Panama Papers Hack Harms The Ordinary People Too

Why The Holding Companies Demonized In “Panama Papers” Coverage Are For Ordinary People Too

I’ve watched with some chagrin over the last several days as my adopted homeland has become the focus of international attention for all the wrong reasons. It has not been a pretty sight.

In case you have been under a rock recently, someone hacked into the servers of one of Panama’s most prominent law firms, Mossack Fonseca & Co, and stole more than 3 terabytes of data in the form of emails, memos, and other documents. That someone then handed over those 11 million-plus documents to an international consortium of investigative reporters, who have, understandably, had a field day with them.

All manner of shenanigans have come to light with the release of the so-called Panama Papers. Mossack Fonseca is in the business of providing trust services and creating holding companies in Panama for clients around the world. The actual ownership of some of those holding companies was cleverly concealed. Some of them may have been used to conceal the ill-gotten gains of corrupt politicians, others to launder money or evade taxes.

But some of those holding companies were created by ordinary Americans for perfectly legitimate reasons. A line from one of the articles jumped out at me. “Determining a precise number of Americans in the data is difficult,” McClatchy’s Washington DC bureau wrote after spending months pouring over the documents. “There are at least 200 scanned individual U.S. passports. Some appear to be American retirees purchasing real estate in places like Costa Rica and Panama.

It appears that some of Mossack Fonseca’s clients may have been up to no good, but it also appears that some of the people unwittingly dragged into this fiasco are people just like you and me—people who came to Central America in search of greener pastures or new adventures and made unlucky choices about which law firm to do business with.

The reality mentioned only in passing but so-far ignored by much of the media in their Panama Papers coverage is that there are often perfectly legitimate reasons for someone to have a holding company in Panama. There is nothing inherently illegal or nefarious about them. People who hold them (and the lawyers who represent those people) may do illegal or unscrupulous things with them, but that’s no reason to shut down the tools themselves. It would be like banning computers because some people use them to swindle others or engage in cyber-crimes. “Throwing the baby out with the bath water” is the saying that comes to mind here.

For example, if you own property in another country and unexpectedly pass away, that property is subject to the probate laws of the country where it is located. If a company owns the property instead of a person, however, that is not the case, and the assets can be moved to another jurisdiction where the probate laws are more favorable. In this case, having a holding company is merely a practical and efficient means of protecting your family’s assets for future generations.

Asset protection is another good and legitimate reason to have an offshore holding company. American citizens pay taxes on investment income regardless of where those assets are held. If they are held offshore, however, they are protected from people other than the government who would like to seize them from you. People who file any of the 15 million frivolous lawsuits in America every year, for example. Is it right that someone who slips on their own banana peel on the sidewalk in front of your house can somehow win a court judgment against you, seize all your assets, and send you to the poorhouse? If you have those assets in an offshore holding company, that’s not likely to happen.

Because of other crazy laws in the United States, many offshore brokers and investment managers will not open accounts for individual Americans. They will, however, open accounts for offshore entities, even if those entities are owned by Americans. So if someone wants to diversify their investment portfolio with international holdings not available through U.S. brokers, an offshore account is the best way to do so.

One the best reasons to own an offshore holding company is in order to take control of your own retirement nest egg. Critics of the shady dealings exposed in the Panama Papers like to say the whole affair exposes how the system is rigged in favor of the rich and powerful. The rich and powerful, they claim, can avoid the fiscal obligations faced by the rest of us because only they have the wherewithal to create and maintain these networks of shell companies.

But it is precisely these holding companies that allow ordinary folks like you and me to sidestep an even bigger rigged system—the collusion between government and Wall Street that forces us to invest our retirement funds in risky U.S. stock markets and line the pockets of fat cat bankers in the process. If you hold an Individual Retirement Account, or IRA, in the United States, you are not allowed to invest that money in real estate or non-traditional investments. You have to buy U.S. stocks, bonds, or mutual funds.

What you can do, however, is create a so-called self-directed IRA and set up a very legal mechanism that does allow you to invest in real estate or other assets. But that self-directed IRA has to be owned and controlled by, that’s right, an LLC or other holding company.

Keep all this in mind as you wade through the coverage of the Panama Papers mess. Those of us who own offshore entities are not all corrupt politicians or tax-dodging billionaires. Some of us are just ordinary people who are smart enough to use the tools available to us to protect our assets and diversify our investment portfolios for our own benefits and the benefit of our families. In doing so, we are following the rules just like everyone else.

The subject of these Panama Papers is sure to be a hot topic at our upcoming annual Panama Conference June 8–10 in Panama City. Tickets are limited and going quickly, so sign up today.

Peg Fairbairn
Panama Insider