Oligarchs, sanctions and money laundering

As part of the undeclared war with Russia, Prime Minister Boris Johnson has frozen the assets of Roman Abramovich, owner of the famous Chelsea Football Club, and six other wealthy Russians who thought their wealth would be secure in the United Kingdom.

Britain has long been a safe haven for dirty money, and not just Russian dirty money.  That’s because, on the one hand, the origin of money can be concealed through shell companies and offshore tax havens, and, on the other, they feel their money is safe.    

Real estate prices in London, and also in New York, Miami and other cities, are being bid up by foreign oligarchs.  This is of great benefit to bankers and real estate investors, but not necessarily to the general public.  So Johnson’s action is a good thing—right?

Economic sanctions have almost never achieved their goals.

The League of Nations, created after World War One, hoped to stop military aggression by sanctioning aggressors.  This failed in its first test, the invasion of Ethiopia by Italy in 1935.  The United States, more than any other country, has used economic sanctions as a weapon.  But decades of economic sanctions did not bring about regime change in Iran or Cuba and probably will not change Venezuela.

The result of Johnson’s actions will likely drive other Russian oligarchs to take their wealth back to Russia, which would be to the benefit of Putin’s government.

Arbitrary economic sanctions against individuals are contrary to the rule of law.

Tax havens are a serious problem.  But if a chief of state, based on his own personal judgment, confiscates the wealth of a few individuals or blocks their access to their wealth, he does not solve the problem of tax havens.  He merely makes his own country a more risky place to invest.

The Bill of Rights to the U.S. Constitution says nobody should be deprived of “life, liberty or property” without due process of law.  Nobody should have their wealth seized unless it can be proven in a court of law that they have violated some pre-existing law or regulation.

Impartial laws and regulations are needed.

We need laws that prevent oligarchs, dictators and crime lords from hiding their wealth and the sources of their wealth.  We need for these laws to be enforced without fear or favor.  Nobody should be above the law and nobody should be below the law’s protection.

Fun fact: Among those who have hidden their wealth in offshore tax havens are Vladimir Putin (through cronies) and Volodymyr Zelensky.

LINKS

Revealed: the $2bn offshore trail that leads to Vladimir Putin by Luke Harding for The Guardian.  [4/3/2016]

Pandora Papers: Russia dismisses leaks implicating Putin by Al Jazeera. [10/4/2021]

Pandora Papers: Ukraine leader seeks to justify offshore accounts by Al Jazeera. [10/4/2021]

Boris Johnson claims the UK is rooting out dirty Russian money | That’s ridiculous by Oliver Bullough for The Guardian.  [2/25/2022]

The oligarch’s guide to getting around the UK’s economic crime bill by Oliver Bullough for The Guardian. [3/9/2022]

Roman Abramovich Sanctioned by U.K. Govt., Assets Frozen by Alex Ritman for The Hollywood Reporter. [3/10/2022]

UK freezes assets of Abramovich, six other Russian oligarchs by Al Jazeera. [3/10/2022]

The American sanctions on Russia’s economy, explained by Ben Walsh for Vox. [3/9/2022]  What sanctions supposedly will do.

How the West undermines its own sanctions by Casey Michel for The Atlantic.  [3/9/2022]. It’s complicated.

Tax havens are big business

Research by the economist Gabriel Zucman shows that tax havens are big business.   He concludes that they substantially increase the after-tax income of the top 0.01 percent of the world’s population and that they enable U.S. and other corporations to evade taxes on nearly half their income from foreign operations.

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Offshore wealth as % of GDP.  Source: Gabriel Zucman. Click to enlarge.

Zucman is a respected economist  I’m not able to evaluate his estimates based on my own knowledge, or to meaningfully compare his figures with those of the Tax Justice Network and other sources.   But there’s no doubt that ultra-rich individuals and powerful corporations are able to keep a lot of their wealth hidden from view.

A new look at the secret hoards of the ultra-rich

Remember the Panama Papers?  That was a massive leak of documents from a Panama-based law firm called Mossack Fonsecka, revealing how the world’s richest and most powerful people hid billions of collars in investments from tax collectors and the public.

Now there is another big leak—called the Paradise Papers—from century-old Bermuda-based law firm called Appleby and its Singapore affiliate.

Like the Panama Papers, the anonymous leaker sent documents to a German newspaper called Süeddeutsche Zeitung, which teamed up with the International Consortium of Investigative Journalists, the Organized Crime and Corruption Reporting Project and some of the world’s other top newspapers, and spent a year going through 13.4 million files.

Some of the highlights of what was found:

• Queen Elizabeth II’s investment manager, the Duchy of Lancaster, invested millions of pounds in a Cayman Islands fund, whose investments included Bright House, a rent-to-own UK furniture company that charged interest rates of up to 99%

• Secretary of Commerce Wilbur Ross, who divested himself of ownership in 80 companies to avoid conflicts of interest, kept interests in nine offshore companies.  Four of them invested in a shipping company called Navigator Holdings, which did business with a Russian energy and chemical company called Sibur, whose key owners include Vladimir Putin’s son-in-law and a Russian oligarch under U.S. sanctions.

• Stephen Bronfman, a key fund-raiser for Canadian Prime Minister Justin Trudeau, teamed up with key Liberal Party figures to evade Canadian, U.S. and Isreali taxes.

Major companies shown to do business through tax havens are Apple, Nike, Uber Barclay’s Bank, Goldman Sachs, BNP Paribas and Glencore, the world’s largest commodity trader.

None of this is, in itself, illegal.  But hidden offshore investments provide a way for criminals to launder money and for individuals, companies and governments to evade economic sanctions by the U.S. and other governments.

As several people have remarked, the worst scandals are not how the law is broken, but what can be done that is perfectly legal.

For what it’s worth, I don’t think any of this is evidence that the Russian government or Russian interests manipulated the 2016 elections in favor of Donald Trump,

Vladimir Putin and the Panama Papers

One of the Russian Federation’s big problems is that its millionaires and billionaires are sending their money abroad, adding to Russia’s serious economic problems.

Sergey Roldugin

The fact that the Panama Papers reveal that one of Vladimir Putin’s oldest friends, a cellist named Sergei Roldugin, is the nominal head of offshore companies controlling billions of dollars in assets, is a big deal – especially since Roldugin does not live the life of a millionaire or billionaire.

Putin said back in 2011 that rich Russians who keep their money offshore are unpatriotic.

The Panama Papers are a trove of documents about shell companies registered in tax havens in the files of a Panamanian law firm called Mossack Fonseca.  The documents were leaked about a year ago by an unknown person to a German newspaper, Seuddeutsche Zeitung, which shared them with other publications around the world and with the International Consortium of Investigative Journalists.  They spent a year picking through the material, and published their findings starting last Sunday.

A tax haven is a jurisdiction with low or zero taxes which provides anonymity and protects financial secrecy.  Drew Schwartz of VICE news explained how a tax haven can be used to hide a money trail.

U.S. has free trade pact with tax-haven Panama

Revised and updated.

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In the light of the Panama Papers leaks of a Panama law firm’s files on tax havens, it is interesting to note that the United States signed a free trade agreement with Panama in 2012.

According to Senator Bernie Sanders, the agreement restricted the right of the United States to crack down on abusive tax havens.

Sanders voted against the agreement.  Senator Hillary Clinton voted for it.  Ted Cruz wasn’t yet a member of the Senate at the time.

Tax havens were a serious concern even before the trade agreement was signed, and the concern went far beyond Panama.  Still, the agreement with Panama didn’t help.

As the chart above shows, the Panamanian law firm Mossack Fonseca registered most of its shell companies in countries other than Panama.  Keep in mind that Mossack Fonseca is not the only law firm that registers shell companies in tax havens.  It is not even the largest such firm in Panama.

Here is what Sanders said about the free trade agreement.

Panama’s entire annual economic output is only $26.7 billion a year, or about two-tenths of one percent of the U.S. economy.  No-one can legitimately make the claim that approving this free trade agreement will significantly increase American jobs.

Then, why would we be considering a stand-alone free trade agreement with this country?

Well, it turns out that Panama is a world leader when it comes to allowing wealthy Americans and large corporations to evade U.S. taxes by stashing their cash in off-shore tax havens.   And, the Panama Free Trade Agreement would make this bad situation much worse.

Each and every year, the wealthy and large corporations evade $100 billion in U.S. taxes through abusive and illegal offshore tax havens in Panama and other countries.

According to Citizens for Tax Justice, “A tax haven . . . has one of three characteristics: It has no income tax or a very low-rate income tax; it has bank secrecy laws; and it has a history of non-cooperation with other countries on exchanging information about tax matters.  Panama has all three of those. … They’re probably the worst.”

Mr. President, the trade agreement with Panama would effectively bar the U.S. from cracking down on illegal and abusive offshore tax havens in Panama.  In fact, combating tax haven abuse in Panama would be a violation of this free trade agreement, exposing the U.S. to fines from international authorities.

In 2008, the Government Accountability Office said that 17 of the 100 largest American companies were operating a total of 42 subsidiaries in Panama.  This free trade agreement would make it easier for the wealthy and large corporations to avoid paying U.S. taxes and it must be defeated.  At a time when we have a record-breaking $14.7 trillion national debt and an unsustainable federal deficit, the last thing that we should be doing is making it easier for the wealthiest people and most profitable corporations in this country to avoid paying their fair share in taxes by setting-up offshore tax havens in Panama.

The selective revelations of the Panama Papers

Update 4/10/2016.  In fact some Americans are named in the Panama Papers documents.  And rich Americans and American corporations have ways to hide their wealth without going abroad.  There’s more in the links below.

Trillions of dollars—an enormous fraction of the world’s wealth—is concealed in secret accounts outside the jurisdiction of the nations of which the owners are citizens.  It is invisible and inaccessible to criminal investigators, tax collectors, bill collectors and divorcing spouses.

Now the world has a glimpse of some of those secret accounts, thanks to a leak of documents from a Panamanian law firm, Mossack Fonseca, to a German daily newspaper, Sueddeutsche Zeitung.  Mossack Fonseca specializes in registering corporations in tax havens.  The leaked documents had information on more than 214,000 companies and 140 world leaders.

The staff of Sueddeutsche Zeitung and the International Consortium of Investigative Journalists spent a year sifting through the leaked documents, and shared their information with other news organizations.

Interestingly few if any of the leaked documents implicated Americans or American corporations.  Maybe Americans don’t happen to use Mossack Fonseca to register their companies.  Or maybe there is more information yet to be revealed.  Or maybe somebody had a hidden agenda.

The passing scene – links & comments 10/21/2015

The Secret to Winning the Nobel Peace Prize: Keep the U.S. military out by Rebecca Gordon for TomDispatch.

Tunisia was the one country where the Arab Spring movement succeeded.  Four Tunisian organizations devoted to human rights deservedly won the latest Nobel Peace Prize.

Tunisia was the one country in which the U.S. government did not interfere, either militarily or politically, and it is the one country where the Arab Spring movement resulted in a stable, democratic government.

Rebecca Gordon, after reviewing U.S. policy in Egypt, Yemen, Libya, Bahrain and Syria, concludes that this is not a coincidence.  There’s a lesson to be learned here.

Obama Just Signed a Blank Check for Endless War in Afghanistan by John Nichols for The Nation.

Rep. Barbara Lee

Rep. Barbara Lee, a California Democrat, says it’s time to repeal the open-ended 2001 Authorization to Use Military Force and have Congress decide whether to continue military intervention in Afghanistan and other countries.

How Credit Scores Treat People Like Numbers by Frank Pasquale for The Atlantic.

I commented on how Chinese credit card companies and maybe the Chinese government are linking all kinds of human behaviors to credit scores, and how this can be a subtle means of suppressing nonconformity.  Well, it seems the same thing is going on in the United States—maybe not with that conscious intent, but with the same result.

Thomas Piketty on democracy and capitalism

Does Earth have a trade deficit with Mars?

Cumulative trade surpluses or deficits, 1980-2008, in billions of dollars. Source: Wikipedia. Double click to enlarge.

Among the world’s rich countries, the United States has a continuing trade deficit, Germany and Japan have continuing trade deficits and the other rich countries move up and down, slightly above and slightly below the break-even point.  But the French economist Thomas Piketty, in his new book, Capital in the Twenty-First Century, pointed out that, if you add them all up, the rich countries as a group have a trade deficit.

Are the rich countries in debt to the poor countries?  No, said Piketty.   If you lump all the poor countries together, they, too, have a combined trade deficit.

In other words, the whole Earth has a trade deficit.  But according to basic economic theory, any nation’s deficit is a surplus for some other nation or group of nations.   Could this mean that Earth has an unfavorable trade balance with Mars?

No, Piketty said.  The problem is that not all the world’s trade is accounted for — in particular, the trade that winds up in hidden accounts in the world’s tax havens.  If it was known how much it is, and who owns it, we probably would realize that the world’s super-rich hold an even higher percentage of the world’s wealth than we think.

One of the benefits of a global tax on capital would be to bring this hidden wealth to light, he said.  Even if you don’t accept the idea of a tax on capital, there is a need for international cooperation on financial reporting and prevention of tax evasion.  World trade treaties, instead of protecting international corporations from national governments, should provide for sharing information on wealth, and for boycotting jurisdictions that don’t meet international standards for reporting.

Inside the hidden world empire of money

The International Consortium of Investigative Journalists is in the process of publishing reports on how the world’s millionaires and billionaires escape taxation and the law through the use of tax havens.   Many are from countries in financial crisis that are in the process of raising taxes and reducing government services for working people and the middle class.

The Tax Justice Network, an anti-tax haven organization, estimated that as much as a third of the world’s wealth is held in tax havens, and half of the world’s trade flows through them.  I don’t know the basis for that estimate.  The fact is that the amount is huge, and that there is no accurate way of measuring it.

Tax havens also are havens from the criminal law.  They hide the wealth of corrupt politicians, crooked financiers, narcotics traffickers and terrorist networks, and they are used by nations such as North Korea and Iran to evade international economic sanctions.  At least two supposedly respectable British-based banks, HSBC and Standard Chartered, actively sought money laundering business in Mexico and other countries.

Switzerland was once the go-to country for secret, numbered bank accounts, but now the United Kingdom and its overseas territories are the key players in the secret world financial network.  Tax shelters in territories such as the Cayman Island, the Cook Islands and the British Virgin Islands are linked to banks in the City of London, which itself is a separate jurisdiction with its own government separate from the rest of London.

Vanity Fair magazine reported in its current issue—

It comes as a surprise to most people that the most important player in the global offshore system of tax havens is not Switzerland or the Cayman Islands, but Britain, sitting at the center of a web of British-linked tax havens, the last remnants of empire. 

An inner ring consists of the British Crown Dependencies—Jersey, Guernsey and the Isle of Man.

Farther afield are Britain’s 14 Overseas Territories, half of them tax havens, including such offshore giants as the Caymans, the British Virgin Islands (B.V.I.) and Bermuda. 

Still further out, numerous British Commonwealth countries and former colonies such as Hong Kong, with deep and old links to London, continue to feed vast financial flows—clean, questionable and dirty—into the City. 

The half-in, half-out relationship provides the reassuring British legal bedrock while providing enough distance to let the U.K. say,  “There is nothing we can do” when scandal hits.

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Britain could close down this tax-haven secrecy overnight if it wanted, but the City of London won’t let it. “We have, to put it provocatively, a second British empire, which is at the very core of global financial markets today,” explains Ronen Palan, professor of international political economy at City University in London. “And Britain is very good at not advertising its position.”

via Vanity Fair

Bill Black, an expert on white collar crime and financial fraud, noted in an interview on the Real News Network that few Americans appear in the ICIJ reports, compared to Russian oligarchs and Central Asian and African dictators.  He said that is because the United States is more aggressive than most of the world’s governments in tracking down and taxing overseas wealth.

American citizens are required to report foreign income to the Internal Revenue Service, and our top income tax rates, especially capital gains, are lower than in most nations, so Americans have more to lose and less to gain than most people by using foreign tax havens.   That is not to say that the United States does not welcome foreign investors who want to escape taxation in their own countries.

American corporations are another matter, Black said.  Divisions of global companies buy and sell to each other, and a smart accountant can easily set things up so that most of the profitable sales are all in low-tax or no-tax jurisdictions, and most of the losses are in high-tax jurisdictions.  But this is outside the scope of the report so far.

I think what’s needed is an international organization similar to the World Trade Organization which would impose economic sanctions on nations whose governments foster money laundering.  However, the direction of international economic agreements, from the North American Free Trade Agreement to the proposed Trans-Pacific Partnership Agreement, is to impose sanctions on nations that impede the free flow of money, whether dirty or clean.

Trillions in tax havens: big news or not?

Recently I came across reports of a study by an outfit called the Tax Justice Network, which said that a huge fraction of the world’s financial wealth—more than I had ever suspected—is hidden in the world’s tax havens, and is for all practical purposes exempt from taxation or the law.

The research team led by James S. Henry, former chief economist for the McKinsey & Co. consulting firm, concluded that at least $21 trillion and possibly as much as $32 trillion of the world’s financial wealth was hidden in tax havens.  The lower bound estimate is more than the 2010 GDP of the United States and Japan combined.  The Tax Justice Network estimated that if that wealth earned a 3 percent return, and the return were taxed at a 30 percent rate, that would be enough to resolve most of the current debt crisis facing poor countries.

Click to enlarge. The MM abbreviation is a million million; that is, a U.S. trillion.

If you do the arithmetic, the chart shows that the world’s billionaires hide more than 43 percent of their wealth in tax havens, and the super-rich hide more than 58 percent.

I am astonished at these facts, and can’t understand why they have received so little coverage in the American press.  I also was disappointed that my post on this subject received relatively few views.   To call attention to the post, I changed the headline, put a link to the post near the top of my links menu and e-mailed a link to the post to everyone I could think of.

Below are some of the responses to my e-mail.

Tax havens are used not only by “high net worth individuals” (=the rich) but also by corporations and affiliates of corporations.
In fact, transfer pricing and tax department of accounting and consulting and legal firms are used by corporations to minimize taxes, through rampant use of offshore financial centers (many of which not “off shore” but in countries such as Luxembourg, Hong Kong, Macau, etc.).

For a good analysis for tax evasion and avoidance, see these two articles:

Tax avoidance, evasion and administration PDF

http://elsa.berkeley.edu/~saez/course/Slemrod,Yitzhaki%20PE%20Handbook%20chapter.pdf

Why pay more? Corporate tax avoidance through transfer pricing in OECD countries PDF

http://www.feweb.vu.nl/ESI/bin/pdf/873.pdf

(The articles are technical, but you can get the main ideas by looking at the outlines and conclusions).

Michael Beruman pointed out that the problem is not illegal tax avoidance, but what can be done within the law.

How the global elite escape taxation and the law

Offshore tax havens are a bigger factor in the world economy that I ever dreamed.  Financial assets held offshore, beyond the reach of effective taxation, are about one-third of the world’s total financial wealth.  Over half of all world trade passes through tax havens.  Without tax havens, there might not be a world financial crisis.

Such are the conclusions of a new report completed last month for an organization called the Tax Justice Network by a team of researchers headed by James S. Henry, former chief economist for McKinsey & Co., a respected business consulting firm.  Among the facts and figures in the report:

• An estimated $21 trillion to $32 trillion were held in secret “offshore” tax havens in 2010.  To give an idea of how much that is, the value of the entire U.S. output of goods and services (gross domestic product) in that year was $15 trillion.
• Some 139 non-rich countries have a combined debt of $4.1 trillion.  But if their citizens’ foreign reserves and secret bank accounts where brought home, those countries would have net assets of $10.1 trillion to $13.1 trillion.
• If assets held in tax havens, beyond the reach of effective taxation, generated investment income at a 3 percent rate, and if that income were taxed at a 30 percent rate, it would generate $190 billion to $280 billion in tax revenue—about twice as much as the world’s wealthy countries contribute in foreign development aid.

Click to enlarge.

This chart shows where the world’s billionaires put their money.  More than 43 percent of their wealth is hidden in tax havens.  Among the small elite group with more than $30 billion each, nearly 60 percent is invisible.

Click to enlarge.

The above chart shows the 20 countries with the greatest capital outflows.  These 20 countries account for more than 80 percent of the money flowing out of the 139 non-rich countries.  Where does the money go?  A lot of it comes to the United States, where our laws exempt non-resident aliens from U.S. taxes and permit them to hide their income from their home governments.

Some of the people who use tax havens may be honest business owners who fear that their hard-earned wealth will be confiscated by a corrupt dictator.  But James S. Henry thinks most of the money in tax havens comes from the corrupt dictators themselves, along with criminals, money launderers and ultra-rich people who are allergic to paying taxes.  Mitt Romney’s Bain Capital made extensive use of offshore tax havens.  It would be interesting to know the names of the investors in Bain Capital’s various deals.

In the Real News Network interview shown at the top of this post, James S. Henry told interviewer Paul Jay that Treasury Secretary Timothy Geithner provided information to the Canadian government on U.S. bank accounts of Canadian citizens.  When the Mexican government asked for the same information, Geithner ignored them.   Our government supposedly is waging a War on Drugs, but our laws enable drug lords in Mexico and other countries to stash invisible wealth in U.S. banks.

The “offshore” tax havens are not just small and obscure nations such as Panama, Liechtenstein and the Cayman Islands.  The biggest tax havens are the United States (not for our own citizens, of course), the United Kingdom and Switzerland.  We are part of the problem, not part of the solution.

Click on The Price of Offshore Revisited press release PDF for the Tax Justice Network’s press release and summary of the report.

Click on The Price of Offshore Revisited: New Estimates of “Missing” Global Private Wealth, Income, Inequality and Lost Taxes PDF for the full report.

Click on Tax Justice Network for that organization’s home page.

Al Jazeera on tax havens, austerity, drone war

There is an expression, the “informal economy,” which refers economic activity that goes on outside the purview of government regulators and tax collectors.  As used by economists such as Hernando de Sota, it refers to street pedlars and people who do odd jobs, but panelists assembled by Al Jazeera English discuss another informal economy, which includes the world’s super-rich and involves trillions of dollars.  This report and panel discussion, which focuses on Europe, is a good reminder that the billionaire shadow economy is a worldwide and systemic problem, and consists of more than just a few bad apples in the United States.

This report and panel discussion by Al Jazeera English, dating from last May, is a reminder that other countries face the same difficult economic choices as does the United States—economic austerity, which is likely to prolong or deepen the recession; or deficit spending, which may put governments even deeper in debt without stimulating the economy.  The discussion is somewhat fragmentary.  Panelists thought the U.S. government is doing a better job of coping with the recession than the European governments, but it wasn’t clear to me exactly what they thought the United States was doing right.

This documentary by a team of Dutch filmmakers is a good report on the technological advantages and political and ethical problems in waging warfare by means of remotely-controlled unmanned aerial vehicles.

Secret money in tax havens = GDP of USA, Japan

According to this Al Jazeera English report, the world’s wealthiest people have more than $30 trillion stashed away in secret tax havens.  That’s more than the annual combined gross domestic products of the United States and Japan.

Tax havens are worth looking at a time when governments are cutting back on basic public services because they supposedly can’t afford them.  Maybe the Greek government wouldn’t be broke if the richest Greeks weren’t able to evade paying taxes.

Al Jazzeera has its own slant on the news, and I wouldn’t recommend anybody use it as their sole source of news, but I get information and ideas from Al Jazeera that I don’t get from the mainstream American TV networks, and I spend more time watching Al Jazeera on my computer than I spend watching news on TV from all sources combined.