► Last week, the International Consortium of Investigative Journalists ('ICIJ') dropped a bombshell revealing how the international elite evade paying taxes...
More than 600 journalists in 117 countries worked together for months to gather and reveal more than 6 million documents, including almost 3 million images, more than 1 million e-mails, and nearly 500,000 spreadsheets. All these documents – collectively called the "Pandora Papers" – show how the uber-rich use complicated and opaque offshore trust structures to hide wealth and avoid paying taxes.
Source: The Washington Post
When people house assets in offshore countries, they typically do so in tax havens with low tax rates or no taxes at all – think of places like the Cayman Islands or Singapore. And these folks hold the assets – which can be property deeds, cash, securities, art... any object of value – in trusts, which makes it hard to identify who the true owners of the assets are. As the Washington Post explains...
Trusts can provide impenetrable secrecy. High-profile people can set up trusts to own shell companies in tax havens, obscuring the true extent of their property from tax authorities, criminal investigators, and the public. Few jurisdictions require public registration of the people who ultimately control and benefit from trusts.
Shielding assets this way usually conforms to the letter of the law, even if the resultant tax avoidance leads to breaking the spirit of the law. It's usually not a good look to have a net worth in the billions, but not pay any taxes... which is why these structures are purposely set up to be opaque and hard to trace.
It's easy to set up shell companies and trusts to hide assets offshore if you have the money to pay lawyers and other experts who know how to exploit these tax havens.
No one knows exactly how much money is hidden offshore... The ICIJ cites a wide range of estimates, from anywhere between $6 trillion to $32 trillion.
Whatever the total, it is costing governments money... since the absolute wealthiest among us are dodging taxes, which the working class and merely working wealthy are forced to pay. The International Monetary Fund ("IMF") estimates that tax havens cost governments $600 billion in lost taxes annually.
The thing that was really shocking – or maybe not, if you are cynical – was the number of politicians named in the Pandora Papers...
Along with the 130 billionaires listed in the papers as having hidden money in these offshore accounts, there were 330 public officials in more than 90 countries named.
No one is going to be shocked to learn that Russian President Vladimir Putin was implicated... He has long been rumored to be the world's actual richest person if hidden assets are considered.
But the breadth of heads of state implicated was astounding. To name just a few... King Abdullah II of Jordan... President Luis Abinader of the Dominican Republic... Prime Minister Andrej Babiš of the Czech Republic... President Uhuru Kenyatta of Kenya... President Sebastián Piñera of Chile... President Volodymyr Zelensky of Ukraine... and more!
Unsurprisingly, there's a raft of irony with many of these officials who are hiding money.
President Babiš of the Czech Republic, a billionaire, has marketed himself as a populist who is an enemy of the elite... but what's more elite than paying an army of lawyers to hide your money and avoid taxes?
Meanwhile in Kenya, President Kenyatta has painted himself an enemy of corruption and stated in 2018 that "every public servant's assets must be declared publicly." I guess everyone except him... The Pandora Papers revealed that Kenyatta and his relatives have seven offshore vehicles holding assets worth in excess of $30 million.
Political hypocrisy should probably surprise no one at this point... but these are some extreme examples.
Noticeably absent from the Pandora Papers were any of America's Big Tech billionaires...
For once, a news story about avoiding taxes came out and U.S.-based mega-billionaires like Amazon (AMZN) founder Jeff Bezos and Tesla (TSLA) founder Elon Musk can breathe in relief as they are left out of it.
But the Post explains that there is a "good news/bad news" aspect to America's highest profile billionaires being notably absent from the Pandora Papers...
Financial experts said the uber-rich in the United States tend to pay such low tax rates that they have less incentive to seek offshore havens. But their absence from the files also may mean that very wealthy Americans turn to different offshore jurisdictions – including the Cayman Islands – and different companies than those represented in the Pandora documents.
However, the U.S. doesn't come out of this scandal totally unscathed. As it turns out, we have our own little onshore hotbed of tax avoidance brewing in the most unexpected of places. The Post continues...
The files provide substantial new evidence, for example, that South Dakota now rivals notoriously opaque jurisdictions in Europe and the Caribbean in financial secrecy. Tens of millions of dollars from outside the United States are now sheltered by trust companies in Sioux Falls, some of it tied to people and companies accused of human rights abuses and other wrongdoing.
It's important to note that these opaque offshore trust structures aren't just the playground of titans of industry and their heirs, along with politicians that may be on the take... They are also how the world's criminals move and hide their money. Secrecy and opacity are desired traits in a financial structure when you make your money smuggling arms, drugs, or people.
Of course, it's not really a news flash that super rich people, criminals, and politicians are hiding money and not paying the taxes that the rest of us pay...
Some of the characters in the Pandora Papers are hiding assets because the money was acquired in an illegal way. But others just don't want to pay the piper and be taxed on gains made through legitimate businesses and investments.
The news of the global elite dodging taxes reminded me of a story I read this summer about mere mortals – but ones who had enjoyed a windfall in cryptocurrencies – trying to avoid the taxman via establishing residency in a new country.
With bitcoin up around 90 times in the past five years, early adopters of the cryptocurrency are staring down significant tax bills if they sell to lock in gains.
With so much money at stake, traders of bitcoin and other cryptos with similarly explosive returns have turned to a company called Plan B to help them avoid a big tax bill. CNBC explains...
Every year, Plan B Passport helps hundreds of people from countries like the U.S., the U.K., Australia, and Canada obtain a second passport in one of seven countries: Saint Kitts and Nevis, Antigua and Barbuda, Dominica, Vanuatu, Grenada, Saint Lucia, and Portugal. The company works in tandem with each government's residence- or citizenship-by-investment programs.
"It's an attractive way to draw foreign investment and especially prominent in countries with few natural resources," said Ernest Marais, an attorney with international tax law firm Andersen.
Obtaining a second passport using Plan B Passport typically costs a couple of hundred thousand dollars, invested in the passport-issuing country, plus a mere $20,000 in legal fees to Plan B... a far cry from the millions that the elite named in the Pandora Papers pay their lawyers to set up offshore trust structures.
Lest you think that the little rich guy is finally catching a break and getting the same favorable treatment as the global elite... keep in mind that having a second passport doesn't absolve U.S. citizens from paying taxes on any capital gains, including those on crypto.
The U.S. taxes its citizens on their worldwide income... So unless the crypto winner chooses to renounce U.S. citizenship, they are still on the hook for U.S. taxes, no matter how many passports they have.
And if you try to renounce American citizenship, the IRS will chase you down and usually subject you to an exit tax, which former IRS litigator Jon Feldhammer explains to CNBC "is essentially a tax equal to what the taxpayer would be subject to if they sold all of their property the day before they gave up their citizenship."
The IRS also seems to be ramping up its investment in tracing cryptocurrency holdings and gains. According to CNBC, "The U.S. Department of the Treasury has proposed comprehensive reporting for crypto, which would make it as difficult to spend crypto, as it is cash, without it getting reported."
Whether you think tax evasion is immoral or fair game, it's clear that the little guy – including the new class of bitcoin millionaires – is at a severe disadvantage when playing this game.
The Pandora Papers are a reminder that the mega-wealthy and politically connected are playing by a different set of rules...
Before the Pandora Papers, there were similar leaks in 2017 – the Paradise Papers – and in 2016 – the Panama Papers.
It's frustrating to read about this stuff, and I commiserate with the sentiments expressed by Dartmouth economic sociology professor Brooke Harrington in her New York Times opinion piece last week...
Each successive leak drives home the same message: Abandon any hope that government will serve the people or that the rule of law will be applied equally to all, the foundational premises of modern government.
Harrington expresses some optimism that the court of public opinion may affect change more rapidly than any official court will... but bad behavior only seems to escalate among the powerful when historically consequences have been slim.
In the mailbag, a couple of readers rightfully called out my hypocrisy in saying social media giant Facebook (FB) is still a buy despite it irrefutably being a bad actor on many fronts...
Do you find the revelations in the Pandora Papers to be infuriating... or is it just the way the world works, and we should throw aside any hope of things getting better? Do you think there should be coordinated governmental and legal action to cut down on the use of offshore trusts to evade taxes? Do you think there is a rationale for bitcoin and other cryptocurrencies being treated differently for tax purposes than any other financial asset? Share your thoughts in an e-mail to [email protected].
"'I'm here to tell you how to make money, not regulate ethics.'"
"This was your quote today. And it completely contradicts your post railing against Brandy Melville just three weeks ago on September 14th. I cannot understand your rationale at all for actively trying to bankrupt Brandy Melville for how their clothing lines body shame teenage girls and causes significant damage to their self-esteems while taking a "no call" on Facebook for how their algorithms body shame teenage girls and cause significant damage to their self-esteems. Since you're now talking out of both sides of your mouth, at least we now know which side the money is stuffed into. I'm disappointed – if you're truly a feminist, you should be doing better than this." – Bryan G.
Berna comment: Bryan, these are fair points... but let me explain why I think it isn't completely hypocritical to root for the demise of Brandy Melville while acknowledging there is probably a good trade on the long side in Facebook (FB).
Companies like Brandy Melville go away all the time. Teen retailers are a dime a dozen, and they often go extinct. Remember Wet Seal? Delia's? Limited Too? American Apparel? Charlotte Russe? Crazy 8? Gadzooks? Merry-Go-Round? May they all rest in peace.
Because teen retail caters to such a fickle crowd, most of these businesses tend to be ephemeral. A strong breeze can tip them into insolvency... So yes, sharing pictures of Hitler in a complimentary way and making sick jokes such as calling a concentration camp victim "Miss Auschwitz" is enough to kill this business. And as deep as the sins are at Facebook, I would bet money that CEO Mark Zuckerberg and COO Sheryl Sandberg have never done something as obviously illegal as ask an employee to strip to their underwear in front of them.
The damage done by Facebook may be more wide-reaching for society, but it is also more difficult to nail down and assign definitively than the more micro-crimes of the Brandy Melville management team.
As for the body shaming... if that was the extent of the misdeeds at Brandy Melville, I probably wouldn't have written about it. The reason I called the company out was the predatory acts against the women that work there, the racial discrimination against employees, the glorification of Nazis, and an alleged act of rape. That goes way past the subjective crime of hurting young women's self-esteem.
The difference between the two entities is that Facebook at this point is essentially too big to fail. It could get regulated or broken up... but it's not going away.
Facebook is also one of the most profitable companies of its size that has ever existed – in any era, region, or sector. It's hard to deny that financial reality.
In contrast, teen retail is a pretty low-margin and volatile business. Even if Brandy Melville wasn't run by a bunch of scumbags, retail history would suggest it is vulnerable to disappearing... Management's actions just might make that happen sooner rather than later.
"Thank you. Like reading your work; appreciate your perspective.
"So please don't now jump into that group that urgently screams that doing the right thing will always cause us to lose money.
"Doing the right thing can – especially considering 'extraordinary' companies like Facebook – cause companies to actually realize greater long-term value." – Ricky M.
Berna comment: Ricky, you are right that it's the cynical, jaded part of me that thinks that nothing will happen to Facebook and there is probably a trade to the long side here. Guilty as charged of being jaded and believing that no one will bring a day of reckoning to Facebook, just like the folks chronicled in the Pandora Papers will continue to get away with their tax evasion.
Forgoing a possible long trade in Facebook is an opportunity cost... If I am right, there may be an opportunity to make some quick money here.
But choosing not to trade it is a commendable and valid choice, and one that I applaud.
There is no shortage of stocks of companies who are good corporate citizens out there in the market where you can make money... And I am a firm believer that many companies that consistently choose to do the right thing will offer a path to big gains, especially in the age of environmental, social, and governance ("ESG") investing, which we are living in.
Subscribers to my Empire Market Insider newsletter got my thoughts last week on three ways to profit from companies that not only capitalize on the ESG trend in investing, but also are at their cores good corporate citizens. (For anyone who isn't a subscriber, you can find out how to get access to that latest issue right here.)
I acknowledge that when I said Facebook is a good investment after the sell-off – while at the same time acknowledging the company is undermining key elements of society – I am in fact talking out of both sides of my mouth.
But let me be perfectly clear... there are plenty of ways to make money out there, and you can skip Facebook and other ethically challenged companies and still do just as well for yourself. And – with exceptions – I agree that companies that "do the right thing" will generally be more successful, especially in the contemporary era.
Thanks for keeping me honest.