Leaders at the International Committee of the Red Cross (ICRC) received a surprise following the release of the Panama Papers – the organization’s name listed as a beneficiary. Multiple outlets, including Reuters, have reported that the “International Red Cross” was named as a faux beneficiary of dummy foundations featured in documents from the Panamanian law firm Mossack Fonseca.
The documents, numbering up over 11 million, detail the dealings of more than 200,000 of shell corporations operating for numerous reasons, including tax evasion.
“The ICRC’s global humanitarian activities depend on trust, transparency and the organization’s reputation for neutrality, impartiality and independence,” the organization’s leaders said in a statement condemning the use of its name. “Any misuse or abuse of the ICRC name could have far-reaching consequences for the vital humanitarian work that its staff carry out every day, in some of the most dangerous and inhospitable places on earth.”
An ICRC spokesperson went on to say that the issue is so grave because the Red Cross depends on the trust its symbol has fostered to carry out its mission. ICRC has never had any relationship with Mossack Fonseca, according to the spokesperson, and the situation “appears to be a massive abuse of our name.”
“In terms of what we intend to do, we’re waiting to gain more information to understand how our name has been misused,” the spokesperson said. “Based on what we find out, we’ll take action…We had no idea that our name was being used this way. We learned, actually, from the media.”
World Wildlife Fund (WWF), too, had its name used by Mossack Fonseca clients. A WWF spokesperson confirmed that the Washington, D.C.-headquartered organization had no knowledge of the use of its name, never gave consent for its use and did not receive any funding from the supposed Panamanian sources.
The spokesperson said in an email to The NonProfit Times that WWF has little to comment on at this time as “we’re still learning the details and evaluating our options.”
Faux donations aside, shell corporations’ and tax avoidance’s most direct impact on the nonprofit sector comes from the added pressure of providing services with reduced government resources, according to Matt Gardner, executive director of the Institute on Tax and Economic Policy (ITEP) in Washington, D.C. Hiding money from the sight of federal and state government reduces tax revenue to a degree difficult to even roughly estimate.
“Pretty clearly, failing to act on this is going to hurt our government’s ability to provide important infrastructure needs we have going forward,” Gardner said. “That is worrisome for middle and low income families.” In such scenarios, organizations are often thrust into the role of filling in gaps.
The ICRC spokesperson said that it is too early to connect the Panama Papers with potential losses of government support and resources and that the organization is not keen to take a stance on tax evasion. Any loss of tax money that would otherwise be used on public services would be an obvious concern, the spokesperson said.
Gardner rejected the notion that shell corporations and tax avoidance are an offshore issue. The release of the Panama Papers earlier this month failed to surprise him because rumblings of such practices have come out bit by bit over the years. Such documents stemming from the U.S. would have been no more shocking.
“The thing that I think is important – there’s a mechanism for this in U.S. law,” Gardner said. “The U.S. is every bit a part of this. It’s only happenstance that this came out of Panama. This could have easily come from the U.S.”
Differences in tax and incorporation laws from state to state mean that Americans don’t have to send their money overseas to avoid taxes, Gardner said. Nevada and Wyoming, for instance, have no corporate income tax – leading some companies to establish legal subsidiaries in those states to avoid taxation.
Nevada also happens to be a state that requires minimal information to set up a shell corporation, he said. Delaware, too, requires little personal information to set up a corporation, but does charge state income tax.
Individuals and corporate leaders could engage in “above the board” practices by establishing a business in Nevada simply to avoid paying state income taxes. Similar practices could also be used to hide assets, Gardner said.
Legislation requiring states to collect basic information on corporations could potentially come down the pike in the wake of the Panama Papers, Gardner said. Finding ways for foreign governments to comply could also be pursued. The Foreign Account Tax Compliance Act (FATCA) of 2010 has been used to encourage foreign banks to share information with American authorities, restricting access to American businesses in the event of noncompliance. Similar measures could be used to combat foreign shell corporations, Gardner said.
The use of shell corporations to front drug trafficking, terrorist funding and money laundering could make reform desirable even for those who care little about corporate transparency. “That’s why I have greater hope for transparency than I do for equally sensible measures that are strictly about taxes,” Gardner said. “But I’ve been wrong before.”