By Edoardo Lanfranchi
In April 2016, the media were on fire for a couple of weeks after the biggest data leak in modern history – the so-called ‘Panama Papers’ scandal. It revealed the dodgy business of some of the world’s most powerful men and women who had benefitted from the services offered by Panama-based Mossack Fonseca, a law firm which specialised in offshore financial services. The leak first appeared on the German Süddeutsche Zeitung and the data was examined by the partners of the International Consortium of Investigative Journalists (ICIJ), which includes the BBC, The Guardian and The New York Times.
Last Sunday, another leak of comparable size was received by the SZ and passed on to the ICIJ, which contained other names and other dodgy – though perhaps not as dodgy – business. It contained information from Appleby, another law firm operating in the offshore financial sector, and from several other similar corporate registries located in other insular tax havens. However, unlike the Panama Papers, the ‘Paradise Papers’ – as they have been baptised – are unlikely to make the headlines for more than one or two weeks. They will probably be vaguely remembered because of the involvement of Her Majesty The Queen and her estate, or because they cast yet another shadow over the Trump administration’s relationship with the Kremlin. But no major legal investigation is likely to follow, no violent political crisis, no widespread public outrage.
And yet arguably, this leak demonstrates once again that there is something profoundly broken within the global financial system. To give an example, one of the documents released by the ICIJ contains the emails in which Apple, the world’s most profitable firm, was making enquiries to choose a new legal headquarters in 2014. The reason for this is that the EU had started an investigation into the legal loophole that had allowed the firm’s European subsidiary in Ireland – accountable for all the profits Apple made in Europe – not to be registered for tax anywhere, and hence paying almost nothing to the Irish or any other European government. The tech giant was now looking for a more discrete, preferably insular resort for its untaxable profits, one where absolute secrecy was the standard and the risk of an opposition party gaining power and changing tax laws was very close to zero. In the end, they chose Jersey, a Crown dependency just off the coast of Normandy.
Something is profoundly broken in the global financial system
But how does Apple transfer its profits to Jersey? The way the trick works has definitely some creativity to it. Say that one of Apple’s European branches, for example, Apple UK, made a £2bn profit in the past year. What Apple UK will do is pay another company – still owned by Apple – for the licence to use the brand ‘Apple’ for the product it sells. And what will Apple charge Apple for using its brand? Roughly £2bn, making Apple UK’s profits equal to zero, on paper, and hence not taxable. The money is then transferred through a series of transactions to a place where it will be safe from tax and ready to be invested in financial assets. This, roughly, is how most multinational firms – Nike, Tesla and Uber were also mentioned in the Paradise Papers – avoid paying millions and millions of pounds of due tax money to the UK government, and to most other governments in Europe and elsewhere.
Financial services offered by firms like Appleby or Mossack Fonseca are designed for the richest 0.01% of the world population and yield no benefit whatsoever to society as a whole. The money hidden in tax havens all around the world is hard to estimate because of the absolute secrecy that surrounds it, but even the most conservative estimates are in the order of five to ten trillion. That is money that could not only pay for, when taxed adequately, hospitals, schools, infrastructure etc., but is also investment taken away from the real economy: it will not create jobs, output and prosperity. Instead, it will remain in the eternally unstable flow of the global financial market, the market that that caused the 2007 financial crisis, and multiply itself in its owners’ pockets.
Privileged firms and people live above the rules, and they are legally allowed to do so
Every free market needs some form of regulation. Firms or individuals that benefit from infrastructure and services offered by national governments, and that then dump their fiscal responsibility onto the rest of us are not being smart: they are being irresponsible, to say the least. Furthermore, the secrecy that most tax havens guarantee makes it easier to use complex financial services for money laundering, thus giving corrupt politicians and criminal organisations a significant advantage over courts and states.
Yet what’s worse is that there seems to be little or no political commitment to changing this global system. The largest providers of deregulated, secret and tax-exempted financial services are not offshore at all: think of Ireland, the Netherlands, or the state of Delaware. And, of course, of Wall Street and the City of London. It seems like a bunch of privileged firms and people live above the rules of common society, and they are legally allowed to do so. They need not pay taxes if they deem them too high. They need not invest money in the real economy to make profits. They are not accountable for any of their actions. This is what emerges from this and the past data leaks. And there is nothing paradisiacal about it.