HSBC alone accounts for more than 2,300 shell companies. HSBC alone accounts for more than 2,300 shell companies.

Written: Ryan Chittum, Cécile Schilis-Gallego & Rigoberto Carvajal

Two global companies were under mounting pressure, and threats were flying. For years, the Swiss banking giant UBS and a Panama law firm named Mossack Fonseca embraced each other in a mutually profitable relationship. UBS had customers who wanted offshore shell companies to keep their finances hidden. And Mossack Fonseca, one of the largest creators of offshore companies in the world, was happy to sell them.

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But in 2010, under threat of a US criminal prosecution for tax evasion and money laundering, UBS was scrambling to contain the damage. The bank’s board of directors wanted out of the shell-company business.

Tensions boiled over in a meeting in Zurich on Sept 28 when UBS asserted that Mossack Fonseca was responsible for identifying the owners of the shell companies behind the secret accounts — not the bank.

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Mossack Fonseca employee Dieter Buchholz argued that his firm had no idea who really owned some of the companies created for UBS customers, because the bank had withheld that information. UBS executive Patrick Küng objected, saying Mossack Fonseca was “in violation of the Swiss money laundering code.”

More than 500 banks, their subsidiaries and branches registered nearly 15,600 shell companies with Mossack Fonseca.

The British banking giant HSBC and its subsidiaries alone account for more than 2,300 of the companies, and UBS accounts for more than 1,100. Other big banks doing business with MF included Société Générale (979 companies), the Royal Bank of Canada (378), Commerzbank (92), and Credit Suisse (1,105).

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The US investigation into banks’ role in offshore tax evasion quickly broadened beyond UBS. Credit Suisse pleaded guilty to criminal conspiracy charges in 2014 for, among other things, “assisting clients in using sham entities to hide undeclared accounts” and paid $2.8 billion to settle. Wegelin, Switzerland’s oldest bank, closed down in 2013 after paying the $58 million for aiding tax evaders.

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“UBS proactively decided to discontinue” setting up companies for customers in 2010 “due to changes in regulation in some of the jurisdictions where offshore companies were held and due to a further tightening of UBS’s policies,” the bank said.

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MF said in a statement, “We conduct thorough due diligence on all new and prospective clients that often exceeds in stringency the existing rules and standards to which we and others are bound.”

Adaptive system

But while the worldwide fight against offshore tax evasion and money laundering has intensified in recent years, the system adapts ingeniously, moving money to what are at any given time the weakest points in the financial system.

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That leaves authorities playing a game of whack-a-mole with banks and wealthy clients popping up in new locales, including the very countries leading the fight against offshore abuses.

Credit Suisse said it has toughed requirements in the past three years. It said that it “terminates the banking relationship” if clients fail to comply with requests for evidence of “tax compliance.”

UBS says it stopped setting up offshore companies for its customers in 2010. However, MF files show the bank set up 25 offshore firms for clients from 2011 to 2013.

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