The Paradise Papers: A Reading Guide

This past Sunday, the International Consortium of Investigative Journalism released the Paradise Papers, a new trove of documents showing the opaque networks, shell companies, and gaping regulatory loopholes that the world’s wealthy use to stash their gains abroad. The revelations therein are still sending shockwaves through Western capitals: From London, where the papers are raising questions about a top Conservative Party donor’s efforts to hide his wealth in Bermuda and Belize, to Washington, where Commerce Secretary Wilbur Ross is facing scrutiny over his stakes in a shipping company linked to Vladimir Putin’s son-in-law. Elsewhere, the reputational damage has engulfed everyone from Apple CEO Tim Cook to Bono, Madonna, and the Queen of England herself.

While the specific details may be new, though, the larger problem is a longstanding one. The contents of the Paradise Papers largely pertain to officially legal activity, thanks to a patchwork of legal loopholes and a proliferation of secrecy jurisdictions that allow the world’s wealthiest citizens to shield their vast riches from taxation. The implications are grim. Not only does the current legal framework empower wealthy Western tax dodgers, it also enables foreign kleptocrats to plunder state coffers and launder their proceeds in the West, compromising our own moral authority while emboldening autocratic adversaries who are quick to cry hypocrisy.

The American Interest has been covering these issues for more than a decade. As the Paradise Papers provoke more public scrutiny of offshore finance and dirty money, here are seven articles from the TAI archives that provide a helpful guide to the legal, political, and moral questions at stake.

Back in 2006, Jennifer M. Nordin and Raymond W. Baker sounded the alarm in “Toolbox: Dirty Money,” explaining how Western legal structures facilitate the spread of ill-gotten gains:

Clandestine funds move around the world, and both in and out of our own country, thanks to a comprehensive dirty money structure that has evolved over the past forty years. Components of this system include more than seventy tax havens and offshore secrecy jurisdictions; one to three million disguised corporations worldwide; “flee clauses” that allow disguised corporations to relocate from one secret enclave to another; anonymous trust accounts; fake foundations; false documentation; mispricing in international trade transactions; and loopholes in Western laws that facilitate the movement of proceeds through the dirty money structure into Western financial institutions. U.S. banks and businesses bear too large a share of responsibility for dirty money, especially those financial institutions that actively solicit deposits from clients and corporations that abuse transfer pricing as a normal part of their international activities. These banks and businesses help the perpetrators of dirty money reach their goal: to get their cash into the legitimate financial system.

“Catching Up With Corruption,” a piece by John Christensen, Nicholas Shaxson, and Raymond Baker from September 2008, argued for a broader definition of corruption, to include the technically legal tax-avoidance maneuvers now at the heart of the Paradise Papers:

There are many consequences of refining our perceptions of corruption. One is that tax evasion is identified as a form of corruption, even if it does not involve the abuse of public office or entrusted power. While those people and institutions dedicated to tackling corruption today tend to focus on the theft of certain types of public assets, tax evasion is generally overlooked even though evaded taxes are stolen public assets, too. Tax evasion also looks very much like more traditionally defined forms of corruption because it involves abusive activity at the intersection between the public and the private sectors. It allows sections of society to bypass accepted norms, and provides one set of rules for the rich and well-connected, and another set for the poor and weak. It involves insiders operating in secret, without restraint. It corrodes governments. Furthermore, the proceeds of tax evasion, along with the proceeds of bribery and criminal activities, use exactly the same mechanisms and subterfuges as they shift across borders: dummy corporations, shielded trusts, anonymous foundations, falsified pricing, fake documentation and more, all abetted by a supporting array of mainstream bankers, lawyers, and accountants. Dirty money in many forms welcomed by the United States and Europe allows the proceeds of drug trafficking, racketeering, corruption and terrorism to tag alongside. These are parallel rails on the same tracks coursing through the global financial system.

For those seeking to understand legislative remedies to the problem, Heather Lowe’s “Law as Leverage” provides a helpful resource. Writing in 2010, Lowe took stock of proposed legislation to combat secrecy jurisdictions and tax evasion, and explained why those issues were essential to a broader financial reform agenda:

Secrecy jurisdictions are magnets for illicit funds and facilitators of illegal and often dangerous activities. They support capital flight out of developing countries, transnational crime, terrorism and massive tax evasion that unfairly burdens ordinary citizens, and as we now know, they imperil the stability of the U.S. and international financial systems. In short, they are a manifest threat to U.S. national interests. We therefore must reform not only the laws pertaining to banking secrecy but also related laws concerning anonymous corporations and accounting rules that allow for non-transparent transfers of funds within corporate families. We must understand the problem not only as an integrated one but also as one that must involve both domestic and international parties.

The laws and bills that Lowe discusses here are still politically relevant: The Foreign Account Tax Compliance Act (FATCA), passed in 2010, has come into the crosshairs of libertarian Republicans like Senator Rand Paul, who is eager to repeal it. And an updated version of the Stop Tax Haven Abuse Act—first introduced in 2009 but never acted upon—was reintroduced in April by Senator Sheldon Whitehouse (D-RI) and Representative Lloyd Doggett (D-TX).
Moving beyond the legal sphere, Ben Judah’s “How Offshore Finance Sank Western Soft Power” from 2014 explains the reputational costs of Western complicity in tax evasion and money laundering. Using the example of Ukraine, Judah explains how activists amenable to Western messages about transparency can grow quickly disillusioned, as they follow the money trail from plundered state coffers at home to secretive tax havens in the West:

Imagine you spent the past decade fighting Ukrainian corruption. The model of good governance you looked up to was Britain or Germany. You applied for European Union funds. You were trained by Western foundations and EU funded think-tanks to follow the money stolen by your state. But then you discovered something horrible: the money was flowing right back to the West. Those models of good governance you looked up to turned out to be providing money-laundering services to the very people and institutions stealing your country’s future.

In “Big Bills” from 2014, James S. Henry takes a look at the hard currency of kleptocrats and tax evaders the world over: namely, the high-denomination banknotes needlessly issued by Western central banks:

Thanks in part to the permissive policies of these “quasi-reserve” countries’ central banks and treasuries, these larger denomination bills are all freely available in highly liquid global markets. Even though big bills serve no purpose for ordinary retail transactions back home, for decades the world’s key central banks have behaved as if the international criminal class were a kind of premium customer segment whose special money-diet needs they had studied in detail. Accordingly, they happen to have issued notes in just precisely the denominations that are most convenient for international transport, safe storage, bulk payments, and anonymous, untraceable exchanges of value.

Readers may also want to check out Henry’s 2016 follow-up, “Come on in, the Party’s Nearly Over,” about European and American policymakers’ belated recognition of the “big bills” problem.
In “Stage Hands,” Oliver Bullough uses the example of the London real-estate market to explain the three-stage process by which Western enablers facilitate kleptocracy. He also summarizes why we should be concerned:

Firstly, and most importantly, it is simply wrong to assist theft. Secondly, we are undermining our own nations’ security by buttressing regimes that are hostile to us, while disenchanting their citizens, who are increasingly likely to conclude that we are as hypocritical as their governments say we are. And thirdly, what Western enablers do is in a sense more egregious than what foreign kleptocrats do, because in the West we have a genuine, institutionalized rule of law, while kleptocrats operate in systems where no real rules exist. The result is that Western enablers effectively undermine democracy in foreign countries, even as Western governments lecture those same countries about civil society and the rule of law.

Finally, Neil Barnett explains how dirty foreign money poses an “existential threat to democracy” by giving kleptocratic states leverage to subvert open societies:

Combining these two developments—the new malleability of Western democracies and the dark pool of offshore wealth—creates a potent recipe for subversion. Françoise Thom, the Sorbonne historian, says, “the Russian strategy is to build up pro-Russian oligarchs to finance co-operative Moscow-oriented parties and ‘movements’, buy up media outlets, influence those in power and in some cases, to take power themselves. The aim is not only to ‘Finlandize’ Western states (i.e. to bring their foreign policy under Russian control) but also to ‘Putinize’ their domestic systems.”

The Paradise Papers have rightly shone a spotlight on the West’s vulnerability to these threats. The above articles help to demonstrate the scope of the challenge—which is the necessary first step to finally reckoning with it.

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