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Over 200,000 shell companies are involved in the Panama Papers leak — here's why that's a big deal

On Sunday, news of the Panama Papers broke.

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Called the biggest leak in history, the 11.5 million documents involve world leaders as powerful as Russian President Vladimir PutinBritish Prime Minister David Cameron, and Argentine President Mauricio Macri.

At the center of the leak are 214,000 shell companies related to the Panama-based law firm Mossack Fonseca. The law firm with offices around the world has been reportedly tied to oligarchs and dictators

putin gun
Vladimir Putin. Itar Tass / Reuters

As the name suggests, shell companies are hollow. They do nothing but manage the money inside of them, with lawyers or accountants listed as management, the BBC reports. If authorities try to figure out whose money is really inside of the company, they end up just getting those lawyers and accountants.

This makes shell companies perfect for owning assets or opening bank accounts without leaving a trace of whose money it actually is. 

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"Even in places that do make shareholder information public, it is often still easy to make the owners anonymous," explains the investigative group Global Witness. "This is done by making the shareholders be further companies registered somewhere that keeps their owners secret, or by registering the company in someone else's name, even that of a total stranger. Astonishingly, it's entirely legal to do this in the majority of countries, and there's an entire profession dedicated to providing such 'nominee' services."

The watchdog nonprofit Global Financial Integrity points out that shell companies have been used in everything from Medicare fraud in the United States to corruption in Malaysia

Shell companies are usually set up in places with weak anti-corruption laws. These tend to be the offshore financial centers like the British Virgin Islands, Macao, or Panama. In the US, Delaware is a go-to spot — the nation's first state reportedly has more companies than state residents

A Global Financial Integrity report found that shell companies are used to send over a $1 trillion every year out of emerging economies

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Defending its practices, the Mossack Fonseca told the Guardian that "it is legal and common for companies to establish commercial entities in different jurisdictions for a variety of legitimate reasons, including conducting cross-border mergers and acquisitions, bankruptcies, estate planning, personal safety, restructuring and pooling of investment capital from different jurisdictions in neutral legal and tax regimes that does not benefit or disadvantage any one investor."

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