Eight weeks ago, the stunning news broke about the involvement of Minister Konrad Mizzi and the Prime Minister’s chief of staff, Keith Schembri, in a highly suspicious and ill-judged plan to set up a trust in New Zealand, with a shell company in the notoriously secretive jurisdiction of Panama.
Although Panamagate is a story still unfolding, my view remains that it is unconscionable that the Prime Minister did not demand, as a first step, the resignation of both the tainted Energy Minister and his own chief of staff pending the outcome of the enquiry into the affair.
I am writing this before the confidence debate in Parliament on Monday. Regardless of the outcome of the audit, the Prime Minister should have acted decisively to remove both from their posts when the story broke. The gulf between what is legal and what is moral has become so wide that it has added fuel to the anger and lack of trust that the public increasingly feels.
By failing to cut out the cancer in his government, Muscat’s personal authority is bleeding away. Malta’s government is being undermined and its reputation tarnished – not helped by Nationalist MEPs raising the issue in the European Parliament when discretion should have dictated otherwise.
This said, there is a danger, as always in Malta, of losing our sense of proportion and leaping to conclusions before having the hard evidence on which to base a judgement. This is not in any way to condone what Mizzi and Schembri have done. There is no question that on the circumstantial basis of what we know, their ill-judged actions have raised genuine suspicions of possible misconduct. As Thomas Jefferson said: “When a man assumes public trust, he should consider himself as public property.”
But suspicion is a far cry from actual evidence of corruption or wrongdoing. The Opposition’s cries about a corrupt government and their call to thousands of their core supporters to take to the streets may be part and parcel of the stuff of local confrontational politics, but it has about it an unsavoury whiff of hypocrisy and opportunism and adds little to the credibility of our parliamentary system of government. Before leaping to conclusions, the facts should be considered in their full context.
Panama is one of only four countries refusing to exchange tax information with others automatically, in line with an OECD measure signed by 89 nations, including Malta. An IMF report in 2014 said that of 40 recommended steps to be taken by countries to combat money laundering, Panama had fully implemented only one. As a prominent Panamanian lawyer said: “When it comes to money-laundering, we offer full service: rinse, wash and Panama dry.”
Does the leak therefore prove wrongdoing, as opposed to suspicion of wrongdoing? The bottom line is that most of the services offered by the offshore industry – including, of course, Malta’s – are legal. The onus is on the client to report their affairs properly to the relevant tax authorities. However, the Panama files released are said to prove that banks and law firms often failed to carry out proper checks of their clients to ensure that they were not involved in criminal enterprises, tax dodging or political corruption.
Tax havens are used for legitimate as well as nefarious reasons, leaving regulators in a tricky position. Havens offer nil or nominal taxes, along with a neutral legal system. This attracts multinationals, which can use accounting tricks to register substantial profits there while avoiding tax. Tight secrecy laws and low taxes have attracted more than 350,000 international companies to Panama, the third largest in the world after Hong Kong and the British Virgin Islands.
It is inescapable that tax havens and their high walls shelter corrupt elites. There is a strong public interest in transparency
Three quarters of top American companies maintain subsidiaries in tax havens. Their defenders say they ensure that other countries keep tax rates down.
Tax havens also offer something even more valuable: secrecy. Law firms there have boasted – until now – of how easily they can protect an investor’s financial information. Foreign businesses move money into the country untaxed and a lack of transparency makes it appealing for those looking to avoid legal restrictions.
What will the impact of Panamagate be globally? The skeletons tumbling out of Panamanian closets should strike fear into the hearts of politicians and their cronies across the world. There will be embarrassment, but for the most part the revelations are likely to do no more than confirm the suspicion about the relationship between power and greed.
In essence, one is addressing the very foundations of the international financial system. Most big international companies sit at the apex of a complex pyramid of financial structures designed to reduce tax bills and circumvent regulations. Tax havens are a symptom of a far deeper issue, a global financial system that encourages those who can afford it – not just rich individuals, but also big international companies – to shift money overseas.
Given the incentives built into the international tax infrastructure, the question is not why big companies and rich individuals take advantage of the financial engineering available, but why would they not?
However, in the face of an international public backlash, the tectonic plates are shifting. Today, as we have seen, it is far easier for investigators and astute journalists to discover whether corrupt FIFA officials, or Brazilian or Maltese politicians and businessmen, are hiding – or attempting to hide – money in Swiss bank accounts, or tax havens like Panama or the British Virgin Islands.
It is inescapable that tax havens and their high walls shelter corrupt elites. There is a strong public interest in transparency. If Mizzi and Schembri have broken the law they should be held to account. Like it or not, the western consumer (including Malta with its offshore tax arrangements) brushes daily with the world of tax avoidance.
The leak has increased pressure on world leaders to tackle offshore tax evasion. The truth is that there is a growing understanding of aggressive tax evasion as a serious crime which makes the world poorer and less equal and defrauds honest taxpayers everywhere. Enforcing stricter standards for tax havens is part of a campaign not so much against privacy as in favour of good governance.
Both the leader of the Opposition and the Prime Minister should consider the impact of their actions in the much wider context of what the Panama Papers have exposed about tax havens and how these might affect Malta’s vital financial services industry. Scoring political points is one thing. Undermining an industry which accounts for about 20 per cent of Malta’s GDP and hundreds of jobs in law and accountancy firms and financial services is quite another.
This is not just about Panama, yachts, errant ministers and senior officials, or even tax dodging, but about the very shape of the global financial system. The efforts to overhaul it, now under way, led by the Big Five in Europe (Germany, Britain, France, Spain and Italy), who will seek a new global standard through sharing company ownership information and an effective crackdown on tax avoiders, may radically affect Malta’s financial services and thus its economy.
Maturity, balance, prudence and a proper sense of proportion are demanded of our leaders, or they risk throwing out the financial services baby with the bathwater.