The Society Killers: Corruption and Tax Evasion

I’ve blogged repeatedly about the devastation of corruption, which can be divided into four general categories (per Transparency International):

·         On the political front, corruption is a major obstacle to democracy and the rule of law. In a democratic system, offices and institutions lose their legitimacy when they’re misused for private advantage. This is harmful in established democracies, but even more so in newly emerging ones. It is extremely challenging to develop accountable political leadership in a corrupt climate.

·         Economically, corruption depletes national wealth. Corrupt politicians invest scarce public resources in projects that will line their pockets rather than benefit communities, and prioritize high-profile projects such as dams, power plants, pipelines and refineries over less spectacular but more urgent infrastructure projects such as schools, hospitals and roads. Corruption also hinders the development of fair market structures and distorts competition, which in turn deters investment.

·         Corruption corrodes the social fabric of society. It undermines people's trust in the political system, in its institutions and its leadership. A distrustful or apathetic public can then become yet another hurdle to challenging corruption.

·         Environmental degradation is another consequence of corrupt systems. The lack of, or non-enforcement of, environmental regulations and legislation means that precious natural resources are carelessly exploited, and entire ecological systems are ravaged. From mining, to logging, to carbon offsets, companies across the globe continue to pay bribes in return for unrestricted destruction.

Globally, poverty remains unabated, social mobility vaporizes, brutality with Swiss bank accounts reigns supreme in too many developing countries, charitable contributions and aid are siphoned off, never to reach the intended recipients, and political systems create plutocracies that embed themselves seemingly without any risk of removal with the ample use of illicit cash that keeps them in power. Conservative estimates (e.g., the World Bank) of the hard dollar costs of global corruption? One Trillion Dollars.

The so-called “Panama Papers” (see my April 5^th blog, Mossack Fonseca – The Panama Papers) have a lot less to do with a Panamanian law firm taking advantage of using the “Russian Doll” model (corporation owning corporation, etc. etc.) than a general proclivity by those who want or need to hide illicit money or shelter income from taxes. Corrupt or criminally-generated money or simply greedy oligarchs and dictators, from every corner of the world. And there are law firms, private banks and obfuscated financial sinkholes all over the world dedicated to hide this dark money. This Panamanian law firm was just one tip of many such financial icebergs.

Writing for the April 10^th NY Times Op-Ed, Panamanian President Juan Carlos Varela responds to the notion of these “Panama Papers”: “The more than 11 million documents, illegally hacked and released last week relating to previously undisclosed “offshore” corporations, is roiling the world with revelations of the vulnerability for rampant abuse of legal financial structures by the wealthy.

“They are unfairly called the Panama Papers because this particular trove of documents came from a single law firm based in Panama. But the problem of tax evasion is a global one.

“Panama does not deserve to be singled out on an issue that plagues many countries. But we are willing to accept the responsibility for fixing it, in part because greater transparency is ultimately a continuation of reforms we have recently undertaken. The world must tackle this problem collectively and with urgency, and Panama stands ready to lead the way.

“The scope of the information is breathtaking: The files include information on more than 14,000 banks, law firms, corporate incorporators and other middlemen from more than 100 countries, which is just a small part of a worldwide industry that harbors trillions of dollars.

“That some can rig the system to hide their wealth is not merely unjust; it also harms global development by siphoning off revenues that could be directed to education, health care and infrastructure…

“Contrary to media reports, Panama does not make special allowances for ‘offshore’ structures. The association of Panama with offshore activities comes from the fact that we tax only income derived from within Panama, not from without, which remains taxable pursuant to the laws of relevant jurisdictions. These rules, based on laws in New York and Delaware, originated in 1927 and are common today. While these laws have been buttressed by additional regulations, they can still be manipulated for illicit purposes.

“Under previous governments, Panama was no doubt a target of money launderers. Today, Panama is committed to adopting all transparency reforms needed to satisfy the international community. In the 21 months of my administration, Panama has taken steps to increase the transparency and strength of our financial legal systems. We developed a robust treaty network that allows exchange of information. ‘Know your client’ regulations were substantially enhanced and extended not only for financial and corporate providers but also for key nonfinancial industries vulnerable to abuse. And as of January this year, we require identity certification of shareholders of all Panama companies.

“I have announced a commitment to the automatic exchange of financial and corporate information, and we have proposed steps we believe are consistent with the goals of the international community, including the Organization for Economic Cooperation and Development through its Common Reporting Standards proposal.” A drop in the bucket.

It is often easier to form a corporate structure, where tracing shareholders is particularly difficult in some states (e.g., Delaware, Nevada, Wyoming, etc.), than getting a driver’s license in the same states. The United States is often complicit, from supporting corrupt regimes (we even installed one of the most corrupt governments on earth in Afghanistan) to allowing legal structures that enable hiding money to creating loopholes that even seem to legitimize corruption (Citizens United permits activities considered corrupt in many countries). Without serious global coordination, evading taxes and sheltering ill-gotten gains will continue to be the way of the world. Even as world power pledge this form of cooperation… well, it just is too easy to step around these efforts.

I’m Peter Dekom, and corruption and tax evasion may be the greatest forces of evil on earth, enabling terrorism, supporting brutal dictators, and empowering criminals worldwide.