It sounds like a cross between a geography lesson and a financial services lecture. Throw in a bit of politics and Konrad Mizzi’s Panama affair becomes a big hotchpotch. Kurt Sansone tries to break it down into digestible portions.

Did Konrad Mizzi break the law when he opened a trust in New Zealand?

No. It is perfectly legal to open a trust and have a financial structure like that set up by the Energy Minister. Various companies in the financial services sector in Malta offer the service to Maltese and foreign clients.

Konrad Mizzi

How is Dr Mizzi’s trust structured?

According to documents disclosed by Dr Mizzi – although he has refused to give us a copy of the trust deed – he used a financial services firm in New Zealand (Orion Trust) to create the trust, which was given the name Rotorua Trust. Dr Mizzi is settlor and protector and the sole beneficiaries are his wife Sai Mizzi Liang and their two children. Orion is the trustee. The documents show that the trust does not have any bank accounts and the only asset is a Panama-registered company called Hearnville Inc.

How does Panama come into the picture?

The company owned by Dr Mizzi’s trust is registered in Panama. According to Dr Mizzi, it was created in 2013 as a shelf company but Rotorua Trust acquired full ownership in August 2015. Blogger Daphne Caruana Galizia contends otherwise, insisting Dr Mizzi had ownership in 2013. The minister has said the investment in the company amounted to €92. He contends that so far it has not traded and holds no bank accounts. Following the controversy that erupted, Dr Mizzi said he would be closing down the Panama company.

So what did Dr Mizzi do wrong?

At this stage the only illegality flagged is that Dr Mizzi failed to inform the Inland Revenue Department in Malta of the trust. The law says that a settlor resident in Malta has to inform IRD within 30 days of setting up a trust. Dr Mizzi did not do this and he has blamed his financial consultants in Malta for failing to point this out to him.

He has taken steps to rectify the situation and will be liable to a fine. However, the yardstick for any politician must not only be a legal one. Dr Mizzi is seen to have been wrong to open a company in a shady jurisdiction like Panama.

He subsequently described this as “an error of judgement”. But Dr Mizzi has also been heavily criticised for opening a trust in New Zealand, an act perceived as unpatriotic given Malta is a financial services centre in its own right.

So why is there talk of corruption and money laundering?

The serious allegations have been made by Ms Caruana Galizia, who broke the news on Dr Mizzi’s financial structure. While she presented no proof to substantiate the claims, her revelations so far on the New Zealand trust, the Panama company and the creation of similar financial structures by the Prime Minister’s chief of staff, Keith Schembri, have all been proven correct. She has also linked Mr Schembri to Allied Newspapers managing director Adrian Hillman and alleged graft.

Konrad Mizzi is settlor and protector, and the sole beneficiaries are his wife Sai Mizzi Liang and their two children

Allied Newspapers, which publishes The Times of Malta and The Sunday Times of Malta has launched an inquiry, and Mr Hillman has gone on leave.

In Parliament, Opposition leader Simon Busuttil raised questions about Dr Mizzi’s Panama company and New Zealand trust, implying that there was “a bag of money” hidden there. Dr Busuttil has not repeated this allegation outside of Parliament, which would subject him to potential libel proceedings. But it has to be noted that Dr Mizzi and Mr Schembri have so far failed to sue Ms Caruana Galizia.

What is so bad about Panama?

Panama is a notorious jurisdiction because of the secrecy it affords to companies and individuals. Last year the European Commission put Panama on the list of non-cooperative jurisdictions. In February, the country, which has tried to clean up its image, got mixed reviews for its efforts.

While the Financial Action Task Force removed Panama from its blacklist of non-cooperative jurisdictions, a report penned for the G20 by the OECD noted that Panama had reneged on a promise to automatically share information. Despite some efforts to reform, Panama still has a negative image. For a long time, it has been linked to secretive accounts held by dictators, money-launderers and criminals.

Does this make investors in Panama money-launderers?

Not everyone with a company in Panama is corrupt or has used the jurisdiction to hide money coming from illegal means. But it does indicate that the two men opted for a jurisdiction that affords secrecy.

The two individuals hold high political office – one is a minister who has negotiated significant contracts worth millions of euros in the energy and health sectors and the other is the Prime Minister’s right-hand man. Their actions have to be measured by a different yardstick than the one used for common citizens.

Keith Schembri

So, again, did Dr Mizzi and Mr Schembri do anything wrong?

The two men have attracted very negative attention by being associated with a country like Panama. Ministers and people in high public office like Mr Schembri must be above suspicion.

They have to do the right thing and be seen to be doing the right thing. Using a jurisdiction like Panama creates a bad perception.

More so, the companies and trusts owned by the two men were set up while they were in office.

Did Joseph Muscat know about their actions?

The Prime Minister said he got to know about Dr Mizzi’s New Zealand trust a few weeks ago when the minister included it in his draft ministerial declaration of assets. On Mr Schembri, the Prime Minister has said he knew that his chief of staff – who had a successful career in business before taking on the public post in 2013 – had similar financial arrangements in Malta and abroad but only learned about the most recent New Zealand trust from the media.

Has Dr Muscat defended them?

Yes. The Prime Minister has reiterated that he found nothing untoward in the creation of overseas trusts and companies in Panama as long as the minister was going to declare them. He later qualified his statement by saying Dr Mizzi’s choices “could have been better” and subsequently “naïve and politically insensitive”.

While the Prime Minister has accepted an independent audit of Dr Mizzi’s financial affairs, he has refused a similar audit for Mr Schembri. Pundits have questioned the futility of an audit, which will not address ethical issues and is unlikely to weed out corruption if there is any.

The Prime Minister has resisted calls to remove Dr Mizzi and Mr Schembri.

Panama is a notorious jurisdiction because of the secrecy that it affords to companies and individuals.

Is the Panama affair about corruption?

At this stage, corruption has been alleged. Especially because the creation of these asset-concealing structures was allegedly conceived at the same time that the two men accompanied the Prime Minister on a visit to Azerbaijan.

But it has yet to be seen whether proof will emerge that there was something untoward.

What has the visit to Azerbaijan got to do with this?

On December 15, 2014, the Prime Minister, Dr Mizzi, Mr Schembri and the government’s chief communications coordinator went on a two-day visit to Azerbaijan.

They were not accompanied by civil servants and the Maltese media were not invited to cover the trip.

Information about the content of the meetings held with the Azerbaijani government reached the media through the Department of Information.

Pundits have questioned the futility of an audit, which will not address ethical issues and is unlikely to weed out corruption if there is any

The government said a memorandum of understanding for cooperation in the oil and gas sectors was signed. This was only tabled in Parliament the following March.

According to Ms Caruana Galizia, it was round about this same period that Dr Mizzi and Mr Schembri initiated the process to create trusts in New Zealand.

Was this the only visit to Azerbaijan?

No. Dr Mizzi had visited Azerbaijan in March and September of 2014 accompanied by his private secretary. After his March visit, the minister had instructed Enemalta to include the Azerbaijani State oil company Socar on its list of suppliers. In April 2014, Enemalta hedged its petrol and diesel requirements with Socar following “ministerial direction”, in a move that was later criticised by the National Audit Office.

How is Nexia BT involved?

Nexia BT is a tax advisory and audit firm headed by managing partner Brian Tonna. It is the company that audits the accounts of Mr Schembri’s private companies that form part of the Kasco Group. Nexia was the company that Mr Schembri engaged to help him set up the New Zealand trust and associated company. Nexia was also used by Dr Mizzi for the same purpose. The minister has claimed that it was Mr Schembri who suggested the creation of an overseas trust and put him in touch with Nexia.

Did Nexia engage in wrongdoing?

No, although observers have questioned the wisdom behind the advice given to Dr Mizzi and Mr Schembri – politically exposed persons – over the creation of overseas trusts and companies in Panama. But it must also be noted that in August 2013 the Panamanian law and advisory firm Mossack Fonseca opened a Malta branch and the only shareholder according to the Registry of Companies was BT International, owned by Nexia’s Brian Tonna. Mossack Fonseca has an international reputation as the law firm of choice for oligarchs, dictators and money-launderers wanting to hide money by funnelling it to shell companies.

How is Mossack Fonseca linked to Dr Mizzi and Mr Schembri?

Mossack Fonseca was the Panamanian agent used to acquire the shell companies held by the New Zealand trusts.

A guide to trusts, shell and shelf companies

What is a trust?

A trust is a financial structure that is distinct from the individual who creates it. The individual – known as settlor – transfers assets to the trust. The assets held by the trust no longer belong to the settlor and are managed by trustees, according to the trust deed drawn up by the settlor, for the benefit of beneficiaries.

Hold it. What are trustees and beneficiaries?

The settlor appoints the trustee to administer the trust. The trustee could be an individual or a company. The trustee holds the property in the trust with a legal obligation to administer it solely for the purposes specified in the trust deed. The settlor may also appoint a protector to oversee the actions of the trustee. The beneficiaries would be the individuals or individual identified by the settlor as those who will benefit from the proceeds of the trust. The settlor may and may not be a beneficiary.

What are shell companies?

They are companies that exist only on paper. They may be used for legitimate purposes such as raising funds before starting operations. Sometimes they are also used for nefarious reasons such as money laundering and tax evasion. The agents that create these companies on behalf of clients often appear as the shareholders and directors thus making it difficult to trace the ultimate beneficiary. The Panama companies acquired by Dr Mizzi’s and Mr Schembri’s New Zealand trusts were both shell companies.

What is a shelf company?

It is a pre-existing company set up by an agent and literally put on the shelf for future use. This was very popular in the past when it took a lot of time to set up a company. In this way any new investor could buy a shelf company, thus shortening the process to create a new company. Dr Mizzi has said that his Panama company was a shelf company incorporated in 2013, which was acquired by his trust in 2015.

How cheap is it to set up a company in Panama?

Panama is renowned as a cost-effective jurisdiction and it is perfectly legitimate to acquire a shell company on the cheap. However, it makes little sense to simply invest €92 in such a company. Dr Mizzi has said the financial planning structure was still in its infancy and still had to transfer assets to the company.