This article was originally posted by the Global Anticorruption Blog at globalanticorruptionblog.com

This is a guest post by Professor Jason Sharman, Deputy Director of the Centre for Governance and Public Policy at Griffith University, Australia:

After the initial flurry of media attention to the Panama Papers, Matthew Stephenson rightly asks how much, if anything, we have really learned from this affair beyond the celebrity gossip.

A notable degree of modesty is in order here, as what we have seen so far is a tiny, almost certainly unrepresentative sample of the vast quantity of information leaked to International Consortium of Investigative Journalists (ICIJ). The initial wave of media coverage related to 140 individuals, including 12 heads of state or government. Since the ICIJ database became searchable on May 9th, we have a few more names, mostly small-time crooks, and it is possible to run individual name searches to your heart’s content. Nevertheless, given that Mossack Fonseca had created 214,000 Shell Companies, what we have seems to be less than 1% of their clientele, and presumably the most sensational and outrageous cases. If you looked at your average big international bank, took the records of 214,000 accounts, and subjected them to a detailed financial audit, you probably would find at least a few hundred people engaged in crime or some other seriously shady business (putting banks’ own criminal conspiracies like rigging the LIBOR and Forex markets and sanctions-busting to one side).

Matthew’s earlier post asked about the structure of the Offshore Shell company industry–in particular, whether it was dominated by a few major providers, or whether it was a highly fragmented market with many firms, each with small market share. The answer is both: There are a few big wholesalers of Shell Companies, four or five, plus a couple in the US. The wholesalers sell to thousands of intermediary retailers, who then sell to the end-users, i.e. the beneficial owners. I was surprised by how many retailers Mossack Fonseca dealt with (14,000), given that the other wholesalers of equivalent size engage with 2,000-3,000 intermediaries. The difficulty keeping track of this number of retailers, let alone their customers, might explain Mossack Fonseca’s otherwise-puzzling suicidal indiscretion in transacting with customers who brought a huge amount of risk for a fairly trivial sum of money, e.g. those on US government sanctions lists.

What does the structure of the industry mean for regulatory solutions? The retailers could take up the slack if the wholesalers were put out of business, although the process of forming shell companies would be less efficient and more expensive. More importantly, the more concentrated the industry, the easier it is to regulate, compared to the whack-a-mole situation of thousands of independent retailers. As Rick Messick rightly points out, for this regulation to work, however, it is necessary for the Eligible Introducer system between wholesalers and retailers to work in identifying beneficial owners. Despite a litany of earlier high-profile failures, a Guardian piece actually suggests that the British Virgin Islands authorities had recently got on top of this problem: in 2015, 90 requests from the local Financial Intelligence Unit to Mossack Fonseca turned up the names of 89 beneficial owners. However, because customer identity documents are now almost always scans rather than paper, there seems to be no good reason why they can’t be held in the jurisdiction of incorporation.

More broadly, with the Panama Papers and the earlier April 2013 Offshore leak, we (or at least the ICIJ) now have information on just over 320,000 Offshore Shell Companies, which probably represents something like 15-20% of all the offshore shell companies ever created. You can work out the total number in that BVI has about 40-45% of the worldwide market. It currently has 450,000 active companies, and 950,000 formed in total since the creation of its registry. If we could draw a random sample of these companies and the associated documentation, rather than cherry-picking the worst of the worst, then we could form a much more accurate and robust conclusion on what the typical uses of offshore shell companies actually are.

In just looking at the information we do have from the Panama Papers, two things are fairly apparent, yet don’t seem to have attracted much comment so far:

• First, Mossack Fonseca was in serious decline well before the leak; their business was crashing for years in terms of new incorporation numbers. The graph on the ICIJ website for new incorporations shows numbers running at over 12,000 in 2005-2006, while they were closer to 4,000 in 2015–a huge reversal of fortunes. Leaving aside that the 2005 spike was an unintended product of the EU Savings Tax Directive (EU tax residents holding their offshore companies could legally beat the requirement to report interest income), and the fact that the numbers are affected by travails of the global economy, something had gone badly wrong with Mossack Fonseca’s business model well before 2016. Is that a problem particular to this firm, or a problem of the offshore shell industry in general? I am guessing the former, because other wholesalers’ numbers seem to have held up, but these figures are still a bit of a mystery.
• The second very noticeable and yet unremarked-upon trend is the huge decline in bearer share companies (i.e. those where ownership is determined by who holds the physical share certificate in the absence of a central share registry), almost to zero. Rather than being a Mossack Fonseca-specific development, this does seems to be a global regulatory success story, at least offshore. Thus the British Virgin Islands, Samoa, Seychelles, Niue, and the Bahamas had all abolished bearer shares despite their earlier popularity, while by 2015 the number of Panamanian bearer share companies had declined from an earlier high of 6,000 to something like 100. For almost 20 years the Financial Action Task Force has identified bearer shares as especially likely to be abused by money launderers (though this didn’t stop the British government retaining them until 2015; I still have my UK bearer share company). Aside from governments’ actions, the increasing squeamishness of banks at the prospect of holding accounts for bearer share companies, given that establishing beneficial ownership is almost impossible, seems vital. Thus bearer share companies seem likely to join shell banks on international finance’s extinct list.

The final point where the Panama Papers are in danger of misleading us is the idea that offshore financial centers and offshore shell companies are the main problem when it comes to establishing global financial transparency and stamping out cross-border financial crime. In fact, the bigger problem is onshore. The British government, current self-appointed paragon of transparency, should read the fascinating piece by Oliver Bullough in the Guardian dealing with a London shell company incorporator which has apparently formed 450,000 such companies. Bullough was able to complete the formation documents in nine minutes, and got his very own shell company for a whole £15 with no supporting information required. A similar piece in the New York Times makes the same point about onshore laxity with reference to 1209 Orange Street, Wilmington, Delaware–the registered address of 285,000 companies, where (in contrast to the British Virgin Islands) there is absolutely no requirement to find anything about the actual owner. But unlike Mossack Fonseca, the chances of beneficial ownership information on the companies formed by these American and British providers being leaked look vanishingly small: there is simply no information to leak.