The setting sun lights up the Panama City skyline, Monday, April 4, 2016.
The setting sun lights up the Panama City skyline, Monday, April 4, 2016.

The scandal caused by the largest leak ever of data about secret offshore companies enters a new phase Monday when a journalists group releases to the public a searchable database of documents that reveals the details of more than 200,000 offshore entities and the people connected to those accounts.

The Panama Papers, as they have been called, are 11.5 million documents belonging to Panamanian law firm Mossack Fonseca. The nearly 40 years' worth of documents show how the firm helped some wealthy people set up offshore firms, often used to hide assets and avoid taxes and sanctions.

What does offshore mean? To register or operate outside a person's or company's national boundary. The arrangement is often done for the purpose of financial, legal and taxation benefits.

What is an offshore company? A company incorporated for the purpose of operating outside the country of its registration. Also known as a shell company. Individuals or companies often use shell companies to disguise ownership or other information about source of funds for the company involved.

Legitimate uses of offshore accounts: The idea of a tax haven -- a country that offers low taxes and high privacy -- is not illegal. A company or trust may legitimately move offshore for the purpose of lower taxation, as well as for legitimate uses such as business finance, mergers and acquisitions, and estate or tax planning.

Screen grab of website for the International Conso
Screen grab of website for the International Consortium of Investigative Journalists, which reported on the Panama Papers, likely the biggest leak of inside information in history.

Illicit uses: However, it is illegal for a person or company to fail to report income from accounts in foreign countries if the taxpayer's national taxing authority requires them to do so, or if an offshore financial institution is used to conceal sources of funds or ownership, or for money-laundering and tax evasion purposes.

Tax avoidance vs. tax evasion: Tax avoidance allows a person or business to lower the amount of income tax owed by legal means by claiming permissible deductions and credits. Tax evasion is illegal because it allows a person or business to intentionally avoid paying taxes.

Tax Haven Sites

Mossack Fonseca is considered one of the world's largest providers of offshore services. Of the companies appearing in the firm's files, one of every two were incorporated in the British Virgin Islands, making it the firm's No. 1 tax haven site.

The top 10 countries used by Mossack Fonseca:

British Virgin Islands, 113,648 incorporated companies
Panama, 48,360
The Bahamas, 15,915
Seychelles, 15,182
Niue, 9,611
Samoa, 5,307
British Anguilla, 3,253
Nevada, U.S., 1,260
Hong Kong, 452
The United Kingdom, 148

Sources: AP, Financial Action Task Force, International Consortium of Investigative Journalists

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