FOR most Pakistanis, the Panama leaks have been their first introduction to the secretive world of offshore financial centres, or OFCs. However, these OFCs, including Panama, have been in the news over the past few years as global concern has gradually mounted over their existence and modus operandi — and what they truly represent.

These OFCs — ranging from Cayman Islands, the Bahamas, British Virgin Islands, to Jersey among a host of other exotic locations — are low-tax jurisdictions that specialise in financial and banking secrecy, which is provided by legal cover as well as by the creation of offshore companies domiciled in these territories. (Not all the centres are located in small, faraway paradise islands. According to estimates by credible institutions, the US state of Delaware is the third-largest tax shelter in the world.)

The purpose of the offshore companies registered in these jurisdictions is mainly two-fold: for global multinationals and other companies, the benefit is the ability to route their profits through these OFCs to avoid higher tax rates in their native or domestic place of incorporation/registration; for individuals, the primary purpose is to hide their wealth and assets, whether legally acquired or via illegal means.

Democracy and development are being undermined by global tax shelters.

These offshore companies are used by the global elite to hide the beneficial ownership of anything and everything ranging from bank accounts, properties, other companies, yachts, expensive paintings, executive jets etc held around the world from tax and political authorities in non-protected jurisdictions.

The issue of offshore tax shelters came to a head in the aftermath of the global financial crisis, and the painful austerity measures governments were forced to adopt as a result. The policy response in most countries hit hard by the recession resulted in widespread job losses, and cuts to pensions and other social welfare schemes. For ordinary citizens of these countries, it has been a painful and unending period of adjustment. However, for large banks and corporations, especially in the US, the reality has been quite different: taxpayer funds have been used to provide bailouts, and in egregious cases, to underwrite compensation bonuses for the top executives of firms whose bad investments, if not outright malfeasance, caused the crisis in the first place.

In twisted irony, many of these same financial institutions and corporations have been legally ‘dodging’ their taxes by using the jurisdictions and tax structures facilitated by the offshore financial centres. Hence the outrage in advanced economies.

For citizens of the developing world, these offshore tax havens represent a different reality. Much of the money deposited in these offshore accounts and shell companies has allegedly been siphoned off by corrupt rulers, crooked bureaucrats and fraudulent businessmen from shady contracts and projects (think the likes of yellow cabs, SGS-Cotecna pre-shipment inspection, Daewoo, oil-for-food, Chinese trains, guns for police, Safe City projects, ephedrine, Haj, metro buses and Orange Line trains).

The projects and contracts are not only overpriced and paid for by incurring expensive debt (or using developmental aid, a scarce resource in itself), but usually are either not required or short-change the country’s citizens by delivering ‘damaged goods’ (think expired polio vaccines or faulty scanners for the multi-billion Safe City project). In addition, because the public contracts have been awarded on the basis of other than merit, it undermines the business and competitiveness environment in the country, potentially reducing the investment made.

The other element in the saga of siphoning money to offshore accounts is tax avoidance and evasion. While corporates use OFCs for largely legal tax avoidance, the use by individuals of these tax vehicles more often than not represents tax evasion in many jurisdictions. According to a 2012 estimate by the Tax Justice Network, the global super-rich had stashed approximately $21 trillion of wealth in offshore tax havens. The unpaid taxes on this horde of wealth were estimated by them to amount to around $280 billion. This is equivalent to the combined economic size of 61 of the smallest countries of the world.

In the context of Pakistan, it is important to realise that only a small fraction of the 11.5 million Mossack Fonseca files have been released. Hence, the limited number of individuals exposed so far is very likely to increase dramatically in the months ahead. Nonetheless, based on what has been revealed, the specific questions the Panama leaks have raised involve the following: mis-declaration of assets and concealment of income to tax authorities; potential money-laundering; and mis-declaration in election filings by public office holders.

(For a fuller perspective, it is important to keep in mind that when the offshore companies in question — the ownership of which has not been denied but rather confirmed in public by the prime minister’s family — were formed in the early 1990s, State Bank forex rules stipulated that it was illegal for a Pakistani resident to open and operate an offshore account.) Much like the case of Rockwood estate — or ‘Surrey Palace’ — whose ownership was vehemently denied through the 1990s by the late Ms Bhutto, only to be admitted in court by Mr Zardari years later, the latest revelations have officially confirmed what has generally been suspected all along.

How the issue is handled from here on could have far-reaching repercussions for rule of law in Pakistan. If a truly independent commission of inquiry can be formed and allowed to work, with the required terms of reference for an impartial investigation, Pakistan’s institutional setting would receive a tremendous boost that would serve the country well for times to come. If, however, a lame eyewash of an inquiry commission is appointed with beholden and compromised individuals, as widely feared, the culture of impunity with which the rich and powerful operate in Pakistan may well become a permanent feature.

The other major casualty of these revelations will be the tax culture in Pakistan. In the backdrop of the Panama leaks, the government’s moral authority to tax citizens has diminished greatly.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

Published in Dawn, April 15th, 2016