Within a year of Mossfon’s arrival in the BVI, another Panamanian law firm, Morgan and Morgan, set up shop. More firms followed. Rising living standards in the developing world began to expand the market for offshore companies. What was once the domain of the superrich became accessible to the merely wealthy. Company incorporations catering to a new global elite took off, launching a boom period for the BVI.
In Mossfon’s early years, the Caribbean was awash in drug money. It’s impossible to quantify the impact of money laundering from drug trafficking on Mossfon’s business, although it was likely significant. The drug trade added an anything-goes flavor to Tortola. Martin Kenney, a Canadian lawyer and fraud investigator, remembers visiting the island during this period because he needed information from one of the dozens of trust companies working out of the BVI. The firm that held the information was run by a bartender, who operated his trust company from a fax machine behind the bar. Busy serving up rum punches, the bartender gestured to the stack of papers piled next to the fax machine and invited Kenney to find the documents himself.
“It was like the three monkeys back then,” says Kenney of offshore client vetting. “See nothing. Hear nothing. Say nothing.”
* * *
ANONYMOUS COMPANIES SOON surpassed the more traditional secrecy vehicle, the trust. The concept of the trust dates to feudal England. Knights setting out for the Crusades entrusted their estates to stewards to safeguard them while they were spilling blood in foreign lands. The steward, usually an adult male relative or friend, took custody of the assets. It was a tidy mechanism for landholders to escape taxes and inheritance complications. At a time when wills had a shaky legal foundation, trusts, with after-death directives, allowed a wealthy man to pass assets to a mistress or a favored child. Prohibitions against leaving property to women could be circumvented. Trusts ensured the family business went to an intelligent daughter rather than an idiot son.
A legal deed spelled out the relationship between the steward, called the trustee, and the person relinquishing the assets, known as the “settlor.” Governments did not register or approve the trustee relationship. It was a private contract, an inexpensive way to create an impenetrable wall of secrecy. By entrusting the assets to a trustee, one could have the benefits of ownership without the duties and liabilities. Officially, the assets of the trust no longer belonged to the settlor but to the trustee. Taxes were levied where the trust was based, which helped British-formed tax havens flourish. Trust laws guaranteed stiff penalties for violations of confidentiality. In Panama, anyone violating trust secrecy could be sanctioned with a $50,000 fine or up to six months in prison.
However, for the sales force at Mossfon, trusts had a major flaw: Their customers did not trust the trustee. In Britain and America, well-placed trustee firms went back generations. When it came to safeguarding assets, they had sterling reputations. Furthermore, trust equity law was well established; courts recognized and understood trusts. These institutional protections did not exist in emerging markets such as Latin America, China, and Eastern Europe—the very places where Mossfon sought to grow.
In those regions, corruption and impunity drove people to Mossfon in search of anonymous companies. Far from expecting their own governments and legal systems to safeguard their wealth, they feared government functionaries might steal their money—if the clients weren’t doing the thieving themselves. Lack of confidence in their own institutions extended to foreign ones, and with some justification. In Jersey and other tax havens, courts had poked holes in the validity of asset transfers, calling certain trust arrangements a “sham.” Many of Mossfon’s beneficial owners had gone to considerable trouble to spirit money away from their home countries. The idea of turning their hard-won cash over to a third party to place in an unregistered financial structure, protected only by a legal system in which they had little faith, was naturally unappealing.
* * *
IN 1989, MOSSFON added another tax haven to its menu, the Bahamas, whose proximity to the United States had long made it a destination for Americans trying to escape taxes. President Franklin Roosevelt sent a letter to Congress in 1937, complaining that Americans were using the Bahamas, Panama, and Newfoundland to avoid paying taxes. Citizens had formed sixty-four offshore companies in the Bahamas to escape their civic responsibilities, the president complained. “When our legitimate revenues are attacked, the whole structure of our Government is attacked,” he wrote. “‘Clever little schemes’ are not admirable when they undermine the foundations of society.”
The Mafia used the Bahamas as a staging area for bootlegging during Prohibition. The first premier of the Bahamas, Sir Roland Symonette, grew rich smuggling whiskey. After Fidel Castro shut down the Mob’s outpost in Cuba in 1959, Mafia strategist Meyer Lansky looked to the islands. He found a ready partner in Symonette, one of a group of local elites known as the Bay Street Boys, because they met at a downtown club on Bay and Charlotte Streets in Nassau. Together they concocted a system of government-backed offshore banking and company formation that laundered money and helped multinationals and individuals evade taxes.
Mossfon was already entering a crowded market in the Bahamas. By 1990, according to the Bahamas public registry, there were more than one hundred agents who were registering companies there. “This seems like an easy business but it is very difficult,” says Jürgen Mossack. “The competition is always there.” Low margins and intense competition required constant improvement to survive. In the offshore business, this primarily meant easier and faster company incorporations.
As more incorporators crowded into the BVI and the Bahamas, Mossfon looked to increase its business elsewhere. The United States pointed the way. As a specialist in maritime law, Mossack was familiar with the Liberian ship registry. Since the 1950s, Liberia had registered ships under its own flag but the public registry was never based in Africa. Rather, the registry resided in a suite of offices in New York City. It was created by a former U.S. secretary of state in conjunction with corporate interests like Shell Oil. The Liberians readily assented in return for a cut of the proceeds.
Mossack thought, if the Americans could have a monopoly by running their own public registry, why couldn’t Mossfon?
The partners sent the recently widowed manager of their Jersey office, an American named Nancy Broadhurst, to the South Pacific. Her instructions were to find a friendly country that would allow itself to be used as an exclusive jurisdiction for Mossfon companies.
“She disappeared for a week, literally disappeared in Papua New Guinea,” remembers Fonseca. “We were really worried. We thought maybe she had been eaten by cannibals or something.”
Broadhurst had gone prospecting at an offshore conference in Papua New Guinea. One day at the conference she was sitting at the hotel bar and struck up a conversation with a neighbor on the stool beside her. She told him she’d been sent out by the bosses in Panama to find a magical land to serve as a new location for offshore companies. Her new friend listened with interest. We can do that, he told her. Her bar mate, Frank Lui, was the premier of the island nation of Niue.
A sparsely populated coral outcrop situated in the middle of nowhere, Niue is 1,500 miles northeast of New Zealand. It’s currently about 103 square miles in size, but rising sea levels threaten to shrink its landmass. Europeans first laid eyes on the place in 1774, when the locals repeatedly prevented Captain James Cook from landing there, prompting him to dub it “Savage Island.” New Zealand annexed it in 1901 but approved self-government for Niue under an association agreement in 1974. As New Zealand’s ward, Niue received a stipend, but the money wasn’t enough to make ends meet, according to Mossack. When Broadhurst met Lui, the island’s leaders were already investigating converting to a tax haven to create additional income for its approximately five hundred inhabitants.
Broadhurst traveled to Panama and joined a group of Mossfon lawyers to draft an incorporation law for Niue. They largely copied the BVI law—which had itself been c
opied from Delaware—and customized it for Niue, adding some innovations of their own. For example, the law allowed company names in Chinese characters and the Russian Cyrillic alphabet, which the BVI did not. The Niue International Business Company Act passed in 1994. Later that year, the firm took Frank Lui to Hong Kong as part of a road show to sell the jurisdiction to the Chinese. They advertised the island as the “Jewel in the Crown of the South Seas.”
With the registry located in Mossfon’s offices, the firm could crank out a Niue company in under an hour, at whatever price the firm determined. Mossfon’s offices around the world had the blank documents and the official seals, pre-signed by the Niue deputy registrar, who happened to be a Mossfon employee. All they had to do was check with Panama to ensure the name was available, get the International Business Company number, pull up the correct template, and print.
“We could control the process, control the quality and the speed,” said Mossack.
All that control did not prevent Mossfon’s Niue companies from being used by criminals. James Ibori, the governor of Nigeria’s oil-rich Delta State, opened a Niue company called Stanhope Investments while still holding office, using it to buy expensive properties in London. In 2012, prosecutors in the UK convicted Ibori of fraud and corruption, sentencing him to thirteen years in prison. Gary Porritt employed his Niue company, Gold Star, to make it appear as if an outside company was buying shares in his South African investment company, to artificially prop up its value, according to prosecutors. In Argentina, the father and son Hugo and Mariano Jinkis operated a network of offshore companies that U.S. prosecutors alleged were used to pay bribes in exchange for multimillion-dollar television contracts to broadcast soccer matches. The Mossfon files show that one of these companies, Cross Trading, based in Niue, purchased the rights for Ecuadorian soccer matches for $111,000 and then quickly flipped them to the Ecuadorian broadcaster Teleamazonas for $311,170.
Niue never equaled the success of the BVI. Despite the ease of incorporation, the island was always a tough sell to many potential customers. “If you think people didn’t know where the BVI was, try explaining to them where this empty spot in the middle of the Pacific Ocean was,” said Mossack.
* * *
BY 1994, THE BVI hosted 136,112 companies. This represented 47.7 percent of the total share of offshore company formation worldwide. Even though there were thirty-nine firms registering companies in the BVI, Mossfon accounted for more than 10 percent of all the companies created.
Inconspicuous-looking from the outside, the Akara Building served as the principal business address for economic activities that spanned the globe, a temple of financial secrecy. Road Town grew up around it. The offshore business accounted for almost half of the BVI government’s revenue, making it one of the most prosperous small island nations in the developing world. Every Belonger who wanted a job had one. Financial service professionals from countries throughout the world came to Road Town to sell companies and offshore structures. The BVI’s population had more than doubled from where it was when Fonseca first arrived.
Success carried a cost. Privately, locals talk wistfully of a paradise lost, a culture changed forever. They describe the old BVI as unspoiled, a place of leisurely rhythms, friendly neighbors, Saturday open-air markets, and pristine beaches. The financial service workers brought traffic, bustle, high prices. Today, the new BVI is a place where the affluent pay others to stand in the long lines at banks and government offices. Criticizing the financial services industry is viewed as disloyal. People drop their voices and look around before expressing disapproval.
The old Saint Ursula Masonic Lodge is gone, too. Ramón Fonseca’s memory of that visit is gauzy with nostalgia. In reality, the lodge was only about half a mile from the main road. While it may have been surrounded by the bush when he arrived, today it’s off a street filled with disheveled houses and small businesses. A new, larger Saint Ursula’s temple has replaced the quaint wooden building that once enchanted Fonseca. Behind the new lodge rises a modern office building. Among its tenants are company formation agents.
3
NAME OF THE GAME
With the additions of the BVI, the Bahamas, and Niue, Mossfon had tax-haven homes for its companies. What it needed next was a way to get its product into the hands of more customers—lots more customers. Taking a page from McDonald’s, Mossack and Fonseca decided the answer was to franchise. They would identify big sellers and turn them into Mossfon distributors. In return for exclusive rights to handle Mossfon’s products in their area, the franchisee received the companies at a slight discount. Jürgen Mossack reasoned that this could expand their market with a limited outlay of resources from the firm.
Beyond sales, there was another benefit to this network of intermediaries. Selling through middlemen added a layer between Mossfon and the product’s end user, the beneficial owner of the company. Mossfon depended on the middlemen to ensure that the companies were used legally. If the beneficial owner of the company turned out to be a crook, Mossfon could claim that the franchisee or the lawyer, accountant, or banker failed to vet the buyer properly. The name of the game was avoiding blame. In practice, though, off-loading responsibility to middlemen proved tricky. Culpability is remarkably sticky, and vile deeds are hard to keep buried. It did not help that Mossfon willingly ventured into direct involvement with questionable activities when the partners thought the financial reward outweighed the risk.
In 1993, Ramón Fonseca came to New York looking for a company formation agent to develop the U.S. market. He found John Gordon. Earnestly intelligent but socially awkward, Gordon had graduated from the State University of New York at Albany in 1981, with a degree in psychology. He took a job as a process server, but after two years of earning minimum wage, Gordon branched out into company formations, which mostly meant filing incorporation papers with the state government in Albany for lawyers in New York City.
Mossfon’s courtship of Gordon included a weekend at Jürgen Mossack’s beach house on the lush island of Contadora. Mossack flew Gordon there from Panama City in his Cessna. The two men fished off Mossack’s yacht. After a twenty-minute struggle, the gangly Gordon, with an assist from Mossack, landed a thirty-four-inch amberjack. Next, Gordon traveled to the BVI, happy to escape the Albany winter. He stayed in Mossfon’s apartment in Road Town. Staff took him snorkeling off Norman Island, the inspiration for Robert Louis Stevenson’s Treasure Island. The VIP treatment worked. In March 1994, Mossfon announced that Gordon’s company, USA Corporate Services, would be the firm’s exclusive franchisee for the United States.
For Gordon, the partnership with Mossfon seemed like a good way to break into the international incorporation market. It turned out to be tougher than he imagined. His new business partners became impatient at the slow pace of sales. At first Fonseca was charming, but lurking under the surface was a temper when he didn’t get his way. Gordon explained that Americans who wanted companies for legitimate purposes could get them in Delaware. Law-abiding Americans didn’t need Mossfon. USA Corporate Services took out advertisements in the Economist magazine and hawked its financial products at offshore conferences, but it was a challenge to make the arrangement profitable. Increasingly, Gordon relied on foreign clients.
In early 1997, Ian Tuppen and Subhash Singh approached Gordon with a proposal to open Mossfon companies in the Bahamas, held through bearer shares. After they became customers, Gordon referred them to the Royal Bank of Scotland and assumed the bank had properly vetted its clients. In fact, it appears no one looked too closely at the business plan, which relied on pirating Microsoft Office software. Less than two years later, the British press would describe the scheme as one of the largest counterfeit software cases in the country’s history. A subsequent court case revealed the two had raked in as much as £2.5 million (about $6 million today) off the counterfeiting. The men used the money to fund a lavish lifestyle. Tuppen lived in a mansion in Hampshire. Singh drove a yellow Porsche.
&
nbsp; Tuppen and Singh had a UK-based company called Backslash Distributors, but they wanted to run their operation out of a tax haven. Through Gordon and Mossfon, the two men created a company called Bahamas Software Agency in March 1997. Mossfon provided nominees to serve as Bahamas Software’s corporate officers. When anyone on the outside looked for the directors, they would see only Mossfon nominees; Tuppen and Singh remained hidden. Secretly, power of attorney over the company was given to Singh. The Royal Bank of Scotland promptly opened a bank account for the company.
Two months later, Tuppen and Singh arranged for Bahamas Software to buy Backslash for £120,000, essentially selling the company to themselves. Mossfon was an integral part of the deal, since the nominee directors serving as the company’s officers had to sign off and agree to release the funds. Mossfon charged only a few hundred dollars for the signatures. As part of the transaction, Tuppen and Singh sent the company books and records for Backslash Distributors to the Mossfon office in the Bahamas for safekeeping.
Three months after Tuppen and Singh created Bahamas Software, the company faxed a handwritten letter to Mossfon. It asked the firm to type the document on Bahamas Software company letterhead, have the Mossfon directors sign it, and then send it to Backslash Distributors. From the outside, it was impossible to know that the men were actually sending a letter to themselves. The heading read: “RE: PROBLEMS WITH SOURCE OF BONA FIDE PRODUCT.” The letter began, “Having spent some considerable time perusing the books and records for which we acknowledge receipt, and having also considered problems with the quality of product which we have, for some time, been sourcing for you, which you have brought to our attention, it is with regret that we hereby direct the following actions.” Bahamas Software then instructed Tuppen and Singh to destroy their stock of software, cease any trading, and send all records to the Bahamas.
Secrecy World Page 4