The International Consortium of Investigative Journalists (ICIJ) released the Pandora Papers in October 2021. The latest in a long series of private data releases to shed light on the wealth and financial behaviors of the international elite, the Pandora Papers contained about 12 million private records from more than 10 international legal and financial services firms, including Alpha Consulting Limited, Trident Trust Company Limited, Asiaciti Trust, and Il Shin.
More than 300 investigative journalists working for some 100 media organizations worked to analyze the Pandora Papers. They produced hundreds of articles, graphics, and video news presentations on the topic for media in the U.S., U.K., France, Spain, Australia, Ireland, and elsewhere. Their work created one of the most talked-about news events of 2021.
Unfortunately, coverage of the Pandora Papers largely missed the mark. For various reasons, including that most of the journalists involved were not experts in the complexities of international finance, many stories about the event contained unfounded allegations or insinuations of legal wrongdoing on the part of the individuals and families named in the release as well as the firms working on their behalf.
This not only caused significant reputational harm to those named but distorted the public’s understanding of the wealth-protection and tax-minimization strategies revealed in the release. As Asiaciti Trust, Il Shin, and others noted in their respective corporate responses to the Pandora Papers, international fiduciaries have an obligation to comply with applicable national and international laws. While compliance processes are not perfect, the activities described in the release are in the main legitimate, legal, and ethical — characterizations all but absent from mainstream media coverage of the event.
Reexamining the Pandora Papers
Judging from mainstream media coverage, the release of the Pandora Papers exposed illicit activity on an unprecedented global scale. The most popular reports on the event focused not on the fact that the data was improperly obtained but on the alleged improprieties of prominent individuals caught up in the release. These “improprieties” were often as mundane as owning real estate in a country to which they had no apparent ties or using offshore bank accounts to maintain liquidity outside their home countries.
Even the ICIJ, supposedly a neutral conduit of information in the public interest, breathlessly asserts that “offshore structures can be used to avoid paying taxes, commit money laundering, or facilitate other types of illegal activity.”
It’s true that bad actors can use offshoring practices for illegitimate purposes. But it’s far more common for wealthy individuals and families, or the companies they control, to utilize offshoring strategies for more ordinary and frankly boring reasons. Service providers like Asiaciti Trust and Il Shin act as fiduciaries for their clients, obliging them to discharge their duties to high ethical standards and in accordance with international law.
So, what do the Pandora Papers really show? They expose legitimate pathways for:
- Avoiding excessive taxation in their home countries or third countries. Much of these activities can be explained by participants’ entirely rational desire to reduce their (heavy) tax burdens. Those located in countries with high corporate and individual tax rates, including the United States, may seek protection in lower-tax jurisdictions.
- Shielding assets from punitive governments. In common law jurisdictions like the U.S. and U.K., strong protection for private property rights is a bedrock principle. Individuals and corporations based in these jurisdictions don’t worry about capricious seizure by state actors. Unfortunately, this guarantee isn’t universal. In illiberal regimes, private property rights are shaky, and the risk is higher for those deemed by those in charge to pose a threat to the regime.
- Ensuring privacy in asset management decisions. Private companies aren’t obligated to be “open book.” Nor are individuals and families. Those with a reasonable desire to conduct their affairs in private may choose to do so in jurisdictions that take personal and corporate privacy seriously.
- Taking advantage of business-friendly laws. Being “business-friendly” requires more than simply respecting private property rights. Jurisdictions with truly business-friendly legal regimes tend to attract investment, even from firms whose primary bases of operation lie elsewhere.
- Seeking international business or investment opportunities. Rational economic actors seek to diversify their investments not just across asset classes and sectors but across geographies as well. Holding business assets in multiple jurisdictions, ideally in more than one region of the world, reduces political and economic risk.
Should the Pandora Papers Spur Governments to Act?
Endless ink has been spilled on sensational and sometimes inaccurate claims about the people and firms named in the Pandora Papers.
Much less has been said about what happens next. Most mainstream media outlets haven’t even bothered to ask the next logical question: If we accept the premise that these financial behaviors are somehow unfair, what is to be done about them?
A Case for International Finance Reform?
It’s not clear that we should accept this premise, of course. It bears repeating that most of the individuals and families named in the Pandora Papers and prior unauthorized data releases have not been accused of criminal wrongdoing. Most acted well within the bounds of national and international law and followed the advice of trusted fiduciaries with strict compliance protocols.
The strongest case for international finance reform in the wake of the Pandora Papers is that “legal” and “ethical” are not one and the same.
Yes, the financial behaviors described in the release may be largely legal and proper, but that’s not quite the same as saying there’s nothing wrong with them. One can operate well within the letter of the law and still run counter to its spirit. Or so the argument goes.
This argument has some problems.
The behaviors revealed by the Pandora Papers aren’t just legal — they’re also entirely rational. By definition, fiduciaries must act in their clients’ interest. They operate on the reasonable expectation that their advice and counsel, if taken, will work to the clients’ benefit. The financial behaviors described in the release occurred downstream of that advice.
Likewise, some invoke “fairness” to make the case that reform is necessary. The argument here is that the financial behaviors described in the release require considerable wealth and sophistication. They’re out of reach for most people, including those who consider themselves quite well off.
This is a persuasive and partly political appeal to widespread sentiment that the international economic system is rigged against regular people. But it overlooks the reality that these financial behaviors are different from more accessible investment and tax reduction strategies only in scale, not kind. Small business owners and individual taxpayers act on the advice of tax advisors all the time. The main difference is that their sphere is domestic rather than international.
Notwithstanding all of this, it’s clear that public sentiment favors some sort of international finance and tax policy reform. If such reform is inevitable, it’s in the best interests of the system’s stakeholders to advocate for measured, common sense initiatives with broad support.
Current Proposals for International Tax Reform
The media’s lack of interest in actionable next steps is surprising given that credible proposals exist right now to address some of the issues raised by the Pandora Papers. Some of these proposals have considerable momentum behind them, in fact, not to mention the sort of broad support that’s essential to compliance.
Setting a Global Minimum Corporate Tax
For advocates of international tax policy reform, the most promising proposal is a global corporate minimum tax.
“Global” is a bit of an exaggeration, as some countries and territories are unlikely to sign on. But the initiative already has enough support to effect structural change in the international financial system. Countries accounting for more than 90% of global economic activity have joined the initiative, according to the World Economic Forum.
The proposal is simple. It would hold larger multinationals to a strict 15% corporate tax rate on international profits, regardless of where the income occurred. Only firms with global sales of more than 750 million euros would be bound to the tax, ensuring that smaller enterprises aren’t unfairly penalized.
Implementing the initiative will be easier said than done. Much hinges on whether the United States is able to pass a durable tax reform package that includes the corporate minimum tax. However, the United States already has one of the world’s highest corporate tax rates, so any failure on its part could redound to other, lower-tax jurisdictions’ benefit.
Addressing the Other Elephant in the Room: Cyber Security Risk
We’ve so far focused on only one policy dimension of the Pandora Papers: how, if at all, to change the incentives for wealthy individuals and corporations to use offshoring to their financial and legal advantage.
Another dimension is arguably more important, and certainly more immediate, for those named in the release — and for countless others who utilize the same practices for legitimate ends. This is cyber security risk, both with regards to self-protection (what individuals and businesses can do to reduce their exposure) and with regards to governments’ obligations to keep their citizens and domestic firms safe from malicious cyber forces.
Self-Protection: Managing Cyber Security Risk in the Global Economy
First, firms and the individuals controlling them have an obligation and self-interest to invest in cyber protection.
While incidents like the Pandora Papers are likely the work of highly sophisticated actors and may not be preventable, these investments reduce overall cyber risk and are worth pursuing. They may also reduce the financial and reputational harm associated with such incidents.
These investments fall into two categories: defensive and remedial. Defensive investments include proactive measures like:
- Using enterprise-grade encryption
- Maintaining computer firewalls
- Using anti-malware software
- Maintaining strict internal information security protocols
- Monitoring for insider threats, such as unauthorized access to sensitive data
Remedial investments include:
- Purchasing cyber risk insurance, which provides financial redress following cyber incidents
- Retaining legal counsel with experience in cyber liability matters
- Retaining digital forensics teams to investigate possible incidents
Controlling Risk: Governments’ Obligations in the Digital Space
Governments also have an affirmative obligation to protect their citizens and domestic businesses from digital interference.
In practice, these obligations manifest via regulation, policy choices, and active and/or defensive measures taken in cyberspace. They can include:
- Increasing legal penalties for malicious cyber activities
- Strengthening privacy and data security law
- Taking proactive steps to counter international cyber forces working on behalf of other governments or organized criminal networks
- Avoiding digital activities that may embarrass or harm their own citizens and businesses, including facilitating data incidents like the Pandora Papers