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The Paradise Papers Hacking and the Consequences of Privacy

Last month, the international law firm Appleby announced it had been the victim of a hacking and that information on its clients was in the hands of the International Consortium of Investigative Journalists, the news gathering organization that broke the story of the Panama Papers in April 2016.

On Sunday, material from that hacking became public. The Paradise Papers exposed the hidden financial dealings of Commerce Secretary Wilbur Ross, Queen Elizabeth and the athletic apparel company Nike, among many others. As revelations about tax-dodging airplane purchases and secret Russian ownership in tech companies came to light, Appleby declared that it takes its clients’ confidentiality seriously and billed itself as “not the subject of a leak but of a serious criminal act.”

In an age in which personal consumer data is routinely plundered for profit, it’s smart public relations for law firms like Appleby and the tax havens in which their clients hide their assets to present themselves as victims of a global crime epidemic. There is also genuine belief operating here. Jürgen Mossack and Ramón Fonseca, the founders of the law firm whose hacked files formed the heart of the Panama Papers, described their work as safeguarding their clients’ fundamental right to privacy in their financial affairs. Mr. Mossack and Mr. Fonseca insisted that when their customers asked them to set up hundreds of thousands of anonymous companies, trusts and foundations, it too was in the interest of privacy.

However, in the world of offshore finance, privacy long ago became a corrosive secrecy.

Appleby is a major player in a global offshore industry that helps multinational corporations and the mega-wealthy legally move money beyond the reach of the taxman through a network of tax havens and secret financial centers. As a lawyer at Mossack Fonseca candidly wrote in a confidential internal memorandum, “95 percent of our work” is “selling vehicles to avoid paying taxes.”

The amounts involved are staggering. An estimated 8 percent of household financial wealth is held offshore, representing a loss in annual global tax revenue of about $190 billion. But this pales in comparison to the tax avoidance and tax evasion by the large multinational companies that use this system. All told, more than $7.6 trillion may well be hidden in tax havens around the world, according to Gabriel Zucman, an economist at the University of California, Berkeley, who studies the issue.

In Congress, Republicans promote lower tax rates for American corporations even as companies employ the offshore system to pay little tax on billions of dollars in profit. This uncomfortable reality is not the focus of the tax debate in part because firms like Appleby help keep these activities secret. The public is simply unaware.

Meanwhile, there is the torrent of illegal cash that washes through tax havens and secret bank accounts — cash that is often put to illicit use, from bribing public officials to arms trafficking. The research and advocacy organization Global Financial Integrity has estimated that transnational criminal activities account for $1.6 trillion to $2.2 trillion annually. And laundered money represents 2 percent to 5 percent of global G.D.P., according to a recent report by the European Parliament.

The right of privacy keeps this underground river of money secret, but its existence has real-world consequences. Tax avoidance robs governments of funds to pay for education, health care and infrastructure. Prices for homes in New York, Miami, Los Angeles, London and other cities have spiraled beyond the reach of most residents because the global elite, often hiding behind anonymous companies, parks cash in them. And the corruption it enables is a major factor in the persistence of dire poverty in resource-rich regions like Africa.

Last week, the special counsel Robert Mueller indicted Paul Manafort, the former chairman of Donald Trump’s presidential campaign, on money laundering charges. The indictment charges that Mr. Manafort used offshore Cypriot companies and overseas bank accounts to disguise payments from a foreign government and bring the money into the United States. Even after scrutiny by one of the most high-powered teams of prosecutors and investigators ever assembled, it’s still not clear how many millions of dollars passed through these various channels. “Manafort’s financial holdings are substantial, if difficult to quantify precisely because of his varying representations,” Mr. Mueller stated in one legal filing.

With the offshore world so expansive and so in need of transparency, it often falls to journalists and those with access to leaked data to shine light on these secret dealings. Privacy is not an absolute right when the public interest is at stake. And so, journalists must face a difficult question before seeking to publish information that comes from hackers or other unauthorized leaks: Does this information directly affect the well-being of society?

When it comes to the secrecy world, which caters to the moneyed elite and the politically powerful, the answer is often yes. Still, the Mossack Fonseca documents in the Panama Papers were full of confidential information about people who broke no laws. The exposure of this information did not meet a public interest test. Despite complaints by WikiLeaks and other advocacy groups that the International Consortium of Investigative Journalists should have posted all the Panama Papers material online, the organization never seriously contemplated such a move.

What it has done instead is create the world’s most extensive online database of offshore company names, directors and shareholders. This database is about to grow significantly thanks to the Paradise Papers revelations, which include information from 19 corporate registries held by tax havens. The consortium has created a resource that shines a light on shadowy activities that undermine the rule of law and the norms of public responsibility. In this way, a flag has been planted on the boundary between privacy and secrecy.

Op-ed published in the New York Times on Nov. 7, 2017

Jake Bernstein, a senior reporter for the International Consortium of Investigative Journalists in the Panama Papers investigation, is the author of “Secrecy World: Inside the Panama Papers Investigation of Illicit Money Networks and the Global Elite.

Guide to the Paradise Papers

A lot of it is legal, but that’s exactly the problem. It’s not that they’re breaking the laws, it’s that the laws are so poorly designed that they allow people, if they’ve got enough lawyers and enough accountants, to wiggle out of responsibilities that ordinary citizens are having to abide by. Here in the United States, there are loopholes that only wealthy individuals and powerful corporations have access to. They have access to offshore accounts, and they are gaming the system. Middle-class families are not in the same position to do this. In fact, a lot of these loopholes come at the expense of middle-class families, because that lost revenue has to be made up somewhere.

– President Barack Obama, April 5, 2016

 

Secrecy allows ostensibly respectable people and companies to profit from behavior that would be scandalous if made public. Activities do not have to be illegal to be reprehensible. This truism is a handy prism through which to view the latest leak investigation by the International Consortium of Investigative Journalists.

Much of the leak comes from the files of Bermuda-based Appleby Global. The multinational law firm has offices in tax havens across the world from the Cayman Islands to the Seychelles. The firm amassed a huge American clientele. The almost seven million records reviewed by journalists contain at least 31,000 individuals and corporate clients who are U.S. citizens or have U.S. addresses.

Appleby began protesting weeks ago – when it preemptively revealed the leak – that it broke no laws. The data covers decades of the firm’s work in the secrecy world, during which requirements for client review and government reporting have changed dramatically. It appears that the firm was cognizant of those changes and tried to keep up. As Obama said, the scandal is in how much is legal.

Appleby’s clients, nonetheless, had plenty to hide.

U.S. Commerce Secretary Wilbur Ross, for example, seems to have done a poor job of disclosing his extensive financial dealings as required by disclosure laws – a remarkably consistent failing of Trump administration officials. If Ross had come clean, it would have been noteworthy that he remains in business with a shipping company that reaps huge profits from its dealings with Putin-connected relatives and oligarchs.

Not surprisingly, a slew of folks in Trump’s orbit from Sheldon Adelson to Rex Tillerson are found in the Appleby files.

In 2011, an American-based Russian tech mogul appears to have been a pass-through for the Russian-state financial institution VTB Banks to invest $191 million in Twitter. Gazprom, the Russian government-controlled energy firm, indirectly held a big stake in Facebook through the secrecy world. These revelations take on added significance given how Russia then used both companies to try and influence the American presidential election.

Apple CEO Tim Cook knows that hiding corporate profits from the taxman is publicly toxic. It’s antithetical to Apple’s hip brand and it doesn’t mesh with the progressive-persona Cook peddles to eager anchors on the national news. It also contradicts his testimony before Congress, where he has insisted his company does not employ the secrecy world to escape the taxman. Not exactly true, it turns out. When Irish tax shelters closed, Apple actively went looking to park cash in other tax havens, landing in Jersey.

The global sports brand Nike is another Appleby client. The firm helped Nike escape billions of dollars in taxes on its famous “Swoosh” trademark. These maneuvers robbed much needed tax revenue from American communities where Nike apparel is popular but earned the company’s CEO millions of dollars in bonuses.

The Queen of England had money invested in Brighthouse, a firm that sold rent-to-own household goods to impoverished Britons in exchange for payment plans with interest rates as high as 99.9 percent. A painful truth for Her Majesty as she sips tea from fine bone china in her ornate palace: some of the vast wealth she enjoys comes off the backs of her subjects who can least afford to pay it.

In Canada, Prime Minister Trudeau’s close friend and adviser Stephen Bronfman along with Liberal party bigwig Leo Kolber secreted millions of dollars in Cayman trusts which likely saved them a bundle on taxes. Such behavior is not particularly surprising from the global wealthy. However, that information would have been highly relevant when Bronfman and Kolber lobbied against legislative proposals to tax income from offshore trusts. It might have also cast Trudeau’s promise to crackdown on the secrecy world in front of the U.N. General Assembly in a different light.

This newest leak investigation should increase attention on how multinational corporations feed corruption in the developing world. A poster child for such behavior is Glencore Plc, a massive mining and agriculture conglomerate. It has left a trail of dangerous working conditions, contaminated air and soil and struggling communities from Australia to Argentina. Glencore was such a big Appleby client, it had its own room at the law firm. The company’s highly suspect efforts to win mining contracts, particularly in the Democratic Republic of the Congo (DRC), were aided and abetted by the secrecy world.

This line from ICIJ’s story on Glencore is a fitting epitaph to Paradise Papers:

“Despite living in the DRC’s richest mineral region, 60 to 70 percent of the inhabitants of the region that is home to Glencore’s operations are reported to live in poverty.”


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