Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

09 April 2016

The “Panama Papers”


[For a note on how the President of Panama just validated this analysis, click here. For a recent post comparing prices and policies of the “Paywall Three” of online print journalism, click here.]

With customary narcissism, Vladimir Putin thinks it’s all about him. It’s all a plot by the US to discredit him and his cronies with big-time money laundering. The main crony is, of all things, a humble cello player, heretofore unknown outside Russia, who just happens to be Putin’s best friend.

But no, Vladimir. It’s not about you. It’s only partly about you, a too, too clever man who appears to have hidden your own corruption far better than most. After last year’s exposé on Frontline—one of the world’s hardest-hitting programs of investigative journalism on global TV—no one but the gullible and blind Russian patriots believes you are squeaky clean.

But you are definitely not alone. A daunting fraction of the world’s leaders have stashed away large sums of money and property behind shell corporations.

It’s not just Putin. It’s the King of Saudi Arabia. It’s Najib of Malaysia, who just happens to be both the prime minister and finance minister of the nation he rules. It’s the prime minister of Iceland, whose name no one outside that tiny nation had heard before this week. It’s even David Cameron, whose “blind trust” is small enough to be laughable were it not for its suspicious secrecy.

Why should a democratic leader’s blind trust be secret from the world? You couldn’t even buy a Tesla Model S with what Cameron stashed away, in secret, in Panama. Most pols want their people to know about blind trusts, which are designed to avoid conflicts of interest in governing. Does anyone really think that David Cameron would subvert his nation—the longest-lived democracy on Planet Earth—for $52,000?

There, if generalized, is the key question. Why should leaders of nations stash money away in secret, outside the nations they govern, let alone in or through a place like Panama? Why, in particular, would David Cameron? Everyone knows he comes from a wealthy family. What had he to hide?

There are only three reasons why a pol would want to hide money. The first is that the source of the money is questionable. The second is fear that someone or something will take it away, including possible “regime change.” The third is a possible use of the money about which the public ought not to know. None of these reasons ought to inspire trust and confidence from the pol’s own people.

In general, there is nothing wrong with pols having money, as long as it comes from honest sources. If it does, it makes them incorruptible, as least in theory. When a pol is rich, he or she can still be blackmailed for unrelated reasons. But it’s unlikely that the mere temptation of yet more lucre would be a factor in his or her governance.

Take our Yankee election of 2008, for example. Barack Obama had, and disclosed, almost $4 million—all from honest sources such as royalties on his books and speaking fees. John McCain had much more, almost all from his wife’s rich family. Those facts—well known by the public—made both men incorruptible, as I noted at the time.

Pols don’t need to hide their wealth unless they fear disclosure of its source or someone taking it away, or unless they may have to use it for shady purposes. So why are so many pols around the world hiding money?

That’s the immediate question raised by the “Panama Papers” and the story on which investigative reporters will and should be chewing for years to come. “Follow the money” has been the mantra of political reporting since modern journalism began. Secret stashes just make that harder.

For the moment, the really interesting thing about the “Panama Papers” is how they came to light. Someone leaked, or someone hacked a computer system. The dam of secrecy was breached.

Mossack and Fonseca are the two now-famous Panamanian lawyers who got rich by setting up an international practice to hide richer people’s money. Leaks like this were not how they intended that practice to work. As a result of the breach, their lucrative money-hiding practice will likely come to an abrupt and painful end. No doubt the two have enough money of their own stashed away in secret to keep their families in the manner to which they have become accustomed.

But Panama?!?! Reliable secrecy requires strong laws, strong institutions, disciplined people with obsessive attention to detail, and strong, independent courts. Are these things for which Panama is noted?

Hardly. No, only the global rubes stashed their big bucks in Panama. Undoubtedly Kind Abdullah and Validimir Putin did so because, having no real democracy or rule of law at home, they did not trust the reliability of laws or banks in the US or England. They likely believe that Yankee and British pols can blast through any secrecy and seize any bank account they wish because they themselves can do so at home.

But, unfortunately for the rest of us and for clean government everywhere, that’s simply not so. The country with the strongest and most reliable path to hiding money is not Panama. Now that we Yanks have prevailed on the Swiss to breach their once-legendary secrecy, at least to catch our own tax evaders, it’s no longer even Switzerland. It’s the United States.

We Yanks have several states, including Delware, Nevada, South Dakota and Wyoming, in which shell companies are legal and fees from them provide a significant source of state revenue. We have a huge cadre of highly disciplined lawyers and accountants who would rather slit their wrists than disclose clients’ secrets, if only because they would be subject to professional discipline and even lawsuits if they did, and their businesses would evaporate. Finally, we Yanks probably have the best computer security in the world, at least outside of government (where the best-paid Chinese and Russian hackers probably work).

So, if you really want to hide ill-gotten gains, evade taxes or keep stashes of cash for nefarious purposes, the good ol’ USA is the best place in the world to do it. Even if you are caught, you can probably get some shadowy gambling financier to loan you pennies on the dollar while the lengthy legal proceedings required to seize your dark cash unfold.

Today we Yanks are making progress in outing and seizing accounts used to evade taxes or to finance terrorism. But if your stash is for other purposes, however nefarious, about the best you could do to insure its secrecy would be incorporate a shell company in Delaware, Nevada, South Dakota or Wyoming and use it to stash the money in a reliable foreign bank outside the United States’ jurisdiction. Then your secrecy would be protected by the strongest nation, with the strongest legal system, on the face of the Earth, and you would have to rely only on the integrity of the foreign bank.

So the Panama Papers are not really surprising at all. What is suprising is that people as smart and well advised as Vladimir Putin and King Abdullah were such tyros in hiding money. If they didn’t believe their own propaganda and knew how the world actually works, they would have incorporated their shell companies right here in one of our “better” states and used those shells to stash their money in a bank outside US jurisdiction.

Why they and others did what they did is an interesting question, which will no doubt occupy international journalism for at least a couple of years. But the much more vital question is why we Yanks maintain a nearly impenetrable system that shields corrupt pols, criminals, tax evaders and even terrorists from ready discovery, and what we plan to do about it.

Without knowing it now, the “populist” insurgencies of Bernie and The Donald may have something to say about that. In a world where personal privacy is fast succumbing to an avalanche of Big Data, can financial privacy that shields and encourages scoundrels and malefactors be far behind?

Footnote 1. It’s an amusing sidelight to this story that Putin picked an unknown musician as his front man. Putin certainly made the most of that odd choice in his speech of attempted exoneration. But I recall well that, while on Fulbright Fellowship in Moscow in 1993, I attended a first-rate classical-music concert in Moscow’s Tchaikovsky Hall for the equivalent of ten US cents. No doubt ticket prices and musician’s salaries have risen since then. But it’s still hard to believe that a humble Russian cellist, all on his own, could have accumulated a sum of money worth stashing in an offshore tax haven.

Footnote 2. A fourth possible reason is self-interested, inexperienced, beguiled or just stupid legal or personal advisers. They may have been part of the problem, at least in Cameron’s case.

Footnote 3. Reporting both in the New York Times and on Washington Week [set timer to 19:20] has recognized that Panama is just the tip of the iceberg, and that it’s easier to hide money in or through the United States.

Panama’s President’s Instant Confirmation

Sometimes events or important people confirm a post on this blog shortly after its publication. Two days after the foregoing post’s publication, Panama’s President Juan Carlos Varela did just that.

In an op-ed piece in the New York Times’ editorial section (Mon., April 11, 2016, at A19), he made two key points. First, “the problem of tax evasion is a global one” for which “Panama does not deserve to be singled out.” Second, through treaties and domestic legislation, Panama is making big strides toward greater financial transparency and toward international cooperation in exposing and discouraging tax evasion and money laundering.

President Varela’s op-ed advanced both those causes ipso facto. It’s a statement by Panama’s democratic leader saying, in effect, “if you want to evade taxes or hide dirty money, don’t come to Panama. We don’t want that kind of money, and we will help international authorities track you down.”

There’s not much more he could have done—let alone with so little effort—to discourage new dirty money and encourage the exodus of old. Mossack and Fonseca are probably already strategizing how to transform their legal practice and/or move it out of Panama to some still-undiscovered tax haven.

A third and partly unstated subtheme of Varela’s op-ed should be obvious by now. Panama is a bit player in the vast, global business of evading taxes and laundering money. It’s just the little fish that got caught.

Estimates of the amount of dark money globally exceed $7 trillion, but no one really knows. Think what that kind of money could do in converting from fossil fuels to clean energy, protecting global cities’ coast lines against rising seas, or simply making the world’s poor less miserable. Instead, the money is languishing in scoundrels’ bank accounts, just to evade lawful taxes and make the scoundrels and their various children, cousins, cronies and brothers-in-law feel more secure.

This situation is not just a moral outrage. It’s a mis-investment of massive capital that our species needs to avoid environmental catastrophe, to continue alleviating poverty, and to insure our collective future.

Marx and Engels were wrong. Communism has failed miserably everywhere it has been tried. Capitalism and free markets are our species’ future.

But capitalism has gone rogue at the same time it has gone global. The Crash of 2008 was just the most catastrophic of many consequences. The loss of 60,000 American factories to poor countries was another.

We as a species must make global capitalism transparent, bring it into the sunshine, and disinfect it. As we do that, we must find hidden and useless money and put it to work on the enormous tasks that face us. Panama’s scapegoating and the demise or transformation of Mossak Fonseca are just the opening battles in our new millennium’s great moral war: transforming capitalism into a system that works better for all of us, worldwide and species-wide.

The campaigns of Bernie Sanders and the less-disciplined Donald Trump are not just some aimless spasm of popular discontent. They are the first serious attempt of the American people—the most well informed (despite Fox!) and quick to react worldwide—to mount a coherent political response to the recent roguery and recklessness of global capitalism. The sooner the people of other advanced nations wake up, stop focusing on the symptoms (such as hapless refugees) and start focusing on the causes of their discontent, they sooner “we, the people” globally can start to win.

Marx and Engels were wrong about almost everything they wrote. But they were right about one thing. To be successful, any effort to reform and improve capitalism must come, first of all, from the most advanced capitalist nations. And it must be global.

The sooner foreigners stop thinking about Sanders and Trump as freaks and start seriously to analyze, improve and replicate the movements they are leading, the sooner a global movement can begin. The EU may be in the vanguard in succoring hapless refugees, but we Yanks are in the vanguard in reforming our global capitalist system as it begins to supplant government worldwide.

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