This episode is sponsored by NYDIG.
On today’s episode, NLW breaks down the latest in a string of embarrassing leaks about how the world’s elite and wealthy use offshore accounts to obfuscate ownership and hide their wealth. He looks at:
- How the Pandora Papers compare to the 2016 Panama Papers and the 2017 Paradise Papers
- Examples of surprising revelations
- How South Dakota has become a wealth haven
- What the leaks mean for future crypto crackdowns
See also: Bank of America Launches Research for ‘Too Large to Ignore’ Digital Assets
“The Breakdown” is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Tidal Wave” by BRASKO. Image credit: Hiroshi Watanabe/DigitalVision/Getty Images, modified by CoinDesk.
What’s going on guys, it is Monday, October 4, and today we are talking about the latest in a string of leaks dating back a few years that relate to offshore accounts, and how the global wealthy hide that wealth for sometimes legal, sometimes not so legal purposes. Of course, the specific bent we’re going to take on this is what it might mean for bitcoin and crypto. I will say in the outset, there is not much here that directly relates to bitcoin or crypto. These aren’t stories of wealthy Russian oligarchs using crypto to move their wealth. These are the traditional financial worlds ways of obscuring wealth through shell corporations, offshore accounts and other means like that. These Pandora papers are the biggest in a string of leaks, but to understand their precedent, let’s go back and look at two other “P” name papers.
The first that I want to reference is the Panama Papers. These were published in April 2016 and they detailed financial and attorney-client information for something like 214,488 offshore entities. Now, these all came from the former Panamanian offshore law firm and corporate service provider called Mossack Fonseca, and some records dated all the way back to the 1970s. So, to be very clear, this is a single law firm and corporate service providers leak and it had information about more than 200,000 offshore entities. This one got a ton of buzz, and there was in fact some amount of legal activity afterwards, particularly with regard to the founders of Mossack Fonseca. Still, the amount of buzz it got versus the amount of action that happened is pretty small and pretty notable for being so small.
The next “p” name paper was the Paradise Papers, which were released on November 5, 2017. These included more than 13.4 million confidential electronic documents, and these were leaked to two German reporters, Frederik Obermaier and Bastian Obermayer. When these German reporters got these 13 million documents, they shared them with the International Consortium of Investigative Journalists, who then shared them with a network of more than 380 journalists to piece them together. Like the Panama Papers, these were leaks from a specific handful of corporate service providers and legal firms. The legal firm was Appleby, and the corporate service provider was Estera. They referenced businesses that were registered in 19 different tax jurisdictions and contain the name of more than 120,000 people and companies. These were notable because they included everyone from Prince Charles, to Queen Elizabeth, to U.S. Secretary of Commerce Wilbur Ross, to AIG, the insurance giant. These again had a lot of bluster, a lot of embarrassment, but not very much legal action that came out of it.
With that, let’s move to the Pandora Papers, which were just released over the weekend. These are a significantly larger leak than the Panama Papers, but they were coordinated by the same journalist organization, the International Consortium of Investigative Journalists, or ICIJ, who looked at the Paradise Papers. In total, there are 11.9 million files and 2.94 terabytes of data. The collaboration to go through this involved 600 journalists from 150 different media outlets, in 117 different countries. Unlike the Panama or the Paradise Papers, these came from 14 different firms or entities that offered services in 39 different jurisdictions. Remember, both Panama and Paradise were largely centered on one, or a small handful of these types of entities. The Pandora Papers have details of more than 27,000 companies and 29,000 beneficial owners of those entities, which is more than twice as many individuals as had been identified in the Panama Papers. The people named in the Pandora papers include more than 330 politicians from 90 different countries, and also include 130 Forbes billionaires. The bulk of these documents relate between 1996 and 2020, although some go back to the 70s, and it is estimated that it revealed $11.3 trillion in offshore wealth.
Basically, the Pandora Papers are one big dox: doxxing the beneficial owners, which is a legal term of entities, which includes trusts and shell corporations that are registered everywhere from the British Virgin Islands, BVI, the Seychelles, Hong Kong, Belize, Panama and South Dakota, as we’ll get into in a little bit.
Now, let’s give you a sense of what was the type of information disclosed. Let’s head over to Jordan where King Abdullah II was revealed to have a $100 million property empire that spanned from Malibu, to Washington, to London. Keep in mind, this is a guy who gives is an annual prize for transparency in his name and who, before the ICIJ investigations went live, blocked the site from his country. In Azerbaijan, the Aliyev ruling family was revealed to have £400 million in U.K. property. The Guardian writes: one of their properties was sold to the Queen’s crown estate, which is now looking into how it came to pay £67 million to a company that operated as a front for the family that runs a country routinely accused of corruption. Uhuru Kenyatta, the president of Kenya, who in 2018 told the BBC that “every public servant’s assets must be declared publicly so that people can question and ask what is legitimate,” has $30 million of offshore wealth including property in London. The prime minister of the Czech Republic, who is up for election this week, used an offshore company to acquire a $22 million chateau in the south of France and is now facing questions about that as he is up for election. Former British Prime Minister Tony Blair and his wife bought a $6.5 million office building in London by acquiring a British Virgin Islands company. Again to The Guardian: “While the move was not illegal, and there is no evidence the Blairs proactively sought to avoid property taxes, the deal highlights a loophole that has enabled wealthy property owners not to pay a tax that is commonplace for ordinary Britons.”
There is also the interesting wrinkle of South Dakota and makes me question whether we should really be referring to this as quote-unquote “offshore.” The Guardian says: “The Pandora papers also placed a revealing spotlight on the offshore system itself. In a development likely to prove embarrassing for U.S. President Joe Biden, who has pledged to lead efforts internationally to bring transparency to the global financial system, the U.S. emerges from the leak as a leading tax haven. The files suggest the State of South Dakota, in particular, is sheltering billions of dollars in wealth linked to individuals previously accused of serious financial crimes.”
The Washington Post goes on: “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 in companies accused of human rights abuses and other wrongdoing. Perhaps the most troubling revelations for the United States center on its expanding complicity in the offshore economy. South Dakota, Nevada and other states have adopted financial secrecy laws that rival those of offshore jurisdictions. Records show leaders of foreign governments, their relatives and companies moving their private fortunes into U.S.-based trusts. In 2019, for example, family members of the former vice president of the Dominican Republic, who once led one of the largest sugar producers in the country, finalized several trusts in South Dakota, the trust held personal wealth and shares that the company which has stood accused of human rights and labor abuses, including illegally bulldozing houses of impoverished families to expand plantations.”
As part of their investigation, the ICIJ identified something like 200 different trusts that were settled or created in the U.S. between 2000 and 2019. Eighty-one of those in South Dakota 37 in Florida, 35 in Delaware, 24 in Texas and 14 in Nevada. The trusts were connected with people from 40 countries, which didn’t include the U.S., and the assets in these single trusts were worth somewhere between $67,000 and $165 million, for a total of more than $1 billion.
That is a breakdown of the overview of these Pandora papers. But let’s talk about the different angles of discussion that might come out of this and that people are taking online. I think we first have to start with the hypocrisy angle, and it actually comes from two different sides. From the non-crypto crowd, Rohan Grey, who is sometimes a combatant of the crypto community as anyone on Twitter will know, but who is an ally when it comes to financial privacy. He points out how hypocritical this makes the U.S. government look when it comes to the way they look at illicit money flows as it relates to things like cash. He tweets: “Clearly, this demonstrates why we need to eliminate $20 bills and surveil sex workers because that will prevent illicit money flows.”
Moving over to the crypto side. there is more than a fair bit of complaining about the hypocrisy given that we’re the industry that officials routinely point to as for criminals or for people who are just looking to obscure their wealth. Maya Zehavi tweets: “Funny how regulators and legislators couldn’t care less about offshore tax avoidance, but are willing to crack down on an entire industry where a younger generation is making their own wealth just to get their hands on alleged tax avoidance.” Paolo Ardoino, the CTO of BitFenix and Tether writes: “Can’t wait for the mainstream media commentary on Pandora Papers to be like ‘Yes, seven kazillion dollars were amassed, but a dude had 1000 satoshi in a wallet!!! See how #bitcoin can be used to for bad stuff?’”
Now, there is another line of analysis, the question about whether this will make people actually switch to crypto. @anderpart, who is a Hong Kong and London-based distressed debt investor went on a Ritalin-fueled tear last night, and I say that not to malign him, he said so as he was tweeting. Now, he’s taking these down, but I do think that they provide some insight into a way of looking at this whole situation. He writes: “The Panama Papers revealed Hong Kong to be the most active jurisdiction for shell companies in the entire world. I’m 100% banking on some CCP officials being linked up to these companies once again.” Editor’s note, NLW here again, I should say that there is no evidence of that so far, this is one of the areas that is rampant speculation on his part, but back to his tweet thread.
“The problem in Hong Kong isn’t regarding taxes, really. Hong Kong is a global offshore hub and tax haven. But the identification of the beneficiaries of trusts, foundations and shell-limited companies, it’s going to be very expensive to set up new shells. Expect a lot of uptick in crypto activity as people try and move their cash across the OTC desks in Hong Kong and Singapore into the custody of newly set up shellcos. Say you’re a Hong Kong tycoon. You want to hedge your political risk and set up a bunch of foreign shells to buy London property and your kids in university live there. Now you get doxxed and everyone knows that the house is owned by you. Did you break the law? No. Screwed? Yes. The problem with the leaks, at least in Hong Kong, has nothing to do with breaking the law, except for Chinese government officials hiding assets, but everything to do with privacy going up in flames. Also, people don’t want business relationships and associates all public.”
The interesting thing here is one, this speculation that maybe some of this activity moves to crypto, which by the way, I don’t think is very good for us as a line of speculation; but two, the idea that in many cases, this isn’t really about breaking the law. It’s about financial privacy. It’s about secrecy. It’s about not wanting your purchases to be available and known to everyone. NPR points out this gray area that there is a difference, and it’s important to keep in mind, between financial secrecy and outright tax evasion. From NPR: “According to the authors, the term ‘offshore banking’ was originally coined to refer to island nations with lax finance laws that allowed people to hide their assets. But now, it refers to places outside of a person’s home country where they can shelter their money without having to abide by the rules where they live. Offshore accounts are not necessarily illegal. Many of the companies that responded to the journalists’ requests for comments said they had not broken any laws. But account holders can use offshore trusts and shell companies for illicit purposes, such as to avoid paying taxes or to fund criminal enterprises.”
This gets to one other weirdness about all of this that there is no focus on the U.S. Of the 336 politicians identified, none is from the U.S. This has a lot of people’s skepticism raised. Ben Norton from Grayzone tweets: “What a coincidence that there are zero U.S. politicians included in the Pandora Papers’ list of offshore bank accounts. I guess they’re all pure and free from corruption. I’m sure this has nothing to do with the fact that the so-called ‘leak’ was likely a hack by U.S. spy agencies.” I will note I have seen nothing additional to support this thesis that the leak is a hack from U.S. spy agencies, but I will say that it’s pretty notable that there are no U.S. politicians, or really U.S. notable figures implicated here. The obvious, non-conspiratorial answer to that is that these 14 firms happen not to be ones that tend to deal with U.S. nationals. In other words, you could assume that there are firms that deal with U.S. nationals, it’s just not these 14. That’s sort of my default base case understanding. When you have a leak, you don’t get to pick which leak it is. And presumably, there are network effects of trust around how the wealthy get to these different firms, and so these might just not serve that clientele. I certainly think that it’s very unlikely that this indicates that U.S. nationals are not part of this overall enterprise.
One other angle that I think is worth noting is there were many, many from Latin America, particularly from Argentina implicated in the Pandora papers. Argentina has extremely strict capital controls and there are many who think that those sort of capital controls are, in fact, relatively unjust, that they come often from corrupt political administrations. And there is some moral, ethical gray area around finding ways to get around them. I point this out, only to point out that it’s very easy to get swept away in the ‘look, the wealthy are just abusing the system to avoid paying their fair share.’ And there’s probably more than enough of that to go around. But, as with all things, it’s not that simple necessarily in a global context, global political context matters.
Two more ways of looking at all this before we close. The first is that this is going to be one big massive nothing-burger. Alan Macleod, a senior staff writer and podcast producer at MintPress writes: “The way corporate media are massively hyping up these Pandora papers means you can be completely sure they pose absolutely zero threat to western state or corporate power. Unlike with Wikileaks stuff or the Snowden revelations, few, if any, important in the West will be exposed.” This is a cynical, but based on the reception of the Panama Papers and the Paradise Papers, probably pretty accurate, cynical take.
But finally, and here’s the one that I’m most worried about, and I think is the reason to really pay attention to this. That’s the idea that these will be used as justification for a clamp down. Crypto Bitlord writes: “Pandora Papers are old news but watch the narrative being spun. New laws will come out of this, more international cooperation and in the end, higher tax for everyone.” INArteCarloDoss, a popular anonymous FinTech account tweeted: “My guess: this has been orchestrated and released on time for a global tax crackdown in an era of increased fiscal pressure.” So, the take here is that what will come out of this is governments, particularly the U.S. government, saying something to the effect of ‘see how rampant this is? This is why we need more power to surveil our financial markets.’ Even with all these new rules, the Bank Secrecy Act, KYC AML regimes, we still don’t have enough power to stop this type of thing. Give us more power. Oh, and by the way, this is why we need more power over crypto because crypto is the next generation of this type of tool to avoid taxes and to avoid our larger legal structures.
Now, of course, the alternate take would be that even with all the power that they have been granted, even with all of the billions of dollars that have been spent on regimes like the Bank Secrecy Act and the KYC AML regime, they are still powerless to stop this type of activity. Perhaps the answer isn’t more power, but a fundamentally different strategy, a different way of looking at the problem and a different way of looking at the solutions. It feels hard to imagine how someone will summon up the political will to make that argument when it’s so much easier to say, look at all these corrupt billionaires hiding their wealth from you. It seems counter to the times and the mood of the times to actually think very differently about this, but, one can hope.
To sum up what the Pandora Papers have to do with bitcoin, the answer is not much yet, but maybe a lot. They’re part of a larger attempt by the powers that be to take more power to point to these sorts of leaks, not as examples of the inefficacy of the extremely stringent approaches they’ve taken for years, such as the Bank Secrecy Act, but instead to clamor for more power, for more control over the financial system. I think in other words, that the Pandora Papers are part of the larger macro frameset that is going to set the tone of discussions around how Bitcoin and crypto should and will be regulated in the months and years to come. Until tomorrow guys, be safe, take care of each other. Peace!