently bombarded with self-serving requests for coverage, conspiracy theories and well-meaning but poorly informed leads. Separating legitimate news from this inbox noise is arguably a signature skill of 21st century investigative journalism.

Obermeyer didn't simply get lucky. He knew the hallmarks of a tip that deserved follow up. What he got out of hitting "Reply" would change the world.

What Are The Panama Papers?

The Panama Papers are a collection of approximately 13 million documents leaked from the Panama City, Panama-based law firm Mossack Fonesca. They included both financial and legal documents detailing a global network of offshore banking corporations. In addition to simple tax shelters, the Panama Papers indicated thousands of cases of money laundering, financial fraud, tax fraud and other financial crimes.

The Panama Papers also identified major banks, law firms and individuals involved with this global network of financial crimes. In total, more than 300,000 people and companies were swept up in the Panama Papers leak. This leak named politicians, royalty, celebrities, athletes and major figures in business, banking and law from over 150 countries. While not all committed crimes, many used the network connected to Mossack Fonesca to build legal tax shelters, others were explicitly identified as participating in global criminal activity.

"John Doe," the individual who released the Panama Papers, has never identified himself. The closest he has yet come was a manifesto which SZ ran at his request.

To understand the Panama Papers fully, you need to know a little bit about offshore banking and tax shelters.

What Is Offshore Banking and What Are Tax Shelters?

At the heart of the Panama Papers are the practices of offshore banking and tax shelters.

What Is "Offshoring"?

Offshore banking, or "offshoring," refers to the practice of moving or keeping your money outside of your home country. For most people the reason to do this is tax avoidance. By finding a jurisdiction with more favorable tax laws you can, if you're wealthy and clever enough, make those laws apply to your money instead of the laws back home. Just like that, an onerous 37% personal income tax can sink down to, say, the Cayman Island's far more generous 0% - 2% rate.

Offshore banking can be legal. It can also be very illegal. It all depends on how you do it.

What Are Tax Shelters?

A tax shelter is any practice of moving money to lower a taxpayer's final taxable income. Retirement accounts are a common form of tax shelter, for example, since something like a 401(k) lets you deduct contributions from your taxes. Houses and property can be a tax shelter too, since the deductions associated with owning a home can reduce your taxable income.

However, most commonly the term "tax shelter" refers to a scheme for lowering your taxes without spending more money than you've saved. For example, while someone who donates money to qualifying charities can deduct that money from their taxes, they will virtually always give away more money than they saved and wind up net-negative. The goal of an accountant or law firm is to help clients build tax shelters in a way that ultimately nets positive in terms of either cash or assets.

Offshoring vs. Tax Shelters

Tax shelters and offshore banking have become largely synonymous in common parlance. This is because foreign financial institutions are a very common form of tax shelters.

Using banks in a foreign country can let taxpayers take advantage of the different tax rates around the world. This is called a "tax haven." It isn't as easy as simply making a deposit, of course. On paper an American always owes their full taxes to the U.S. government… but there are ways around that for a clever accountant.

And let's not forget the countries that will simply sell you citizenship so you can claim their income tax.

How and when this works is complicated because tax situations are incredibly situation-specific. What lets a wealthy banker create a tax shelter in the Cayman Islands may be entirely different from what helps out a Hollywood celebrity, and both have a completely different financial situation from a corporation. However, the thread remains the same. In all cases, using foreign financial institutions gives you the opportunity to take advantage of foreign taxes, reporting and financial laws.

Are Offshore Tax Schemes Illegal?

In general, no. Using an offshore bank to create a tax shelter might be unpopular but it's not illegal per se. However, it's very common that people commit crimes as part of setting up these tax havens.

After all, half the point of a bank account in someplace like Panama is that the foreign government won't look at those records and your domestic government can't. Unsurprisingly, a lot of people take advantage of having undisclosed finances to commit fraud, tax evasion and other crimes.

How Offshore Tax Schemes Quickly Become Illegal

Well… people take advantage of having undisclosed finances to commit fraud, tax evasion and other crimes.

In the past the Swiss owned financial secrecy. Their institutions were notorious for ultra-secrecy and a see-no-evil approach to banking. The country swiftly became a depository for the worst of the worst around the world.

Switzerland has cleaned up its act. In its place have stepped nations like the Cayman Islands, the British Virgin Islands and Dominica. Banks there, like their Swiss predecessors, take client secrecy seriously. This discretion allows bad actors to use these accounts with relative ease, committing financial crimes from fraud to tax evasion and even the violation of international sanctions.

In most financial crimes the most powerful tool that law enforcement has is a paper trail. When someone defrauds his investors those millions of dollars have to go somewhere, and the FBI can follow that money back to the wrongdoer.

If that trail leads to a foreign jurisdiction that doesn't cooperate with law enforcement, or a numbered account with no personal identification, stealing becomes orders of magnitude easier.

Shell Corporations and Tax Havens

Then there are shell corporations.

A shell corporation is a legal entity that is technically an independent business. It has articles of incorporation and bank accounts. In theory it's just a business ticking along and trying to make the weekly payroll.

In reality, a shell corporation does no business whatsoever. It exists only to hold assets and is owned and directed entirely by someone else. For example, shipping companies may use shell corporations to register individual ships; real estate firms may sometimes use them to buy or hold individual buildings. In both cases the asset is legally owned by the shell corporation but a parent corporation or individual is actually calling the shots.

From a public perception standpoint shell corporations are almost inevitably shady. They aren't always illegal, but their use almost always hides an asset's true owner, manages liability or both. For example take the case of the shipping companies noted above. They may use shell corporations so that liability for a shipwreck can't go past its limited holdings. The parent company can't be sued because it didn't actually own the boat. (This doesn't always work, but it's the theory.)

Shell corporations can also exist just to hold bank accounts and hide the true owner of money. In this case the shell corporation operates to hide financial information, usually relying on the laws of the tax haven. This quickly leads to crime.

These shell corporations only exist to move money along. In doing so they can mask a money trail on the incoming end, preventing law enforcement from seeing past the shell corporation's name and corporate account, and they can launder a money on the outgoing end, making an individual recipient appear as though he were receiving funds from a legitimate corporation.

Shell corporations aren't always illegal. But, especially as constituted in tax havens, they often are.

Offshore Banking and The Panama Papers

This leads directly to the Panama Papers.

The thing about offshore banking, tax shelters, shell corporations and the accounting gimmicks necessary to make all of this work is that they require quite a bit of expertise. Lawyers and accountants alike have to file the paperwork required to make sure that the money goes where it should.

And most people need two sets of experts. They will always need lawyers and accountants local to the tax haven they have selected, and they will typically need lawyers and accountants local to where they live. As a result, whether you're committing financial crimes or just legally dodging your taxes, it creates a lot of paperwork.

That's the paperwork that found its way onto the editorial desk of Suddeutsche Zeitung, via the law firm of Mossack Fonesca.

The Caribbean and Central America are at the heart of modern tax avoidance. Indeed, island tax havens are why we now call it "offshore banking." Mossack Fonesca was one of the largest firms working in the Panama City tax shelter industry, and as a result it filed hundreds of thousands of cases stretching back to the 1970s. By one measure they worked with politicians, public officials and other wealthy clients from almost every wealthy nation on Earth. (Although this is a link to Wikipedia, it is a compact visualization of data from the International Consortium of Investigative Journalists.)

Inside the Panama Papers were the details of offshore accounts and shell corporations set up by these individuals. The Panama Papers held information about the legitimate banks and law firms that had helped their clients move assets to tax havens, and also held information about the banks and law firms in those tax havens that helped receive those assets.

Much of the information in the Panama Papers was sketchy but not illegal. Despite the public embarrassment, prominent individuals caught building offshore tax shelters had done nothing legally wrong.

However, a lot of the information revealed in the Panama Papers was overtly criminal. The leak contained information about tax fraud and other financial crimes, and the details of the offshore banking used to hide those felonies. It contained information about major firms who helped wealthy individuals evade sanctions by moving money around the world, and about others which helped commit money laundering.

The Panama Papers were ultimately a dossier on financial wrongdoing, both criminal and ethical. What shocked the world was the raw scope. Although Caribbean tax shelters are common knowledge, few people had fully understood just how widespread they had become.

In the wake of the Panama Papers the world learned that offshore tax shelters aren't an occasional indulgence by the rich. They are a way of life for the ultra-wealthy.

The Panama Papers and Modern Journalism

The Panama Papers are a trove of 13 million documents sent, ultimately, to one reporter. Analyzing this data took one of the largest concentrated acts of journalism in the modern era.

Suddeutsche Zeitung, working with and through the International Consortium of Investigative Journalists, recruited a team of over 370 journalists from 80 different countries to report on these documents. Aware of the wealth and power of the individuals named in these documents, Obermeyer and SZ set up a secured data drop. Journalists would receive their share of the documents only through this system, sending back notes and information in the same way.

Even with that kind of manpower it took over a year for SZ and the ICIJ to fully report this story. Although the Panama Papers documents appeared genuine, nothing within the leaked documents could be reported until the newspaper could vet its information. They worked in secret, counting on the professionalism of their team to tell this story right and not to break the news early seeking personal gain.

It worked.