The Paradise Papers emphasises, yet again, that the damaging effect of offshore is much more pervasive that robbing countries of tax. Offshore creates a two-tier business environment, hiding ownership and in general throwing an opaque veil over the offshored part, thus undermining competition, regulation and ultimately the rule of law. The offshore alchemists also need the rule of law – the heart of the offshore industry is firmly onshore in countries with the stability provided by rule of law. As juicy as it is to read about famous individuals benefitting from insane offshore projects, the offshore enablers are onshore in fancy metropolitan offices, the heart of the offshore industry. Shaming, scrutinising and exposing the enablers needs to be part of anti-offshoring policies.
Yet again, a major leak is deepening our understanding of how wealthy individuals and companies make use of the offshore universe. The Panama Papers provided insight into wealth management of private individuals. Apart from further insight into the same, the Paradise Papers show how big companies like Apple and Nike use the power of wealth and offshore craft to negotiate tax reductions with governments and authorities.
In addition, the leaks underline that offshore isn’t just about tax. It’s about secrecy and opacity; the concept of secrecy jurisdiction as the Tax Justice Network defines it gives a much clearer understanding of the nature of offshore. And secrecy undermines markets, governments and the rule of law.
Intriguing as it is to think of warm and exotic places like the Bahamas or Seychelles, places lacking any infrastructure needed to oversee the oceans of money floating through them, at least on paper, the heart of the offshore industry is firmly onshore. It is in cities like London and countries like Switzerland and the US where the best paid offshore experts and enablers live and work.
Iceland – (possibly) the most offshorised country in the world
Through serendipity and coincidence, the first thing I started digging into after the collapse of the three main Icelandic banks in 2008 was their offshore operations, mostly in Luxembourg. A whole new dimension of the Icelandic banks and businesses opened up when I discovered how to search the Luxembourg Gazette for Icelandic links.
Apart from the well-known Icelandic tycoons operating abroad I found dozens of Luxembourg companies connected to people I had never heard of. When I contacted some of them it turned out they were mainly owners of small companies. One of them had sold a small fishing boat for around £15.000.
In all of the cases I looked into, the banks had suggested the client should offshorise, set up a company in Luxembourg and move their funds abroad – a good example of the role of the enablers. If the client both paid tax and the offshore fees offshoring didn’t make much financial sense; it was more lucrative to hide this from the tax and then for example have a foreign credit card to make use of the funds in Iceland, out of sight from the Icelandic Inland Revenue (which now keeps an eye on the use of foreign credit cards by Icelanders in Iceland).
What made the Icelandic offshoring so interesting was its pervasiveness: in no other country I know of did the banks set the asset bar so low, i.e. they advised offshoring as little as £10.000-15.000. After the collapse, some of these owners discovered how difficult and costly it was to revert the offshorisation and move their funds again to Iceland.
A 2016 report (in Icelandic) on Icelandic offshore assets, published in the aftermath of the Panama Papers, estimates that Icelandic assets in low-tax regimes 2015 amounted to ISK580bn, just over 25% of GDP that year. A staggering amount, four times the Danish figure; it explains to some degree why so many Icelandic names were found in the Panama Papers.
Offshore ultimately undermines the rule of law
In a small country like Iceland it is easy to see how offshore creates a two-tier business environment where only the onshore is in sight but the offshore part hidden from authorities and the public.
The operations of banks and businesses, the main players in the boom up to the collapse of the banks in October 2008, were thoroughly exposed in the 2010 report of the independent Special Investigation Commission, SIC. One of its findings was that fourteen foreign entities with unidentified owners owned more than 10% in 410 Icelandic companies (see Vol. 9 p. 79-83; in Icelandic).
Hidden ownership can be (ab)used in various ways. With ownership hidden abroad, large shareholders can control companies but avoid take-over regulations. Small investors who might steer clear of investing in companies of certain owners or under majority control, will be misled if some shareholders hide ownership offshore.
The latest example of intriguing interplay of offshore and ownership is the story of Alisher Usmanov in the Paradise Papers and his allegedly hidden ownership of Everton, in addition to his 30% of Arsenal; possibly a breach of Premier League rules.
The offshorised life: offshorised watch, offshorised children
Apart from the insight into the offshore craft, how offshore experts organise the offshore affairs of wealthy individuals and international companies, the story of the self-acclaimed “tax alchemist” James O’Toole is shows how offshore is now a life style.
O’Toole is a British lawyer, an offshore enabler. He runs a company called Ashton Court Chambers and has himself offshored his life down to assets such as his £25.000 Rolex. Not a major financial asset though slightly more expensive than an Icelandic fishing boat but valuable enough to be offshorised. To satisfy British tax authorities O’Toole surmised it would be enough to pay his own offshore watch-holding company £50 a month to make it look like a wholly legitimate set-up.
Another example of Ashton Court tax alchemy is the “Educational Purpose Trust,” set up in Mauritius in 2013. It’s not for the benefit of school children on the island but for children of some wealthy individuals, clients of Ashton Court attending British private schools. Once their application was accepted (no examples of the contrary) the applicants were asked to make a “charitable donation” to EPT, exactly equivalent to the school fees/grant, in addition to a donation of £1000 – not for administration but for an “orphan child.”
Legal or not? Not the most pertinent question
Much of offshore activities is entirely legal. But the distinction between legal and illegal is far from always visible to the naked eye.
Statements issued by lawyers working for those whose names have come up in the Panama Papers and now in the Paradise Papers, claiming there is nothing illegal in the exposed schemes are rarely worth the paper they are printed on. These statements almost never come with any tangible evidence. The statements mainly show that those offshorised are likely to be well lawyered.
Further, the question of legality isn’t even the most important question. The effect of offshore is to hide and that in itself is the damaging effect. The corroding influence is the two-tier business environment, the visible onshore, the invisible offshore.
The offshore effect on poor … and rich countries
In exposing hidden offshore wealth, the focus is often on how poor countries lose substantial amount of their wealth abroad, often due to the vicious combination of corruption and offshorisation.
Offshoring corrupt funds exacerbate the underlying corruption. In order to make full use of corrupt money at home it is crucial that it can’t be seen who really owns the funds. That is done by offshoring them: by sending the money out of the country and back ownership and origin of the funds become invisible. Creating this invisibility is largely the work of offshore alchemists – bankers, lawyers and accountants – in London and other Western countries.
However, I would argue that the corrosive effect of offshored wealth is no less damaging to the wealthy developed countries but measuring and demonstrating this effect is more difficult.
The two-tier business environment is one thing: it undermines competition and regulation by exempting part of the business community from rules and regulation. Further, offshore funds make it easier for big business and wealthy individuals to influence politics, again by creating loops to send money out and get them back, for example when paying lobbyists, funding think tanks and in other ways influencing the political debate and legislation.
Ultimately, if flow of funds from offshore into these activities is pervasive enough, it could be argued that the rule of law, the fundament and pride of Western democracies, is dangerously undermined. What the offshore enablers don’t seem to understand is that undermining the rule of law is also harmful to their business: after all, the reason why it’s better to run an offshore business from London rather than Kinshasa is exactly the rule of law. Rule of law provides stability in addition to respectability.
That is why the heart of the offshore is onshore. Without the onshore heart, where offshore experts at the Big Four – PwC, EY, Deloitte and KPMG – and others in similar position feel at ease, the offshore business and its enablers would be a lot less potent. Actions to throw open the offshore universe, the secrecy jurisdictions, need to be directed at the onshore heart of the offshore industry.
The onshore presence, found at fancy addresses in gleaming offices in London, New York and elsewhere gives the offshore business legitimacy and gravity. Gravity the offshore enablers use to influence the legislative process, politicians and regulators in Western democracies in order to nourish the socially harmful industry of offshoring.