Thursday, September 1, 2016

Going Off-Shore, Dodging Sanctions, and Laundering Money: The World of the Richest of the Rich

On April 3, 2016, 2.6 terabytes of data—more than 11.5 million documents—leaked from Panama’s law firm, Mossack Fonseca. The documents show that the firm “helped heads of state, oligarchs and celebrities launder money, dodge sanctions and avoid taxes.”[1] Over 40 years, 214,000 offshore shell companies in 200 countries implicate individuals including the family of Syrian President Bashar Assad, and that of British Prime Minister David Cameron, several friends of Russian President Vladimir Putin, and Icelandic Prime Minister Sigmunder Gunnlaugsson; financial institutions implicated include UBS, HSBC, and Société Générale.[2] I contend that the markets themselves had been tilted in the interest of the greater power (i.e., the rich), so systemic rather than incremental or piecemeal efforts would be necessary to solve the problem.
To be sure, offshore accounts were not at the time illegal, yet even so, the ethical dimension is stinging. Peter Atwater, a behavior economist, points to the 1% being able to “move anywhere they want and profit handsomely from the relocation” whereas “the 99% are left with the aftermath—the empty buildings of a deserted Detroit, the toxic waste from chemical plants in West Virginai or the unsustainable tax liabilities of Puerto Rico.”[3] In short, the richest of the rich had for years gotten away with minimizing their taxes in ways that are not open to anyone else. Simply put, this is not fair; no social contract with any sort of equitable basis would have such an “out.”
Global Financial Integrity found at the time of the leak that “developing and emerging economies lost $7.8 trillion in cash from 2004 to 2013 because of maneuvers like those allegedly perfected by Mossack.”[4] In 2016, illicit outflows were increasing at the rate of 6.5% a year, twice the rate of global GDP growth.[5] As most emerging economies were slowing in the first quarter of 2016, the outflows could have tipped the global economy into recession.
Clearly, a cultural mentality of self-aggrandizement at the expense of the general economic good (not to mention ethics) had gripped the richest of the rich, with a slanted (i.e., unfair) economic “game-board” resulting. Such a dynamic is the antithesis of a social contract. Put another way, the mentality undercuts the de facto social contracts by which people agree to live within societies and accept even their basic frameworks. Were the 99% organized, we might have seen an effort to re-evaluate how the market mechanism works. As it was, incremental rule-changes by governments was the response. For instance, “new rules released by the U.S. Treasury on April 4 crack down on American corporations that allow themselves to be acquired by foreign firms to avoid U.S. taxes.”[6] Yet if the Panama Papers are any indication, the problem goes well beyond the acquisition of U.S. firms by foreign ones. For instance, a company need only establish operations in a tax-haven to shield taxation at higher rates. Furthermore, what was being done to stop companies from dodging sanctions to do business with certain countries? What of the money laundering? Even answering these questions one by one misses the more fundamental point that the global market-system itself is flawed—and in a way that is convenient only for the rich. Attention to the system itself is needed, yet without the organized pressure of the 99 percent, wholesale political efforts are unlikely.
Abstractly speaking, a system is not a system if certain internal variables can maximize themselves without stopping at the contours of the system. Put another way, a system that restricts the vast majority of people yet is semipermeable to the maximizing few is inherently as well as ethically compromised. Yet efforts to level the board would seem to require lessor power to overrule a greater power unless the power of the vast majority is organized and activated such that it becomes the greater power.

[1] Rana Foroohar and Matt Vella, “The Panama Papers Expose the Secret World of the 1%,” Time, April 18, 2016, pp. 11-12.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Ibid.