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How the Rich Hide Their Money From Tax Collectors

I've spent half a century writing for radio and print (mostly print). I hope to still be tapping the keys as I take my last breath.

Seven-point-six trillion dollars is hidden in offshore tax havens. This is more than 4.75 times all the economic activity in Canada.

That staggeringly huge amount of money is the estimate of Gabriel Zucman, a 27-year-old French economist. He arrived at that figure by studying the secret deposits of foreigners in central banks in Switzerland and Luxembourg. These were revealed in data leaks. He then extrapolated those numbers to all the places where money can be sheltered such as the Cayman Islands, Malta, Cyprus, and a couple of dozen other states.

The Tax Justice Network says Mr. Zucman misses the target by a wide margin. Its report, The Price of Offshore Revisited, written by economist James Henry, noted “There may be as much as $32 trillion of hidden financial assets held offshore by high net worth individuals . . . ” That would be 1.7 times the Gross Domestic Product of the United States in 2017.

Even with Mr. Zucman’s lower estimate, about eight percent of the world’s total personal wealth is stashed away out of sight of national tax collectors. And, that $7.6 trillion does not include money that corporations have shifted to the Isle of Man, San Marino, Barbados, and similar locations.

The New York Times reports that “According to Mr. Zucman’s calculations, 20 percent of all corporate profits in the United States are shifted offshore . . . ” The Federal Reserve Bank of St. Louis estimates total U.S. corporate profits in 2015 were $2.2 trillion before taxes. That means that $440 billion escaped the corporate tax rate of 30 percent. So, $132 billion that could have been used for education, poverty reduction, and other social programs simply vanishes from the U.S. every year.

The Canadian Broadcasting Corporation reports that “Perhaps most troubling, according to one economist, is that somewhere in the ballpark of $1 trillion is illegally funnelled out of developing nations each year into mysterious shell companies.” The economist quoted is Matt Salomon with Global Financial Integrity.

"Taxes are what we pay for civilized society."

— U.S. Supreme Court Justice Oliver Wendell Holmes

The Panama Papers

In 2015, an anonymous source contacted the Süddeutsche Zeitung (SZ) newspaper in Germany. This person offered to hand over internal documents from a law firm in Panama called Mossack Fonseca. The unknown insider leaked 11.5 million files detailing a shadowy “global industry led by major banks, legal firms, and asset management companies [that] secretly manages the estates of the world’s rich and famous.”

Süddeutsche Zeitung shared the data with the International Consortium of Investigative Journalists (ICIJ). The information revealed that politicians, celebrities, and professional athletes along with drug dealers, fraudsters, and dictators have been hiding money in offshore accounts.

Mossack Fonseca created a shell company for each client. Such corporations do not conduct any business but they can open bank accounts and handle money transfers. The actual owner of the phantom company is concealed. SZ says “the Panama Papers provide data on some 214,000 companies.”

It’s important to understand that there is nothing illegal about setting up a shell company. However, what is a crime is using a shell company to evade taxes or launder money gained from criminal activity.

Prime Ministers, Presidents, and Pimps

Let’s have a look at some of the customers Mossack Fonseca serviced:

  • David Gunnlaugsson was prime minister of Iceland until the Panama Papers surfaced. While Icelanders suffered mightily in the financial crisis of 2008, Mr. Gunnlaugsson and his wife secretly stowed money away in a shell company in the British Virgin Islands. In April 2016 he resigned after large public demonstrations against him. According to the ICIJ, 12 current or former heads of state had dealings with Mossack Fonseca, as well 61 relatives and associates of those leaders, and 126 other politicians or public officials.
  • “More than 500 banks, their subsidiaries and branches registered nearly 15,600 shell companies with Mossack Fonseca,” says ICIJ. The Royal Bank of Canada (RBC) is one of those named as having helped set up more than 370 shell companies. In a statement, the bank says “If we have reason to believe a client is seeking to commit a criminal offence by evading taxes, we would report that offence and not do business with the client.” RBC says it will hand its Mossack Fonseca files over to the Canada Revenue Agency. There may be a touch of uneasiness among some of Canada's wealthier families.
  • The ICIJ reports that “In Russia, businessmen kidnapped orphan girls as young as 13, raped them, and then sold them for sex. One of the alleged leaders of this crime was a client of Mossack Fonseca. When the firm realized their client was a pedophile, they didn’t report his actions to authorities.”
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“Tax havens are now at the heart of the global economy. Their tentacles have curled their way into pretty much everything.”

— Nicholas Shaxson, author of Treasure Islands

  • The organization that governs world soccer, FIFA, has already been unmasked as deeply corrupt. It comes as no surprise that the names of several senior officials have turned up in the Panama data dump. Juan Pedro Damiani was a member of FIFA’s Independent Ethics Committee. Confidential documents show he had business dealings with “Eugenio Figueredo, a former FIFA vice president who has been charged by U.S. authorities with wire fraud and money laundering for his role in the alleged bribery conspiracy” (ICIJ).
  • Peter Sabourin goes by the lofty title of “venture capitalist,” or “tax consultant,” or “offshore investment adviser.” After two trials in 2007, the Ontario Superior Court says his occupation is “fraudster.” Based in Toronto, he swindled victims out of $32 million and has since disappeared, which is quite the trick for a man who weighs at least 600 pounds. The Ontario Provincial Police would very much like to have a chat with him. Possibly Mossack Fonseca knew his whereabouts because he was one of their clients. There are at least 550 more Canadians, some of them with what’s called “colourful pasts,” in the leak.

One interesting sidelight is that Mossack Fonseca wasn’t even the biggest player in this shadowy world. Three other international financial services companies have bigger client lists. There are scores of other small businesses helping the mega-rich hang on to their wealth.

The controversy surrounding the tax haven scandals caused Mossack Fonseca to go out of business in 2018.

Ralph Nader Checks out the Cayman Islands

Closing Tax Havens

In 2009, the members of the G20 got all angry and promised to shut down the world’s tax havens. The U.K.’s then-Prime Minister Gordon Brown “hailed the agreement as he issued a blunt warning to individuals and corporations that invest in renegade tax havens that their money will be unsafe” (The Guardian).

Mr. Brown’s comment came from an interesting background, because it was Britain that played a leading role in creating modern tax havens. During the 1960s and ‘70s, the U.K. had several micro-territories dotted around the world as well as former colonies that were newly independent nations. Most of these places depended on money coming from the British government, which was stuck in the economic glue itself.

So, locations such as Barbados, the British Virgin Islands, the Cayman Islands, Guernsey, Jersey, and the Isle of Man were encouraged to set up financial services industries. They had to offer something financial capitals such as London and New York didn’t. What they came up with was loosey-goosey banking rules, client secrecy, and a no-questions-asked policy about where the money was coming from. This relaxed attitude towards legal issues has proved convenient to tax cheats, crooks, and even legitimate businesses.

Members of a coalition of leftist legislators protest in the European Parliament.

Members of a coalition of leftist legislators protest in the European Parliament.

The tax havens themselves have done very well out of the system. The Cayman Islands (population 58,435) is the world’s fifth largest financial centre with “almost 300 banks, 800 insurers, and 10,000 mutual funds” (CIA Factbook). Every transaction that passes through the tiny nation generates a fee giving a gross domestic product of $76,300 per person (in the U.S. the 2019 per capita GDP was $60,200).

Writing in The Guardian Richard Brooks notes that “The U.K. has great leverage over its 17 overseas territories and crown dependencies, all of which depend on the mother country for security and happily trade off its legal system. At a stroke our government could shut down the British Virgin Islands corporate system, for example.”

It hasn’t done so.

Other countries could blockade money from tax havens, but they don’t do so. The truth is that offshore tax shelters are useful to the rich individuals and large corporations that make hefty donations to political parties and have the ear of government.

So, what about that G20 agreement of 2009? That was then. This is now and, as the Panama Papers show, not much has been done to shut down the industry.

Bonus Factoids

  • Mossack Fonseca helped U.S.-based Heritage Oil avoid paying $400 million in capital gains tax when it sold its Uganda holdings. Uganda is struggling with an HIV/AIDS epidemic and its entire health care budget is less than $400 million a year.
  • A 2007 leak from the Swiss arm of HSBC Bank revealed thousands of its clients were being helped in a tax evasion scheme. The global bank’s chief executive at the time, Stephen Green (now Lord Green), was later appointed trade minister in David Cameron’s Conservative government in the United Kingdom.
  • Among those who have enjoyed the Panama advantage are: former president of Egypt Hosni Mubarak, soccer star Lionel Messi, close friends of Russian president Vladimir Putin, music tycoon Simon Cowell, Duchess of York and former wife of Prince Andrew Sarah Ferguson, actor Jackie Chan, golfer Sir Nick Faldo, and many others.
  • An article in Foreign Affairs notes that “People in Panama ‘rent’ their names for use as a director of a shell company in order to hide the true ownership, even though these name renters have little to no knowledge of what the companies do . . . the Norwegian bank DNB used only three Panamanians to serve as fronts for 4,000 companies.”

Sources

  • “The True Cost of Hidden Money.” Jacques Leslie, New York Times, June 15, 2014.
  • “Revealed: Global Superrich Has at least $21 Trillion Hidden in Secret Tax Havens.” Tax Justice Network, July 22, 2012.
  • “Panama Papers only a Glimpse into ‘Astonishing’ Wealth Stashed Offshore.” Lucas Powers, CBC News, April 6, 2016.
  • “Panama Papers.” Süddeutsche Zeitung, April 2016.
  • “The Panama Papers.” The International Consortium of Investigative Journalists, April 2016.
  • “Tax Havens Don’t need to be Reformed. They Should be Outlawed.” Richard Brooks, The Guardian, April 4, 2016.

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2016 Rupert Taylor

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