-12. 6% �Blake Schmidt

Digits

Joseph Stiglitz to evaluate Panama’s financial system, and given interviews and speeches upholding Panama’s ethical standards.

The campaign was triggered by the leak of 11.5 million documents from Panama law firm Mossack Fonseca that revealed much about the way corporations and individuals hide money in offshore companies. On May 9 the same investigative journalism center that released the papers provided access to a searchable database.

Even as Varela has called for more transparency, he’s resisted pressure from the Organisation for Economic Co-operation and Development to automatically share bank account information with foreign tax authorities. Such measures have been embraced, at least in principle, by other locales such as Switzerland, Bermuda, and the British Virgin Islands, where Mossack Fonseca incorporated most of its shell companies. Instead, Varela has said reforms cracking down on money laundering were well under way. “Panama’s success does not depend on irregular flows of money into our financial system,” he told U.S. officials including Secretary of State John Kerry at an event in Washington on May 3. Nonetheless, on May 11, Panama could no longer resist the pressure from the OECD and agreed, in principle, to automatically share bank account information with foreign tax authorities.

The Panama Papers, which Mossack Fonseca says were obtained by a hacker and then leaked by the International Consortium of Investigative Journalists, provide a glimpse into decades of deals by a major creator of offshore companies. According to a poll by local research group Dichter & Neira, most Panamanians fear that the fallout from the scandal will hurt the economy, which is already slowing from double-digit growth. Some Panamanian Twitter users have even tried, and failed, to wipe the country’s name from the scandal by rebranding the affair as #Mossackfonsecapapers.

The initial reaction by Panamanians to the papers was a nationalist outburst that united even the worst of enemies. Says ex-president Ricardo Martinelli, a bitter rival of Varela’s since the former allies had a falling out: “It’s going to hurt Panama. These people who are looking to hide money, they don’t want these problems. It’s an attack on Panama.”

That the U. S. hasn’t signed up for the automatic exchange of banking information rankles many of Panama’s defenders—including the corporate lawyers who make up the offshore company industry in the country. Mossack Fonseca is among many other firms whose partners made big profits from the sale of shell companies. Partner Ramon Fonseca was until recently an adviser to Varela. The law firm declined to comment.

Eduardo Morgan Jr., the senior partner of a Panama City-based law firm with offices in 17 jurisdictions and double the workforce of Mossack Fonseca, has been a justice minister and an ambassador to Washington. His father opened one of Panama’s first firms for incorporating offshore companies in 1923, although the 100 lawyers at Morgan & Morgan now focus largely on litigation. Morgan is an unofficial spokesman for Panama’s law firms, appearing on local TV and talking with foreign media. “The OECD wants to govern the world,” he says sitting in his office in a Panama City skyscraper he owns. (He also owns a stake in a Bahamas bank.) “The OECD says Panama has to sign, but the U. S. didn’t sign,” he says.

Morgan echoes many of Varela’s arguments: Panama’s removal from the Financial Action Task Force’s gray list shows money laundering is largely a thing of the past (the Task Force is an international body that combats money laundering, and its list names the uncooperative nations); “know your client” rules have forced Panama firms to boost due diligence; Panama fares better than Japan, Germany, and the U.S. in the watchdog Tax Justice Network’s ranking of financial transparency.

Morgan often refers to a book on his desk by Australian academic J.C. Sharman, The Money Laundry: Regulating Criminal Finance in the Global Economy. In an experiment, the author found it easier to form a shell company in the U.S. and other developed countries without proof of identity than in emerging markets such as Panama.

Panama is just one of many in the business of creating offshore companies, Morgan says. And Mossack Fonseca isn’t the only firm with shell companies linked to politicians. A search in Panama’s public registry shows two offshore entities with ties to relations of Eduardo Paes, the mayor of Rio de Janeiro. The shell companies, at which family members are directors, weren’t part of the Mossack Fonseca leak. Paes says his father set up the companies—and has always paid his taxes in full. The registered agent of these businesses? Morgan & Morgan in Panama City. The firm declined to comment.

Year-over-year drop in the University of Michigan’s Index of Consumer Expectations. The April reading reflects a gloomy outlook for growth. The bottom line Panama protests being smeared by the Panama Papers even as it tries to defend its offshore company industry.

Edited by Christopher Power Bloomberg.com