Playing in the Gray

“Our firm, like many firms, provides worldwide registered agent services for our professional clients (e.g., lawyers, banks, and trusts) who are intermediaries. As a registered agent we merely help incorporate companies, and before we agree to work with a client in any way, we conduct a thorough due-diligence process, one that in every case meets and quite often exceeds

all relevant local rules, regulations and standards to which we and others are bound.

“However, filing legal paperwork to help incorporate a company is a very different thing from establishing a business link with or directing in any way the companies so formed. We only incorporate companies, which just about everyone acknowledges is important, and something that’s critical in ensuring the global economy functions efficiently. In providing those services, we follow both the letter and spirit of the law. Because we do, we have not once in nearly 40 years of operation been charged with criminal wrongdoing.

We’re proud of the work we do, notwithstanding recent and willful attempts by some to mischaracterize it.

“Finally, it is well established that many countries (e.g., UK, USA) have trust laws that permit a person or enterprise to represent a third party in a fiduciary capacity, which is 100% legal and serves an important purpose in global commerce.” 

Excerpt from a March 9, 2016 reply from the Panamanian law firm, Mossack Fonseca, the purported source of the leaked Panama Papers

Back in March of 2016, 11.5 million intensely private documents were leaked from the Panamanian Mossack Fonseca law firm, containing personal and detailed financial information about mega-wealthy individuals using multiple corporate and other business structures, linked around the world, to hide their wealth and avoid (evade) taxes both from where they reside and where they do business. An anonymous “John Doe” leaked the documents to a German journalist, whose newspaper (Süddeutsche Zeitung), began publishing juicy excerpts beginning on April 3, 2016.

The names ranged from elected and appointed officials (all the way to the top), dictators, billionaire businesspeople, major banks and investment banks, corporations, sovereign wealth funds, private equity firms, etc., etc. Prosecutors the world over swung into action, seeking tax evaders and going after the name law firm’s founders on charges of accessory to tax evasion and forming a criminal organization. It was huge news when it happened, but somehow all those nasty tax machinations slipped out of mainstream public view. Nobody except those individuals and the prosecutors who pursued them seemed to care anymore. After all, everybody knows that the “rich get richer,” and the “rules don’t really apply to them.” Clever lawyers can always find a way to shelter vast wealth.

Don’t kid yourself, even within the United States itself, without resort to offshore games, corporate secrecy is often protected under state laws. In addition to hiding from the taxman, these laws are often used to hide the donors to SuperPACs attempting to use hard cash to influence politics, which would be corruption in many other countries. The rich are not bound by international boundaries; they often pick and choose jurisdictions with laws that simply cannot begin to expose these tax-evaders, even presenting statutory opportunities for avoiding detection and allowing deductions for expenses that, simply, stink. But exactly how do they do it?

University of Chicago Professor of Sociology, Kimberly Kay Hoang’s new book, Spiderweb Capitalism: How Global Elites Exploit Frontier Markets, examines the shadowy, international web of political and economic elites and the secretive and corrupt practices they use to make and protect their money. Interviewed in the August 27th FastCompany.com by Jennifer Alsever, here are a few of her most salient observations: “The web is so complex, and involves so many layers and actors, that it becomes challenging to trace. Every strand is connected by networks of financial, legal, executive, and public relations professionals, all of whom are hidden from one another. They purposefully obfuscate their relations with other parts of the web.

“I call the ultra-high-net-worth individuals who control the web the big spiders. But those spiders use ‘agents’ or ‘fixers’ to cover close connections to transactions that would be considered ‘dirty’ or corrupt.. Playing in the gray was language that many of my interviewees used to describe how they finesse the boundary between legal and illegal activity, often by front-running the market and the law. Many said—and this was their language— ‘Yeah, this is all legal, but it’s morally reprehensible. I shouldn’t be able to get away with this. But, you know, this is just the way that financial markets operate.’…

“The ultra-wealthy often use offshore entities and shell companies to choose their legal jurisdictions and effectively legally avoid paying taxes both in the countries where they are making capital investments and where they reside. These offshore vehicles also allow them to set up legal firewalls to insulate their assets from all sorts of criminal and civil risks and to protect accumulated wealth from states wanting to charge investors with corruption or litigation with various business partners. They also enable the ultra-wealthy to conceal their identities by hiring other financial professionals to serve as the face of many of these deals.

“One person I interviewed pointed out that I’m a professor on a W2, and that I pay more taxes than they do. They might only pay 5% taxes offshore in Hong Kong or Singapore, and 0% taxes in the British Virgin Islands or Cayman and Seychelles. Legally, they essentially claim liabilities or losses onshore where they have operations in Vietnam or Myanmar, and then they claim profits offshore in the vehicles that are sort of the holding companies of the onshore companies.

“The other legal but morally reprehensible practice is ‘front-running the law,’ or taking strategies that were highly profitable pre-regulation in developed economies and [using] them in frontier markets where they are getting ahead of formal regulations… One example is business transfer pricing practices, where companies that are part of the same entity would charge themselves for services, consulting services, or intellectual property. They took those transfer pricing practices and brought them to China. And then once they were in China, they took those practices to Vietnam and Myanmar. They claim they’re imitating what slightly more developed economies are doing, and they keep moving it to more and more front-emerging markets.” By charging those “fees” from their home country company to an untraceable but related entity, they effectively move their profits overseas as a “deduction” to be taxed, if at all, at a tiny rate in the offshore country where that related entity is incorporated.

They often hide behind “front men,” sometimes CEO’s of big companies or financial advisors or offshore law firms, when the real wealth is stealthily behind very closed doors. They seldom get caught unless someone leaks private information or, more likely, when their spending and social habits – driven by their egos and the lust to live the high life – shine a light on who they are… and people begin to ask questions. But some still “get away with it.”

The notion of special rules, the ability to slide outside the law and move money across internationals boundaries, to hire phalanxes of accountants and lawyers to delay, misdirect and occasionally function as sacrificial lambs, is something that “everybody knows.” But these mega-wealthy players, often using their positions to “influence” politicians… sometimes becoming politicians themselves to access even more wealth and power… actually believe that they are special, entitled to game the system, that others are just there to help them succeed. Those who can speak with passion, embrace blame and offer simple solutions… well.

Indeed, these practices, when transferred to a head of state without concern for morality or their nation’s welfare, can snag tripwires that move a democracy into autocracy, an ugly pattern in recent times. Ruth Ben-Ghiat, writing for the August 29th Los Angeles Times, notes: “In autocracies, ruling parties become personal tools of the leader, and loyalty to the head of state, rather than expertise, is the most prized political quality. Those loyalty demands surge when the leader faces legal challenges or threats to his power. After the 2016 failed military coup against him, Turkish President Recep Tayyip Erdogan didn’t just purge the armed forces, he also forced the resignations of six mayors, all of whom were prominent members of his Justice and Development Party, or AKP.

“Even in democratic contexts, when an autocratic-minded leader is under investigation, loyalty becomes paramount and the party’s time and resources are channeled into defending him. Party functionaries portray the leader as a victim of a ‘witch hunt’ and smear journalists, prosecutors and judges, as Silvio Berlusconi’s Forza Italia party did with regularity during the former Italian prime minister’s many corruption trials, and as the GOP did during Trump’s two impeachment trials.” Sound familiar? Do you care? Do you really care?

I’m Peter Dekom, and greed combined with a lack of morality and enabling experts, can eat away at a nation’s core values more efficiently than termites can destroy a wooden house.