Pandora Papers: The Not-so-curious Case Of Vanishing Wealth

The biggest ever expose featuring data from firms offering offshore services in tax havens is a call to action for the world’s powerful countries to jointly build a mechanism that prevents the super-rich from hiding their money and avoiding tax.

The world’s elite are running for cover after the latest expose by the International Consortium of Investigative Journalists (ICIJ) showed how they have been stashing wealth in ways that escape tax scrutiny.

Nearly 12 million confidential documents sourced from 14 legal and financial service firms are part of the just-released Pandora Papers, which has been preceded by the Panama Papers in 2016 and the Paradise Papers in 2017. Albeit, the main difference being that the Pandora Papers unearth a much bigger trail of hidden wealth, tax avoidance and money laundering than the earlier exposes by providing 2.94 Terabyte data compared to 2.6 TB and 1.4 TB from the other two, respectively.

Some of the big names that appear in the Pandora Papers are former UK Prime Minister Tony Blair, Pakistan PM Imran Khan’s close associates, Russian President Vladimir Putin’s associates, Czechoslovakia PM Andrej Babis, Jordan’s King Abdullah II, Qatar’s ruling family, Azerbaijan’s ruling Aliyev family, and Kenyan President Uhuru Kenyatta’s family.

Several businessmen, sportspersons, politicians, and celebrities are part of the list, which has been under the perusal of more than 600 journalists from 140 media organizations in 117 countries for months together. Their findings on how anonymous firms have been used to siphon off and stash money are being published this week.

According to the International Monetary Fund (IMF), parking money in tax havens has cost governments across the globe up to $600 billion every year. The clear loser here is the common man, who could have had better access to healthcare or housing if the spending capacity of the governments was raised through effective tax collections. The searing issues of poverty and inequality could have been better addressed if such systematic tax abuses were ended.

In a nutshell, tax havens are territories/offshore countries where corporation tax is low or nil, and where identifying owners of companies are made difficult by certain laws. Switzerland, Samoa, the British Virgin Islands, the Cayman Islands, Belize, and Panama fit the bill, while Singapore and New Zealand also offer relative tax benefits. The Pandora Papers show how new tax havens have emerged in the US states of South Dakota and Nevada by adopting financial secrecy laws that rival offshore jurisdictions.

Swiss bankers have long back caught the public imagination, thanks to their appearances in movies and novels as the enigmatic keeper of secrets. Their clout as the custodians of the hidden wealth of the affluent began to wane after the Great Recession when several countries pressured Switzerland and other tax havens to divulge information on shady money trails.

The Pandora Papers reveal how such complex networks operate. The elite ‘legally’ avoid paying some taxes by making use of the loopholes in the laws in offshore countries. They set up shell companies – sans office or staff, but with office addresses and names of directors – in territories with air-tight secrecy laws. Firms are paid handsomely to get the shell companies going on behalf of the business owners who remain obscure through a maze of entities.

According to the ICIJ, shell companies are not the only vehicles for such opaque routing of funds. Setting up of private trusts and foundations in offshore countries offers similar benefits. As such, there is no harm in being named a beneficiary of a foreign trust. A trust has three major elements – settlor, trustee, and beneficiary. Settlor sets up the trust, while the trustee holds the assets. The beneficiary is the person whom the settlor wants his assets bequeathed. The settlor, if needed, can appoint a protector with powers to supervise the trustee.

One of the main benefits of such an arrangement is that settlor insulates the assets from creditors by maintaining that he no longer owns them. Legally, the offshore trustee is seen as the owner of the asset. At the same time, secrecy laws ensure that the settlor’s family is not placed at a disadvantage for being the actual beneficiary of the trust.

For example, if an Indian businessman facing bankruptcy proceedings has set up an offshore trust in advance with an offshore trustee running it, he can deceive his creditors by moving a sizeable portion of his wealth abroad. This way, he ring-fences his money from those to whom huge amounts are due. Simultaneously, if his NRI children are the beneficiaries of the trust, they do not have to pay tax on income from the trust. If the settlor is a resident Indian, then beneficiaries can only be non-residents and vice versa.

With such data troves surfacing periodically due to rigorous media investigations, why haven’t offshore tax havens reformed themselves? Yes, some jurisdictions such as Monaco and the Cayman Islands have become more compliant, while new territories such as Nairobi and Casablanca Financial City have emerged. The army of accountants, high-profile lawyers, and bankers has one foot in those loosely regulated territories, creating multi-layered structures that are partly registered there. It is near impossible to find out whose money is involved in this financial puzzle, which endears the idea to the mighty and powerful.

Setting up public registries of real owners of companies and trusts is key to addressing the issues raised by the Pandora Papers. However, many countries have so far failed to reach an agreement on it at the United Nations. Ironically, the people who have the power to end offshore secrecy are the same people who benefit from it the most.

Neither the IMF nor World Bank has pledged support to the registries. The G20 Summit to be held in Rome in October-end has also not placed financial transparency as a topic of importance. However, the European Union, Argentina, and Ghana have shown some progress in this regard.

So, should we expect such massive exposes in the future? Hidden wealth is not going to go away unless the US, China, and the countries in the EU agree on a foolproof international mechanism to snuff out secretive financial deals. The post-Panama Papers exit of Nawaz Sharif and Sigmundur David Gunnlaugsson from Pakistan and Iceland PM position, respectively, shows media investigations can stop those in the higher echelons in their tracks. But it is in the hands of the world’s most powerful countries to bell the cat forever. 

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