Is financial “offshoring” illegal? That’s the question at the heart of the Pandora Papers disclosure, a tranche of more than 12 million private records held by some of the world’s top legal and fiduciary services firms.
Amid the October 2021 release, hundreds of clients of Il Shin, Asiaciti Trust, Alpha Consulting Limited, and others saw sensitive personal and financial information released to the public via the International Consortium of Journalists (ICIJ). Hundreds of journalists and dozens of media organizations reported on the release, many harping on the purported unlawfulness of the strategies high-net-worth families and individuals use to protect their wealth and mitigate business risk.
Like many financial matters, offshoring is complex, not black-and-white. Unfortunately, the public’s understanding of it — and, critically, the media’s as well — is rudimentary at best. Despite having done nothing wrong, many of the individuals and firms mentioned in the Pandora Papers release saw their reputations suffer due to inaccurate or misleading reporting.
The bottom line is that financial offshoring is commonplace, fits squarely within the ethical framework of international fiduciary activities, and is typically done with strict attention to applicable international laws and regulations.
Let’s take a closer look at what the Pandora Papers actually revealed about the practice of financial offshoring, what the law says about this practice, and what media and other stakeholders can do to improve the public’s relationship with it.
Media reporting on the Pandora Papers focused on sensational details about the real estate investing activities of current and former heads of state. This focus obscured a more complex and interesting story about the legitimate tax-reduction and wealth-protection strategies used by members of the international elite:
Using offshore entities to protect assets.
Many individuals and families of means use offshore vehicles — corporate entities domiciled in business-friendly foreign jurisdictions — to protect valuable assets from punitive taxation or seizure. This is particularly common among elites in countries with authoritarian or illiberal governments that use domestic tax policy to punish or silence dissidents and rivals.
Investing in alternative assets, such as real estate, in foreign jurisdictions.
Likewise, it’s quite common for wealthy individuals and families to diversify their investments by purchasing and holding business interests and alternative assets in other parts of the world. This has the effect of reducing political risk in countries with unstable governments or limited protection for private property rights.
Taking advantage of lower corporate tax rates in certain jurisdictions.
Individual and corporate tax rates vary considerably across the world. The difference between countries and territories with high corporate tax rates and those with low or no corporate tax is particularly stark. It’s natural for successful entrepreneurs to take advantage of this difference by domiciling their enterprises in lower-tax jurisdictions.
Again, these and other financial strategies described in the Pandora Papers are perfectly legal and regarded by legal and financial experts as being well within the ethical bounds of the fiduciary relationship. This is why — as we’ll see — the media’s casual insinuation of wrongdoing by individuals and firms named in the release has the potential to do grievous harm.
The answer to this question depends on your point of view, but those named in the releases certainly don’t think so.
In a response delivered to The Guardian newspaper and later released to the public, Asiaciti Trust asserted, “[Y] our allegations about us are premised on inaccuracies and incomplete information” and noted that “each of our offices have passed third-party audits for anti-money laundering and counter-financing of terrorism practices in recent years, which reflects our intense focus on this area.”
Fidelity Corporate Services Limited had a similar response, stressing that “We conduct relevant due diligence in respect to all of our clients at the time of establishment of the relationship and during subsequent compliance updates.”
Every organization that has responded publicly to the Pandora Papers has reminded the public that it is prohibited by confidentiality agreements and legal process from disclosing confidential client information — even if it would be to its benefit to do so. With these organizations unable to defend themselves in public, distorted and at times inaccurate narratives have taken root.
Traditional media gatekeepers are an important driver of these narratives. While social media bears more responsibility for spreading the most inaccurate and sensational claims, mainstream media have powerful incentives both to focus on splashy aspects of the releases — especially those involving public figures — and rush to publish without adding context.
Moreover, many of the ICIJ reporters and editors responsible for this coverage are not financial or legal experts. Their depth of coverage, or lack thereof, tends to reflect this. But many of them are experts in audience engagement. For better or worse, they follow a business model in which “clicks” and “shares” are the most important indicators of revenue potential — and where outlets’ economic success very often depends on their ability to produce and market sensational stories that increase reading or viewing time and attract new subscribers.
It’s notable that media coverage and editorials by media in the jurisdictions portrayed as “tax havens” by these releases tend to strike a more cautionary note. These on-the-ground outlets are more apt to warn of the dangers of oversimplified coverage and the potential economic backlash it could trigger.
The real-world impacts of “unfair” or inaccurate media coverage extend beyond the Bahamas and British Virgin Islands. They land in the corporate offices of the firms named in these releases and in the homes and businesses of their clients, sometimes with devastating effect. They cost jobs and livelihoods, destroying incalculable value.
That’s all the more tragic because, in the main, the activities described in the Pandora Papers and similar large-scale data releases are legal.
Most of the formal responses from firms named in the papers have stressed the rigor of their compliance processes and their respect for international law. These processes are important not only for legal reasons but for reputational ones as well — and for the overall health of the businesses themselves. To clients, a fiduciary’s respect for national and international law is an indicator of their legitimacy and credibility, a sign that they won’t cut corners or pursue high-risk strategies that could adversely affect their clients’ own reputations or jeopardize their wealth.
The global financial compliance regime is complex, of course. The average journalist, and certainly the average media consumer, is not an expert on policy in any single country, let alone all the jurisdictions mentioned in these releases.
This has important implications for accuracy in reporting. As we’ve seen, media coverage of these releases is not uniformly inaccurate, but it’s often overly sensational or misleading. It also raises the risk of reporters and media organizations eliding vital context about these jurisdictions.
Indeed, pro-business legal frameworks in places like the British Virgin Islands and the U.S. state of South Dakota are vital to local economies, attracting financial firms that employ thousands and generate billions in value. The firms named in large-scale data releases like the Pandora Papers can describe their activities as legal because they are legal in these jurisdictions. Mainstream media coverage often, and conveniently, fails to mention this very simple fact.
So, where do we go from here? How can government and corporate stakeholders regain the public’s trust?
The answer is far more nuanced than simply outlawing the activities described in the Pandora Papers and prior document releases. This would serve no one, and the unintended consequences would be stark. Fortunately, few advocate for such drastic measures.
What we can do is take a balanced and sensible approach that acknowledges legitimate public concerns while upholding fundamental principles of property ownership, free enterprise, and the right to conduct one’s affairs as one sees fit without the bounds of existing law.
This approach will of necessity have multiple facets, some of which will be easier to attain or implement than others:
Better public education.
Stakeholders can do better to educate the public about the activities described in this and other large-scale financial and legal data releases. This education should acknowledge and celebrate that — for the most part — this behavior is perfectly legal and occurs within the bounds of all applicable national and international regulations. From there, it should focus on the incentives for individuals, families, and corporations to pursue these strategies and how they fit into the context of the international system.
Improved media literacy.
The average person is not a sophisticated media consumer. This is a failing not of the individual but of the education system and media itself. In an increasingly fragmented information environment, school and university curriculum should incorporate basic media literacy: how to read news, determine a point of view, bias or agenda, evaluate the quality of information, and so on. Media should participate in this education and reinforce the core concepts to the broader public, perhaps through reading or viewing guides available free of charge.
Improved media coverage.
The media itself can do better to report complex stories with balance and sophistication. Sensationalism sells, but the audience is ultimately better off for having a fuller and more nuanced understanding of what’s really going on.
Advocacy for sensible tax and legal reform.
One common criticism of the financial behaviors described in this and other large-scale data releases is that they’re not fair even if they’re legal. That’s a reasonable position to take, but it’s not very useful in isolation. Those troubled by what they’ve learned should advocate for sensible tax and legal reform that reduces incentives for these sorts of behaviors or allows for more transparency in their execution. Credible proposals are already on the table, such as the global corporate minimum tax.
These measures won’t produce change overnight, or even in the course of a year or two. Systemic shifts take time to implement and bring no guarantees of success.
But that’s not an excuse for inaction. For better or worse, and setting aside the questionable provenance of the information, the public is demanding substantive changes in the wake of the Pandora Papers. That same public has an important role to play in bringing about these changes.
It’s past time to get started.