An Unending and Growing Web of Money Laundering and Tax Evasion
A reminder about the Panama Papers, and why all the recent changes to the tax code will not result in trillions of dollars being repatriated to the United States.
With the annual gathering of global financial elites taking place this week in Davos, and all the recent news focusing on money laundering, taxes and the .0001 percent, it seems an appropriate time to take another look at where so much of the wealth-that-dare-not-speak-its-name is being stashed.
Back in 2016 we learned that a Panamanian law firm had become a kind of digital safe-deposit box for tainted money and tax evaders. WhoWhatWhy has extensively covered this story, which laid bare something like an alternative global financial system — an incredibly complex web of offshore accounts, lawyers, guns and money.
In the wake of Davos and the ongoing revelations about Deutsche Bank, it seems important to take a fresh look at the “Panama Papers.” My guest for this week’s WhoWhatWhy podcast is journalist Jake Bernstein, who has devoted years to uncovering and explaining what is really going on behind the scenes of international finance.
One can’t help wondering: How many owners of the private jets at Davos have Panamanian accounts?
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|Welcome to Radio WhoWhatWhy. I’m Jeff Schechtman.
|In the debate over taxes, we hear a lot about offshore funds, the repatriation of corporate dollars, and how lowering the marginal tax rate will bring all this money pouring back and stimulate the economy. Unlikely. Particularly because what we don’t hear about is the almost hundreds of trillions of dollars that are hidden from view in a complex web of offshore accounts, tax havens, laundered money, corrupt banks and nations that have created a kind of alternative financial system.
|Back in April of 2016, leaked documents from a Panamanian law firm, known as the Panama Papers, began to shed light on this universal flow of tainted money. More recently, the Paradise Papers brought this corruption to the doorstep of the White House. Covering every step of it has been my guest, journalist Jake Bernstein.
|Jake Bernstein is a two-time Pulitzer Prize winner, a senior reporter on the International Consortium of Investigative Journalists that originally broke the Panama Paper story. It is my pleasure to welcome Jake Bernstein here to Radio WhoWhatWhy to talk about Secrecy World: Inside the Panama Papers Investigation of Illicit Money Networks and the Global Elite.
|Jake Bernstein, thanks so much for joining us.
|No, thank you so much for having me, Jeff.
|I want to go back first to talk a little bit about the Panama Papers, what they were and how they were leaked.
|Sure. The Panama Papers ended up being well in excess of 11.5 million documents that came from a Panamanian law firm called Mossack Fonseca and this law firm had been, well, either leaked or hacked. The information had found its way to a German newspaper called Suddeutsche Zeitung and they, in turn, gave it to a group called the International Consortium of Investigative Journalists, ICIJ.
|ICIJ ended up sharing it with more than 300 journalists around the world, who collaborated on investigating the data and writing stories about what they found, and then, all dropping their stories simultaneously on the same day in April in 2016.
|It’s ironic, I suppose, that it was a German publication that was the first to get this, given if we look at the history, as you outlined it, of this law firm, Mossack Fonseca, that it has these origins and roots going all the way back to Nazi Germany.
|I think that could very well be part of it.
|Another reason was that the Germans had gotten an earlier leak from the law firm of a smaller subset of information and already written some stories. So I think that’s part of the reason they came to the attention of the leaker, who remains anonymous. We still do not know where exactly those 11.5 million documents came from.
|The other thing is that the Germans have a long history of paying for this kind of information. The German government, not the media, but the German tax authorities routinely buy information about German private citizens, tax evaders who are trying to hide their money in neighboring countries, like Luxembourg or Lichtenstein. Bankers fill CDs full of information about these German account holders, cross the border, and sell it to the German government. So, there’s more of a … history of using this kind of data and being aware of it.
|We’ve long known about tax havens and about offshore money. Talk a little bit about the scope of this as it’s revealed in the Panama Papers.
|I think you’re absolutely right. We’ve long known about it in sort of isolated incidents and little exposes or court cases, things like that. But what this really allowed for was a macro view of this world and how it evolved over time.
|Mossack Fonseca formed in the mid-’80s and there are companies actually in the data that are much older than that. We found a company that went back to the 1930s, so you could really see the whole scope of this system. Mossack Fonseca was doing business around the world, all over Latin America and Europe and Africa and everywhere in between, so you could really get a sense of how this system developed, how it morphed, the differences between different jurisdictions, how it changed over decades, and it was all available through this data.
|What’s fascinating in looking at the early history of Mossack Fonseca is that it sort of feels like a modern-day startup. There was a couple of guys that figured out a need, a problem that existed, and filled it in a way that gave them a kind of monopoly.
|You’re so right in the sense that their timing was perfect. They had a vision, which was of a business model that was low-volume/high … high-volume/low-cost, excuse me, and it’s kind of like the McDonald’s of the Secrecy World.
|They came up with this idea right at the time where computerization made it possible to do this kind of mass, wide-scale business, and also at a time when there was incredible wealth being created in the developing world, and these new wealthy people didn’t necessarily trust their countries. They wanted to get their money out, they wanted to use these offshore companies, so they hit the moment perfectly.
|The high-volume/low-cost business model worked great because when they started, really, all that was required for creating an anonymous shell company was you created the company, and you didn’t ask very many questions. It was, you know, think of those monkeys, right? See nothing, hear nothing, say nothing? So you created this company, and then, you stuck it in a file. You forgot it for a year until it’s time to invoice the client to renew the company, and so, you could do high-volume/low-cost.
|But what happened was, over time, there started to be new vetting requirements and new due diligence requirements, but they had already released 115-plus companies into the wild. So as Ramon Fonseca said to me, “You know, we created this monster, and then, we were handed a comb and told to comb it and it proved impossible.”
|So, in doing what they did, they created a level of complexity that made them and, I guess, firms like them — and they really had the market cornered — essential for anyone who wanted to do business in this offshore world.
|Yeah. It’s actually quite widespread, this business, and they were in the top five. There’s a lot of different organizations that do it.
|But, really, when I talk about the Secrecy World, and it’s not a phrase that I coined myself, it’s actually a phrase that I found within the documents themselves, but we’re talking about not just a system of tax havens. We’re also talking about sort of secret bank accounts in places like Singapore and Switzerland, and we’re talking about the intermediaries, the registered agents who create these companies or foundations or trusts, but also lawyers and accountants and bankers that go to these intermediaries and ask for the companies on behalf of their clients.
|It’s an entire infrastructure and the ones who really want to do concealment, there’s lots of different layers. You might have an anonymous company, but the anonymous company is owned by a foundation, and the foundation is owned by a trust and it crosses across three different places. It’s in Jersey, and it’s in Panama, and it’s in the British Virgin Islands, and there’s lots of different steps. You’re hiding your activities with each step a little bit deeper, making it harder for law enforcement or tax authorities or business partners or your wife to find out exactly what you’re doing.
|Talk about the role that authoritarian leaders played in building up this business, because they took advantage of this, particularly in areas of money laundering and getting money out of various countries.
|Absolutely. That is a great insight. We see a lot of that in the Panama Papers. Azerbaijan is a great example, right, and so, the children of the ruler of Azerbaijan have property all over the country, all over the world, in London and different places like that, in Switzerland, Monaco. They also have monopolies of certain key industries inside the country. But they need to get that money out of Azerbaijan, and so, they use these offshore companies to do that.
|One of the most sort of interesting insights that we gleaned from the Panama Papers was we found heretofore unknown anonymous shell companies with people around Vladimir Putin, including the godfather of Putin’s eldest daughter, a classical musician, named Sergei Roldugin, who nobody even knew was a businessman. But he was ostensibly the owner of several offshore companies that were doing incredibly complex and very interesting and high-dollar business activities. So this is a system that is used by rulers to deflect what they’re actually doing, in some cases, is robbing the states that they control.
|How aware did Mossack Fonseca need to be in terms of being up-to-date on political nuance in the world? To what extent were they reacting to, and to what extent were they influencing some of that, as it relates to offshore funds?
|Oh, that’s a very good question. They were very cognizant of different rules, of different activities by different powers to try to curtail this business, and they were part of a global movement to fight back against that.
|For example, the organization of, well, the OECD, the Organization of … I can’t even remember the full title of it. But it’s the group of developing nations that tries to sort of create rules for trade and other things. They tried to curtail some of this business, rein in the tax havens. Mossack Fonseca was part of a group of tax havens and intermediaries and others, including certain libertarian Washington-based think-tanks that really launched a campaign to try to stop the OECD from reining in this business, so they were very cognizant of that kind of thing.
|Then, they also were very aware of how this … I mean this is a system that evolves. It’s almost an organic creature, right? So one of the big offerings that they had for a long time was something called bearer shares. Bearer shares are kind of fascinating because it’s essentially a certificate, a piece of paper, and whoever holds the piece of paper owns the company. Prosecutors and government hate this because it’s ideal for money launderers. I can give you a piece of paper and, suddenly, you own the company. The company can hold an asset, and I can move assets around without anybody knowing about it.
|So, systematically, countries started to either restrict or outlaw completely bearer shares. The BVI was one of the early ones to do that, the British Virgin Islands, and when they did that, you can see a spike in company and corporations in Panama which still allowed these bearer shares. I think Mossack Fonseca was very aware of how this system evolved and moved around from place to place so that they could continue selling this kind of secrecy.
|Beyond money laundering, and even illegally moving money out of these countries by authoritarian leaders, one of the other areas that was part of this was the degree to which illicit activity was part of what the money was used for. It appears that so much of this money was either used for, or came from, things like illegal drug dealing and human trafficking. Talk a little about that.
|Yeah. It’s quite extraordinary. We have to say that this system can be used legally, right, and even though one of the Mossack Fonseca lawyers said in an email, sort of in a moment of private candor, that almost 95% of what they do is helping their customers legally avoid taxes. There was a huge amount of criminality that was also involved. We found Mexican cartels and Russians who were involved so they, literally, had boats where they were treating people who they had dragooned into being sailors as actual slaves.
|Then, we saw a tremendous number of scamsters and Ponzi schemers. It seems like after Bernie Madoff did his master fraud in the United States, every major fraud in every country had their own sort of mini-Madoff, so you see a number of them in the Panama Papers. There was the Argentinian Madoff, for example, and he was running his scam through anonymous offshore companies that were bought through Mossack Fonseca.
|So there were all kinds of things like that and, again, it was the anonymity and the lack of transparency that allowed them to do this.
|To what extent did tax authorities around the world, including the Internal Revenue Service, try and track all this down, or do anything about it?
|My goodness, that’s a good question. There’s a chapter in my book Secrecy World about this extraordinary IRS agent named Joe West, who was sort of given a task of actually researching how this world functioned, and coming up with a menu of ideas of how they could go after Americans who were using tax havens to evade taxes.
|Then he came up with a whole bunch of good ideas and the IRS ended up doing one of them and had some success with it. But Joe West was so frustrated by the bureaucracy, and by the resistance that he encountered within the agency, that he ends up retiring early and giving up on the whole thing.
|The IRS, in their defense, has been savagely cut back by the Republican Congress. They do not have the resources that they need. It’s very hard to break through the secrecy behind these intermediaries, these tax havens. They do not give out information willingly. The IRS is a little bit worried about attorney-client privilege when there are lawyers involved in this kind of stuff, so there’s a lot of obstacles.
|It takes great resources for governments to break through it, to track this information. They really need leaks and whistle-blowers and things like that, and those things don’t come along every day, so it’s been a big challenge for governments to get their hands around it.
|What impact, if any, have the Panama Papers had in curtailing any of this activity?
|Well, there’s been hundreds of investigations and criminal inquiries that have been launched around the world over this stuff, and then, there’s been direct political fallout in different places.
|The prime minister of Iceland was forced to resign when it was revealed that he had a secret company that Icelandic voters didn’t know about. The president of Pakistan was removed from office because his family was using offshore companies to buy property in London, and sort of hard to explain where the money came from. The minister of industry for Spain was also forced to resign. So there’s been political repercussions in a number of places, and then, there have been open investigations and prosecutions out of this.
|It also, I think, has raised awareness about how this system works. As you sort of said so eloquently in the beginning, this massive shadow economy, trillions of dollars are flowing through it, and most people are not aware of it, even though we live with the impacts in soaring property prices in places like New York and Miami and Los Angeles, and in taxes that aren’t paid for health care and infrastructure and education and police and stuff like that. But we don’t really know how the system works, and these leak investigations have given us a window into it that we otherwise wouldn’t have.
|Talk a little bit about the subsequent release and leaking of what were called the Paradise Papers, what they were, and how they were sort of the next step in learning more about this story.
|Well, the Paradise Papers came from a law firm called Appleby primarily, which is based in Bermuda. Appleby was very different from Mossack Fonseca, in that they were smaller and they were more exclusive, so they handled a lot of corporate clients like Nike and Apple. They had a lot more Americans, more than 30,000 I think, or American customers.
|What they were doing was generally more legal, more above-board, but had, in some way, the same impact. They helped their customers avoid billions of dollars in taxes. But you see a lot more sort of high-dollar Americans, both Democrats and Republicans, all kinds of business stripes.
|Appleby kind of gives us a different perspective. They were not as freewheeling as the Panamanians. The Panamanians were much more open and loquacious on email. Appleby was more guarded and more careful. But it gave us sort of a different perspective on how this world works.
|Talk a little bit about Panama, and why it became the epicenter of so much of this.
|You know, Panama’s incorporation law was passed, I think, in the 1920s, or maybe even before, maybe it was around 1919. They cribbed their company incorporation law from Delaware, among other US states. They sort of copied it and, originally, it was about shipping. They were pushing Panama, because of the canal, as an idea where people could register ships, and get away from the kind of regulation and oversight that people had if they tried to register their ships in United States.
|From there, it sort of morphed into companies for reasons other than ships. It really sort of took off during the dictatorship of Trujillo where he kind of opened up the country for money launderers and for drug traffickers and the banking system and offshore anonymous companies, and it sort of grew from there.
|One of the things you write about is the degree to which all of this money played such a critical role in both Russia, in particular, with respect to Putin, and in China. Tell us a little about that.
|Well, this is interesting in that, again, it’s sort of legal, right, in many cases, a sort of workaround.
|Russians, for example, had been offshoring now for quite a bit. There was a bit of a rush, a land rush, with the fall of communism. People were involved in all kinds of businesses, some legitimate, some not so much, and they wanted to legitimize these overnight fortunes. They also are somewhat distrustful of their government. The rule of law is shaky, at best, in Russia, and so, people get their money out, if they can, and there’s been a huge drain. I mean Putin himself sort of ironically has castigated Russians for moving their money offshore.
|China is sort of another example of this. China sort of embraces capitalism, but their system of government and their business system doesn’t quite catch up with the entrepreneurial fervor that is unleashed. So, they need a workaround and the workaround is this offshore system.
|The government kind of knows it and turns a blind eye to it and, in some cases, encourages it. It allows you, say, if you want to import machinery into China, it can be very difficult, right? But if you have an offshore company that is created to buy the machinery, and then, you are a foreign subsidiary, instead of an actual Chinese person importing that machinery into China, it’s easier to do.
|This happened all around the developing world where they had archaic rules or they had corrupt governments and it allowed the citizens to sort of sidestep a lot of that by creating these companies in tax havens. It also allowed them to avoid paying taxes. In many cases, if their financial wherewithal was coming from corruption, it allowed them to hide their crimes.
|To what extent are the rules constantly changing, and how important is it for those that are doing this with money around the world, to really have the resources of people like Mossack and Fonseca to really fully understand the changing landscape?
|That is a fantastic question because the system is constantly evolving.
|One of the things that has changed, and I think the Panama Papers is part of that change, is the bar to entry has risen a bit because the requirements are greater now for vetting clients and things like that, and you have to go further afield to get the absolute CSP (corporate service provider) that the people wanted. What Mossack Fonseca was really trying to do was make this available to the merely rich. Now, I think it’s become a little bit more exclusive, now more the province of the uber-wealthy, the truly wealthy, so that has been one of the changes.
|The other change, I think, is that there had been other avenues where people go. So whereas the British Virgin Islands was a place that a lot of people created companies, they’ve gotten a little bit tighter under demands for due diligence. So people had moved to places like Dubai or Singapore, or money laundering has embraced bitcoin because it offers the kind of secrecy and the lack of transparency that has tightened up a bit in the offshore world.
|What role, if any, has technology played in making all of this possible? Because there’s a kind of creative destruction side to all of this.
|No, you’re absolutely right. I think technology has made it available in a way that was not possible before. This is one of the things that Mossack Fonseca really prided themselves on. They felt that they were cutting edge as far as technology was concerned, and they really tried to systematize their business.
|It also allowed them to do things like they created their own personal tax haven, in a Pacific island called Niue, which is a spit of sand with 500 inhabitants. They created their own Mossack Fonseca tax haven out of Niue, but the tax haven is actually run out of their offices in Panama. So if you wanted a Niue company, you contacted them and they had all of the templates and the information. The deputy registrar of the Niue Ministry that created companies was a Mossack Fonseca employee. He had a stamp and you hit Print. Once you got the name and the company number, it just kicked out a company in less than an hour.
|You can only really do that when you have computerization, so I think it was a big factor in making this world much more accessible.
|Is there any reason to think that this sunlight, this exposure to all of this, is going to do anything to curtail this, or just chase it somewhere else?
|Boy, that’s a good question. I think that the only thing that’s going to curtail this or reform it will be an active citizenry. People in places like Europe and United States who recognize that there’s a connection to their lives, that the tax evasion has a direct connection to the services they receive and what’s available for them, and that idea that there’s now a transnational class of people who are not bound by the rules that we are bound by and most people are bound by, that they have apartments all over the world and bank accounts all over the world, and even though they might make their money in the United States they don’t feel obligated to pay taxes here or pay their input into society.
|So I think that the key thing is these leaks have sort of pulled back the curtain. We can see how this business works and we could see the effects of it. So, hopefully, citizens will start to demand that there’s more accountability and more transparency. That’s the only way it really changes.
|Jake Bernstein. His book is Secrecy World: Inside the Panama Papers Investigation of Illicit Money Networks and the Global Elite. Jake, I thank you so much for spending time with us here today on Radio WhoWhatWhy.
|No, thank you, Jeff. It’s been great.
|Thank you. And thank you for listening and for joining us here on Radio WhoWhatWhy. I hope you join us next week for another Radio WhoWhatWhy podcast. I’m Jeff Schechtman.
|If you liked this podcast, please feel free to share and help others find it by rating and reviewing it on iTunes. You can also support this podcast and all the work we do by going to whowhatwhy.org/donate.
Related front page panorama photo credit: Adapted by WhoWhatWhy from Panama City (maureen / Flickr – CC BY 2.0), Panama hat (Lucas dos Santos / Flickr – CC BY 2.0) and Secrecy World (Henry Holt and Co.).