Afghanistan has experienced a violent 2017, with the government continuing to steadily lose territory to the Taliban. According to the US Special Inspector General for Afghanistan Reconstruction (SIGAR), the Afghan government’s control over districts has deteriorated to its lowest level since December 2015, when SIGAR first began analyzing such data. US forces in Afghanistan estimate that as of August 2017, the government controlled about 56.8% of the country’s 407 districts, while the Taliban controlled about 13.2% and the remaining 30% were contested.

Concurrently, UN estimates show that armed clashes in Afghanistan are at a record high, indicating that the Taliban is moving away from a guerrilla-style warfare and to more conventional combat techniques that involve direct fighting between government forces and insurgents.

Meanwhile, in eastern Afghanistan, the Islamic State (IS) remains active despite intensified US air strikes. The campaign included the largest ever conventional bomb used by Washington in combat in April, which reportedly killed 92 militants and destroyed a complex of tunnels and bunkers used by IS in Acin district in Nangarhar province.

The uptick in violence has placed severe constraints on Afghan security forces, evident in the increasing number of attacks in Kabul. This year has seen multiple attacks in and around Wazir Akbar Khan, the district in the heavily-fortified Green Zone that houses all major government buildings and embassies. On October 31, a  occurred a few hundred meters from the American and British embassies, and on May 31, yet when a car bomb killed more than 150 people and wounded hundreds of others near the German embassy. Insecurity in the capital has been so high this year that at the end of the first six months of 2017, the United Nations assessed that Kabul province had become the deadliest for civilians in Afghanistan, displacing Helmand for the first time in decades.

Attacks in Kabul have ranged from isolated shootings, IED and grenade attacks to suicide bombings and even rocket attacks, as seen during US Secretary of Defense Jim Mattis’ unannounced visit to Kabul in September when  were fired in and around Kabul airport. Many of the incidents have been complex attacks, where suicide bombers detonate their devices outside targeted buildings, paving the way for gunmen to storm the premises and continue the attack until security forces intervene. Examples include the on the Kabul military hospital, which killed over 50 people, and the attempt to storm the that left two Afghan employees dead and three policemen injured.

Several of these attacks were claimed by the Taliban, although IS has increasingly asserted responsibility. In particular, attacks on Shia mosques — such as the that killed 72 people in Kabul’s Imam Zaman mosque — are almost always attributed to and claimed by IS, as the Taliban typically avoids stoking sectarian tensions. However, IS has also claimed attacks on major targets, including the Kabul military hospital and even the rocket attacks on Kabul airport in September, although this attack was also claimed by the Taliban. In many cases, the accuracy of the Islamic State’s claims remains unclear. The rocket attack on Kabul airport, for example, was most likely carried out by the Taliban, which has a proven history of carrying out coordinated attacks and firing rockets against critical infrastructure.

Nevertheless, in conducting mass-casualty attacks against Shia minorities, IS has demonstrated the capability to carry out major attacks in Kabul. The Islamic State’s growing activity in Kabul and elsewhere in the country indicates its intention of expanding beyond its stronghold of Nangarhar province. This, in turn, has raised concerns that the group is seeking to make Afghanistan its new base, particularly as it faces significant military pressure in Iraq and Syria, where it has rapidly lost territory over 2017. The Iraqi embassy attack, for instance, came three weeks after the fall of Mosul and led to widespread speculation that the operation was in retaliation for Iraqi military gains against IS.

Afghanistan in 2018

In this context, the coming year is likely to remain a challenging one for Afghanistan. Although the US has pledged to deploy 3,000 additional security personnel to the country — bringing the total number of US troops in Afghanistan to about 14,000 — the figure is unlikely to be sufficient to counter the Taliban’s gains, particularly in rural areas. US Director of National Intelligence Dan Coats observed in May that the performance of Afghan security forces will probably worsen in 2018 due to a combination of Taliban operations, combat casualties, desertions, poor logistics support and weak leadership. He also noted that Afghanistan will remain dependent on external support until it either ends the insurgency or engages in meaningful peace talks with the Taliban.

Trends over the past few years indicate that Afghan forces lack the ability to win the war militarily, evident in the Afghan army’s failure to hold on to territorial gains achieved after the surge in US troops seen in December 2009. The Afghan government led by US ally President Ashraf Ghani is weak and beset by infighting, making it harder to achieve a political settlement with the Taliban. US efforts to restart the official peace process — along with Afghanistan, Pakistan and China — have faltered, as the Taliban has refused to participate in negotiations with what it sees as a US-funded government in Kabul.

The Taliban’s territorial gains also bode poorly for the prospect of peace talks, given the incentive for the insurgent group to push for further territory and increase pressure on government troops. Meanwhile, the Islamic State’s growing geographic presence in the country mean that considerable US resources, in the form of air strikes and counterterrorism activities, will continue to be diverted toward the group.

In the near term, a form of stalemate appears likely. Afghan security forces will continue to fight Taliban insurgents to ensure that the group does not capture strategic districts or overrun key provincial capitals, while both the Taliban and IS are likely to continue carrying out periodic mass-casualty attacks in Kabul and other major cities to maintain pressure on government resources.

*[This article is based on a report by .]

The views expressed in this article are the author’s own and do not necessarily reflect 51łÔąĎ’s editorial policy.

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During the week of February 13, Pakistan suffered a series of terrorist attacks in all four of its provinces: Punjab, Sindh, Balochistan and Khyber Pakhtunkhwa. Jamaat-ul-Ahrar (JuA), a breakaway faction of Tehreek-e-Taliban Pakistan (TTP), claimed the majority of the attacks, followed by TTP and the Islamic State (IS), which claimed the February 16 attack on a Sufi shrine in Sehwan that killed 90 people.

Multiple assaults perpetrated by different militant groups have raised concerns about the heightened presence and capabilities of terrorist groups in Pakistan. IS, JuA and TTP have all demonstrated the ability to conduct gun and IED assaults, as well as large-scale suicide bomb attacks against both government and civilian targets.

Nevertheless, only JuA has managed to conduct attacks in every province of Pakistan, as well as the tribal regions. The assaults came after the group announced the start of “Operation Ghazi” in a video message on February 13, in which it named legislative bodies, media outlets and state institutions as potential targets. Of note in JuA’s video statement was the claim that it would not target crowded areas such as markets and mosques. If true, this signals a divergence from its previous modus operandi. The group has conducted some deadly attacks against civilians in the past, including the March 2016 suicide bombing during Easter celebrations at the Gulshan-e-Iqbal Park in Lahore that killed more than 75 people and wounded 340 others.

The spike in militancy has also increased fears that IS has established a presence in Pakistan. Authorities have long denied that the group has a foothold in the country, despite periodic reports of the arrests of IS operatives and IS claims of attacks in Pakistan, although Pakistani security officials have regularly raised concerns about the Islamic State’s presence in neighboring Afghanistan. The group’s notable claims in Pakistan have mainly been attacks against minority communities. Prior to the Sehwan attack, IS orchestrated a suicide bombing at another Sufi shrine in Khuzdar, Balochistan, in November 2016, killing 52 people.

Moreover, there are concerns that competing militant groups may be collaborating in their activities. In February, General John Nicholson Junior—the commander of US and international forces in Afghanistan—said that TTP militants from Pakistan’s Orakzai tribal agency had formed the Islamic State’s core fighters in Afghanistan, helping the group enhance its capabilities and establish a base in the country. Reports in 2016 also indicated that JuA had largely resolved its differences with the TTP, although it retains autonomy with regard to choosing the targets and means for its attacks. While there have also been reports that JuA has pledged allegiance to IS, there is little evidence to suggest that both groups have joined forces, with JuA adopting a largely neutral approach toward the Islamic State.

Security Response

The current wave of violence is the first major test for new Chief of Army Staff General Qamar Javed Bajwa, who took over from Raheel Sharif in November 2016. Pakistan’s response to the attacks so far appears to follow a familiar pattern. Externally, it has blamed Afghanistan for providing sanctuaries to the perpetrators of the attacks. In an unusual move, Islamabad also conducted cross-border attacks against militant camps in Afghanistan’s eastern Nangarhar province, along with closing the border with Afghanistan.

Domestically, the army launched Operation Radd-ul-Fasaad across the country on February 22, with the aim of “indiscriminately eliminating residual/latent threat of terrorism” and consolidating gains made in earlier campaigns. Authorities claim that tens of “militants” have been killed in air and ground operations, while more than 200 others have been arrested in a matter of days. These developments highlight the risks of exaggerated claims, possible extrajudicial killings and the disregard for the rule of law.

The harsh campaign has also raised concerns of an offensive similar to the largescale and devastating Zarb-e-Arb operation, first launched in North Waziristan in June 2014. While the campaign was successful in dismantling terrorist safe havens and dispersing militants from groups such as the TTP and the Islamic Movement of Uzbekistan to tribal areas across the border in Afghanistan, it did not eliminate the threat.

Porous borders and the Afghan government’s inability to police remote areas have facilitated a steady stream of militant attacks within Pakistan over the past few years, a situation exacerbated by Kabul’s sole focus on preventing the Afghan Taliban from overrunning major provincial capitals such as Lashkar Gah. Cooperation on counterterrorism between both countries has also been hampered by allegations of support for militant groups focused on targeting the other. The Afghan government claims that Islamabad supports the Afghan Taliban and the Haqqani Network, while Pakistan accuses Kabul of turning a blind eye to the TTP’s activities. Given these broader considerations, the long-term impact of yet another offensive by the Pakistani army is unclear.

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Pakistan appears set for a period of volatility. A fresh nationwide military campaign suggests that security forces conducting raids, killing suspected militants and making mass arrests are likely to continue. The Zarb-e-Azb operation saw more than 3,500 suspected militants and over 500 soldiers killed, and thousands of others arrested during a period of over two years. Concurrently, militant attacks could continue across the country, including reprisals against a stepped-up military offensive.

The United Kingdom Foreign and Commonwealth office issued a travel advisory on February 18 warning travelers to exercise caution in crowded areas, claiming there was evidence to suggest that further attacks were being planned in the capital Islamabad and the military hub of Rawalpindi. Even after the Pakistani government issued a high alert in major cities and mobilized the police, paramilitary and army for counterterrorism operations, JuA militants attacked a local court in Charsadda, Khyber Pakhtunkhwa, on February 21, killing six people. Major cities such as Islamabad and Karachi remain on high alert for possible terrorist attacks.

Further such incidents at greater frequency could point to the return of instability in Pakistan and threaten economic projects that have only started to gain ground after years of intensive counterterrorism operations by the security forces. In particular, heightened insecurity would pose a serious threat to the prospects of the $57 billion China-Pakistan Economic Corridor (CPEC), which was first proposed in 2013 but has seen notable progress in recent months.

Instability would also affect investor confidence in Pakistan, where foreign direct investment grew 10% to nearly $1.1 billion between July and December 2016, with Bloomberg ranking the Pakistan Stock Exchange as the fifth-best performing stock market in the world last year. The turn in investment sentiment has mainly stemmed from an improvement in the security situation, as well as China’s involvement in a range of infrastructure ventures, such as port development, electricity projects, and road and rail networks.

The latest wave of militant violence has so far mainly targeted state personnel and institutions or, in the case of mass-casualty attacks, civilians. Security for CPEC has been helped by the creation of a special force with 15,000 police, army and paramilitary troops dedicated to the security of the projects and personnel involved. However, violence targeted specifically against Chinese personnel or assets would mark a serious escalation and pose the risk of halting progress on the projects.

*[This article is based on a report by .]

The views expressed in this article are the author’s own and do not necessarily reflect 51łÔąĎ’s editorial policy.

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Indian-administered Kashmir has seen a new wave of unrest since early July when , the former head of the Hizb-ul-Mujhaideen militant group and a popular separatist leader in the Muslim-dominated Kashmir Valley. His death has prompted prolonged protests by tens of thousands of Kashmiris, despite a curfew imposed by Indian authorities.

More than in ensuing clashes with security forces and over 5,000 people have been injured, many of them maimed or blinded due to the use of pellet guns.

The latest spell of violence has been the deadliest in Kashmir since 2010, when the killing of three villagers—mistakenly identified as Pakistani militants—by security forces sparked months of demonstrations in which nearly 120 people died.

Worsening unrest due to violent state response

The use of excessive force by Indian security forces against unarmed protesters has fueled public anger in the Kashmir Valley and reduced the likelihood of a timely resolution to the unrest. The heavy-handed security response has been accompanied by severe restrictions on movement, mainly in restive districts in southern Kashmir, for over 40 days, as well as the suspension of mobile and internet services—a common practice during periods of unrest in the Valley, which the government claims helps prevent the mobilization of people. More than 1,000 people, including prominent separatist leaders, have also been arrested.

The use of force has touched upon longstanding underlying grievances in Kashmir over draconian policing laws and the lack of accountability for civilian killings. Against this backdrop, the July protests that began over the killing of a separatist leader have morphed into calls for independence from India, as was seen during the sustained demonstrations that occurred in the summers of 2008 to 2010.

The Indian government has, so far, shown little inclination toward resolving the crisis by engaging with political actors in Jammu and Kashmir. India’s adoption of a parliamentary resolution to “restore peace and harmony” to Kashmir and stated willingness to talk to moderate groups in the Valley at the exclusion of separatist groups that enjoy a degree of legitimacy in Kashmir will do little to calm the unrest.

The government has also failed to address key issues such as lifting the controversial Armed Forces Special Powers Act—which provides security forces with immunity from criminal and civil prosecution—as well as the excessive military presence in the area even during periods of calm. In the absence of tangible progress on these concerns, the threat of civil unrest is likely to continue, at least until the harsh winter months.

As yet, the risk of a renewed armed conflict, as seen in the 1990s, remains low. By the government’s own estimates, fewer than 100 armed militants—defined by New Delhi as those who have received training and support from Pakistan—are thought to be based in Valley, compared to the nearly 700,000-strong presence of Indian troops. However, the potential for isolated clashes remains, as seen in the periodic gun battles between security forces and armed fighters and small-scale attacks on police personnel.

The heightened tensions have also hurt the prospects of Kashmir’s tourism industry—a key driver of the economy—particularly in the peak summer months. There have already been several reports of tourists cancelling bookings amid a perceived security threat and concerns over restrictions to movement due to the curfew. According to the state’s tourist department, about 10,060 tourists visited Jammu and Kashmir between August 1 and 12, compared with 89,243 during the same period in 2015.

Growing tensions with Pakistan

The crisis in Kashmir has seen relations between India and Pakistan deteriorate to a new low, with New Delhi accusing Islamabad of instigating the unrest. Given that Islamabad was widely believed to have armed and trained Kashmiri insurgents in the 1990s, India’s typical response during periods of tensions in the region has been to tighten security along the border and blame increased infiltration by Pakistan-based militants for any unrest.

This time, New Delhi has gone further and alleged that members of the Pakistani army had infiltrated the local population in Kashmir and were fueling the protests, even though there is little evidence to substantiate this claim.

Such accusations, as well as counter-claims by Pakistan of widespread abuses by Indian security forces and assurances of “moral and diplomatic support” for Kashmiri independence, have placed a severe strain on bilateral ties. Reports of Indian security forces killing Pakistani militants are on the rise, with the that it had  three terrorists from across the border in North Kashmir’s Tanghdar sector. According to intelligence officers quoted in Indian media reports, over 60 Pakistani militants purportedly entered the country during the past month in Kashmir.

The dispute marks a blow to the progress made in improving relations during Indian Prime Minister Narendra Modi’s first months in office, when he invited Pakistani Prime Minister Nawaz Sharif to New Delhi for his inauguration in May 2014 and followed it up with a surprise visit to Lahore in December 2015.

By contrast, both sides now appear focused on capitalizing on the Kashmir unrest to meet their own domestic political objectives. For instance, Sharif told a political rally in July that he was , while Modi , which has seen separatist insurgency for over six decades, and in Pakistan-administered Kashmir.

Outlook

There is little political will to find a solution to the ongoing crisis, and bilateral talks over a range of issues including Kashmir—first scheduled for January—have been repeatedly postponed. The leaders of both countries also face several other domestic challenges, which militate against spending political capital on an issue that is extremely divisive in both countries.

For Modi, the near-term focus will be on state elections in 2017, particularly in Gujarat and Uttar Pradesh, which will have a bearing on his chances of re-election in 2019. For Sharif, the  over leaked Panama Papers, alongside ongoing security and economic challenges in the country, remain pressing problems.

In this context, the likelihood of tangible progress in bilateral talks is low. Strategic competition over regional issues such as India’s role in Afghanistan and Pakistan’s relationship with China also underpin wider regional tensions between both countries. Modi’s remarks on India’s Independence Day in August hinting at possible support for Balochistan and Gilgit-Baltistan, which are both key to the $46 billion China-Pakistan Economic Corridor, have triggered a sharp backlash from Islamabad and highlight how provocative political statements can both spur unrest and derail prospects for bilateral cooperation.

Prospects for improved trade relations also appear limited, in contrast to optimism seen in December 2015 following Modi’s visit to Lahore, when Indian officials acknowledged the possibility of high-level talks over liberalizing the visa regime and granting additional business visas to Pakistanis visiting India. Previous periods of stability in Indo-Pak relations have seen a willingness to strengthen economic ties, an issue that is seen by both as relatively uncontentious and mutually beneficial.

The hardening stance of both countries amid the Kashmir unrest, however, suggests that such efforts are likely to take a backseat.

Against this backdrop, relations between India and Pakistan will remain tense. Although the unrest in Kashmir is unlikely to escalate into a bilateral conflict, the tensions could result in heightened cross-border skirmishes along with a tightening of security along the Line of Control, as was seen in late 2014 and early 2015 when troops engaged in intermittent shelling for several consecutive months.

*[This article is based on a report by .]

The views expressed in this article are the author’s own and do not necessarily reflect 51łÔąĎ’s editorial policy.

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In the first-ever largescale , gunmen stormed Holey Artisan Bakery, an upscale restaurant in the Gulshan neighborhood, on July 1 and held the patrons hostage in a siege that lasted 12 hours before Bangladeshi commandos ended it. The assailants were armed with grenades, sharp weapons and automatic guns, and , were killed.

Foreign nationals were the clear targets: The café was owned by expatriates and was popular with foreigners in Bangladesh. The assailants also separated Muslims from foreigners before killing nine Italians, seven Japanese, one American and one Indian, along with two Bangladeshis.

The attack marks a distinct escalation in the Islamist violence that has gripped the country since early 2015 during which tens of bloggers, activists and members of minority groups have been killed in what have mostly been machete attacks targeted at specific individuals.

Possible perpetrators

The Islamic State (IS) has claimed responsibility for the Dhaka attack, with the Amaq news agency—which is affiliated to the group—stating on Twitter minutes after the assault that “Islamic State commandos” had orchestrated it. Amaq also posted photographs that appeared to show the aftermath of the bloody attack inside Holey Bakery. If true, the Dhaka episode represents a major shift in the group’s presence and capability to carry out a planned attack of this magnitude in Bangladesh.

IS has made a conscious effort to focus on Bangladesh, with its propaganda magazine Dabiq in November 2015 carrying a eulogy for Bangladeshi IS fighter named Abu Jundal al-Bengali. In April 2016, the magazine also carried an interview with the leader of the Islamic State’s Bangladesh chapter, Sheikh Abu Ibrahim al-Hanif. After the Dhaka attack, IS released a propaganda video in which a Bengali fighter said that Bangladesh “must know that it was now part of a bigger battlefield to establish the cross-border caliphate the group proclaimed in 2014.”

While IS has made several claims for the targeted killings in Bangladesh —including the murder of an Italian aid worker in September and a Japanese national in October last year—there has been little concrete evidence that the group is present in the country. Instead, it appeared to be the case that IS—keen to be seen as expanding its geographical influence, particularly in the volatile region of South Asia—made claims to any killings with Islamist motives. If it emerges that IS had definitive links to the Dhaka attack, then it would mark the first successful footprint of the group in the Indian subcontinent, which has long been viewed by rival al-Qaeda as its sphere of influence.

Diplomats from countries such as the United States, Germany and Japan have called for tighter security in Dhaka and criticized the government for failing to follow up on intelligence provided by other countries.

Bangladeshi authorities, however, have dismissed IS’ claims and instead blamed domestic militant groups such as Jamaat-ul-Mujahideen Bangladesh (JMB), which has pledged allegiance to IS, and Ansarullah Bangla Team (ABT) for the attack. In particular, senior police officials have said that JMB is likely to have played a major role in putting the team of Dhaka attackers together. JMB was notorious for carrying out several attacks in Bangladesh during the early 2000s—most notably it orchestrated about 500 bomb blasts simultaneously at 300 locations across the country in 2005—but it was significantly weakened after most of its top leaders were executed in 2007.

It is as yet unclear which group the perpetrators belong to. If, as security officials in Bangladesh claim, JMB is indeed responsible for the attack, then the operation suggests that the group has significantly improved its capabilities. And while JMB claims to represent IS in Bangladesh, there has been little information to indicate that both groups have concrete links. However, the scale and sophistication of the Dhaka attack suggest that the attackers very likely received outside help in terms of guidance and resources. Whether this was the result of direct links and clear coordination with IS remains to be seen, although it is worth noting that the focus on foreign nationals is in line with the Islamic State’s choice of targets.

Disjointed government response

The Dhaka attack has exposed serious deficiencies in the government’s security apparatus. The fact that the assault took place inside the heavily fortified diplomatic zone, which contains several checkpoints and CCTV cameras, has raised concerns over the quality of security in the capital.

Diplomats from countries such as the United States, Germany and Japan have called for  in Dhaka and criticized the government for failing to follow up on intelligence provided by other countries. A political adviser to Prime Minister Sheikh Hasina’s government also told Reuters that authorities monitoring social media picked up references to an imminent attack in Dhaka but only increased security around embassies and large hotels, which they thought were the likelier targets.

Moreover, there have been conflicting accounts of who is responsible for the attack. Some security officials have said that , while the home minister said that the attackers were members of JMB and had no ties to IS. The suggestion of a coordinated strike between JMB and ABT is dubious, given that JMB has pledged allegiance to IS and ABT is affiliated to al-Qaeda in the Indian Subcontinent (AQIS), and the broader transnational groups are competing with each other to establish a foothold in the Indian subcontinent.

The uncertainty over who engineered the attack is exacerbated by the government’s tendency to vehemently deny the presence of international jihadist groups in Bangladesh and consistently blame domestic outfits for the growing tide of violence. Besides IS, AQIS has claimed responsibility for some of the killings that have occurred since early 2015, an assertion that has also been disregarded by the government.

Furthermore, authorities have attributed the spate of violent attacks to the opposition Bangladesh Nationalist Party (BNP), which they claim is trying to destabilize the country along with its ally Jamaat-e-Islami, the country’s largest Islamist party. Part of this allegation stems from the fact that Bangladesh saw an increase in Islamist violence in 2013, when sustained rioting saw over 60 people killed after a Jamaat-e-Islami leader was executed on charges of committing war crimes during the 1971 conflict with Pakistan that led to the country’s creation.

Before the Holey Bakery attack, the government’s response to targeted killings was to launch a blanket crackdown across the country in which  on charges of supporting or participating in Islamist violence. The absence of a nuanced and considered approach from Dhaka has meant that there is general uncertainty over the militant groups that are active in the country and the kind of capabilities they possess.

The Outlook

The Dhaka attack marks a significant change in the kind of violence Bangladesh has witnessed over the past year. The high level of coordination and the weapons used in the operation suggest that the threat of Islamist violence has escalated from isolated unsophisticated attacks to planned mass-casualty attacks. Six days after the Dhaka episode, five armed with grenades, guns and “sharp objects” during Eid prayers. One policeman died in the blast, while another was stabbed to death. A woman was also killed in the assault.

The Dhaka episode also points to the possibility that IS either already has a base or is close to establishing its presence in the country, at a time when the group is seeking to gain a foothold in Asia—whether in Afghanistan or in countries such as Malaysia and Indonesia where it has already managed to carry out attacks.

Alternatively, if authorities conclude that IS was definitely not involved in the Dhaka assault, the Holey Bakery mishap could mean that domestic militant groups have significantly improved their capabilities. In either scenario, further largescale attacks are likely in the coming months in the absence of a coordinated response from security officials.

The government’s investigation into the attack and its efforts to improve security in the capital and elsewhere will determine both the security risk and the resultant economic impact on key industries such as textiles. The Dhaka attack has already prompted Japan’s Fast Retailing Co, owner of the Uniqlo brand, to , and other garment markets are reportedly reviewing their operations and the threats to their staff. Additional attacks will, therefore, have a detrimental impact on the $28 billion garment industry in Bangladesh, which accounts for 80% of its exports.

*[This article is based on a report by .]

The views expressed in this article are the author’s own and do not necessarily reflect 51łÔąĎ’s editorial policy.

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The leak of about 11.5 million documents from in April has resulted in various repercussions for those named in the files. At the political level, the scandal has exposed financial wrongdoing by elites—with Icelandic Prime Minister Sigmundur Gunnlaugsson the biggest casualty so far—and threatened political instability in a number of countries.

For the financial sector, the leaks have provided fresh impetus for regulatory scrutiny over the role of banks in facilitating the creation of offshore companies, and the accompanying risks of tax evasion and money laundering.

In the first signs of the regulatory impact from the leaks, authorities in various countries have demanded that banks disclose information about their dealings with shell companies and individuals named in the Panama Papers. For example, on April 20, the US Department of Financial Services (DFS) ordered 13 banks—including Credit Suisse, Deutsche Bank, Commerzbank AG, ABN Amro Group and Societe Generale—to hand over information on their dealings with Mossack Fonseca, comprising communications, telephone logs and details of whether their employees were involved with the Panamanian law firm in setting up shell companies. Regulators in Hong Kong and Singapore reportedly issued similar requests to their respective banks, asking them disclose details on whether they have dealings with entities and individuals named in the leaked files.

Authorities have not limited their interest only to Panama and Mossack Fonseca. Rather, the scandal has paved the way for a wider debate on banking secrecy rules that enable financial crimes and the manner in which tax havens operate. Mexico’s tax authority, for instance, widened the scope of an inquiry it first began in April to investigate 33 Mexicans named in the Panama Papers, and has since asked banking regulators to oblige banks to share details about local clients involved in transactions in more than 100 jurisdictions.

The leaked documents have brought into sharp focus the complicated corporate structures and the lack of transparency over the ultimate owners of offshore accounts that allow beneficiaries to conceal their wealth and illegally profit from tax havens. Following the revelations, the United Kingdom stepped-up its efforts to crack down on tax evasion and create a public registry on company ownership to track the ultimate owners of British firms. Australia has followed London’s lead and will become the second major economy to create such a register with the identities of the owners of shell companies.

The leak of about 11.5 million documents from Panama-based law firm Mossack Fonseca in April has resulted in various repercussions for those named in the files.

The scandal has also spurred countries to explore opportunities for collective action to tackle money laundering and both tax evasion and avoidance. In Europe, where several economies are still reeling from the effects of the 2008 global financial crisis, public tolerance for tax evasion or avoidance by the wealthy is very low, evident in a European Union (EU) proposal to draw up a list of tax havens and jointly issue sanctions against them.

Scope for criminal investigations

The catalogue of crimes revealed in the Panama Papers include cases of money laundering, tax evasion and the flouting of international economic sanctions, which raise the prospect of criminal investigations. The United States has already launched a criminal probe into possible wrongdoing stemming from the leaks, spurring an aggressive campaign by the Department of Justice against Americans suspected of evading taxes that has been underway since the 2008 financial crisis, as well as entities that have helped them stash away money in offshore accounts.

Much will depend on whether further revelations are likely. The International Consortium of Investigative Journalists—which has led the public disclosure of the documents based on information provided by an anonymous source—has so far supplied data in two tranches, the latest of which was in May when it made a searchable database of companies and individuals publicly available. Details disclosed in subsequent tranches—if any—will have a significant bearing on the momentum for criminal probes by other governments.

Moreover, the anonymous individual behind the leaks has publicly stated a willingness to cooperate with law enforcement agencies by handing over the original documents in exchange for protection under whistleblower laws, although public information on whether such an arrangement is underway is limited. Canada has said that it has acquired access to the complete set of leaked files—although it has not said how—and has warned that criminal proceedings will be brought against wrongdoers.

Outlook

Recent developments suggest that the banking industry is poised for further regulatory changes because of the Panama Papers. The focus on compliance procedures, which began in the aftermath of the global financial crisis, appears set to continue. The limited political will to abide by tax evasion and money laundering means that a greater push for changes to existing regimes is likely.

On June 8, the EU agreed to set up an inquiry committee into the Panama Papers to investigate the alleged failure by member states to impose relevant penalties under the group’s laws on money laundering, tax avoidance and tax evasion. The committee will consist of 65 members and have one year to present its findings. Regulators in Canberra are considering various recommendations, including imposing a requirement on Australian firms with foreign branches or subsidiaries to evaluate the gaps in anti-money laundering and terrorism financing regimes between jurisdictions abroad and those at home and to apply the higher standard.

Meanwhile, the US government unveiled a new set of financial regulations on May 19 which, once approved, will force companies to disclose more information about their owners, including the customer due diligence (CDD) rule, which had been under consideration for four years. The CDD rule—which the government hopes will come into effect in May 2018—requires banks to verify the identity of ultimate beneficial owners, develop adequate risk profiles of their clients, and conduct regular monitoring to report suspicious transactions and ensure that customer information is up-to-date.

Banks will, therefore, need to monitor regulatory changes across multiple jurisdictions. Moreover, implementing these proposed measures will be sure to increase compliance costs for banks and impact consumer practices, with additional information requirements for the creation of bank accounts, especially for foreign nationals. As regulators continue to compel banks to share more information on links with jurisdictions known to have opaque tax and ownership laws, banks will face increased pressure to eschew secrecy in order to assist with investigations. Entities that continue to invest in enhancing due diligence procedures will be better placed for future regulatory scrutiny.

Finally, progress on the anonymous whistleblower’s cooperation with law enforcement agencies should be monitored, as it will be a key element of any future criminal investigations. The outcome of potential criminal probes in turn will influence the dialogue over broader concerns such as banking secrecy laws and drive the direction of future regulatory changes.

*[This article is based on a report by .]

The views expressed in this article are the author’s own and do not necessarily reflect 51łÔąĎ’s editorial policy.

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In the biggest data leak in history, German newspaper Sueddeutsche Zeitung, along with the , on April 3 released findings on offshore companies based on confidential emails, bank records and client information belonging to Panama-based law firm Mossack Fonseca. The data, which amounts to about 11.5 million files dating back nearly 40 years, revealed the offshore holdings of at least 12 current and former world leaders, including several already tainted by past accusations of corruption.

The findings exposed how hundreds of influential people and international companies across the world have used offshore companies to avoid taxes and facilitate financial fraud. The magnitude of the revelations has prompted authorities in Australia, New Zealand, France and the United Kingdom to launch probes into possible financial wrongdoing. While it will take several months for the full extent of the repercussions to become apparent, the scandal has already threatened political stability and led to in some countries. It has also highlighted major financial, legal and reputational considerations for implicated individuals and companies.

Political reverberations

The initial revelations could stoke public discontent and unrest in countries where politicians are already grappling with allegations of corruption and—in some extreme cases—threaten political stability, as currently witnessed in Iceland. So far, current and former leaders from countries such as Ukraine, Qatar, Sudan and Spain, and the associates and family members of prominent politicians like Chinese President Xi Jinping and Russian President Vladimir Putin, have featured in the leaked documents.

Multiple examples in recent years have demonstrated the growing propensity for large-scale popular protests against political corruption, and the Mossack Fonseca revelations will likely inspire major demonstrations, as already seen in Iceland on April 5. In particular, countries badly affected by fiscal austerity or slowing economic growth are likely to see an increase in anti-government rallies. Political opponents could exploit the episode to maintain pressure on those in power for some time to come, potentially initiating legal investigations into implicated politicians or forcing the resignations of suspects. Some of the countries that are likely to face political turmoil due to Mossack Fonseca data breach include Iceland, Pakistan, Argentina, Brazil, Malaysia and Mexico.

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Iceland

The fallout from the data leak in Iceland demonstrates the direct threat to the futures of some governments, creating an unpredictable political environment in the affected countries. Large-scale public protests along with sustained pressure from opposition parties forced Prime Minister Sigmundur Gunnlaugsson to resign on April 5, he had in fact stepped aside temporarily.

The premier faced significant backlash after leaked documents showed that in 2007, he and his wife bought offshore company Wintris, which had substantial investments in the bonds of three major Icelandic banks that collapsed during the 2008 financial crisis. Since taking office in 2013, Gunnlaugsson has been involved in negotiations with creditors of the banks, which put him in a position to influence the value of the bonds that Wintris held.

Pakistan

According to leaked documents, all four of Pakistani Prime Minister Nawaz Sharif’s children either owned or were part of various offshore companies. Sharif and his family have previously faced corruption allegations, although they have been cleared of any wrongdoing.

The latest revelations could reignite public skepticism and provoke a backlash from political opponents. Pakistan Tehreek-e-Insaf (PTI), the political party which in 2014 led nationwide protests against alleged vote-rigging in elections, has already called on the country’s tax authorities to launch a probe into the assets of the premier’s family. and attracted tens of thousands of people in several cities, including Islamabad and Lahore.

Argentina

Files showed that Argentine President Mauricio Macri, who took office in December 2015, was the director of a Bahamas-based company that was dissolved in 2009, a fact that he failed to disclose while running for office. The Macri administration has said that the president had never been a shareholder in the company, but played an “occasional role” as CEO.

The revelations provide an opportunity for government opponents to mobilize against Macri early in his presidency, at a time when fiscal reforms are already fueling public grievances among some sectors of the population.

Brazil, Malaysia and Mexico

The governments of Brazil, Malaysia and Mexico have faced unrest over public corruption in the past 12 months, and the leak threatens to strengthen public disaffection toward the political elite.

Malaysian premier Najib Razak—who has spent much of the past year reeling under allegations that he embezzled money from —could face renewed criticism following the disclosure that his son was involved in two offshore companies set up after Najib came to power. It could lead to fresh protests and lend impetus to opposition calls for the premier’s resignation.

The findings exposed how hundreds of influential people and international companies across the world have used offshore companies to avoid taxes and facilitate financial fraud.

In Mexico, President Enrique Peña Nieto has just ridden a wave of public mistrust over a scandal linking the allocation of government construction permits and personal house purchases. The revelation that Juan Armando Hinojosa Cantú—one of the country’s richest tycoons also involved in the previous scandal—has allegedly hidden $100 million in offshore companies could rekindle protests, especially as his company has secured tens of high-value government contracts.

For Brazil, the leaked documents widen the scope of the Petrobras corruption scandal that has gripped the country and threatened to bring down the government of President Dilma Rousseff. Three months after Brazilian authorities had charged two employees of Mossack Fonseca with money laundering in connection with Petrobras, Eduardo Cunha, the speaker of the lower house of Congress, as well as 57 people already linked to the scandal featured in the law firm’s files. Although the leak did not implicate any politicians from Rousseff’s Workers Party, it will fuel public disaffection toward politicians inside the country, sentiment that has contributed to anti-government protests that at their peak have attracted as many as 2 million people.

Challenges for businesses

For corporates, the leak presents notable reputational and legal risks. In the short term, businesses implicated could face reputational risks from targeted campaigns by activists, similar to those that were directed at companies such as Amazon, Google and Starbucks in 2013 for tax avoidance on their UK sales. In the long run, legal scrutiny could compound reputational challenges, and companies will also need to bear the associated financial costs.

Following the leak, UK tax authorities have requested access to documents from media organizations involved in publishing findings, and the HM Revenue and Customs has said that multiple offshore companies, including some based in Panama, are currently the subject of “intensive investigations.” The Australian tax regulator is investigating 800 individual taxpayers who are residents of the country and whose names have featured in leaked documents.

Any association with a Panama-based entity for the purposes of wealth management is likely to present major reputational challenges for businesses, given that the country has some of the world’s strictest financial secrecy laws. Panama also has a poor record of compliance with international regimes designed to tackle financial crime: It has implemented just one of the 40 recommendations made by the International Monetary Fund in 2014 to combat money laundering and terrorism financing.

Until February, Panama was on a Financial Action Task Force “” for money laundering. The country has also resisted calls to comply with the global tax transparency initiatives proposed by the Organization for Economic Co-operation and Development (OECD). Bahrain, Nauru and Vanuatu, which have financial secrecy laws similar to those in Panama, are also likely to come under pressure to boost compliance with OECD rules, which facilitate the exchange of tax data among countries. UK offshore jurisdictions such as the Cayman Islands, Jersey and British Virgin Islands could see increased calls from London to bolster transparency regarding the ownership of companies registered in those territories.

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Offshore financial services providers could also face renewed scrutiny. Leaked documents show that banks and law firms had often failed to follow legal requirements that help ensure that their clients do not engage in illicit activities such as political corruption or tax evasion. Findings have revealed cases of money laundering and instances where international economic sanctions have been flouted. Major global banks, still recovering from the effects of the 2008 global financial crisis, are likely to face the spotlight again, given that it is virtually impossible to set up a shell or offshore company without the involvement of financial institutions. According to leaked documents, more than 500 banks, including big names such as HSBC and UBS, and their subsidiaries registered nearly 15,600 shell companies with Mossack Fonseca.

Reverberations

In addition to the aforementioned political and reputational considerations for implicated individuals and companies, the revelations could provide a catalyst for coordinated international efforts against tax avoidance, as was seen in the aftermath of the 2008 financial crisis. For example, British Prime Minister David Cameron plans to host a summit in May in London to discuss the issue of offshore assets, while Norway has invited the heads of the boards of top companies to talks on corruption in June even as the leaked documents showed that the country’s top bank DNB—which is 34%-owned by the state—had helped clients set up offshore companies in the Seychelles.

Investigations already launched by countries into individuals named in the documents could also take on a criminal angle if instances of financial wrongdoing are uncovered. Leaked files show that Ponzi-schemers, drug kingpins, tax dodgers and at least one jailed sex offender had set up offshore companies through Mossack Fonseca.

Finally, the data breach could encourage further exposés. Although the exact source of the leak is not known—Mossack Fonseca has claimed that it suffered a successful but “limited” hack—the episode raises concerns of both insider leaks and cyber vulnerabilities, bringing renewed focus on the strength of corporate cyber security systems and threat from internal staff information breaches.

Future disclosures are likely, especially should the leak form part of a campaign of ethical or politically motivated hacking or encourage others to disclose private corporate data at other firms. Added scrutiny of other companies operating in the same space as Mossack Fonseca could see them take the initiative to disclose information in an effort to limit damage or be subject to targeted campaign activity in upcoming months. Even in isolation, the scale of the leak means that further political and legal fallout from this episode is likely.

*[This article is based on a report by .]

The views expressed in this article are the author’s own and do not necessarily reflect 51łÔąĎ’s editorial policy.

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