The Panama Papers are the biggest leak in history, with 11.5 million documents regarding the global elite's secretive financial dealings slowly coming to light.
At the center of the leak are 214,000 shell companies related to Mossack Fonseca, a Panama-based law firm that's reportedly been involved with dictators and oligarchs.
Shell companies exist only on paper, and they're often used to hide money that is illicitly taken out of developing countries.
Since only the person who incorporated them is listed as management — like a lawyer or an accountant — they can hide funds and goods without leaving a trace. As it stands, the only way to learn who actually owns an anonymous company is through leaks like these.
A December 2015 report from watchdog nonprofit Global Financial Integrity (GFI) found that developing countries "lost $7.8 trillion in illicit financial flows from 2004 through 2013."
The most extreme case is in Sub-Saharan Africa, where an average of 6.1% of each country's GDP was lost through outflows of illicit capital. GFI estimates that the global average is 4% of GDP.
GFI economist Joseph Spanjers tells Tech Insider that about 80% of those trillions are moved through "trade misinvoicing," which is a way to launder money through trade.
It's a form of trade fraud where someone misrepresents the value or amount of a good they're importing or exporting. This allows them to evade taxes and gain subsidies, as well as take "dirty money" made in illicit ways and reintegrate it into the formal finance world, like by saying that a bulldozer or crane cost more than it actually did.
"You can underinvoice an export or overinvoice an import, which allows you to shift value abroad, and a lot of times it's an anonymous company," Spanjers says. "Once you shift that money abroad, that’s an illicit action, and you want to put it in a place where it cannot be found, and that's a shell company."
Spanjers is careful to note that not all shell companies are nefarious, but they are a way to hide wealth.
Also, GFI can't say who is transferring the money, just that it's happening.
One way to combat the misinvoicing and the anonymity offered by shell companies is to create a public registry of ownership, Spanjers says, so that the public could know who truly owns a company, rather than the individual who registered it. The measure is gaining traction in the UK (especially after Prime Minister David Cameron's father has been connected to shell companies), and nonprofits like Global Witness are leading campaigns to make them happen worldwide.
