What may be the most interesting aspect of last week’s release of the Pandora Papers — an epic leak of information outing hidden wealth and the role of offshore financial centers in providing havens for avoiding taxes and laundering illicit funds — is that it actually tells us little that we didn’t already know.
The stories are certainly new, and spectacular. A Catholic order, disgraced by an international pedophilia scandal, secretly held nearly $300 million in U.S. real estate and other assets through a network of trusts and an investment company. The funds were amassed at the same time victims of the sexual abuse were seeking compensation for the harm.
All told, the investigation found 206 U.S.-based trusts with links to 41 countries. According to the investigators, “Nearly 30 of the trusts held assets connected to people or companies accused of fraud, bribery or human rights abuses in some of the world’s most vulnerable communities.” We have, in dramatic fashion, been reminded that the litany of harms caused by these practices is real and large.
The lessons, however, are not all that new. We already knew that offshore financial centers harbor more money than most people can imagine — at least 84 million accounts holding $11 trillion in assets in 2019. Anonymous corporate structures are the primary vehicles for moving this money across borders to safe havens. Real estate in prized markets are magnets for secret cash and money laundering. Developing countries are hardest hit by the revenue loss and, most importantly, the U.S. and other advanced economies are consistent, central players in these tax avoidance and money laundering schemes.
This last point, the U.S. as facilitator, while not revelatory, is an important focus of this latest tranche of information. Unlike previous leaks, the Pandora Papers explain the explosive growth of the dynasty trust industry in South Dakota and other states. The stories detail the facilitating role of all types of U.S. corporate service providers and the manner in which they help clients hide funds.
In a recent interview with a reporter from Swiss public radio, I was asked if these stories reveal a certain hypocrisy when U.S. officials and bankers lecture the Swiss about financial secrecy. The Biden administration, the U.S. Congress and the entire U.S. financial services industry should be embarrassed that such a question can even be plausibly asked.
For years, the Financial Action Task Force, a multilateral body that sets global standards for fighting money laundering, has called out the U.S. over the significant gaps in our financial rules. Specifically, it has noted the lack of transparency and oversight of agents that assist in forming U.S. corporations, and of our real estate and private investment markets.
The good news is that, earlier this year, Congress passed a bipartisan law called the Corporate Transparency Act to crack down on the abuse of anonymous shell companies. That’s a meaningful and necessary first step. In drafting the rules to implement the law, the Biden administration must take particular care to address the examples in the numerous stories of abuses of trusts highlighted by the Pandora Papers, as best they can within the confines of the law.
The administration should also take this opportunity to announce plans to expand and make permanent a targeted pilot program that will bring accountability to the real estate sector and help ferret out dirty money laundered through U.S. real estate. They should also finalize anti-money laundering rules for the private investment sector, including for private equity, hedge funds and venture capital firms, which remains a key avenue for dirty money to enter the U.S. financial system.
The complexity created over many years by clever lawyers and other “gatekeepers” to our financial system will take additional laws to fully unravel. Closing the loopholes exploited by these professional enablers of money laundering and corruption will take time and bipartisan support. In the meantime, the Biden administration already has the authority to take the above actions. They simply need to do what the Pandora Papers has reminded us is imperative if the U.S. hopes to rein in corrupt financial practices.
With the Pandora Papers, a consortium of journalists from dozens of countries have given us an even clearer picture of the architecture that props up a secretive and destructive financial system. The U.S. must act on this latest scandal to build on progress and put an end to the exploitation of offshore financial centers.
Gary Kalman is the director of the U.S. Office of Transparency International, the largest global coalition fighting corruption.