-Analysis-

What have we learned from the Panama Papers? Mossack Fonseca, the law firm from which 11 million documents have been revealed by the International Consortium of Investigative Journalists, of which Le Monde is part, is just one link in a vast industry in New York, London or Singapore that employs thousands of young graduates from the world's best universities: It is an industry built to protect the interests of the wealthiest people in the world.

The lesson from the Panama leaks is simple: The regulation of that industry and of the territories that shelter it needs to be rethought from top to bottom. This challenge is essential to limit the rise of inequalities and to avoid the risk of drifting toward a global oligarchy.

Preserving wealth has been a century-long activity that developed exponentially during the 1980s. The industry was transformed into an all-out pursuit of one objective: evade the taxman. There are legal ways (exploiting tax breaks or loopholes), other ways that aren't legal (stash your money in undeclared offshore accounts), and there is also a vast grey area, sometimes illegal and sometimes not, without anybody really being able to know.

The "Panama Papers" revelations have set off a global reaction because they expose these ploys in a crude light, at a time when wealth inequalities deepen and economic growth slows. The revelations show that a small elite has access to increasingly sophisticated and varied means to make their assets grow and avoid taxation, while the immense majority of the population has to pay. They bring to light the clockwork mechanism of oligarchic societies, that defend their amassed capital, identified by Jeffrey A. Winters in his 2011 masterpiece, Oligarchy.

But there's something even more disturbing. There is, at the heart of financial regulation, an essential, though ambiguous, distinction between legitimate and illegitimate wealth. Anti-money laundering rules demand of financial institutions that they identify their clients, and forbid them to conduct transactions with drug traffickers, criminals, corrupted officials and money launderers. The Panama leaks reveal that many of these institutions located in tax havens show little concern for this distinction. For them, any business is good business. In 2015, among the 14,086 front organizations located in the Seychelles, Mossack Fonseca knew the effective beneficiaries of only 204 of them.

In other words, a small elite can not only make their money yield a tax-free profit, but nothing tells us that their wealth is even legitimate. An industry whose job is to protect wealth simply cannot be trusted to make any sort of selection of who gets in and who doesn't.

It's high time we drew the appropriate conclusions of this state of affairs. Since the Financial Action Task Force was created in 1989, the fight against money laundering consisted of making rules, expanding the number of participating countries and sending in a few investigators every now and then.

Too much cash at stake

Sure, these anti-money laundering norms and systems have been greatly improved over the years, but the recent revelations show that the ground rules — in particular about the identification of the effective beneficiaries, and of people exposed politically — continue to be violated on a regular basis. Though necessary, relying on offshore locations to enforce the legislation isn't enough. There's too much money to be made by helping fraudsters and launderers, and too much money to be lost due to the lack of concrete international sanctions.

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Mossack Fonseca headquarters in Panama — Photo: Valenciano

So we need a new, stronger approach. We know that Panama, the British Virgin Islands, the Cayman islands, and others are home to hundreds of thousands of letterbox companies. Why are we accepting the existence of such a developed financial industry in the British Virgin Islands, especially when we know that it's being used, at least partly, by criminals?

The United States and the European Union should immediately impose sanctions on these territories and maintain these sanctions until it's been proven that all effective beneficiaries of all shell companies established there have been correctly identified.

If the financial crisis and successive scandals should teach us one thing, it's that some financial actors will unscrupulously break the law if there's enough money to be gained. A sanctions-based approach could change people's behaviors, for example by making fraud and money-laundering more costly than they are nowadays.

Finally, the wealth of these front companies isn't in Panama or on the British Virgin Islands: It's invested in real estate in London or New York, in French equities or German bonds. One of the main issues concerning financial regulation and the fight against inequality lies in identifying the effective beneficiaries of that wealth. There are two ways to do this.

Europe and the U.S. could politely ask Swiss banks, Luxembourger investment funds or Panamanian shell company creators to give them this information. This is the spirit behind the current efforts by the Organization for Economic Co-operation and Development (OECD) and the G20 to establish a global system of automatic exchange of information. Some will fulfill their obligations, others won't.

There is another approach: Europe and the U.S. could improve the tracking of wealth on their own soil — the apartment buildings of Manhattan or Chelsea, stocks in Paris or German bonds. In practical terms, this would consist of keeping estate and financial registers in which the effective beneficiaries of all European and American buildings, lands and financial equities would be entered.

Having such public registers would be benificial not only to our economies, but also to the developing world, where elites too often still hide their wealth in Western countries. A European and American financial registry would be a public good for the world. And it's the core issue of the fight for financial transparency.

*Gabriel Zucman is assistant professor of economics at the University of California, Berkeley.