With the so-called “Panama papers” shedding light on how a global elite hides fortunes offshore, experts say this isn’t just a tale of corruption – it also goes to the heart of the world’s yawning chasm of economic inequality.
It may seem obvious enough: If people with connections are able to shelter their money from scrutiny and taxation, those rich people get richer. Yet the import of this fact may be obscured by the raw and personal details emerging this week as investigative journalists report on how one Panama-based company has helped hide well- or ill-gotten money in the anonymity of shell corporations.
Headlines include news about friends of Russian President Vladimir Putinmoving $2 billion overseas, about shell companies being created by Chinese power brokers including a relative of President Xi Jinping, and about a firm set up years ago as a tax shelter by the father of British Prime Minister David Cameron. Revelations about secret dealings toppled Iceland’s prime minister Tuesday after citizens took to the streets.
And corruption probes that threaten governments in South Africa and Brazil, which were in motion before this week, include ties to the same Panama entity as all those others – the law firm Mossack Fonseca.
The questions go beyond whether the financial activities were legal or illegal. The news puts names and faces on the problems of political cronyism and tax evasion by the wealthy, and on the global scale of these problems. That’s politically volatile in its own right. But the news, arriving at a time income inequality is an issue of high worldwide concern, also suggests that global tolerance of tax havens is one of the important roots of the rich-poor gap.
“Financial secrecy enables inequality. Tax havens enable inequality,” says Matthew Gardner, executive director of the Institute on Taxation and Economic Policy, a nonprofit research organization in Washington.
“It may feel like window into a different world,” he says, referring to thePanama Papers data, which was reported Sunday by the International Consortium of Investigative Journalists (ICIJ). “But it is also a window into how our financial system works in the United States” and beyond.
HOW SHELL CORPORATIONS WORK
Panama, and the specific law firm whose records were leaked to the ICIJ, is just the part of a much larger network of tax havens worldwide – including opportunities to hide assets in the United States as well as in smaller nations such as Luxembourg and the Cook Islands.
“The cache of 11.5 million records [from the firm Mossack Fonseca] shows how a global industry of law firms and big banks sells financial secrecy to politicians, fraudsters and drug traffickers as well as billionaires, celebrities and sports stars,” the ICIJ reporters write in an overview of their findings.
Shell corporations lie at the center of this secretive realm. Individuals can easily set up entities to park their money in, maintaining effective control of it while tapping other individuals to be publicly listed as directors.
The basic process isn’t illegal, and the fact that prominent or wealthy people use such havens isn’t much of a surprise. But the scale and detail of the ICIJ’s Panama Papers makes the issue concrete to an unprecedented degree.
HOW EVERYDAY PEOPLE LOSE OUT
And the reports sketch the connection between financial secrecy and inequality. For instance, one ICIJ report calls out a Ugandan company for avoiding taxes on a $400 million oil deal – and notes that the forgone tax revenue would be enough to cover a shortfall in health-care spending that currently leaves some Ugandan patients sleeping on hospital floors.
The tax-avoidance tactics help rich individuals and firms become wealthier still, and they deprive nations of tax revenue that’s as needed in Kalamazoo, Mich., as it is in Kampala, Uganda. If the wealth was ill-gotten to begin with – whether through activities like drug trafficking or politicians accepting bribes – the adverse impact on average people is all the worse, experts say.
“For those who are seeking to use the financial system to steal money, ... anonymous corporations are basically their getaway car,” says Mr. Gardner, who spoke to the Monitor by phone.