What do the Pandora Papers Mean?

And why we should all be outraged.

The International Coalition of Independent Journalists along with The Washington Post, the Guardian, and dozens of forensic investigators are conducting the world’s largest-ever journalistic collaboration, involving more than 600 journalists from 150 media outlets in 117 countries.

Their work exposes a global cabal of tax cheats, graft, asset shielding, and - for the American individuals and families involved - a complicit US Trust & Estate system concentrated in a few rogue states like South Dakota, where laws allow the shielding assets from global tax authorities, potentially abetting criminal activities.

Sadly this is not news.

For those following along at home, tax evasion is a multi-billion global industry designed to consolidate wealth and power and hide both from municipal taxing authorities. A 2008 report identified about 52,000 Americans hiding billions of untaxed assets in Swiss accounts. Some of these claims were buried (in the case of UBS) or settled in the case of HSBC, though news coverage was also watered down by news outlets worried about advertising dollars, leading to the resignation of Peter Oborne, editor of the UK’s Telegraph.

So basically, it went away.

Then around 2013 the UK’s then-Prime Minister David Cameron waged a public effort to increase transparency around global tax avoidance, corruption and money laundering. The Guardian even gave it a name, “The Global Laundromat”. Cameron was parried and thwarted and his message was watered down to basically nothing.

So once again, nothing - really, nothing - changed.

Then the much-ballyhooed Panama Papers dropped in 2016, and showed us how Swiss bankers infiltrated the regulatory system and were hiring former regulators to help devise ever more complicated tax evasion strategies. When caught, the Swiss agreed to tighten parts of its anti-money-laundering law but rejected additional due diligence requirements for advisers. So basically, you can still launder money but it’s harder, you can hire any unscrupulous dingdong to do it, then the Swiss don’t ask and don’t tell about where the monies they’re hiding come from.

Around that time we also learned from a UBS whistleblower Bradley Birkenfeld that Swiss banks admitted to intentionally subverting U.S. tax laws and defrauding the U.S. government by sending dozens of unregistered bankers to the United States on thousands of illegal trips to facilitate tax evasion schemes for wealthy U.S.-based clients – a fraud hiding as much as $20 billion in secret undeclared accounts and earning UBS up to $200 million a year in ill-begotten profits. UBS agreed to pay $780 million to avoid prosecution, consenting to turn over the names of some 4,500 U.S.-based clients - only a fraction of the total number of tax cheats on its roster. Birkenfeld went to prison. But nobody else did.

So the upshot here is that some of the perps pay a fine. A whistleblower went to jail. Some of the rules were tightened, but nothing really changed.

Yeah, it’s pretty messed up. But what’s worse is that it is still happening. And probably always will.

So, what’s different about the Pandora Papers?

For one, they will continue to show asset hoarding on an unimagined scale. The poster child of the moment is King Abdullah of Jordan, who used shell corporations to amass a global property empire worth $100s of millions while his country was the recipient of $1B+ in US Aid. And he’s not alone. It will be interesting if these revelations change how US Aid is monitored in developing countries. If the funds are being siphoned into offshore shell entities or family businesses, there must be a massive accounting of where these taxpayer dollars are going.

Second, the Panama Papers will demonstrate a financial system complicit in the facilitation of tax evasion, money laundering, and fraud. In 2017, Panamanian regulators already found that Paulo Roberto Costa, a former executive at the Brazilian oil company Petrobras, set up two shell companies that he used to take in more than $5 million in bribes. The 2.8T of data released in the Pandora Papers will reveal similar kickbacks for family members and global executives ensnared by this investigation. We will find companies lending their executives and family members money, declaring the loan in default, and asking corrupt judges or other officials to certify the default as legitimate (and giving the judge a kickback) when the loan is merely an asset transfer that would normally be subject to tax.

Third, and this is just speculation, it will reveal that company owners are aggressively shielding assets from creditors prior to filing for bankruptcy. What this means is that creditors are being fleeced by the same system they helped create. While on the one hand this could be seen as a moral hazard for high finance, on the other it could be another money-laundering mechanism for the ultra-wealthy. So when a company lards itself up with debt only to later file for bankruptcy, don’t be surprised if the breadcrumb trail leads to shell companies and trust entities based in Belize. Or Panama. Or the USVI.

(By the way, this happens all the time in the US. Wealthy family members offer to finance the purchase of homes and private businesses, then when the “borrower” goes into intentional default, the wealthy individual writes off the loan on his/her books. It’s essentially a gift registered as a mortgage and conveniently reduces a wealthy person’s taxable estate by passing the “mortgage” along as a gift of property.)

And on and on.

What will also be troubling to digest is that the voices most concerned with fighting corruption are engaging in the most aggressively corrupt practices. While more distillations of the Papers are forthcoming, we’ll learn that Vladimir Putin’s outrageous $1.2B home on the Black Sea has been financed through shell entities funded through bribery schemes involving his dead relatives. We will find petrochemical companies bribing officials as aggressively as before, and we’ll find that Swiss bankers have developed sophisticated new tools and tactics to facilitate money laundering, asset trafficking, arms dealing beyond anything that we might have previously imagined.

But what’s clear is this: The cheats are good at math.

The benefits of evading taxes, laundering money, and taking bribes, then plopping them in shell entities, far exceeds the costs of litigating or settling accusations of wrongdoing. While legal fees might run into the single-digit millions, the benefits of these tax avoidance schemes are worth many $100Ms or even $1 billion. Enforcement is challenging because the Swiss banks cultivate and hire regulators from tax havens to help craft new client services that can evade detection.

So until and unless the punishment for tax evasion on this scale meets (or exceeds) the punishments for far lesser crimes. Because when you compare the tax evasion penalties with the following sentencing guidelines for cocaine or heroin possession, you realize that just how lenient we are as a country on white-collar criminals:

COCAINE SENTENCING GUIDELINES

• Less than 1 gram: a state jail felony with possible punishment of up to 2 years in jail and a fine of up to $10,000

• 1-4 grams: a 2nd-degree felony with possible punishment of 2-20 years and fine of up to $10,000

• 4-200 grams: a 1st-degree felony with a possible punishment of 5-99 years and up to a $10,000 fine

• 200-400 grams: a 1st degree enhanced felony punishable by 10-99 years in prison and a fine of up to $100,000

• 400 grams or more: a 1st degree enhanced felony punishable by life in prison or 15-99 years and a fine of up to $250,000

Those are serious penalties. For drug possession or trafficking.

But money laundering is often prosecuted as a misdemeanor, which leads to a maximum of a year in jail, plus court fines. But even if it is prosecuted as a felony, a money-laundering sentence carries a typical MAXIMUM of three years in prison and a fine of $250,000 or twice the amount of money laundered, whichever is more.

So money laundering equals 3 years in prison and maybe a big fine. But criminal cocaine trafficking you get LIFE? Come on.

So until the punishments fit the crime - i.e. are either on par with drug trafficking or at least carrying “mandatory minimum” sentences of 10 years or more, we’ll continue to have the wealthiest people on earth engaging in this behavior.