Money laundering and Panama Papers scandal

Just in the other day, when I was having lunch with my dad, he asked me about Panama Paper and told me how confused he was with all of that stuff. I was a bit surprise since this is quite a complicated subject, which I did not expect my dad to be aware of. So, as a finance enthusiast, I tried my best to explain it to my father. I realized that there are a lot of issues around us that we want to know but it’s just too complicated or irrelevant to understand and care about. I have always wanted to do something small but useful for people like my dad, my younger brother, my nephew, or anyone who want to know more about finance. However, I, of course, still need to learn and practice to make it happens.

So, today I will try to explain the process of money laundering and the Panama Papers scandal.

First, let’s start with tax evasion, something we often heard from news or TV. Try to imagine a husband who has to give to his wife a portion of his monthly salary. When the husband receives his money from his work, his wife can take the agreed amount for household expenditure from the husband salary. Because his salary may volatile each month, his wife often wishes to know how much he earns, the benefits, bonuses, or, sometimes, even how he spends so that he cannot hide any extra money. Therefore, occasionally, his wife will check his bank balance and, maybe, his wallet. If the husband gains any extra money, he may have to explain it to his wife and, obviously, give her a part of it. The husband may not be willing to have to give up a portion of his income, especially when he gets promotion and earns much more. So he will try to hide his extra money from his bonuses, for example, by giving it to his friends and taking it back later when he needs it. This process sometimes is pretty easy for the husband as he and his friend hang out one in a while, so when he spends the money, his wife probably won’t notice. This is tax evasion.

Now, as we understand tax evasion, we can come to money laundering. Money laundering is the process of making “dirty money” appear “clean”. But how money can be dirty? The husband now, as for the illustrating purpose, is having an affair with a rich woman. Every month, he receives from his mistress a large amount of his money. He may be very pleased to receive the money but he does not want his wife to know about its origin because she can file for a divorce and claim half of his asset. He can try to hide it like he does in tax evasion. But it’s not easy like that since the money is not from work and he also does not want many people to know about it. Another reason is that the amount of money is way larger, he is willing to give a part of it to his wife so he can spend the amount of the money left, as long as she does not know where it comes from and file for a divorce. So he has to do something with the amount of money to make it look “work-related”. For example, he will tell his wife that he recently is investing in stock market and starting to earn extra money. Then, he will try to use bank services to move the money around and come back later to his bank account. When the wife checks his bank balance, she notices the extra amount of money but its origin appears “clean”, she will not complain and take a portion of it as usual. As the result, the money the husband gains from having an affair, which is obviously unethical and untrustworthy to his wife, has become reasonable and he can use it. The “investment” is where his money is laundered and some cheat experts, for example, are so good at hiding cheating money may offer to help the husband with all the moving money stuff. So that is the process of money laundering.

I hope that I did make it simple and understandable. Now for Panama scandal, we will combine both of the stories above. We now have a group of husbands who often hang out at a bar for a couple of beers after work. Everyone annoys about their money being checked and taken away automatically by wives. However, Johny, someone in the group, does not have to deal with this problem since his wife is very busy and does not really care about how much Johny makes. More importantly, she rarely checks his bank account and let Johny voluntarily give her a portion of his income. So, Johny offers that he can keep the money for everyone and when they are hanging out he will pay it back for beers and stuff. Now more and more people know about Johny’s lovely wife and, not so long after that, entire company male workers give Johny their salaries in order to keep it far from their wives. However, one day, Johny’s wife discovers the huge amount of money in her husband’s bank account. She is so angry and she immediately notices everyone wives. The problem with Johny’s service is that although a majority of the money he keeps is just for beers and hanging out purposes, some of the money may from an affair as we have discussed above, which can be pretty serious. And that’s how Panama Papers scandal started.

Now think of an affair as the crime like selling drugs, weapons, bribery or financing terrorists and you will get the picture. Think of Johny as Panama, a place where multination corporations can use some service to “clean” their cash. As the matter of fact, Panama is known as a tax haven and Mossack Fonseca, the Panamanian law firm whose papers were leaked in the Panama papers affair, is one of the biggest in the business.

Hope you find this post useful.


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