The Pandora Papers explained
Global financial wealth stored in so-called “offshore” accounts corresponds to some 10% of the world’s GDP. While not illegal per se, offshore accounts are often used to hide proceeds from corruption, tax evasion and criminal activities. In this episode you’ll learn about the making, revelations and outcomes of the largest-ever journalistic investigation into offshore finance: the Pandora Papers.
Listen to the podcast in English here and in Italian here.
The investigation
11.9 million documents. 600 journalists. 117 countries. The Pandora Papers are the largest collaborative investigation in the history of journalism. Released in October 2021, the Pandora Papers are a collection of documents revealing the wealth hidden by the earth’s powerful through a complex system of shell companies and offshore accounts managed via trusts in so-called “tax havens.”
Tax havens are jurisdictions where the tax rate is very low and the legal regime for financial activities very loose. Famous tax havens include Monaco, the Cayman Islands, and Fiji. In these countries, creating legal entities such as corporations and foundations is easy, and the checks that financial service providers have to make on the identity, activities, and origins of their clients’ assets are minimal. In addition, these countries do not participate in tax information exchange agreements with authorities in other jurisdictions and refuse international administrative cooperation. This makes tax havens perfect places for offshore finance, that is, the provision of financial services to people residing in other countries, especially those seeking secrecy for their transactions. Among offshore financial services, the creation of foundations and shell companies is particularly prominent.
Shell companies are empty legal entities, firms that produce nothing and only exist on paper to justify the transfer of funds from one account to another. This, in turn, helps hide the owners of the accounts and the origins of their capital in a completely legal manner. The ideal structure to establish and manage these shell companies are trusts. The Pandora Papers are the result of a massive leak of documents from 14 trusts scattered around several tax havens: Belize, Cyprus, Hong Kong, Dubai, the British Virgin Islands, Panama, the Seychelles and Switzerland. 7 more trusts were added to the Pandora Papers list in 2022.
The trust that suffered the largest leak (3.4 million documents) was the Trident Trust, a company founded in the British Virgin Islands in 1970. Like the other trusts involved in the investigation, its mission was managing the wealth of high-profile individuals from around the world. Such high profile individuals included politicians, public officials, businessmen, celebrities, but also criminals and terrorists.
Some of the names that have caused uproar are Ukrainian President Volodymyr Zelensky, Jordan’s King Abdallah II, former British Prime Minister Tony Blair, Chinese entrepreneur Jack Ma, supermodel Claudia Schiffer, singer Shakira, and soccer coaches Ancelotti and Mancini. When we look at geographies, Russia, Brazil, the United Kingdom and Israel are the countries with the most millionaires involved, while Ukraine, Russia, the United Arab Emirates, Honduras, Colombia and Nigeria dominate the politicians rankings.
It took 151 newspapers and 2 years of work to publish the Pandora Papers. Some of the most prominent media involved include The Washington Post, Le Monde and El Pais. The International Consortium for Investigative Journalism (ICIJ) ensured their coordination and is in charge of the maintenance of the database of the investigation, which is entirely public and free to access. The ICIJ was established in 1997 as a project of the Center for Public Integrity and became an independent nonprofit organization with headquarters in Washington DC in 2017. The ICIJ rose to international prominence in 2015 with the publication of the first-ever investigation into offshore finance, the Panama Papers. Two years later, the ICIJ made headlines again with another investigation, the Paradise Papers. What is so special about the Pandora Papers then?
The revelations
In Greek mythology, Pandora, whose name means “all gifts,” was the first mortal woman and one of Zeus’ weapons against the titans. After ordering Hephaestus to mould her, Zeus required all the other gods to give Pandora a gift. Zeus’ gift was a vase that he advised Pandora not to open. He then sent Pandora to earth to marry the titan Epimetheus, who did so despite his brother Prometheus’ warnings not to accept any gifts from Zeus. Shortly after the wedding, Pandora succumbed to curiosity: she opened the vase gifted to her by Zeus, releasing all the evils of the world on earth. Only hope, stuck in the hasty closing of the vase, could not get out.
The reason why the Pandora Papers caused such a stir is because they revealed three great “evils”.
The first revelation of the Pandora Papers is that offshore finance, while formally legal, remains the go-to wealth management solution for criminals. Indeed, the loose regulations in tax havens have emboldened trust companies to accept convicted criminals, fugitives, wanted persons, people under investigation and sanctioned individuals among their clients. Italy provides two prime examples in this regard.
One is Camorra boss Raffaele Amato, aka “Lello Amato” or “a’ vecchiarella”, who has grown famous for inspiring the character of Salvatore Conte in the TV series “Gomorra.” A key player in the Secondigliano drug war of the early 2000s, Amato exploited offshore finance to launder drug proceeds through real estate investments in Spain, where he spent much of his criminal career. Here’s how.
Amato first deposited some 3 million euros from drug trafficking into the Banque Monegasque de Gestion in Monte Carlo using the name of his wife Elmelinda Pagano. He then entrusted the money to a management company also based in Monaco, Moores Rawland International. Amato’s alleged partners then gave a subsidiary of Moores Rawland, Radnor Investments SA of Panama, a mandate to subscribe 10,000 shares valued $1 USD each of another company, the Palm Tree Service Ltd, based in the British Virgin Islands. Palm Tree Service Ltd in turn entered into a trust agreement with the British company Starfield Investment Limited, which then acquired a Barcelona-based firm called Mer Vacanze Immobiliare. It was the latter that purchased, on Amato’s behalf, some plots of land in Andalusia. If you got lost in all the steps the money went through don’t worry: this is exactly what money laundering is about.
Another criminal case is that of the neo-fascist terrorist Delfo Zorzi. His story-and the fortune he made from offshore finance- could be the plot of a movie. Convicted in 1968 for possession of weapons and explosives, Zorzi ended up in the suspects list for the Piazza Fontana massacre that took place in Milan in 1969. To escape capture, Zorzi fled to Japan, where he married a wealthy heiress, obtained Japanese citizenship and changed his name into Hagen Roi. The new identity enabled him to avoid an international arrest warrant issued in 1997 and to create a business empire completely undisturbed. Indeed, the Pandora Papers, and in particular documents from Alcogal, a trust firm from Panama, identified him as the owner of the Thor Trust, a shell company run by another trust, the Swiss firm Fidinam. To further add secrecy, the trust was formally run by a “protector” that is, a representative who allowed Zorzi to remain anonymous. Such a protector was a lawyer called Giorgio Spiess, famous in Italy for defending the leader of the P2 Masonic lodge. Starting 2009, Zorzi’s Thor Trust has acted as treasury for six other offshore companies, all of which can be traced back to Hagen Roi, Zorzi’s Japanese identity. These six companies are scattered among the Isle of Man, Madeira, Cyprus, Panama and Luxembourg and control, sometimes through representatives, clothing brands in Italy, Sweden and other European countries.
In 2004 a Supreme Court ruling acquitted Zorzi for the Piazza Fontana massacre, but confirmed his responsibility for two other bombings, fortunately without casualties, carried out against the Slovenian minority in Italy in the 1960s. This, however, has had no impact on his life or wealth.
The second revelation of the Pandora Papers is that offshore actors have become increasingly good at walking the fine line between legality and illegality. If the revelations of the Panama Papers brought down entire governments (that of Iceland for instance), the Pandora Papers have proven insufficient to bring about convictions or at least push powerful men to resign.
A prime example is Ecuador’s President Guillermo Lasso, who was linked by the Pandora Papers to 10 trust companies between Panama and the United States. Holding offshore companies is illegal for candidates and public officials under Ecuadorian law. However, Lasso declared he was no owner, shareholder or beneficiary of any of the companies involved in the Pandora Papers investigation and that any use he made of international entities before becoming president was legitimate. Today, most of the companies linked to him have been dissolved and Lasso remains in power.
Another example is that of Abdul Daim bin Daim Zainuddin, a wealthy Malaysian businessman who also served as Minister of Finance. The Pandora Papers revealed his and his family members’ involvement in as many as 12 trusts. His sons, for example, control two shell companies that own properties worth several million in London. Daim Zainuddin denies any wrongdoing by claiming he has always correctly declared his offshore companies and paid the due taxes. To date, no formal charges have been brought against him.
The third and most surprising revelation of the Pandora Papers is that the engine of the global financial system, the United States, is also a tax haven. Indeed, the Pandora Papers have uncovered the existence of 206 trust companies scattered among South Dakota, Florida, Delaware, Texas, Nevada and Alaska. Many of these entities have sprung out of a massive wave of financial liberalization driven by local lawmakers persuaded that a loose regulatory framework would attract foreign investment and create jobs in otherwise marginal states like South Dakota and Alaska. While foreign capital has arrived, it has not produced the desired effects on growth and employment. Worse still, these reforms have left the United States in an awkward position vis-à-vis their international partners: while the United States requires other jurisdictions to share information about U.S. citizens holding accounts abroad, they refuses to do the same with foreigners who control offshore accounts on their soil.
The challenges ahead
Contrary to what these stories seem to suggest, holding offshore accounts, companies or foundations is not a crime, not even if they are in a tax haven. However, it is undeniable that the secrecy and lack of oversight of the offshore financial system facilitate tax evasion, money laundering, corruption, and allow criminals and wanted persons to move capital undisturbed.
Without the involvement of the United States, who play an outsized role in global finance, putting an end to this system seems impossible. In 2014, the United States refused to join an international agreement supported by more than 100 jurisdictions, including other tax havens such as the Cayman Islands and Luxembourg, on the sharing of information about offshore account holders in their territory. There seems to be no willingness to address the issue domestically either. Foreigners who own shell companies in the United States are in fact exempt from a recent transparency law that requires trusts to declare the identity of their clients. On top of that, trust managers in the United States have no obligation to verify the origins of their clients’ funds, making them a perfect destination for money laundering. Lastly, the Enablers Act, a law proposed in reaction to the Pandora Papers to force trusts, lawyers and art dealers to verify the profile of clients who intend to bring capital into the United States, was blocked by the Senate in December 2022.
Should we simply surrender to the existence of a parallel and opaque financial system? No. Some of the investigations initiated thanks to the Pandora Papers are still ongoing. It’s the case, for example, of the probe into the purchase of a villa on the French Riviera by the former Czech prime minister Andrej Babiš through a series of shell companies based in Monaco and the United States. This kind of investigation has the potential to demonstrate that offshore finance is being systematically used to commit financial crimes and thus increase political pressure to drastically overhaul the system. Perhaps we should reopen Pandora’s box- this time to unleash the hope that remained trapped inside.
Sources
https://gabriel-zucman.eu/files/AJZ2018.pdf
https://www.icij.org/investigations/pandora-papers/
https://www.icij.org/investigations/pandora-papers/secrecy-brokers/
https://www.icij.org/investigations/pandora-papers/global-investigation-tax-havens-offshore/
