On Tuesday evening, the International Consortium for Investigative Journalism CK (ICIJ) released a new database of people and companies who own shares in businesses registered in tax havens and who were exposed in the document leak known as the Panama Papers.
The leak contains more than 11.5 million documents from the Panama-based law firm Mossack Fonseca, which specializes in providing legal services for offshore companies. The documents, some of which date back to the 1970s, were originally provided to the German newspaper Süddeutsche Zeitung by an anonymous source.
In cooperation with the ICIJ, the Süddeutsche Zeitung published an initial batch of documents on April 3. The only information relating to Egypt concerned Pan World Investments, a fund owned by Alaa and Gamal Mubarak.
The expanded database, which launched May 9, did not contain any documents. The information released was limited to names of people and companies registered in tax havens. The documents connected to these names are supposed to be posted in subsequent batches.
To learn more about the contents of the database, and new information uncovered about Egypt and about offshore companies in general, Mada Masr spoke with Osama Diab, a transparency and anti-corruption officer at the Egyptian Initiative for Personal Rights.
MM: Does the new database contain references to individuals and companies from Egypt?
OD: Egypt does make an appearance in the new database. As a search-term, Egypt is linked to 38 offshore entities and about 300 people.
Prominent names in the database published yesterday include: Businessmen Naguib Sawiris, Salah Diab, Hassan Heikal, Hazem Barakat, Badr Sednaoui, Mamdouh Abbas and several of his family members, as well as members of the Mansour, Ghabbour and Nosseir families. The database also included individuals linked to political figures, including two sons of former presidents, Gamal Anwar Sadat and Alaa Mubarak, and Hosni Mubarak’s brother-in-law Mounir Sabet. Both Alaa Mubarak and Mounir Sabet have had their assets frozen by Switzerland, and Mubarak is also on a number of other sanctions lists.
The database also contains the names of Egyptian doctors, engineers and media figures, like Amr Adib, who is named as one of the shareholders in Queensgate Overseas Limited. It’s not clear which sector this company is operating in.
MM: What is the significance of these people appearing as owners or participants in offshore companies. After all, start-ups are often advised to register offshore simply to avoid dealing with Egypt’s cumbersome regulations.
OD: It isn’t illegal, per se, to own an offshore company. But these companies are often associated with illegal activities, such as money laundering and shielding assets from tax authorities and public view. Offshore centers are also often used for tax evasion, since they offer high secrecy and zero or near zero taxes. This encourages people to transfer profits earned in Egypt to offshore jurisdictions.
Sometimes this is clearly criminal tax evasion, other times it is done in a way that doesn’t technically violate the law, which is known as tax avoidance. But the damage is the same: it deprives the state treasury of tax revenue due from individuals and companies who made profits in Egypt but disguise those profits on paper as having been earned in tax havens. This deprives society of public services financed from taxes, such as schools, hospitals and roads.
MM: Isn’t the great extent of such practices, not just in Egypt but in much of the world, a sign of their legitimacy?
OD: The publication of the Panama Papers could potentially be met with one of two reactions: first, shock over the widespread use of offshore companies by business people, politicians and even media figures, or the perception that as long as everyone is involved in it, it must be a normal practice and therefore somehow acceptable.
In fact, the spread of this phenomenon should be treated like an epidemic. No reasonable person would take a disease reaching epidemic level as an excuse not to fight it, or argue that since so many people suffer from it, a disease should be normalized and people should learn to live with it. We recognize that the greater the spread and virulence of the disease, the greater the need for concerted efforts to fight it.
We should treat the phenomenon of tax havens in the same way, and see their pervasive use as cause to confront them decisively, not as a reason for normalization.
As mentioned, tax havens help criminals and terrorists, dictators and their cronies to hide their networks. They allow businesspeople and multinational companies to evade and avoid taxes by artificially transferring profits to shell companies registered on paper in distant islands, leading to the collapse of tax revenue for governments and consequently adversely impacting the ability of states to provide education, health, infrastructure and other services to their citizens. In time, this can lead to economic crises, the costs of which are borne by poor and middle-income citizens, and by extension to political and social unrest.
MM: How does this apply to the situation in Egypt?
OD: Unlike the other countries mentioned in the Panama Papers documents, the Egyptian government has not announced plans to open investigations into the information released so far. But all you have to do is look at the Mada Masr report on the first batch of Panama Papers documents released. This report concerns just one company registered in a tax haven, but it shows that this single company’s network in Egypt includes dozens of companies: Suez Cement, the National Bank of Egypt, Talaat Mostafa Holding, Alexandria for Mineral Oils, Edita Food Industries, Alwadi Holding, Misr October for Food Industries (El-Misreieen) and other companies. Alaa and Gamal Mubarak made profits from all of these companies without anybody knowing about it, or any taxes being collected.
MM: Apart from tax evasion, does the use of tax havens cause other economic damages?
OD: There are two other aspects that are not often addressed: the impact of the practice on owners of small and medium businesses, and the distortion of data on investment.
First, small and medium businesses are at a disadvantage when competing with large companies, because of their inability to build these complex offshore networks to reduce their bills and taxes and thus maximize their profits. According to a study by Abdel Fattah al-Gebaly, official tax data from 2009 showed that companies with business volumes of up to LE2 million paid 28 percent of their profits in taxes, while companies with business volumes exceeding LE1 billion paid only 3.5 percent of their profits in taxes. This is economically and socially dangerous, since SMEs make up the bulk of GDP and are the largest employer of Egyptians.
On the data level, when these offshore companies reinvest their profits in Egypt, they are recorded on paper as foreign investment, even though the companies are owned by Egyptians. In many cases, they are treated as foreign investors in legal contracts, giving them the ability to resort to international arbitration, a form of commercial dispute settlement that has recently cost the Egyptian treasury billions of dollars.
Therefore, in a report issued in October 2015, the Organization for Economic Co-operation and Development (OECD) advised that investments that pass through offshore companies be excluded from foreign investment figures, because they distort the data. In some countries, such as Luxembourg and the Netherlands, cash flowing to shell companies account for more than 80 percent of all “foreign investment,” without providing any real value to the economy or society.
The organization also recommends that data be organized according to the country where investors actually reside (Ultimate Investing Country), in order for recipient countries to have accurate data on foreign investments.
MM: Again, how does this apply to the situation in Egypt?
OD: Unfortunately, it isn’t applied in Egypt. Data from the General Authority For Investment (GAFI) shows that money from companies registered in tax havens is counted as ordinary foreign investment, just as if it was actually foreign investment coming from another country.
We find that some of the biggest investors in Egypt are microstates, like the Cayman Islands and the British Virgin Islands. They are listed as bigger investors than the United States, France and Italy, which is clearly absurd.
MM: So far, how have you seen the Egyptian authorities dealing with the publication of the documents.
OD: Dealing with, how? It’s been over a month without the government, judiciary or parliament taking any action.
We could, of course, behave like failed and rogue states (or “quasi-states”) and describe the Panama Papers as a plot to undermine confidence in the economy. Or, it’s possible to do what functional countries do, and view the Panama Papers as an opportunity, in the current economic crisis, to use this information to deal with structural imbalances in order to promote the common good and increase the resources of the state.