TAX HOLE

The Paradise Papers leak is about one thing: growing inequality

Obsession
Future of Finance
Obsession
Future of Finance

Thanks to yet another massive data leak, the world has been gifted more secretive information about how the rich move their money around the world, avoiding taxes and hiding their association to dodgy financial deals. Featuring intel on everyone from the British queen to close aides of Donald Trump, the revelations made by the Paradise Papers are going to keep surfacing in the news for weeks to come. Journalists working for nearly 100 media partners are revealing their analyses of more than 13.4 million files on the world’s wealthiest—but what does it mean for most ordinary citizens of the world?

Let’s first look at what a previous, even larger leak revealed: the Panama Papers. In April 2016, hundreds of journalists working with the International Consortium of Investigative Journalists exposed the inner workings of a Panama-based law firm, Mossack Fonseca. Nine months after the first stories about the leaks were published, the consortium analyzed its impact:

  • 4,700 news stories were produced by journalists working with the consortium
  • $110 million was recovered by the governments of Colombia, Mexico, Slovenia, and Uruguay
  • $135 billion was wiped off the value of nearly 400 companies linked to the leaks
  • 150 investigations were ordered in more than 79 countries
  • 6,520 people and companies were investigated

For the common citizen, the real-life effects of these developments are hard to pinpoint. In the long run, it may mean that governments are able to collect more taxes from the rich than they were able to before—because much of what these papers reveal are clever tricks to avoid taxes. But that’s not the main reason why you should care about these leaks.

For the real reason for watching (and worrying) about what happens next in the offshore empire, we can turn to the leaker of the Panama Papers. Known by the pseudonym John Doe, he broke his silence a month after the leaks were published. He said he leaked the information because he was worried about “income inequality” and “understood enough about their contents to realize the scale of the injustices they described.”

What Doe is getting at, as one expert told me, is the difference between the “letter of the law” and the “spirit of the law.” According to the letter of the law, much of what offshore law firms do is legal. But is it in the spirit of the law? Is it just? Is it fair?

Doe’s view is that allowing the rich to avoid taxes is going against the spirit of the law. These safe havens—and the routes that lead to them—were created for historical reasons. In the 1970s, offshore routes could be used for hiding an individual’s money from corrupt governments or helping banks move money to manage currency-rate fluctuations. But thanks to highly paid, smart lawyers, offshore routes are now being abused. Doe believes that the rich people who can afford to protect themselves using these routes are committing “injustices.”

This is why we ordinary citizens should care about the offshore empire. If it were a question of legality, the solution for how to deal with those implicated would be easier: Perhaps we’d taken them to an international forum that holds criminals accountable, for example. Instead, the question is about fairness—and the solution to it is much more complex.

On a policy level, bodies such as the OECD have been working toward increasing transparency and exchange of information among countries for quite some time. If and when widely adopted, it would help end one of the biggest problems with the offshore world: anonymity. One way the rich use these routes is to hide their association to dodgy investments. The Paradise Papers revealed how the Russian government secured investments in Facebook and Twitter through the billionaire Yuri Milner. On the other end of the spectrum, the Panama Papers revealed how offshore law firms are able to use shell companies to fund terrorism.

But to get any of these progressive policies adopted, citizens will need to pressure their representatives to act and should consider the issue when electing their next representative. Political pressure can produce action: Just look at Switzerland, which adopted policies for spontaneous exchange of information earlier this year. Though some of these initiatives, like those enacted by the OECD, started in the early 2000s, it was only after the recession hit in 2008 that they began running in full vigor. Starting with the Occupy Wall Street movement in the US, governments were forced to rethink where corporate abuse was hurting their ability to function, which led to them pushing through work on reforming offshore empires.

The notion of fairness may be subjective, but the burden to decide what’s fair lies with all of us. We are the decision makers. Both the Panama and Paradise Papers are well-timed injections of motivation for us ordinary citizens to decide what we think is just. And once we do, we need to act. Without political pressure, all this will be for nought.

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