The Panama Papers: Leaks, Whistleblowers and Shield Laws

It’s convoluted, confusing, and perhaps has too much information to process. The Panama Papers leak, by far the largest of its kind, has 11.2 terabytes of emails, images and PDFs which go into excruciating detail of how the law firm Mossack Fonseca helped hundreds of dignitaries, politicians and businessmen conceal and launder billions of dollars, most of which illegally obtained. There are a plethora of articles detailing exactly what was in the Panama Papers, but the common person barely making enough money to have checking and savings accounts, let alone off-shore accounts, has struggled to figure out why this leak is important to them.

Why Are the Panama Papers Important?

Al Capone was jailed for evading income tax, partly because of the discovery of his offshore accounts. This concept is nothing new, but trying to figure out why we care about the shady dealings of the bourgeoisie has always been difficult for everyone else. These offshore accounts are not just tax havens; they are also used for much more sinister purposes.

For example, Iceland Prime Minister Sigmundur Gunnlaugsson had to resign his position amid public outcry regarding his involvement with the Panamanian law firm. He is not the only world leader under fire, but so far he is the only one to step down. Gunnlaugsson’s involvement essentially amounted to a conflict of interest; he and his wife set up a company in the Virgin Islands, and he had sold his half of the company to his wife, for 1 dollar. The conspicuous part is, he sold them the day before a new law was put in place, which would have forced him to declare ownership. So why should this matter to the average U.S. citizen, particularly since almost no Americans were named in the leak?

Well, that answer is three-fold. Panama is mainly used as an offshore haven by European citizens; very few U.S. citizens have accounts in Panama. American companies and wealthy individuals have accounts in the Cayman Islands, Switzerland or Belize. There are other cities and countries rising up the list of most commonly used for offshore accounts, but Panama is pretty far down that list.

Secondly, an estimated $150 billion disappears into offshore tax schemes every single year. This is almost twice as much as the federal government spends on education. And sometimes it’s not just money that wealthy individuals and companies are trying to hide. Sometimes that money is used for illegal purposes, as evidenced by the presence of drug lords in the Panama Papers. The money is laundered through offshore accounts which helps these people escape jail time.

Lastly, the Foreign Account Tax Compliance Act was implemented in 2010, and it’s a federal law that stipulates all U.S. persons, including those living outside the country, must file yearly reports of their non-U.S. accounts. There has been some criticism of FATCA, stating that the powers of the IRS reach too far. For example, if someone retires to a foreign country, takes their bank accounts with them but still retains U.S. citizenship, they would still be subject to IRS oversight.

Have Tax Information Leaks Happened Before?

Believe it or not, there is a lot of precedent for financial information being leaked to the public, most of them having just happened within the past five years. The most recent before the Panama Papers was the Swiss Leaks, which showed in detail how a tax evasion scheme was operated with the knowledge of HSBC, a multinational bank. The information revealed 100,000 clients and 20,000 companies had passed a total of 180 billion euros through offshore accounts within the span of a year. The company agreed to pay a fine of $40.5 million to settle the investigation.

However, the man who released the information, a former HSBC systems engineer named Hervé Falciani is still going through trial. This is directly correlative to the Panama Papers leak, because it showcases a paradox that is at the forefront of this controversy: Is the leaker a whistleblower, or is the leaker a thief looking for a quick payday?

Are There Protections for Whistleblowers?

It has happened for decades, and will likely happen again soon. Someone working for the government, or, as happens in finance as well, blows the whistle on that government agency or corporation when they discover its shady dealings. When this happens, the motive of said whistleblower is drawn into question, especially once they start doing interviews and appearing on magazine covers. But legally speaking, are there protections afforded to these informants?

The answer is somewhat complicated. The Whistleblower Protection Act provides a shield from criminal prosecution to government employees who reveal wrongdoing. The key phrase there is “government employees.” The same protections are not necessarily provided to employees of businesses and corporations. And depending on the type of information the government employee reveals, they may be painted as a criminal.

The aforementioned Hervé Falciani has been on trial for a long time, and it’s because HSBC is accusing him of taking the information and selling it to the highest bidder. Falciani has of course denied these claims, and is now living in France, as he is a natural citizen of the country and so does not have fear of extradition. Unlike the situations with Falciani and Snowden, however, the Panamanian law firm has stated that it was not an inside source who leaked this information to the press.

Such was also the case with Edward Snowden. We all remember him, the NSA whistleblower who revealed huge swaths of information on just how extensive government spying was, and still is. While most of the public regards him as crucial in opening our eyes to privacy rights, the government has more or less disowned him from the country. He sought political asylum in numerous countries before finally settling in Russia, and he lives there to this day. This is because the information he revealed was deemed classified, and a threat to national security if made known to the world.

Cases of whistleblower protection have made it to the Supreme Court. Just last year the bench ruled in favor (by a 7-2 margin) of air marshal Robert J. MacLean, who blew the whistle on the Department of Homeland Security in what can be perceived as frugal efforts in the face of credible danger. To summarize, the DHS had issued a warning al-Qaeda was planning to hijack a long-distance flight. However, because it did not want to pay for hotels and overtime, they decided flights longer than 3½ hours were not going to be covered by air marshals.

MacLean feared the public may be in danger, and so blew the whistle. Initially, the Merit Systems Protection Board ruled against him, but this was overturned once it made it to the Supreme Court. The DHS and TSA argued that he revealed classified information, but the Court rejected this notion, because the actions “gravely endangered public safety. They determined that the Whistleblower Protection Act still covered those who revealed sensitive information even if doing so was forbidden by department regulations.

There are exceptions to the whistleblower law, but what of the journalists who report this information to the public? Their rights are constitutionally protected by the First Amendment, but do the rules of classified information with regard to national security apply to journalists the same way that they apply to those who blow the whistle?

Are There Protections for Journalists?

From Watergate all the way through to the Panama Papers, journalists have uncovered numerous cases of information leaks, inside informants and whistleblowers. Sometimes, they are reporting information which was obtained illegally by the whistleblower. This leads to a question of conscience as much it does a question of legality when it comes to whether or not to write about it.

Mossack Fonseca has claimed that they are victims of an outside hacker, rather than this information being leaked from an inside source. If this is true (which is up for debate) it constitutes a key difference in any legal proceedings that may follow this mess. There are no protections afforded to hackers or outside sources, because it can be shown that the information was obtained illegally, and thus inadmissible in court. But what of journalists reporting said illegally obtained information?

This is another complicated issue that depends on the situation. There are “shield laws” in 48 states, which stipulate that a journalist does not have to turn over information which has not already been reported or their sources to state law enforcement. There is no federal shield law, but that could change soon. Shield laws, such as the proposed Free Flow of Information Act, would also protect journalists in the case of their being a trial, and allows them the right of refusal in testifying or revealing their sources.

On the subject of “information illegally obtained,” which Mossack Fonseca has claimed is what happened here, there has been precedent set in the courts in regards to a journalist’s rights in this situation. The case of Bartnicki v. Vopper involved the defendant, Vopper, having taped a conversation that involved Bartnicki and another person. Vopper was a radio host who played said conversation, which involved negotiations for a collective bargaining agreement. Bartnicki sued, claiming the tape was obtained illegally.

However, the court ruled that even though the conversation itself may have been recorded illegally, it was not obtained with these means by the radio station, and thus they were free to broadcast it. This emphasized an important distinction; while the conversation was in violation of the Electronic Communications Privacy Act, the means by which the radio station obtained the recording was not illegal. And because the matters discussed on the tape were of public concern, Vopper and the station were not committing a crime.

So, while there are laws that protect a journalist from having to reveal their sources or information not yet reported, it depends on whether the information was stolen or hacked into by the journalist. If information was obtained illegally by a third party who then gave said information to a journalist, that journalist would not be in trouble for simply reporting on the information he was given.

Are Offshore Accounts Illegal?

In short, no, they are not illegal. However, as we’ve seen from the Panama Papers and previous tax haven leaks, it is the means by which this money is made and for what it is used. In short, having an offshore account, by itself, is not illegal. The means for having one, however, certainly tend to be, as evidenced by the recent revelations of British Prime Minister David Cameron’s investments.
The fact is that a lot of laws have been created that protect these tax havens, and of course loopholes are exploited which allow for criminal activity to take place. In short, the practice of putting money in offshore accounts is not only legal, but has been encouraged among CEOs and business owners for a long time. The only way any of this is going to change is if these tax loopholes are closed, and corporations are made to pay their fair share.