The Pandora Papers – Pandora’s Box is Hardly Opened

With so much money at stake, there is little incentive to change

By Anil Madan

Some five and one-half years ago, the International Consortium of Investigative Journalists (ICIJ) released the Panama Papers, revealing offshore financial dealings of such scope as to shock the world. This past week the ICIJ has released the Pandora Papers, showing that when it comes to concealing assets in tax havens not much has changed. Or perhaps the only thing that has changed is that there are today more tax havens than there were five years ago.

What is staggering about the Pandora Papers is that they dwarf the revelations of the Panama Papers. Some 130 billionaires, 29,000 accounts, 90 countries, and more than 330 public officials are implicated. The amount of money said to be held in tax havens has been estimated to be as much as $6 to $36 trillion. 

In other words, when it comes to parking money and concealing where and how it is parked, it is business as usual.

Obvious questions

The Pandora Papers are a collation of almost 12 million confidential documents leaked from 14 firms of lawyers, advisors and other professionals. These papers comprised about 100 million pages in total, said Gerard Ryle, the director of ICIJ in an appearance on the program ‘On The Media’ on WNYC, a New York City Public Radio station. In passing, he noted that the number of public officials involved may be double the above estimate.

The obvious question is, will these revelations amount to anything in the sense of bringing those engaged in corruption and crime to account? A secondary inquiry concerns the implications of this type of activity that drains resources from countries desperately in need of capital, and why this type of work by journalists is necessary, indeed critical. Another question is perhaps the simplest: why is this sort of thing allowed to happen at all?

The titillating headlines are well known. They implicate leaders who have condemned the offshore financial havens but now hypocritically are shown to be exploiting what they have referred to as loopholes. Foremost among these are Tony Blair, the former UK Prime Minister and his wife. Other big names include Jordan’s King Abdullah who has reportedly bought properties worth over $100 million in California and London, Dutch finance minister Wopke Hoekstra, the Czech Prime Minister, as well as celebrities like Shakira and Elton John. Then, of course, there is the salacious account of a woman said to have had a child by Vladimir Putin and ended up owning a rather expensive property in Monaco. 

The Pandora papers reveal in great detail how wealthy people, politicians and criminals, have pulled a veil over their financial assets by the use of trusts, middlemen, and anonymous entities holding undisclosed assets. 

The ICIJ’s website recites these facts: The Pandora Papers gathered information on more than 27,000 companies and 29,000 so-called ultimate beneficial owners from 11 of the providers, or more than twice the number of beneficial owners identified in the Panama Papers. The documents connected offshore activity to more than twice as many politicians and public officials as did the Panama Papers. 35 current or former country leaders are implicated.

Impenetrable secrecy

 As has been explained in some of the articles discussing the strategies involved, one characteristic is that property or assets held in a trust exist in a state where ownership is unclear. The creator of the trust, known as the settlor, has given ownership of the property or asset to the trustee of the trust. But the trustee does not own them for his or its (yes, a corporation such as a bank can be a trustee) own use, but rather, for the benefit of the beneficiaries of the trust designated by the settlor.

The beneficiary may be the settlor himself. And the settlor may or may not retain the power to revoke the trust. Meanwhile, at the outset, the beneficiary may not have received any of the benefit of the property. Ultimately, the structure allows the settlor, the trustee, and the beneficiary to disclaim responsibility. The trustee and beneficiary can also deny that they are in control of the asset even though the trustee is likely to follow the directions of a wealthy client. 

An added benefit is that trusts can conceal the true ownership of assets and thereby create a veil of sometimes impenetrable secrecy. Of course, as the releases of the Panama Papers and now the Pandora Papers have shown, secrecy is not guaranteed. Trusts can own shell companies in tax havens and thus another layer of secrecy can be added to conceal ownership and, as well, to hide the true ownership of property from tax collectors, from the public and, as well from prosecutors and investigators looking to uncover criminal activity.

Public disclosure or registration of the identities of those who control such properties and assets is most often not required. Even less so is disclosure of beneficiaries. 

Can we expect any reform or change? The problem is of colossal magnitude. A threshold observation is that the assets secreted could amount to about 10% of global GDP. As I have previously noted in an article about the proposed global minimum corporate tax, parking money offshore has allowed corporations to escape taxes on profits to the tune of $245 billion to $600 billion every year. Over a ten-year period, two and one-half to six trillion dollars are lost to nations desperate to deal with problems of infrastructure, poverty, healthcare, transportation, education, energy supply, food production and distribution, and mitigation and adaptation for the results of adverse weather events.

The estimate of total wealth held in tax havens is probably closer to the $36 trillion estimate than the lower number. This follows from the sheer number of billionaires (130) that the ICIJ has identified. That number is a little over $10 trillion short of the market capitalization of all stocks on US stock exchanges. The problem is that capital secreted away in tax havens is simply not available for investment in the country of the individual involved. So, King Abdullah’s $100 million, Putin’s billions, or the millions and billions of politicians and oligarchs from Russia, Europe, Africa, Asia, and the Middle East, do not benefit the local people.

One would think that the revelation that these staggering sums are lost to productive use would spur calls for immediate reform. Unfortunately, not so. Those who secrete assets away have incentive to maintain the status quo and, in many instances, the have the power to ensure that things do not change.

The desire for privacy

It is logical to assume that one of the primary motivations for setting up an offshore entity to hold one’s assets is the desire for privacy. It is also logical to ask why the imperative for such privacy arises. Reports from the ICIJ investigation indicate that a surprising number of billionaires who have set up offshore holdings that were revealed in the Pandora Papers have faced questions about the sources of their wealth. Others have been accused of using their companies to engage in thefts of money or natural resources and some have been found to have deep connections to autocrats even to the point of becoming the subject of sanctions.

Speaking of sanctions, we must pause to note that while the US has been at the forefront of decrying the use of tax havens, several US states including Delaware and South Dakota have become welcoming homes for trusts and corporations that are used to conceal ownership of assets. This highlights the idea that the term “offshore” no longer means a remote island but rather simply signifies assets held outside one’s domicile.

Following on the release of the Pandora Papers, an article in The New York Times by Nicholas Shaxson, a staff writer for the Tax Justice Network, points out that London and Britain’s “spider’s web” of offshore satellites is ranked number one in its Financial Secrecy Index of tax havens.

Given that two of the world’s major democracies profit immensely from these types of arrangements, there is little likelihood of change. And we have seen that since the release of the Panama Papers, this truth has been borne out.

What are the impediments to change? The first issue of significance to note is that the use of offshore trusts and holding companies is not in and of itself illegal. Whereas one may raise legitimate questions about the source of the wealth, that sort of inquiry may or may not occur at an official level. Certainly, in the case of King Abdullah of Jordan, it is difficult to see Jordanian authorities questioning their monarch. His spokespersons have already stated that as King he is not subject to taxes and so tax evasion is not an issue. Nevertheless, the question remains where did he get $100 million to spend on homes that he is likely never to use?

Nor is Putin, perhaps closer to being an absolute dictator than even Xi Jinping, likely to be investigated. Indeed, the Brookings Institution has noted that Russia’s response to the release of the Pandora Papers is to spread disinformation and conspiracy theories. The absence of Americans listed as holders of offshore assets is seen as a sign that an American plot is at work. They have even gone so far as to implicate George Soros as responsible for this attack on Russia.

Nevertheless, private individuals as distinguished from public figures and country leaders, may find themselves ensnared in legal proceedings. Reports indicate that an Israeli billionaire was accused of using shell companies to steal hundreds of millions of dollars from Congo. But the problem is also one of legal jurisdiction. Other than Congo, which country has jurisdiction to prosecute such a crime? A Venezuelan television tycoon used shell companies in what US prosecutors say was a $1 billion bribery scheme. At least seven Russian oligarch billionaires under sanction by the United States have shell companies in the documents, too. 

Safe haven

As noted, very few US-based billionaires show up in the records of the Pandora Papers. You will not find Elon Musk, Jeff Bezos, Warren Buffett, or Bill Gates. One reason may be that US billionaires pay so little in taxes compared to their counterparts in the world, that they don’t need to hide assets through offshore intermediaries. More importantly, the US is considered a safe haven for holding assets to avoid expropriation, market risk and, as well, currency risk. There is little incentive for Americans to have massive holdings abroad where both security and currency risk counsel caution.

Nevertheless, there are no absolutes. American billionaire Robert Brockman was indicted on charges of hiding $2 billion in income to avoid taxes by using a web of shell companies and offshore holdings. He has pleaded not guilty. In contrast, Robert F. Smith, another billionaire admitted that he had hidden profits in offshore companies and filed false tax returns for ten years. But he has worked out a deal to cooperate with investigators and have avoided charges. 

Russian billionaires under sanctions are found in the Pandora Papers. In a striking plea, a Venezuelan treasurer pleaded guilty to receiving a bribe of $1 billion from Raúl Gorrín Belisario, the owner of a television network. One can only imagine how much profit justified a bribe of $1 billion.

An Israeli diamond trader, Beny Steinmetz was convicted in a Swiss court on charges that he paid a $10 million bribe to obtain iron ore rights in Guinea. 

In one audacious scheme, Dan Gertler an Israeli businessman is alleged to have amassed his fortune through hundreds of millions of dollars’ worth of opaque and corrupt mining and oil deals in the Democratic Republic of the Congo. Between 2010 and 2012 alone, the country reportedly lost more than $1.3 billion from the underpricing of mining assets, according to a US Treasury statement when sanctions were imposed. The records for some of Gertler’s offshore companies appear in the documents obtained by the ICIJ as well.

Another example involves the Nigerian oil minister. London homes, worth $3.8 million, $5.1 million were bought by companies and a Seychelles company purchased a home for $4.4 million, and a British Virgin Islands company bought another multimillion-dollar home. All four companies were turned over to the Nigerian oil minister Alison-Madueke. The first family of Azerbaijan owns $700 million worth of luxury properties in London.

It should be emphasized that these are not prosecutions arising from the release of the Pandora Papers, they are antecedent charges.

Crimes against humanity

The journalists who have worked tirelessly to expose these abuses are to be commended. Their work must continue. To some extent, public figures, even monarchs and country leaders will have to answer to the public. In the case of King Abdullah or Vladimir Putin, there may be no accountability as such, but the fact that their spokespersons have responded, shows that the efforts of the journalists are not a total waster. The Czech Prime Minister who was already a billionaire appears to have lost his parliamentary election which followed the release of the Pandora Papers.

It is unlikely that unrelated jurisdictions will undertake prosecutions. These financial crimes are not on a par with crimes against humanity although one might well see them in that light.

Ultimately, this sort of thing is allowed to happen because of complacency and because the jurisdictions that facilitate such transactions make money from the fees the filings generate.

Professional firms of lawyers, accountants, tax advisors, and investment managers make enormous profits from such transactions. As the director of the ICIJ said, name the large bank, law firm or accounting firm, and you’ll see them in the Pandora Papers. With so much money at stake, there is little incentive to change.

From the Panama Papers to the Pandora Papers with a Pandemic in-between, aside from a panegyric extolling the journalists who uncovered this, we can expect little by way of action.


* Published in print edition on 15 October 2021

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