Panama law firm used charities’ names as cloaks for clients

The Panamanian law firm at the center of a global investigation advised some clients that they could cloak their money in foundations that named as beneficiaries prominent international charities such as the Red Cross, UNICEF and the World Wildlife Fund.

There’s no sign that any money from those offshore dealings went to the charities, whose spokespeople say they had no clue they were part of Mossack Fonseca’s marketing strategy.

A massive leak of records, which came to be known as the Panama Papers, has laid bare Mossack Fonseca’s services and its clients – among them world leaders, drug traffickers and convicted criminals. In their files are two memos suggesting that clients could move their assets into so-called “private foundations” with well-known charities as their supposed beneficiary. The papers suggest that the firm took steps to create such foundations for at least 700 clients.

Nearly everyone is familiar with foundations big and small that help the poor, the environment or the animal kingdom. They are nonprofits that rely on donations. Private foundations formed in Panama, however, are quite different.

One Mossack Fonseca marketing memo, sent to a prospective client in 2008, offers this roadmap: Only three people are needed to set up a foundation. Public filings would reveal the identities of just two, both of whom would work for the law firm. Mossack Fonseca’s employees would serve as directors. The true beneficial owners could remain anonymous because Panamanian law requires only the disclosure of corporate shareholders. Foundations don’t have shareholders, only beneficial owners.

As behind-the-scenes “protectors,” the true owners or their agents would have total decision-making power, like the Wizard of Oz, operating the controls from behind a curtain. They could secretly make or approve every decision about their assets and could “at any time change the names of the beneficiaries” to themselves, the 2008 marketing memo said.

A confusing structure

Mossack Fonseca’s records show that it created foundations for clients at least as early as 1997. A 2006 marketing memo offered full management of private foundations that would “maintain the strict confidentiality of the beneficiary” – services that could be facilitated by “a team of English, Spanish, French, German, Polish and Russian speaking staff.”

The firm created two vehicles for parking clients’ money in foundations – the Brotherhood Foundation and the Faith Foundation. Under the confusing structure, those foundations were given shareholder interests in hundreds of companies formed to serve the firm’s clients, a circular way of protecting the true owners’ interests. The Brotherhood and Faith foundations listed either the Red Cross or Wildlife Fund as beneficiaries.

“We normally use the WORLD WILDLIFE FUND as the first nominal Beneficiary,” the memo said, while assuring clients: “You may name another.”

Also among the documents is paperwork to establish more than 200 other foundations, listing both the true owners and the two charities, as well as UNICEF, as beneficiaries. It could not be determined how many of those foundations were brought to fruition.

Ana María Garzón, a public relations adviser to Mossack Fonseca, declined to respond to emailed questions from McClatchy.

But the firm has said that it is free to list anyone or any group as a foundation beneficiary. In a 2014 memo, the law firm said that it merely provided its clients “secretarial services.”

Experts in offshore dealings, however, said marketing memos suggest that Mossack Fonseca took a more proactive role.

“This is an arrangement made to look like a charity so that the money can be managed, and the name of the person who controls it will be nowhere on the paperwork,” said Jack Blum, an expert on international tax evasion for Columbia University’s Center for the Advancement of Public Integrity. He said that some foundations function as family trusts, and when they are dissolved, the funds are distributed to all beneficial owners.

There are legal reasons to put money offshore. But Adam Rosenzweig, a law professor at St. Louis’ Washington University who specializes in international tax matters, said Mossack Fonseca’s foundations appear designed to “obfuscate who the beneficial owner was by trying to make it look like legitimate situations” in which people set up foundations to anonymously donate to their favorite causes.

Charities call the practice cynical

A Geneva-based spokeswoman for the International Committee of the Red Cross, Jennifer Tobias, said Mossack Fonseca’s tactic “appears to be an abuse of our name.” She voiced disappointment “at the cynicism of those individuals who apparently have established these (foundation) agreements.”

Tobias said the Red Cross is especially concerned about reputational damage that might create risks for workers deployed in conflict zones such as Syria and Afghanistan.

Spokespeople for all three global charities – the Red Cross, the Wildlife Fund and the United Nations Children’s Emergency Fund, or UNICEF – said they did not know they had been listed as beneficiaries or possible beneficiaries of the Panamanian foundations and had found no evidence that donations flowed their way as a result.

Mossack Fonseca’s use of the Red Cross’ name was first reported in France’s Le Monde, together with the Swiss newspapers Sonntags Zeitung and Le Matin Dimanche.

Among clients who agreed to put assets in foundations set up by Mossack Fonseca were Alan Trustman, a onetime Hollywood screenwriter best known for the 1968 film “The Thomas Crown Affair,” starring the late Steve McQueen and Faye Dunaway, and a flock of Canadians, some of whom considered the arrangement in their estate planning, the law firm’s files show.

The documents do not suggest whether Trustman or any Mossack Fonseca clients intended to shelter money from tax authorities nor did the documents disclose how much money went into the foundations.

A Hollywood connection

Trustman, now 85 and living on exclusive Fisher Island south of Miami Beach, said he always reported all his income while trading currencies and precious metals through a Geneva bank account from 1969 to 1990. He said he has kept some of his funds offshore since then.

He said he found it “hilarious” that his name showed up in the Panama Papers, and said he could not recall why his lawyer might have recommended putting some assets in a Panama-based foundation in 2009 that listed the Red Cross as its beneficiary.

McClatchy searched the trove of the Mossack Fonseca files, which also has been scoured by more than 350 reporters in a journalistic collaboration of unprecedented scale, led by the Washington-based International Consortium of Investigative Journalists and the Munich-based German newspaper Süddeutsche Zeitung.

Panamanian authorities raided Mossack Fonseca’s Panama City offices in mid April, shortly after news agencies revealed a number of world leaders or their associates were engaging in offshore dealings. They seized records stored on more than 100 virtual servers, La Prensa, a Panamanian newspaper participating in the consortium, has reported.

Stashing cash in a Panamanian foundation isn’t illegal; it’s only a problem if the intent is to launder money or evade taxes. “If at any point in time we find that any such company (that it formed) is used in an illegal or inappropriate form, we terminate our relationship with the concerned client,” the firm’s released statement said.

Daniel Reeves, a former adviser to the Internal Revenue Services on offshore matters, said that the law firm’s marketing memo is “indicative of the fact that they’re knowingly trying to help people conceal their identities. It’s sort of like, 'What happens in Vegas stays in Vegas.' That doesn’t mean that it’s legal.”

Tax expert Blum said that Mossack Fonseca’s lawyers might not have known how the foundations they created were used. Their bank accounts might even be in another country, he said. But the arrangement is meant to offer a convenient answer to ownership. “If somebody asks who owns it, well it’s a charitable foundation that has a board of directors and has this charity at the end of it,” he said.

Trustman said he signed papers so that the Brotherhood Foundation became a shareholder in his Blatingdale Holding Co., Ltd., registered in the British Virgin Islands, another tax haven. Trustman said his Swiss attorney sought the arrangement, but he couldn’t recall why.

“I have no idea why it was set up and can only guess that there was some wrinkle in Swiss law or some change in Swiss law which required this sort of entity to hold some security or contract in which I was investing,” he said in phone interviews and an exchange of emails.

The documents also identified more than 200 other proposed foundations, each listing all three global charities as beneficiaries, along with the names of various clients, including numerous wealthy Canadians. It was unclear how many of those structures were actually formed.

Regulations often thwarted

Governments worldwide have tried to track the movement of money and to hold taxpayers accountable for offshore income.

Blum recalled that within three months of the Isle of Jersey’s pledge to increase transparency surrounding the identities of the beneficial owners of companies, the tiny Channel Islands nation off the coast of France passed a law providing an escape-hatch. It allowed foundations to keep their true beneficiaries confidential.

Blum said the pattern has been: “One place cleans up, another place opens.”

In 2010, the U.S. Foreign Account Tax Compliance Act took effect, requiring any taxpayer with assets in a foreign bank exceeding a certain threshold – usually $50,000 – to disclose them to the IRS. The law, however, was aimed at curbing the use of secret accounts at Swiss banks, leaving loopholes for offshore shell companies and foundations.

While U.S. and Panamanian negotiators reached agreement on the law, Panamanian officials have yet to sign it.

More recently, the 34-nation Organization for Economic Cooperation and Development has campaigned for a new system in which governments around the world would automatically share financial information.

Rosenzweig said that governments still could find their hands tied if records show only that it “is an entity called XYZ” whose beneficial owner is the Red Cross, even if they suspect the real owner will change at the end.

“The issue of shareholder or beneficial owner anonymity,” he said, “is going to be the single biggest challenge to any new worldwide tax system.”

Greg Gordon: 202-383-0005, @greggordon2

A tangled web

Internal documents show how Mossack Fonseca forms interlocking companies and foundations that give no hint they are shielding clients’ ownership:

Brotherhood Foundation Foundation

Council: Charitable and Goodwill Corp.

Directors: Mossack Fonseca employees

Beneficial owner: International Red Cross

Charitable and Goodwill Corp.

Directors: Mossack Fonseca employees

Shareholder: Faith Foundation

Faith Foundation

Foundation Council: Foundation Management Co., Inc.

Beneficial owner: International Red Cross

Foundation Management Co., Inc.

Directors: Mossack Fonseca employees

Shareholder: Faith Foundation

Source: Mossack Fonseca records