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Alex Lo
SCMP Columnist
My Take
by Alex Lo
My Take
by Alex Lo

US cracks down on tax havens, then becomes one

  • The Pandora Papers expose the central role some US states, as well as major legal and financial institutions, play in helping some of the world’s richest and most powerful people hide assets and dodge taxes

The Pandora Papers have understandably upset many rich and powerful people around the world. We even have a few of them in Hong Kong.

Billed as the biggest journalism partnership in history, the Washington-based International Consortium of Investigative Journalists (ICIJ) has dropped a bombshell of three terabytes of incriminating data. In their own words, they “uncovered financial secrets of 35 current and former world leaders, more than 330 politicians and public officials in more than 91 countries and territories, and a global line-up of fugitives, con artists and murderers”.

But, as some critics such as Ben Norton, an editor at the investigative news site The Grayzone and Hu Xijin, chief editor of the nationalistic tabloid Global Times, have pointed out, the papers do not name a single American politician, leading them to suspect the whole leak might have been “a hack by US spy agencies”.

That may be so. But they underestimate the extent the Pandora Papers have exposed how some states, as well as major financial and legal institutions, in the US, form the nexus that makes it possible for rich and powerful people to hide their wealth with legal covers.

Most news reports have focused on the leaders and billionaires involved. What I find equally revealing are their global networks formed and enabled by some of the most respected legal and financial institutions in the US and Europe. As the papers put it, “[it’s about] how the rule of law has been bent and broken around the world by a system of financial secrecy enabled by the United States and other wealthy nations”.

Most of the tax-dodging and wealth-hiding methods and cases exposed are technically legal or at least make criminality extremely hard to prove. That is the real outrage.

The papers reveal: “Banks around the world set up at least 3,926 offshore companies for their customers with the help of … a Panamanian law firm led by a former Panamanian ambassador to the United States.

“The law firm … has affiliated offices in a dozen countries and set up at least 312 companies in the British Virgin Islands at the request of American financial services giant Morgan Stanley.”

Ecuador’s current president, Guillermo Lasso, for example, was found to have held bank accounts with Morgan Stanley and JPMorgan Chase through “a highly secretive foundation in Panama”.

The biggest revelations from the Pandora Papers leak

The papers allege that: “In 2017, [Lasso] transferred ownership of his bank accounts to confidential trusts he created in South Dakota.”

The ICIJ investigation shows “how Baker McKenzie, the largest law firm in the United States, helped create the modern offshore system and continues to be a mainstay of this shadow economy. Baker McKenzie and its global affiliates have used their lobbying and legislation-drafting know-how to shape financial laws around the world.

“They have also profited from work done for people and companies tied to fraud, corruption and authoritarian regimes ... The people the firm has done work for include Ukrainian oligarch Ihor Kolomoisky, who US authorities allege laundered US$5.5 billion through a tangle of shell companies, purchasing factories and commercial properties across the US heartland.”

The paper continues: “Baker McKenzie also did work for Jho Low, a now-fugitive financier accused by authorities in multiple countries of masterminding the embezzlement of more than US$4.5 billion from a Malaysian economic development fund known as 1MDB.

“ICIJ’s reporting found that Low relied on Baker McKenzie and its affiliates to help him and his associates build a web of companies in Malaysia and Hong Kong. US authorities allege they used some of those companies to shift money looted from 1MDB.”

Some states in the US become the tax and wealth-hiding havens of choice for the world’s rich and powerful

Some cases are worthy of Hollywood thrillers. For example, a famous balladeer sets up offshore companies and vast real estate holdings in South Florida for Haiti’s richest industrialist and a Vatican money man linked to a defrocked cardinal.

A Roman Catholic order, based in Mexico and marred by an international paedophilia scandal, holds extensive residential properties, also in South Florida. Three beachfront mansions in Malibu were purchased through three offshore companies for US$68 million by the king of Jordan.

As rich developed countries, led by the US, crack down on tax havens, some states in the US become the tax and wealth-hiding havens of choice for the world’s rich and powerful.

“The winners of these new double standards are the US states of Delaware, Alaska and South Dakota” – states that allow corporate secrecy,” the papers quote a Bahamian lawyer.

The investigation shows that “tens of millions of dollars moved from offshore havens in the Caribbean and Europe into South Dakota, a sparsely populated American state that has become a major destination for foreign assets”.

“Over the past decade,” the investigation finds, “South Dakota, Nevada and more than a dozen other US states have transformed themselves into leaders in the business of peddling financial secrecy.”

Quoting a study by an Israeli law academic, Adam Hofri-Winogradow, the papers reveal: “By 2020, 17 of the world’s 20 least-restrictive jurisdictions for trusts were American states. In many cases, he said, US laws have made it more difficult for creditors to put their hands on what they are owed, including child support payments from absent parents.”

The US is criticising all the rest of the world, but in their own backyard, this is a very, very serious issue
Yehuda Shaffer

However, most of the policy and law enforcement efforts of the world’s most powerful nations have focused on “traditional” offshore havens such as the Bahamas, the Caymans and other island paradises.

“The United States is one of the biggest players in the offshore world,” the papers report. “US authorities have taken action over the past two decades to force banks in Switzerland and other countries to turn over information about Americans with overseas accounts.

“The United States has been more interested in forcing other countries to share information about Americans banking offshore than in sharing information about money moving through US bank accounts, companies and trusts.

“The United States has refused to join a 2014 agreement supported by more than 100 jurisdictions, including the Cayman Islands and Luxembourg, that would require American financial institutions to share information they have about foreigners’ assets.”

State lawmakers are very well aware of what they are doing.

“Year after year, South Dakota [has] approved legislation drafted by trust industry insiders, providing more and more protections and other benefits for trust customers in the United States and abroad,” the journalist group writes.

As a result, customer assets in South Dakota trusts have more than quadrupled over the past decade to US$360 billion. One of the state’s largest trust companies has clients from 54 countries and 47 US states, involving more than 100 billionaires.

Perhaps Yehuda Shaffer, former head of the Israeli financial intelligence unit, puts it best.

“Clearly the US is a big, big loophole in the world,” he says. “The US is criticising all the rest of the world, but in their own backyard, this is a very, very serious issue.”

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