Price of Transparency

The #PanamaPapers debacle reveals odd tensions between a few goals: transparency, tax equity, and sovereignty.

To see why, consider one subplot in the sprawling multinational scandal involves Argentina’s former president. As Australia Financial Review reports,

Mossack Fonseca & Co had a problem in Vegas.

Legal papers filed in US District Court in Las Vegas claimed that the Panama-based law firm had created 123 companies in Nevada that had been used by a crony of Argentina’s former president to steal millions of dollars from government contracts. A subpoena demanded that Mossack Fonseca turn over details about any money that had flowed through the Nevada companies…

The recently settled court action in Las Vegas was begun by a US company, NML Capital, which is controlled by billionaire investor Paul Singer — a hedge fund manager perhaps best known for his massive donations to the US Republican Party.

Mossack Fonseca was not a defendant, but it has been the subject of court orders seeking to obtain information about Nevada companies that the hedge fund claimed had been set up through Mossack Fonseca by Lázaro Báez, a businessman close to former Argentine presidents Néstor Kirchner and his widow Cristina Fernández de Kirchner.

In  April  of  2013,  an   Argentine  journalist   named  Jorge  Lanata  initiated  an  investigation   dubbed   La  Ruta  Del  Dinero  K   (i.e.,  “the  K  Money  Trail”)   into  the   Kirchner s,  Báez ,   and  the  trio’s   financial  dealings. All three allegedly embezzled billions  of pesos from public -infrastructure projects  and laundered  the proceeds and other embezzled funds through various international shell corporations.

The scheme was allegedly executed in two steps. Weeks  before  Nestor Kirchner was elected in  2003,  Báez  founded  Austral Construcciones S.A ., a construction company that was awarded public -works  contracts in Patagonia. In exchange for these lucrative contracts, Báez  allegedly funneled a portion of the  public funds back to the Kirchners through Báez ’s hotel -management company, Valle Mitre S.A.  (“Valle  Mitre”).  Valle Mitre guaranteed that hotels owned by the Kirchners would, on paper, appear at least one – third occupied throughout the year.

These allegations  culminated in an official criminal investigation. The  lead prosecutor, José María  Campagnoli, report ed that Báez laundered $65 million in embezzled state  funds  through Panama and 150  corporations in  Nevada.  Campagnoli’s  report also stated that all 150 Nevada corporations have the same  domicile,  Las  Vegas,  Nevada,  and  the  same  director,  Aldyne,  Ltd.,  a  Seychellois  corporation.  After   submitting  the  report  to  Argentina’s  National  Supreme  Court  of  Justice,  the  Kirchner  government   retaliated and  removed Campagnoli from office.  On  August  13,  2013,  NML  subpoenaed  123  corporations  in  Las  Vegas .  It  argued   that  the re  is   reasonable  suspicion  to  believe  that   the  123  corporations   (“the  Báez   Entities”)   are  the  same  150   corporations referred to in Campagnoli’s report . The court agreed…

Ms. Amunategui argues that the parties agreed to keep this information
out of the public eye, and that should be sufficient to do so. ECF 80 at 5. If this
were a private arbitration, this argument may have some merit. But, with all
respect to Ms. Amunategui’s position, what she and the parties agreed to is
entirely irrelevant. Access to the courts is neither Ms. Amunategui’s, nor NML
Capital’s, nor The Republic of Argentina’s to barter or broker – that access belongs to the people. See Nixon v. Warner Communications, 435 U.S. 589, 597
(1978) (public access is a common law right)…

Ms. Amunategui was the sole employee of MF Nevada for over a decade
and oversaw corporate registration for thousands of companies forming under
the Nevada Secretary of State’s regulations. Ms. Amunategui served as the
Secretary for MF Nevada (not to be confused with merely being a secretary at
MF Nevada). She may be the only one who possesses this information as to how
MF Nevada, and therefore Mossack Fonseca operates. She may be the only
person who has information and supporting documents that demonstrate how
the shell corporations were formed, and at who’s bequest, and therefore, who is
ultimately responsible for laundering away billions of dollars worth of Argentina’s
money…

The people of Argentina have a right to see this information for obvious
reasons. The people of the United States and especially Nevada have a right to
see how their courts and corporate laws have been used, and perhaps abused.

According to court transcripts, Cam Ferenbach (the presiding judge in the case) celebrated the presence of this outside party:

to tell you the truth, this is helpful to me that there will be an advocate advocating for
disclosure in front of me because usually what happens is, you know, the parties all agree to keep it confidential or one party wants it confidential, the other side doesn’t care, and there’s nobody advocating for the public. And so I have to kind of shift a little bit in that direction, instead of being neutral, to do my job about access to the records… with other cases under the discovery rules, you know, I feel obligated to make as much as possible public. The presumption is that it be public, but I do have to balance individual privacy interests and so on… You got here first [Mr. Lanata, ahead of other advocacy groups]. I’m going to let you fight — in fact, I appreciate, as I said, you’re going to fight the fight in front of me and I’ll hear from the other side.

So far, this seems like a pretty open and shut case of U.S. courts helping to promote transparency and clamp down on alleged overseas corruption.

But there’s two other factors that make this story a bit messier. Both relate to the strange route by which Argentina’s tax finances ended up in U.S. courts.

First, the trail led outside of Argentine territory and into Nevada only because Nevada is a secrecy jurisdiction. The upside is that litigants and outside parties benefit from the presumption of U.S. courts towards openness. This wouldn’t be the case in every legal system. The downside is that these procedural rules only apply because tax dodging was incentivized in the first place.

Second, the possibility of attaining discovery only exists because of a very enterprising hedge fund. NML Capital has used U.S. courts as a legal battering ram in their quest to make Argentina pay the full value of its defaulted debt (even while other creditors accepted a renegotiation). NML even got Ghanaian courts to help seize an Argentine naval ship. The Nevada gambit was just the latest in a long fishing expedition to find any assets that the Argentine people might have and appropriate them for itself. U.S. courts have become the forum for these types of disputes, thanks to earlier Argentine governments’ outsourcing of various legal and financial functions to New York.

In short, we’re getting transparency, but only because of (U.S.) tax havens’ existence in the first place, a hedge fund’s efforts to bleed a sovereign treasury, and U.S. courts facilitating of both.