Someone somewhere knew something and told the right people. It sounds so vague, but that’s how most investigations start. In 2021, the biggest of its kind, the Pandora Papers, revealed how the wealthy, the powerful, and the corrupt handle money. But, it also shone a light on a situation so complex that finding a solution could be impossible. So, let’s talk about the Pandora Papers and tax havens in this episode of Forensics.
How Pandora Papers and other investigations begin:
“Follow the money” defines investigative journalism. The phrase gained popularity after the Watergate scandal. But tracking money has been vital for uncovering who’s behind the shadiest business in the world since long before Nixon. The problem is that power, greed, and corruption can sweep even the deepest trail.
For decades, journalists have dedicated countless hours to “following the money.” One important player is the International Consortium of Investigative Journalists (ICIJ). This is a global organization that gets a lot of info from a lot of people. They even have a “leak to us” tab on their home page.
The ICIJ is behind some of the most important investigations. They’ve released the Mauritius Leaks, China Cables, Panama Papers, and the Pandora Papers.
Also, the ICIJ hasn’t divulged who leaked the information to the Pandora Papers. Most likely, it never will. So we spoke with an anonymous investigative journalist to understand how it works.
Leaks are key
The ICIJ gets a lead, which is a piece of vital information. These can be emails, records, memos, compliance reports, and incorporation records. A group of researchers takes this leak and analyzes it to see whether it’s true or not.
That’s when the racking begins. First, the journalists sieve through every possible clue. For this, they use tons of databases, such as the Global Investigative Journalism Network and the Nieman Institute, to name a few. These databases contain verified sources that can link people on a global scale.
I’m summarizing this, but it can take years to verify leaks. Then, once they confirm all the information is valid, it’s time to start building the report. And, what’s the goal of following the money?
The wealthy and powerful use offshore corporations to make their earnings untraceable. So, it’s a game of cat and mouse, where some try, and manage to, hide the money, while others look for it.
The problem is that the Pandora Papers revealed that it’s worse than we thought. The ICIJ estimates that moving money to avoid taxes causes governments to lose $800 billion a year.
Pandora Papers explained
We don’t know precisely when the ICIJ began to get the info that led to many investigations. But we do know that it’s been happening since 2013, at least.
This latest leak is the biggest in history. 11.9 million documents, totaling almost 3 TB of information, tell the story of how the rich hide their wealth, avoid paying taxes, and, yes, launder money.
For years, the Pandora Papers investigation required the work of 600 journalists from 117 countries. They went through the records of 14 offshore service providers.
What came out has devastating implications. But, what’s worse, is that the problem might be too complicated to solve.
It’s a parallel economy
Let’s think of it as a parallel secret financial world where the rich and powerful safeguard their wealth.
One way to do so is through offshore accounts. These are outside the country that generates the money, in countries with low or no corporate tax. But, then, they create a network of corporations so complex that it’s almost impossible to keep track. Until there’s a leak, of course.
Who does this? Big names. The Pandora Papers include 35 current and former Heads of State, 300 politicians, and many celebrities from more than 90 countries. If you want to know more about the people involved, check out Jake Tran’s killer video on the topic.
As for Slidebean, I wanted to talk about how tax havens and how they work. You see, offshore companies and tax havens aren’t necessarily illegal or wrong. But they can be. The key is how people use them.
What are Tax Havens?
There isn’t one universal definition of a tax haven. It’s more a set of conditions. First of all, there are the terms.
A tax haven is a country, state or place, that has minimal or no corporate tax. So, setting up a corporation has a minimal cost.
Besides the low or no tax, these places have a series of laws and regulations that allow for secrecy. So, there’s limited public disclosure on the companies that operate there.
The term offshore comes from the fact that it’s outside the country of origin. If you generate money in the US and take it to the British Virgin Islands, you’re taking it off the US shore. But don’t let the term fool you. They don’t have to be islands or near the shore.
In fact, in some cases, they don’t need to be outside the country. For example, the Pandora Papers revealed that the US is a primary destination for tax havens. Some states like Delaware have legislation that makes creating corporations easy. But, up until this investigation, the US didn’t like admitting that some states were tax-havens.
Still, it’s most typical to associate tax havens and offshore accounts with islands in the Caribbean. So, where are these tax havens? All over the world, and these are only the most popular.
- Hong Kong
- South Dakota
- St. Kitts and Nevis
- The Bahamas
- The British Virgin Islands
- The Cayman Islands
- The Channel Islands
- The Cook Islands
- The Isle of Man
Stability is key
Then, there’s another critical factor to these tax havens. These locations are generally considered safe, with stable democracies in most cases. This is key, as you don’t want your money in a country that’s rife with civil war.
Some countries and states don’t even need a physical presence to create a corporation. With an email or a phone call, you’re solved.
The ICIJ reports that the Cayman Islands house around 19,000 corporations, out of which most are international. There are registries of a single building housing hundreds of corporations. But, since there’s no need for staff and operations, this is legal.
Finally, there’s owning up to it. Most tax havens deny being tax havens for reputation reasons. But more international pressure is forcing these countries to have less secrecy. So, Tax havens like Switzerland have lost some of their popularity.
But tax havens are only one part of the equation.
What are Shell Corporations?
If a tax haven has low or no corporate tax, then using it to create a corporation makes perfect sense. That’s where the term shell corporation comes in.
As its name suggests, it’s a corporation with nothing inside it. No assets or significant business are going on. Now, this isn’t illegal. In fact, some startups might create them to have an entity with which to raise funds or even go public.
Big companies also use them. For example, apple has corporate entities in Ireland. There, it finds significant tax benefits when compared to California, for example. So, not everyone in the Pandora Papers is doing something illegal.
Shell corporations aren’t illegal if the company is transparent about them. The problem is that there are so many loopholes that some take advantage of them. So, let’s look at different scenarios on how people might use these.
Scenario 1: the legitimate reason
A company creates a shell company in a tax haven to enjoy looser tax codes. It’s that simple. Apple does it and so do many other corporations. All they have to do is keep the records clean and transparent.
Scenario 2: the gray area
Now, imagine that someone from the US feels that the government is taxing them too much. So, they set up a shell corporation in the Cayman Islands or the British Virgin Islands.
Then, they can funnel their earnings through that corporation. All that shell company does is claim these earnings as its own so that the person doesn’t have to report as personal income in the US. And, so, they pay fewer taxes.
Since the tax haven also has fewer taxes, then it’s a win-win for them. Plus, with so much secrecy, nobody will know what that corporation owns.
The Pandora Papers revealed some of the uses for these corporations. For example, some used them to register properties, art, investments, and belongings before divorces to protect them. So, not illegal, but not entirely playing by the rules.
Then, some break the law.
Scenario 3: illegal shell corporations
Let’s take an example from the Pandora Papers. Raffaele Amato was the boss of a Camorra clan in Naples, which earned a lot of its money from drug dealing.
But he was also the protagonist in one of the bloodiest mafia wars, in 2004 and 2005. He has twelve murders to his name, and the feud ended with at least sixty killings.
An Italian court found him guilty of drug and arms trafficking, money laundering, and associations with the mafia. So the Italian government stripped of more than 20 million euros in 2010.
The problem was that that wasn’t all they had. Raffaele Amato appeared in the Pandora Papers as having a shell company. He used it to buy property in Spain moments before fleeing Italy. Though he’s now in jail, the company still exists.
So, yeah, sometimes shell companies are great for money laundering. Amato, and many others, used them to buy properties and other assets to get rid of illegally-earned money. But that’s where we run into a bigger problem.
What are the Pandora Papers really telling us?
Joe Biden promised that the US would fight against this problem and the loss of revenue to offshore accounts. But that was before the Pandora Papers revealed that the US can also be a great tax haven.
The ICIJ estimates that money held in offshore companies and tax havens are more than $6 trillion. Some experts draw parallels between this and the required financial efforts during the Covid pandemic.
Then, there’s another phenomenon to consider, something called bottoming out. Tax havens see the benefits of their conditions. Otherwise, they’d be more strict.
Imagine people investing their money in your country at will. It moves a lot more than money; there’s frequent investment, jobs, and stability. So, nations compete to bottom out, with lower rates.
To counter this, the world’s seven most powerful nations want to create a global corporate tax of 15%. And, to be global, everyone has to approve it.
But, how? As we’ve seen, even the most powerful people in these seven nations are also involved in tax havens. Plus, some countries don’t want to give up the benefits. So it seems that the problem is going to get worse before it gets better