On October 3, the International Consortium of Investigative Journalists (ICIJ) began publishing the Pandora Papers, a massive expose about companies that provide tax evasion or avoidance and in some cases money laundering services to the world's very wealthy and powerful people including more than 330 current and former politicians from 91 countries. Among the politicians implicated in the documents are those who rose to power vowing to curb corruption and boost transparency in their countries.
The Pandora Papers leaked nearly 12 million documents which have shed further light on the secretive world of offshore companies and trusts. These offshore destinations for companies are often called tax havens. The Papers draw on leaks from confidential records of 14 different offshore wealth service firms operating throughout the world including Switzerland, Singapore, Hong Kong and the UK as well as firms in well known tax havens such as Belize, Bahamas, Seychelles and the British Virgin Islands.
The investigation while puts the spotlight on the offshore tax havens in general and their modus operandi, provides an expose of how the US has been emerging as a big player in the global offshore tax haven industry. South Dakota, in particular, has been mentioned in the Pandora Papers because 81 out of 206 US based trusts identified in the papers with assets worth more than US$1 trillion are based in South Dakota.
The Pandora Papers reveal complex networks of companies that are set up across borders to hide ownership of money and assets. These offshore countries display certain common features such as easy to set up companies aided by the legal system, generally called "shell" companies or trust which means they do not employ people or carry out business themselves and help hide their activities or assets.
A shell company is a legal entity that exists only on paper. Its sole purpose is to hold and hide assets. It is designed in a way like a series of Russian dolls, one hidden into the other which makes it almost impossible for the tax authorities to find assets or owners. Therefore, for tax purposes the shell company must reside in a tax haven.
These "shell" companies are designed for a variety of reasons. They are created to evade or avoid taxation; money laundering and hide their assets from people they owe money. It costs a lot of money to obtain tax advice and consulting. So, the owners of "shell" companies are very careful in spending money and will only do so if benefits significantly outweigh costs i.e., it must be cost-effective.
In this context the difference between tax avoidance and tax evasion needs to be understood clearly. Tax evasion is illegal, meaning not paying the tax that was due. But tax avoidance is legal where arranging one's affairs in a way to show that tax was not due. The UK government says tax avoidance "involves operating within the letter, not the spirit, of the law". Now the Pandora Papers show the distinction has lost its meaning.
The confidential documents show high-level public officials, oligarchs and billionaires using "shell" companies to move wealth offshore and to anonymously buy real estates or luxury goods. But it is very difficult to say how much money is stashed away in these offshore tax havens. According to the ICIJ, estimates range from US$6 trillion to US$32 trillion. The international Monetary Fund (IMF) estimates that the use of tax havens costs governments around the world up to US$600 billion in lost tax revenue each year.
The leak further highlights the increasingly important role US states such as South Dakota, Florida, Nevada and Delaware have been playing in facilitating the global tax avoidance schemes. The papers show South Dakota now rivals highly opaque jurisdictions in Europe and the Caribbean in financial secrecy. The US states that are with most active trusts include South Dakota (81), Florida (37), Delaware (35) and Nevada (14).
President Joe Biden (who represented Delaware in the US Senate from 1973 to 2009) has been in the forefront pushing for a stricter global regime for corporate taxation and denounced wealthy people stashing away money in offshore tax havens, but the leaked papers show the US as one of the major destinations for billions of dollars of hidden foreign money.
The Guardian pointed out that "in a development likely to prove embarrassing for U.S President Joe Biden, who has pledged to lead efforts internationally to bring transparency to the global finance system, the United States emerges from the leak as a leading tax heaven".
It is not only these popular secrecy jurisdictions like Delaware and South Dakota in the US and British territories such as Jersey, Guernsey, Isle of Man, Gibraltar and British protectorates like Bermuda and British Virgin Island but also the City of London is a tax haven. The Guardian pointed out that "the leaked records vividly illustrate the central role London plays in the murky offshore world. The UK capital is home to wealth managers, law firms, company formation agents and accountants. All exist to serve their ultra-rich clients.". Tax havens also help crime and corruption to flourish.
Nicholas Shaxson in an article in the New York Times wrote, "But there is one country at the system's heart, it is Britain. Taken together with its partly controlled territories overseas, Britain is instrumental in the worldwide concealment of cash and assets. It is, as a member of the ruling Conservative Party said last week, "the money laundering capital of the world". And the City of London, its "gilded financial centre, is at the system's core".
Even countries who proclaim themselves as "business friendly' nations are also very low tax countries. This type of countries include Ireland, the Netherlands and Singapore. They are also in the same business of attracting investment and money flowing into those countries.
There are always nefarious reasons for wanting to seek secrecy about one's assets. Surprisingly these "shell" companies are legal in the territories they are set up, otherwise they could not operate there. Whether legal or not, these "shell" companies are conduits for committing frauds like tax evasion and to deprive people who might have claims on those assets or tax minimisation. They are also used to launder dirty money which may be proceeds of crime, corruption and bribery. No wonder the global public perception of these "shell' companies even when legal, is completely immoral and illegitimate.
However, politicians listed in the Pandora Papers, in some instances, insist that they did nothing wrong. Take for example, Najib Makati, a fabulously wealthy businessman and now holding the position of Prime Minister of Lebanon, a country that is now financially and economically bankrupt and the capital city Beirut where people currently live almost without any electricity, claimed complete innocence.
Makati even came out as the defender of the "free market" to defend his offshore investment in Monaco through an offshore company owned by him based in Panama. In a statement Makati said "a logic that goes against the free-market business practices and good governance in liberal economies, principles that the Makati family defends". One can presume, on the basis of his statement, he is not going to interfere anyway with the "free market" outcome for electricity supply or more precisely the lack of it in Beirut.
This is not the only bizarre twist involving the Pandora Papers, there are others. There are 336 politicians identified in the Papers but none are from the US. This is rather very surprising in view of the fact that the ICJI found over US$1 trillion held in the US based trusts, the integral mechanism for tax avoidance and money laundering.
However, the Papers did include 19 Russian and 38 Ukrainian politicians. That inconsistency made Russia's RT to ask "Could the CIA be behind the leak of the Pandora Papers, given their curious lack of focus on US nationals". The editor of the Global Times also suggested that US and Western "intelligence agencies" were involved in the leaks. Also, in a television interview Afshin Rattansi of RT told George Galloway that the people that bankrolled the ICIJ were linked to intelligence agencies.
There is an overall thrust of providing detailed information on financial misdemeanors of people from countries considered as enemies of the US. Such a complete absence of any corrupt politicians in the US surprised many others reinforcing the view that the whole exercise may be a means for political intervention in developing countries as suggested by the editor of Global Times. In fact, White House Press Secretary Jen Psaki gave further credence to that view when she said President Biden was committed to "fighting corruption as a core national security interest".
The Papers expose a shadow financial system that benefits the world's most rich and powerful. This is almost like an obscenity on public display. The involvement of very powerful political figures as revealed in the Papers explains why existing political institutions seem incapable of closing down the system that enable wealth hiding and tax evasion.
Also, so long countries such as the US and the UK remain prominent destinations for billions of dollars of hidden foreign money, the task of introducing a stricter global regime of corporate taxation will remain ineffective.
The Pandora Papers have, however, now created a momentum for a globally coordinated endeavour for ending decades-long abuse of financial secrecy by powerful public figures and billionaires using these offshore tax havens. At the same time national governments also need to get their acts together to seize the opportunity as the heat is being turned on politicians who try to maintain the wealth-hiding and tax evasion status quo.