The Pandora Papers: Exposing a shadow economy of the elite

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As one of the first articles in our innovative Spotlight series, I feel obligated as the Chief Editor to focus on one of the world’s most talked-about leaks, the Pandora Papers. This leak is colossal in its files, but more so in its implications. The world’s rich and powerful move wealth through a shadow economy of illicit financial activity facilitated by offshore accounts. An overarching theme emerges from these papers: transparency is a fallacy in the global political economy. Thus, how can we trust people with such influence in domestic and global politics if this is how they conduct themselves?

The International Consortium of Investigative Journalists (ICIJ) has been investigating 12 million documents, images, and emails in one of the biggest leaks in the history of journalism. The papers surpass even the leaks of the Panama Papers in 2016 and Paradise Papers the following year. The investigation uncovered the shady dealings of over 300 politicians in 91 countries, 35 world leaders, and more than 130 billionaires from Russia, the United States, Turkey, and further afield. More than 600 journalists from 150 media organisations have delved into Pandora’s box of data, including the Guardian and the BBC in the UK. The source of the leak came from 14 financial services firms from around the world and revealed how shell companies – located in tax havens such as the British Virgin Islands – are used to conceal funds and facilitate tax evasion. The collective capital of these offshore accounts is worth trillions of dollars. Trillions. Government losses due to tax avoidance and evasion are estimated to be US$600 billion – almost the United States’ entire 2021 defence budget.

Nevertheless, the true scandal of this leak is that much of its activity is legal. Tax evasion is illegal under UK law, but loopholes facilitate tax avoidance. Whilst the use of offshore companies is frowned upon by most taxpayers – and is indisputably unethical – it is a legitimate loophole in most tax laws and one that is used and abused by the elite.

The leak irrefutably confirmed the reality of the shadow economy, one utilised to prevent taxation and ensure secrecy. A shadow economy is the ‘underground, informal, or parallel economy’, which crucially includes ‘not only illegal activities but also unreported income’. Essentially, the shadow economy encompasses all economic activity that would be taxed if properly reported to relevant tax authorities in a state. However, the shadow economy adapts to changes in taxation and regulation, with these financial services firms creating an ever-evolving environment to promote secrecy.

The Pandora Papers illustrate just how tax avoidance schemes work. Loan-back schemes are one such example. The process is as follows: financial services firms set up a shell company in a tax haven (i.e., Seychelles, Belize, Hong Kong) which ‘loans’ capital to another shell company in another location, finally ‘loaning’ the funds back to purchase property, yachts, hard to trace assets and pay little or no tax. Critically, the firms facilitating these schemes ensure it is near impossible to trace ownership back to those involved. King Abdullah II of Jordan used this method to accumulate $100 million of property in the US and UK. Following the revelations, criticism has arisen since the kingdom receives over $1.5 billion in aid and military funding from the US, with the EU agreeing to $218 million – all whilst its King secretly owns a colossal property portfolio. The current Czech Prime Minister Andrej Babis has used offshore companies to move $22 million to buy property in France, all whilst his ownership is secret. Azerbaijani President Ilham Aliyev and his family have secretly bought 17 properties worth $542 million. One of these is in London, valued at $45 million, and bought for his 11-year-old-son.

Even more astonishing is the international interest in the US as a booming tax haven. Dubbed the ‘next Cayman Islands’ by the Washington Post and ‘the new Switzerland’ by the Financial Times, the papers expose $360 billion stashed in South Dakota – a state in the US – with minimal oversight or regulation. The US has over 200 trusts, yet 80 of these are in South Dakota. Trusts have become an increasingly popular method to transfer wealth between generations, without paying tax. An interesting aspect of this revelation is the relevant regulatory legislation. South Dakota state law does not require disclosure of company owners – enabling wealthy families and international interests to establish companies with few questions asked. In addition, South Dakota abolished a previous limit on the lifetime of a trust – intended to limit generational wealth – and subsequently cemented its attraction for family wealth. Has the US become the destination for offshore activity? Quite simply, yes. With a world ranking of number two by the Tax Justice Network, it is clear the US is luring tainted and suspicious funds for the foreseeable into its economy.

Here in the UK, the papers shed light about donations to the Conservative party. Although an issue requiring an entire Spotlight article, the fundamentals from the Pandora Papers are that, as with any donation to British parties, political access is granted to those who can pay the price. We already know that donors have attended private dinners with former prime ministers David Cameron and Theresa May, donors who have exceeded a sum of £50,000. The Electoral Commission has once more come under scrutiny for failing to properly inspect the source of party donations. The Tory party has received more than £750,000 from businessman Mohamed Amersi who has himself said:

“You get access, you get invitations, you get privileged relationships, if you are part of the setup.”

An extraordinary admission, but one that will not surprise many. The ‘cash for access’ culture has reared its ugly head once more, and highlighted that businessmen like Amersi, who is seeking to expand into the Middle East and thus influence British foreign policy, are manipulating a system that benefits those with money. Amersi is not without controversy and is linked to a corrupt deal with the president of Uzbekistan’s daughter – now in prison on corruption charges. Furthermore, it was found that the Conservative party co-chair’s offshore company indirectly benefitted from £121,000 in tax credits. The co-chair, Ben Elliot, has raised more than £70 million in Tory party donations since taking over, including £37 million in 2019 when Johnson was in the midst of a general election. Whilst not criminal, the revelations paint a picture of a ruling elite comprising of a close network of politicians and business leaders in a mutually beneficial partnership.

The Pandora Papers expose the shadow economy. Lebanese politicians linked to offshore havens, the Qatari ruling family who avoided £18.5 million in taxes, and the ‘cash for access’ system right here in Britain. This is the largest leak of its kind in history. At almost 3TB of data, it is no wonder investigations are barely beginning across the globe. The UK, US, Chile, and India are some of the few states leading inquiries into the findings of the papers and more will come. But I must implore you to uncover more than what is written here.

By choosing this issue, a Spotlight has been cast for you to examine. The Pandora Papers have ultimately exposed a culture of secrecy, power-politics, and shady dealings of the world’s rich. They have proved once more the value of investigative journalism in delving to the depths of financial enigma and exposing the shadow economy of world leaders and billionaires.

You can discover more of the findings of this investigation, its implications, and other useful information by clicking on the links below: