Secrecy World

by Jake Bernstein

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  To Eve, without whom this book would not exist. Your wisdom and beauty light my day.

  PROLOGUE

  In the spring of 2015, a prosperous shipping-company executive in Mexico faced a problem. He wanted to buy a $585,000 town house in Seattle for his sister and ten-year-old niece. It was not the distance that posed a challenge. His sister was embroiled in a divorce. The executive did not want the house to become part of the dispute. He also hoped to minimize any taxes on the transaction. Finally, the ownership of the house needed to revert back to him should his sister die.

  He contacted a law firm in Panama that handled such matters. The firm had decades of experience helping people all over the world hide their money and disguise their most intimate affairs. Mostly it sold anonymous shell companies based in tax havens. Sometimes, as in this case, it went a bit further.

  The executive flew to Panama. A car picked him up at the airport and took him to the firm’s offices. Nothing about the firm’s outward appearance indicated it was a massive global operation with hundreds of employees scattered throughout the world. Its headquarters was in a squat office building on an unassuming mixed residential and commercial side street in Panama City. The firm owned many of the houses on the street, but that was not immediately obvious.

  The new client met with one of the firm’s top lawyers and explained what he hoped to accomplish. The lawyer asked for and received proper documentation from the client that established his identity, including copies of his passport and bank statements. The scheme the lawyer devised was not particularly complex by the standards of a wealth management industry that is accustomed to mixing and matching multiple legal structures and countries to safeguard the riches of its clients. This transaction was a small one. Of questionable ethics, but by all appearances completely legal.

  The strategy began with a Delaware limited liability company. It would be the entity to buy the house. The law firm contacted an outfit in Delaware that procured companies in the state on its behalf. To establish a company based in Delaware required minimal information. Anyone, anywhere in the world, could create one. As long as the company did no business in Delaware, it was not required to file any information about its activities or reveal who really owned it. The company only had to list a “member,” but that could be another company or legal entity.

  The ability of foreigners to hide their activities through companies in Delaware and other states was the cause of considerable consternation by governments around the world, including the United States. The same year the Mexican businessman set up his company, the U.S. Treasury issued a report in which it expressed “particular concern” about Eurasian organized crime figures using U.S. shell companies to conduct their illegal activities. The worry was exacerbated by the sheer number of anonymous companies the United States was pumping out. In 2015, Delaware alone produced more than 128,000 LLCs.

  The executive had a name in mind for his company. He wanted to call it The Cherry Group, but a Delaware company with that name already existed. He settled for Cherry Group USA LLC. The company cost little more than $300 to summon into existence but the law firm charged $1,260 in total to make it active with all the appropriate books and records. The executive paid promptly.

  But the Delaware company by itself was not sufficient for the executive’s needs. If he owned it directly, it would be clear to the soon-to-be ex-husband and the U.S. government who actually purchased the house. The lawyer suggested a Panamanian foundation that would legally own the Delaware company.

  The law firm gave the executive a choice of names for the foundation, Vanora or Eleus. It had already created the foundations two months earlier, before the firm was even aware of this particular client. Two women, who were actually low-paid employees of the firm, ostensibly controlled the foundations. In actuality they served as figureheads for thousands of companies and foundations. Their existence was a shield behind which the actual owner could hide. The executive chose Vanora and paid $3,950 to buy the foundation.

  By this time, a lawyer from another firm in the United States had also been brought in to help shepherd the transaction. His retainer was $3,500. The executive made plans to fly to Seattle to buy the house. But his real estate broker informed him of a hitch: He could not purchase the home in the name of Cherry Group USA because the company was owned by the foundation, not him. This was easily remedied. The two low-paid employees of the Panamanian law firm simply signed a document saying that as the controlling members of Vanora Foundation, they authorized him to buy the house. The law firm was willing to provide this service because the executive was paying for the house in cash, so there was no risk the Panamanians would be stuck with the mortgage.

  This was only one of thousands of transactions the law firm facilitated in 2015. Its name was Mossack Fonseca. Unbeknownst to the firm, at the same time it was helping someone secretly buy a house in Seattle, its data was being siphoned off and given to reporters. The resulting global journalism investigation, the Panama Papers, afforded an unprecedented look into the operations of an underground economy through which trillions of dollars flow annually.

  This river of cash exists in a largely unregulated place known as the secrecy world. It’s an alternate reality available only to those who can afford the trip. In the secrecy world, wealth is largely untouchable by government tax authorities and hidden from the view of criminal investigators. Through the secrecy world, family dynasties are nurtured, their fortunes—often acquired illicitly—laundered and passed on to heirs. It’s a place where capital always triumphs over labor and the well-to-do are free to ignore the laws that govern their fellow citizens.

  Global private wealth has steadily increased in recent years, from $121.8 trillion in 2010 to $166.5 trillion in 2016. An estimated 8 percent of the world’s household financial wealth is held in the secrecy world. The wealthy individuals who control this money appear disproportionately reluctant to contribute back to their native countries. One recent study of three Scandinavian nations found that personal tax avoidance among the population at large was about 3 percent. But for those in the top 0.01 percent—each of whom had more than $40 million in assets—a staggering 30 percent stiffed the taxman. Not surprisingly, the ease by which wealth is transferred through the secrecy world has become a major contributor to global inequality.

  The effects are everywhere around us. Money hijacked by the secrecy world is no longer available to pay for infrastructure, build schools, or police communities. It has led to the spiraling cost of real estate in major cities such as New York, Los Angeles, Miami, and London. The wealthy eager to park their money in safe assets are bidding up prices by grabbing properties in these places. They often buy through anonymous companies that keep their identities secret from tax collectors at home and abroad. In the last quarter of 2015, the buyers of 58 percent of all property purchases in the United States worth more than $3 million were LLCs
. They spent a total of $61.2 billion.

  The biggest abusers of the secrecy world are multinational corporations. They base their operations in places that provide minimal taxes and maximum secrecy like Delaware, the Cayman Islands, and Luxembourg. After they were exposed, Mossack Fonseca’s principals insisted they were no different from these corporations. They were simply behaving the way accountants, bankers, lawyers, and trust companies operate every day.

  They were right.

  1

  NAZIS AND RADICAL PRIESTS

  Against the backdrop of a brilliant blue sky, a disembodied voice, vaguely recognizable from the world of advertising, declares: “All our dreams can come true, if we have the courage to pursue them.”

  The quotation launches an eighteen-minute corporate video to celebrate the thirty-fifth anniversary of the Panamanian law firm Mossack Fonseca. Filmed in 2012, the video tells the sanitized origin story of a pair of visionaries who built a global empire selling secrecy.

  The firm started as two people and grew to almost six hundred employees with forty-two offices around the world. Its Panama headquarters operated twenty-four hours a day, churning out anonymous companies, a product as versatile as it was desirable. Each company was an empty corporate shell waiting to be filled. It could do practically anything: hold a bank account, own a mansion, enter into complex business transactions. Best of all, it was near impossible to discover who owned it.

  The video doesn’t dwell much on this wonder product. Instead it’s a paean to the law firm’s ambition and cutting-edge technical achievements.

  “One thing is for sure,” states the narrator, “we are the leaders when it comes to utilizing technology in order not only to meet but to anticipate our clients’ needs.”

  Jürgen Mossack, the firm’s senior partner, is the star—the man, the video’s narrator states, “who has been in the forefront of making technology a priority attending to our clients.” The video recounts how for Mossack’s forty-ninth birthday in 1997 the firm retired its original IBM computer system—“state of the art at the time”—and replaced it with a customized Oracle software database.

  Mossack delivers a curt opening statement from a formless brown easy chair as bland as its occupant’s demeanor. The senior partner’s smooth brow highlights close-set eyes and a tight mouth that relaxes into a frown. What the video does not reveal is a quiet reserve, a protective layer like the anonymity of the companies he sells, which serves as a way to keep his feelings hidden.

  “My vision is that our company and its various different divisions become an organization that is really, really, not only well respected but that which is an organization similar to perhaps, Microsoft,” Mossack says, before adding, “in a much smaller scale, of course.”

  The video forecasts a limitless horizon. “I believe this group will endure and we will still be here as a sound and strong firm in thirty, sixty, or ninety more years,” says the firm’s cofounder, Ramón Fonseca.

  The usually gregarious and charming Fonseca appears stilted and uncomfortable while delivering his short statement. Hair streaked gray and slicked back, his skin a colorless office pallor, he peers at the camera as if suspicious of its intentions.

  His performance, like the video itself, is slightly off-kilter—a mimic of what big companies do—like a boy wearing his father’s suit. In another scene, the IT director, who joined the firm while still a university student in Panama, looks into the camera and remembers the joy of experiencing snow and air travel for the first time.

  Yet the accomplishment to which the video testifies is undeniable: Mossack and Fonseca built a factory that flooded the planet with more than 210,000 anonymous companies, trusts, and foundations. Rather than Microsoft, they became the McDonald’s of secrecy, selling cheap products that offered limited economic nourishment while clogging the world’s financial arteries with tax evasion and sometimes even criminality.

  * * *

  THE MOSSACK FONSECA story begins in war-torn Germany, in the ashes of Hitler’s Third Reich.

  In March 1945, two months before Germany’s unconditional surrender, U.S. forces captured Erhard Mossack, a corporal in the Waffen-SS Skull and Crossbones division. Only twenty-one years old, Erhard had already lived a full life. He joined the Hitler Youth at fifteen and enlisted in the SS three years later. He saw action in Russia and was wounded in Czechoslovakia. While the Waffen-SS had a gruesome reputation for massacres, no evidence has emerged that Erhard took part.

  Nine months after his capture, Erhard and seven other POWs stole a truck and escaped from a prison camp near Le Havre, France. They had almost made it to the German border when a French sentry surprised them. Erhard and two comrades fled. At Cologne, they separated, melting into the population. Germany was a battered and contested land, with the Soviets and the Americans actively recruiting former Nazis to repurpose them as agents in the coming Cold War. Former SS officers such as Erhard, when not choosing sides, secretly banded together for mutual aid.

  These comrades helped Erhard locate a physician skillful at removing the telltale tattoo of his blood group, stenciled under the left arm of most Waffen-SS. The tattoo was a dangerous giveaway to occupiers hunting for former Nazis. The small scar the doctor left behind was one of the few successful actions Erhard took in the year after his prison break. Almost everything that followed, as detailed in a report by the Federal Bureau of Investigation stamped “secret,” reads like a clandestine comedy of errors.

  Erhard found work as a farmhand. That spring, a former Nazi propaganda official attempted to enlist him in the German Communist Party. Erhard rejected the offer. Two months later, a man who claimed to be a former high official in the Nazi Party came to the farm. He told the gullible Erhard that he toured Germany as a traveling salesman, all the while quietly building a network of secret agents. He offered the former corporal a choice: join a covert organization for the Soviets or one to restore fascist rule to Europe. Erhard pledged his support for the latter option.

  Why did ex-Nazis peddling dreams of future glory find Erhard such a promising mark? A U.S. Army intelligence assessment provides a clue: “[Erhard] has had a very extensive, but superficial political education and is thoroughly indoctrinated with Nazi ideology. A typical [Hitler Youth] leader, he still lives in his world of Nazi slogans and is a striking example of German youth under HITLER.”

  In late May 1946, Erhard fell in with another former SS officer bent on reconstituting the Reich. Erhard explained he’d already committed to one underground organization. Nonetheless, he accompanied the man home to obtain forged papers. Late that night, U.S. Army intelligence roused Erhard and took him into custody. His new friend had betrayed him.

  After first refusing to talk, Erhard told his army interrogator the convoluted tale of his life on the lam, characterizing his apparent willingness to join German underground organizations as a ruse. He was gathering information, he said, to barter with army intelligence to escape punishment for the Le Havre prison break.

  The interrogator was skeptical.

  “His alleged motive in doing this—to win the good graces of the US Authorities by acting as an informant for [us]—is open to question and may well simply constitute a shrewd attempt to get out of an awkward situation,” states the interrogation report.

  After his release, Erhard married and scraped together a living as a small-time journalist and author. In March 1948, his first child, Jürgen, was born. Three more children followed over the next decade. Soon after the birth of the last one, Erhard uprooted his family and moved to Panama.

  In the early 1960s, there was much to recommend Panama to a former Nazi ideologue. It was a country with a mercantile bent, controlled by a white oligarchy and stratified along class, racial, and geographic lines. Located on the isthmus connecting North and South America, it never produced much itself. Yet its strategic value as a crossroads, with less than forty miles between the Atlantic Ocean on one coast and the Pacific on the other, gave rise to a me
rchant class that grew rich off the despoiling of the Americas. Along with the descendants of the Spanish colonial elite, Germans and their institutions also had deep roots in Latin America, making it a beacon for former Nazis following Germany’s defeat.

  According to a declassified Central Intelligence Agency report, Erhard contacted the agency in 1963, offering to peddle information about Communist Cuba, but the files don’t detail what relationship, if any, he maintained with American intelligence. Erhard found employment with Lufthansa and dabbled in different jobs. Jürgen, thirteen years old at the time of the family’s arrival, spoke neither Spanish nor English at first. Only able to communicate among themselves, the family stuck together. Self-conscious about the language barrier and naturally shy, Jürgen found it hard to make friends. “It was kind of difficult,” he recalls with typical understatement. Still, the Mossacks had an immigrant’s zeal to succeed. His seven-year-old brother was first in his class within six months, Jürgen proudly notes.

  Jürgen Mossack’s upbringing, isolated by language and his father’s Nazi past, taught him to keep secrets, instilling a wariness he carried his entire life. People mistook his shyness for callousness, which he didn’t discourage, as he discovered that a little intimidation could be useful. “He’d look at you with cold eyes like you were nothing,” says a subordinate of their initial encounters. However, the same employee quickly learned that if there was a problem that needed solving, Mossack, rather than his partner, Fonseca, was the one to approach.

  At one of the law firm’s occasional company retreats, another employee recalls a facilitator conducting a trust-building exercise. Unaware that she had chosen the leader of the firm, the facilitator blindfolded Mossack, who was then led around by a junior employee. Upon the conclusion of the exercise, the facilitator asked Mossack how he had felt. Did he trust his guide? Mossack replied he didn’t like the exercise at all. “I don’t trust anybody,” he reportedly said.