February 9, 2023
A new book entitled “Invisible Trillions” by anti-corruption activist Raymond Baker warns how unbridled financial secrecy and corruption now threaten capitalism and democracy globally. “Over the last half century, capitalism has created the means by which trillions upon trillions of dollars, euros, pounds, and other stores of wealth can move and shelter invisibly, out of sight and beyond the control of central bankers, revenue authorities, law enforcement agents, and international institutions. With this level of financial secrecy now available to, and dominating, capitalist operations, riches move inexorably upward, accelerating economic inequality. Rising inequality is directly imperilling—weakening, obstructing, and degrading—democracy,” he writes. Exhibit A is Russia, a monstrous kleptocracy and military dictatorship which is now a threat to global security.
Baker describes the global infrastructure that is dedicated to hiding wealth from tax officials, police, investors, the media, ex-wives, judges, regulators, impoverished publics, and scrutiny of any kind. It consists of “enablers” or networks of lawyers and accountants who scour the world for loopholes and tax or secrecy havens for their clients. It includes banks, hedge funds, financial advisors, stock brokers, real estate agents, mutual funds, tax consultants, art galleries, casinos, politicians, corporations, and dozens of nation-states that proffer secrecy and tax dodges. The result is that the world’s rich become richer and the poor, and their governments, become poorer. Baker’s book aptly describes this capitalist carnage.
The enablers deploy “Weapons of Mass Deception” such as tax and secrecy havens, shell companies, anonymous trust accounts, fake foundations, falsified transactions, and cryptocurrencies. The illicit flood of undocumented and untaxed funds damages everyone. As wealth disappears into the shadows, honest taxpayers must pay more to cover the cost of social benefits, economic disparity grows, corruption proliferates, and democracies in developing or rich countries erode or disappear. The Russian dictatorship was built by Putin and others after they stole the country’s corporations and resource endowment. They corrupted its institutions, including the church, and hid their personal ill-gotten gains offshore. Now Putin wages war against Ukraine and the West.
Baker’s book, and discussions by other anti-corruption experts, were featured this week in Washington at a conference, called the DC Forum, organized by Charles Davidson, former Executive Director of the Kleptocracy Initiative at Hudson Institute. Some countries have begun to introduce legislative and regulatory reforms but progress has been glacial. The public is only made aware of the impact and extent of the problem occasionally. Most recently, the revelations contained in the “Pandora Papers” in 2021 were exposed by the efforts of the International Consortium of Investigative Journalists. It was the biggest data leak about illicit financial flows in history, involving massive offshore tax evasion and looting by thugs and dictators, but also by famous politicians, heads of state, rock stars, athletes, and royalty. This was the fourth gigantic
leak since 2013, and yet little has changed to clean up the financial system because the world’s governments and financial or legal intermediaries have not been regulated, deputized and, worse, are crooks themselves.
In 2013, the “Offshore Leaks” detailed the extent of international tax fraud perpetrated by banks. In 2016, the “Panama Papers” exposed offshore money laundering through shell companies created by now-defunct law firm Mossack Fonseca. In 2017, the “Paradise Papers” unearthed thousands of unknown offshore corporations owned by prominent corporations and individuals such as Prince Charles, Queen Elizabeth II, and former U.S. Secretary of Commerce Wilbur Ross. These, along with the “Pandora Papers” generate headlines, but then are forgotten, and the wholesale redistribution of the world’s wealth into the hands of a few ruthless and unethical entities continues virtually unabated.
Developing nations, in Africa and Eastern Europe, have been stripped of their wealth, but so have rich nations. All are victims because the system facilitates monumental tax evasion, and yet many countries are also accomplices by providing loopholes and secrecy: These include the Caribbean, Luxembourg, Switzerland, Ireland, Bermuda, and Hong Kong as well as Delaware, Nevada, Canada, London, and newly minted illicit capital global “laundry” superstar South Dakota. A few years ago, Dakota legislators passed estate laws that allow anyone to set up anonymously a tax-free trust in perpetuity. By 2019, it had attracted $367 billion in funds and this year it had reached $500 billion – trusts controlled by unknown persons who will never pay taxes anywhere. It is a money laundering and tax evasion dream and should be illegal.
“The equivalent of 10 percent of the world’s total GDP is held in tax havens globally,” wrote Gabriel Zucman, professor at UC Berkeley and author of the 2015 seminal book on the topic called The Hidden Wealth of Nations: The Scourge of Tax Havens. This hemorrhage of money deprives countries of tax revenues for schools, healthcare, pensions, and welfare, and also drives up taxes, and discontent, among the world’s middle-class and honest taxpayers. Some estimate that percentage is double now.
Baker’s book explains one of the biggest, and relatively unknown, money laundering and tax evasion schemes which involves falsifying trade transactions: “Agreements are made with suppliers to over-invoiced trade transactions, so that upon payment the mis-invoiced amounts will then be deposited into foreign bank accounts. Or under-invoiced transactions, thus avoiding customs duties and value-added taxes in the importing country. These transactions deprive local economies and local governments of resources needed for infrastructure, health, and education.”
Even legitimate multinationals duck taxes by transferring profits to no or low tax jurisdictions in order to avoid taxation in their more highly-taxed home countries. Fortunately, in October 2021, U.S. Treasury Secretary Janet Yellen devised a way to stop this “tax jurisdiction shopping by multinationals” by imposing a global minimum tax of 15 per cent. This has been accepted in principle by 130 countries and governments who are working on laws to implement this reform. But Baker says taxes are symptoms only and the underlying problem – financial secrecy – must be eradicated. “Trying to impose a minimum tax—in other words, treating the symptoms while
leaving secrecy mechanisms in place, which are the causes— is unlikely to work. Instill transparency and accountability first, then a minimum tax regime can work.”
Switzerland is the funnel through which most dirty money passes because ownership is erased there once assets are deposited into Swiss corporations and trusts. This allows the bad guys to identify themselves as Swiss corporations or trusts, and hide the real ownership from then on. Much of this Swiss money goes immediately to Luxembourg and put into anonymous trusts. Luxembourg has a tax treaty with the United States (that should be rescinded) allowing these trusts to invest in U.S. mutual funds tax-free and without detection.
Asia has its own laundries to hide money from China and other nations. Its “Switzerland and Luxembourg” are Singapore, Hong Kong, Macau, and Vanuatu. Once the ownership and source of funds is erased, the money is ready for “snow washing” (buying condos in Toronto or Vancouver) or investing in corporations or luxury residences in New York, Los Angeles, London, or wherever desirable.
The reforms are obvious: Eradicate secrecy everywhere and anywhere. Ban anonymous trusts, shell companies, numbered companies, and eliminate proxies by establishing beneficial ownership registries where the actual owner (not his lawyer or trust) must come forward publicly so culprits cannot hide from police, taxmen, courts, or litigation. Another critical reform, argues Baker, is that all governments should require citizens to pay taxes, irrespective of residency, then governments must create a global tax collection police force. Only the United States taxes its citizens wherever they live.
Enablers must also be reined in, notably lawyers, hedge funds, stock brokers, art galleries, and real estate developers. A proposed “Enablers” bill was defeated in Congress this year, but support builds because of the scale of the problem. This would require enablers to report suspicious clients and transactions to authorities as banks now must do.
Most disturbing is the cryptocurrency threat to capitalism and democracies and global security. “Combined values of cryptocurrency transactions, highly volatile, hit $15 trillion in 2021,” writes Baker. “Specialized money laundering services have arisen and crypto crime exceeded $14 billion in 2021. An Australian study concluded that close to half of crypto transactions examined had illegal purposes. Criminals use cryptocurrencies to do business across borders, completely unseen, and domestic and foreign terrorists are already detected among users.”
The world’s Weapons of Mass Deception proliferate and must be eradicated globally. They facilitate the world’s biggest and most dangerous money heist, culminating in Putin’s kleptocracy that now threatens the global economy and global security.