Pandora Papers: What does it reveal about the shadow economy?

The biggest journalistic partnership in history—consisting of more than 600 journalists from 150 media outlets, including the BBC, the Washington Post, the Guardian, Radio France and Indian Express, among others—has recently exposed the financial misadventures of 35 prominent world leaders, more than 330 politicians and influential public office holders, from 91 countries and territories.

The two-year investigation conducted by the International Consortium of Investigative Journalism (ICIJ), involving scrutiny of 11.9 million leaked confidential files from 14 offshore service providers, has resulted in the Pandora Papers—one of the biggest revelations of financial misconduct of influential national leaders in recent history.

The Pandora Papers investigation has linked the names of Jordan's King Abdullah II; Lebanese Prime Minister Najib Mikati; Hassan Diab and his predecessor; governor of Lebanon's central bank Riad Salameh, who is also undergoing investigation in France for money laundering; Kenyan President Uhuru Kenyatta, along with six members of his family; former British Prime Minister Tony Blair and his spouse; Ukrainian President Volodymyr Zelensky, a former comedian and a beloved figure in the country; and other influential leaders, with dubious offshore investments. 

Some of the names have caught the world by surprise, because these leaders in the past has been very vocal in condemning tax abusers in their countries, including their political opponents. "We should not make our tax rules a playground for… tax abusers who pay little or nothing while others pay more than their share", Tony Blair had suggested earlier. Andrej Babis, the millionaire Czech Prime Minister, had expressed his desire to create a business environment in the country where "entrepreneurs will do business and will be happy to pay taxes." Kenya's Uhuru Kenyatta in 2018 had told the BBC, "Every public servant's assets must be declared publicly so that people can question and ask, what is legitimate?... If you can't explain yourself, including myself, then I have a case to answer."

These same leaders are now at the centre of the Pandora Papers scandal.

So, how come these prominent world leaders—many of whom have advocated for stricter tax rules and punishment for tax dodgers—find themselves embroiled in a scam like this? The answer perhaps lies in the fact that these leaders themselves are involved in the making of such laws.

Pandora Papers could be the largest such revelation, but it is not the first one. There had been LuxLeaks in 2014, Panama Papers in 2016, Paradise Papers in 2017 and FinCen files in 2020. While there have been some positive result of these exposures connecting influential national leaders, politicians, businesspersons and celebrities with the shadow economy—former Pakistan Prime Minister Nawaz Sharif had been disqualified from office by a Supreme Court verdict in the aftermath of the Panama Papers leak—the shadow economy continues to operate smoothly with the blessings of its beneficiaries.

The reason being, the people who are responsible for safeguarding the money of the common people are making personal gains at their expense. These people hire expert tax lawyers who are well versed in manipulating the loopholes in the existing system and allow their clients to circumvent the rules—all at the expense of the common people's interest.

For instance, Tony Blair and his wife brought a British Virgin Islands (BVI) company, through which they became owners of a Victorian building worth USD 8.8 million. This enabled the couple to evade paying a property tax of more than USD 400,000. The building currently houses the law firm of Tony Blair's wife.

Similarly, while on the one hand the Lebanese people are struggling to cope with one of the worst economic meltdowns in recent history—with stores shutting down and people not being able to buy the daily essentials because of a sharp spike in inflation—the current Lebanese Prime Minister, his predecessor, the country's former minister of state and the chairman of  Al Mawarid Bank, have all been linked to offshore wealth.

On the one hand, these revelations expose the sheer apathy of the politicians towards the interests of the common people who elect them to power. On the other, they also raise questions about the system that allows these individuals to get away with amassing illegal wealth while the people suffer. And they can do it because they have the money and the means to access expensive lawyers and their unethical services.

These revelations have become a norm now—more like a leitmotif in a drama. It is the same plot, the same cast, the same act and the same scenes playing out again and again with no result.

When the revelations of the global shadow economy began to unfold in 2014, governments around the world promised to take strong measures to stop the practice of hiding disclosed wealth by the rich and the influential though offshore investment mechanisms. Unfortunately, not much has changed today.

While offshore investment is not illegal itself, using this mechanism to hide illegally amassed wealth and or evade taxation is. But this practice continues—the repeated failed attempts by journalists and investigators to break this system only reveal the strength of the underground economy that is growing in size. According to the United Nations Office on Drugs and Crime estimate, the volume of money laundering every year is around two to five percent of the global economy—or about 800 billion to two trillion in US dollars.

And the volume of this will increase, unless world leaders see the folly of their actions and acknowledge their role in nurturing it. Those who are involved in illegal offshore financial transactions should acknowledge their misdeeds and step down.

The Financial Action Task Force on Money Laundering (FATF), an inter-government body with 39 members, responsible for developing standards for Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT); and United Nations Convention Against Corruption (UNCAC) should be empowered and strengthened so that they can continue to fight against the financial crimes of the political elites by formulating policies and standards to make money laundering more difficult.

The US banks and financial institutions also have a major role to play here, since the majority of these transactions are carried out in US dollars. "Because of the US dollar's status as the de facto global currency, most international transactions flow in and out of New York-based banking operations", the ICIJ report mentioned.

While the US has over the years coerced other banks, especially the Swiss banks, to disclose the names of US nationals involved in wealth hiding through offshore accounts, the US itself is rather unwilling to share "information about money moving through US bank accounts, companies and trusts… The US has refused to join a 2014 agreement supported by more than 100 jurisdictions, including the Cayman Islands and Luxembourg, that would require American financial institutions to share information they have about foreigners' assets," the ICIJ report added.

This attitude of the US is also a hindrance in addressing the issue of illegal offshore investments. Many US States, including South Dakota and Nevada, have emerged as major destinations for hiding illegal wealth—in South Dakota alone, assets in trusts have increased four times to USD 360 billion in the last 10 years, according to ICIJ. This is hurting the global economy and in the long-run will be harmful for the US economy itself.

By dismantling this system, the US can contribute significantly in curbing the illicit flow of money through offshore account transactions, and as an international power, it should prioritise global interests over national gains though illegal means.  

While the international community together has a role to play in curbing illegal offshore investments, the common people should also wake up to the stark reality of the corruption and financial crimes of their leaders and raise their voices for justice. They must also create pressure from the bottom to end this economic and social injustice that continues to plague economies. In the long-run, this will yield disastrous consequences for both the culprits and the victims. Such an outcome would not be palatable for any party involved.

Tasneem Tayeb is a columnist for The Daily Star. Her Twitter handle is @tasneem_tayeb