Two faces of transparency

The 11.5 million Panama Papers constitute the largest electronic information leak to date. But what has it really exposed? Not much that is truly surprising. We have long known about offshore shell corporations and how they can be used to hide assets and avoid taxes, legally or otherwise.

We have known of their use not only by those who have earned or inherited wealth, but also by criminals. Meticulous examination may reveal that Mossack Fonseca offered something startlingly creative and new in the devices it created. But so far it appears the firm was just willing to act on instructions that had become challenging in alternative off-shore jurisdictions that had committed to different rules on transparency.

The novelty here is in the details of the revelations. We know much more about how these companies function and who has been using them. The revelation of specific arrangements has already brought political and reputational repercussions. The use of such entities to obscure the beneficial ownership and control of assets is still a permissible means to secure financial privacy. It should not be, but it is.

Offshore entities are fairly thoroughly discredited, but before we cast financial privacy away entirely, we should consider the legitimate functions it can serve. Offshore companies have been used by political dissidents to shield assets from corrupt rulers. They have protected those with legitimately accumulated wealth from extortion demands and threats. The same arrangements that a kleptocrat employs to divert his nation’s wealth allow a business to keep sensitive financial information away from competitors.

These more sympathetic reasons are likely at play in a tiny minority of cases and are not worth the cost of propping up a substantially corrupt system, but we should acknowledge that they will be a casualty of more transparency.

We must also not forget the other privacy interests at stake in this disclosure. As lawyers, should we be celebrating the loss of lawyer-client confidentiality? Mossack Fonseca is a law firm, after all, with legitimate clients. At some level, this may appear similar to the Ashley Madison hacking scandal – dubious actors getting what they deserve. But there can be an ominous aspect to such breaches as well – more akin to the publication of private celebrity photographs lifted from iCloud. We certainly welcome having a light shone on this area, and investigative journalism plays a critical role in exposing corruption and insisting on transparency.

But surely publishing the communications of those whose alleged conduct gives rise to official concern is qualitatively different to hacking the emails of the clients of Ashley Madison. At a minimum, if these tactics are to become standard practice for cleaning up international financial markets, it would be good to see an international consensus develop around some ground rules.

We must make institutional and regulatory decisions in the face of competing interests. On balance, the public interest in transparency far outweighs the rights of those hiding, for whatever reasons, behind secret or shell companies. Heads of state should not need financial privacy and drug lords certainly do not deserve it. The well-documented cost of financial secrecy outweighs its benefits, and serious efforts to combat money laundering, kleptocracy and other major financial misconduct cannot bear fruit until we abolish this tool of the international financial sector.

But let us end this secrecy in a manner consistent with our own values, leading thoughtfully and not rushing to respond in our justified, collective outrage. We must explore the public interest comprehensively, and change the financial secrecy laws deliberatively – without cutting corners.

Alexandra Wrage is president of anti-corruption business association Trace International

• Mossack Fonseca denies wrongdoing. It has stated: ‘We are responsible members of the global financial and business community. We conduct due diligence on all new and prospective clients that often exceeds in stringency the existing rules.’