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Pandora Papers and the Geopolitics of Tax Evasion

After Swiss banking secrecy was taken down, the obvious is revealed: the great powers (the US, the UK and China) are the ones who can keep sheltering undeclared assets and even launder money in a world that keeps promoting transparency. Will the «leaks» change this state of affairs? We have some doubts.

Myret Zaki
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The Pandora Papers follow four other such «leaks» (Panama Papers, Swissleaks, Offshoreleaks, Luxleaks). They raise several questions.

First, who are the leakers: are they conscientious insider whistleblowers, or are they governements? Each case involves big data leaked from several institutions. This requires significant technological means. The role of governments appeared in the Swissleaks case, with the leaker, Hervé Falciani, assisted in his data theft by the Frech secret service. Since 2010 and the start of the US and EU war against tax evasion, a market for data theft has been encouraged by governments using «moles» inside banks, such as Germany spying on Credit Suisse in 2011.

The most opaque financial center: the Cayman Islands

The question about the origin of the data is key to understand which jurisdictions could be more targeted, or less exposed, than others. According to the the 2020 Financial Secrecy Index compiled by Tax Justice Network, the Cayman Islands (a British overseas territory) and the United States rank first and second as the most opaque financial centers and facilitators of tax evasion, followed by Switzerland, which ranks third.

One could notice, throughout the previous leaks, that the real size of the US and UK jurisdictions and dependencies as facilitators of tax evasion was never correctly reflected. Only in the Pandora Papers, with the October 4, 2021 extensive investigation by «The Washington Post» about South Dakota’s trusts, can one say that the opacity of some US states is finally revealed. A «Financial Times» report also stresses the central role of the British Virgin Islands, a British crown dependency. Still, other UK media coverage has mainly put forward small tax havens such as Panama, Dubai or Monaco, but above all, they put the focus on celebrities (such as kings and politicians) using the opaque structures instead of focusing on the structures themselves.

Tax evasion is lucrative

Second question: how come these operations don’t have any effect on tax evasion, let alone on money laundering? The same structures that facilitate tax abuse are the ones that facilitate money laundring from drug and crime. One would think it is so self-evident that structures providing opacity should be abolished. But it isn’t that simple. This business is extremely lucrative for the financial centers providing it. Therefore, the US, the UK and China, which have the most opaque financial centers (Cayman Islands, British Virgin Islands, Delaware, South Dakota, Hong Kong, etc.) have leveraged their geopolitical power not to act against their own shortcomings.

Globally, the fight against opaque structures has been moving extremely slowly in somes jurisdictions, but it has kept going and has even been thriving. The previous leak (Panama Papers), it is reported, helped governments find 1.6 bn $ in lost tax revenues. But this is a drop in the ocean: it is estimated that every year, 427 bn $ in tax revenue is lost due to tax abuse by multinationals and rich individuals. As to the estimated amount of money laundered globally in one year, it is higher than ever: between 800 bn and 2 tn in current US dollars, or 2-5% of global GDP, according to the United Nations. So the leak operations have seldom had any effect on the global tax evasion market, and even less on the money laundering activities worldwide. The sheer amounts reveal one thing: there has to be opaque structures for those activities to keep flowing through the financial system.

Massive flows of undeclared assets to the US

Among the key facilitators, American states such as South Dakota and Delaware had never been exposed in a previous leak, while they have been gaining clients from everywhere in the world for the last decade. Even while the US was condemning other financial centers, undeclared assets have been flowing into secretive trusts and corporations hidden in those states. «The Washington Post» describes an «American trust industry increasingly sheltering the assets of international millionaires and billionaires by promising levels of protection and secrecy that rival or surpass those offered in overseas tax havens». It adds that «that shield, which is near-absolute, has insulated the industry from meaningful oversight». The question is, how come that in a world in which the OECD has supposedly implemented very tough standards of exchange of information, such an opaque, 80s-style, tax evasion industry could flourish in the very country leading the war on tax evasion?

I had explained and forecast this whole turn of events in a 2010 book called «Das Bankgeheimnis is tot. Es lebe die Steuerflucht». My thesis was that with the death of Swiss banking secrecy, the trust would become the instrument of choice for avoiding taxes. The U.S. would become the number one place for tax avoidance. It also said that U.S. states such as Delaware, Wyoming and South Dakota would make clever use of the possibilities of offshore trusts and shell companies, in order to attract flows from all over the world and champion this activity. And we just learned that since 2011, South Dakota’s trust assets have more than quadrupled to reach 360 bn $.

Could it be that there was a shift of undeclared assets from Switzerland and Europe to U.S. trusts and opaque arrangements? Clearly, this can explain part of the asset growth since the end of Swiss banking secrecy. If you take a look at non-resident custody accounts of private clustomers in Switzerland, you will see that they decreased from 1110 bn CHF in 2007 to half of that amount in 2020, or 588 bn CHF. You will notice that non-resident custody accounts of institutional investors have made up for this loss, which can partly mean a shift from private accounts to legal entities (offshore trust accounts or elaborate arrangements of trusts combined with underlying offshore companies).

The end of the US trust industry?

Tax avoidance trusts are also found in Delaware, Alaska, Nevada or New Hampshire. The Pandora Papers identified 206 U.S.-based trusts, linked to 41 countries, holding combined assets worth more than 1 bn $, and it is just the tip of the iceberg. The issue is that trusts, if used in an abusive way, can shield the ultimate owner against taxes, creditors, authorities, spouses, family member claims, but also from answering for criminal activity. «Nearly 30 of the trusts held assets connected to people or companies accused of fraud, bribery or human rights abuses in some of the world’s most vulnerable communities», says «The Washington Post».

After such revelations, one could argue that this could be the end of the US trust industry. It would be silly. The question is who can pressure great powers into changing course? Regular leaks do generate bad publicity and exert pressure on US legislators towards cleaner practices and better international compliance. Which brings us back to the first question: who is leaking this info?

Myret Zaki

Myret Zaki started in 1997 as a junior analyst in a Geneva private bank where she learnt the basics of equity research, before joining the daily newspaper «Le Temps» in 2001, where she was in charge of the finance section for 9 years. When the financial crisis broke in 2008, she wrote the investigative book «UBS, am Rande des Abgrunds» (originally published in French as «UBS, les dessous d'un scandale»), for which she received the Schweizer Journalist prize. She joined «Bilan» magazine in 2010 where she became Chief Editor from 2014 to 2019. Between 2010 and 2016, she wrote three other bestselling books, about Swiss banking secrecy, the end of the Dollar reserve status, and the rise of the shadow banking system. She has a Political Science Bachelor from the American University in Cairo and an MBA from the Business School of Lausanne. She is now head of the Communication faculty at the School of Journalism and Media in Lausanne.
Myret Zaki started in 1997 as a junior analyst in a Geneva private bank where she learnt the basics of equity research, before joining the daily newspaper «Le Temps» in 2001, where she was in charge of the finance section for 9 years. When the financial crisis broke in 2008, she wrote the investigative book «UBS, am Rande des Abgrunds» (originally published in French as «UBS, les dessous d'un scandale»), for which she received the Schweizer Journalist prize. She joined «Bilan» magazine in 2010 where she became Chief Editor from 2014 to 2019. Between 2010 and 2016, she wrote three other bestselling books, about Swiss banking secrecy, the end of the Dollar reserve status, and the rise of the shadow banking system. She has a Political Science Bachelor from the American University in Cairo and an MBA from the Business School of Lausanne. She is now head of the Communication faculty at the School of Journalism and Media in Lausanne.