The International Consortium of Investigative Journalists (ICIJ) has released their findings of 2.5 million files worth of data from offshore acounts. Information from over 120,000 bank accounts details what many of us already know: the mega-rich and political-elite don’t play by the same rules. The report, “Secrecy for Sale”, was produced by a team of 86 journalists from 46 countries and it is an uncompromising look at how far individuals and governments will go to hide their money.
The information contained in the files is over 160 times larger than the leak of U.S. State Department documents from WikiLeaks in 2010. The wealth of knowledge contained in these documents is far too large to contain in one article, but here are some of the main takeaways.
The Amount of Wealth in Offshore Accounts is the Size of U.S. and Japanese Economies Combined.
It’s estimated that individuals have $21-32 trillion dollars in private wealth invested in offshore accounts. Billionaires aren’t the only individuals hiding their money. The files obtained by the 38 media organizations indicate that offshore accounts are held by a wide variety of people including doctors, lawyers, and Wall Street investors. Individuals with wealth looking to hide their money are usually able to get help from their personal banks.
Banks setup companies under a variety of guises in offshore centers, these secretly held companies are then used by the bank to assist customers in hiding their money. When banks provide this service, it gives individuals an easier method of obtaining offshore accounts. The report explains how Credit Suisse setup unprecedented levels of security to maintain the privacy of its consumers, “a company so anonymous that police and regulators would be met with a blank wall if they tried to discover the owner’s identities.”
It’s not just Swiss Bank players who are providing this type of service for its customers. According to The Economist, the major U.S. accounting firms of Deloitte, Ernst & Young, KPMG and PwC also provide offshore accounting products to its consumers.
Average People Are Screwed
If you don’t have millions of dollars to invest in yachts or mansions, chances are you don’t possess the ability to hide your money the way the mega-rich do. Individuals with a large amount of wealth are able to take advantage of tax breaks and loopholes by investing their money into things like priceless pieces of art. They use intermediaries and a variety of other techniques to remain anonymous. The wealthy just don’t play by the same rules. James R. Mellon, one of the individuals profiled in the report, is able to name third parties as directors of his accounts. By doing so, he limits his direct involvement with his offshore investments. Intermediaries like tax advisors, corporate service providers, and financial institutions all help to facilitate the flow of capital to offshore locations.
Above: Image from The Economist detailing offshore wealth
Offshore Accounts Offer a Safe-Haven for Criminal Activity
Some of the largest offshore accounting firms like Singapore-based Portcullis TrustNet and British Virgin Island-based Commonwealth Trust Limited, fail to verify the people they are opening up accounts for. The report also indicates that the two firms regularly and freely violate anti-money-laundering laws. TrustNet setup offshore accounts for renowned Wall Street criminal Raj Rajartnam and Paul Bilzerian. Rajartnam is currently serving a prison sentence for his part in this largest insider trading scandal in U.S. history.
The families of government and political officials in Russia, Canada, Pakistan, the Philippines, Thailand, Mongolia, Azerbaijan and many countries, openly and indiscriminately make use of offshore accounts. Individuals with ties to dictators and the Iranian government are also able to circumvent international blacklists by using offshore accounts.
Companies Are Made-Up
Twenty-eight people are named as the directors for 21,500 companies. The UK based paper The Guardian reports that these companies are usually held anonymously in the BVI. In a substantive piece on offshore accounts published by The Economist in 2013, they discovered that there are 60 tax-havens that house two million paper companies.
Above: How tax havens cater to corporations and the mega-rich, from The Economist
Lax Regulatory Laws Enable the Proliferation of Offshore Accounts
Individuals are mistaken if they believe that governments regulatory rules ban offshore accounting. Lax regulatory laws allow offshore financing to flourish. It is vital that individuals understand that offshore accounts are not excluded to places like the Cayman Islands. The U.S. State of Delaware is home to more than 6,500 paper companies. Other states like Nevada and Wyoming have also been accused of being tax-havens.
The Bahamas for example, does not tax income on offshore company profits and is home to over 250 licensed banks. Liberia is a great location to stash money because it’s been rated No. 3 in bank secrecy by the Tax Justice Network and allows you to register your yacht for more than 40 years. The Cook Islands are part of the territory of New Zealand, there, it is considered to be a criminal offense to breach company confidentiality. The Cook Island’s do not recognize court orders from foreign countries. Obviously, one of the most desirous places to stash your wad of cash is the Cayman Island, which boasts more money on hand than all of the banks in New York combined.
Global Economic Stability and The Future of Tax-Havens
Part of the Greek economic collapse was due to the heavy use of tax-havens by its citizens. Offshore accounts also increase the ability of individuals to partake in real estate speculation like the kind currently happening in Britain. Lax regulatory laws elsewhere create tension between countries attempting to crackdown on offshore account abuse. The information contained in the ICIJ’s four databases details individuals account data from 170 countries. To say that the desire to avoid paying taxes is widespread is the understatement of the century. Tax-evasion is so rampant that attempting to combat it offers an entirely different set of problems. The use of proxies and other technology has made it even more difficult to uncover who owns what.
Why isn’t it easy to crackdown on tax-havens and tax-dodgers? Because the international quality to offshore accounts enables people to exploit the lax regulation. The Organization for Economic Co-operation and Development (OECD) has repeatedly called for crackdowns on offshore tax-havens. OECD has requested that countries update their tax rules to compete with the digital age. The report by the OECD asked that countries apply current treaties to digital goods and services and crackdown on preferential regimes. The problem with addressing tax-evasion is that the current approach is too incremental which allows for companies and individuals to easily adjust for any small changes to regulation.
Above: One example of the vast network involved in offshore accounts from ICIJ.
Internally, countries must alter their tax laws to ensure more consistent reporting of all aspects of a companies or individuals profits and accounts. Externally, countries must work together to combat and bring to justice individuals and corporations engaging in tax-evasion.
Seriously, do yourself a favor and check out this amazing interactive guide to how people and companies hide their money.