Sunday, January 24, 2021

OPINION AND ANALYSIS | 11-11-2017 11:57

The double Irish, the Dutch sandwich and offshore ethics

The globalisation of capital necessitates a decentralised financial structure.

James Simons isn’t a well-known person. An obsessive mathematician who worked as a codebreaker for the United States during the Vietnam War, Simons published the Chern-Simons theory in 1974 that would become one of the pillars of string theory. Yet this isn’t why people know him. Rather, Simons is the founder of Renaissance Technologies, one of the most successful moneymaking machines ever known to man, making the academic one of the world’s wealthiest men (49th according to Forbes’latest tally). At an estimated US$18.5 billion, Simons’ networth is probably dramatically underestimated.

Documents released by the International Consortium of Investigative Journalists (ICIJ) in the context of the Paradise Papers show that in 2010, when Forbes estimated Simons’ wealth at US$8.5 billion – mainly on the value of his share of the assets held in Renaissance, a hedge fund — Simons was also sitting on a US$7.25 billion Bermuda-based trust fund aptly named “Lord Jim Trust.” James the hedge funder, of course, goes by Jim.

The trust pays no taxes until it makes distributions to its beneficiaries, and it is unclear how much Simons has paid the taxman on those funds. But what is clear is that amassing such levels of wealth make him an extremely powerful person. During the last US electoral cycle, he was the sixth-largest benefactor of political causes, while his business partner Robert Mercer was one of the most influential backers of Donald Trump’s presidential campaign.

Over the past eleven months, more than 380 journalists — including Perfil’s Emilia Delfino — working on six continents in 30 languages have dug through 13.4 million leaked files obtained by German newspaper Süddeutsche Zeitung. The juiciest documents came from Appleby, a leading offshore law firm based in Bermuda, Asiaciti Trust in Singapore, and the company registries in 19 secret jurisdictions going from the Cayman Islands to the Isle of Man.

As journalists began publishing their findings this week, many have been quick to highlight the lack of legal wrongdoing, labelling them “entertainment,” as the Financial Times did. “As eye-popping as some of these cases may be,” read the FT’s editorial on Friday, “the papers contain no obvious instances of criminality.” Instead, they suggest, the focus should be on “the convoluted structure of global tax regimes,” the newspaper wrote. In other words, less regulation.

“The journalists do not allege, nor could they, that Appleby has done anything unlawful. There is no wrongdoing,” Appleby’s public statement read, “It is a patchwork quilt of unrelated allegations with a clear political agenda and movement against offshore.”

Let’s be clear. The use of offshore firms to optimise a company or an individual’s tax situation is not illegal by any means. Companies or investors operating in multiple jurisdictions, or firms owned by multiple shareholders from several countries, need offshore centres. The globalisation of capital, which is a positive economic force, necessitates a decentralised financial structure that allows investment to flow. Minimising tax payments is not tax evasion. Also, paying high taxes to inefficient and bloated governments, particularly when they are run by corrupt officials, adds a further incentive to operate offshore.

But let’s not kid ourselves, the complexity and opacity of the global financial system, in large part  made possible by the existence of low-to-no-tax jurisdictions, has allowed the largest corporations and the wealthiest individuals to blur the line between illegality and unethical behaviour. According to Gabriel Zucman, assistant professor of economics at U.C. Berkley, roughly US$8.7 trillion in financial assets from wealthy families has gone below the radar of their domestic tax man, most of it disappearing into tax havens. Tax strategies used by multinational corporations cost as much as US$240 billion in lost tax revenue across the globe, according to one estimate by the Organisation for Economic Cooperation and Development (OECD). Instead of being used to build schools and hospitals, improve infrastructure or invest in innovation, it is going into trusts and investment vehicles that help worsen income inequality.

There are no doubts that the conditions that put the global financial system on its knees in the 2007-2008 global financial crisis haven’t changed all that much. Bear Stearns and Lehman Brothers’ use of aggressive accounting, aided by a network of off-balance sheet entities allowed them to hide in plain sight. Using tax strategies like the ‘Double Irish’ or the ‘Dutch Sandwich,’ global giants like Apple, Nike, and Uber only pay a few percentage points of tax on their huge overseas revenues.

Secrecy laws allowed Odebrecht to mount a global operation of 17 entities, some of which have been proven to have been used for bribery. And Glencore, the global mining and commodity training giant, leans on at least six offshore firms to siphon out hundreds of millions of dollars from Latin American countries including Argentina, Bolivia, Chile, Colombia, and Peru. Lewis Hamilton was able to pay zero VAT as he leased his private jet from himself, while major US and UK universities that champion the battle against man-made climate change invest in carbon-polluting industries.

In Argentina, the Paradise Papers leaks have put the government on high alert. Finance Minister Luis Caputo, whose cousin is an influential businessman and President Mauricio Macri’s best friend, ran a Cayman Islands-based hedge fund from 2009 to 2015, when he took office. Caputo, who negotiated Argentina’s payment to the litigative ‘vulture funds,’ claimed there’s no conflict of interest. Energy Minister Juan José Aranguren also appeared in the leaked documents, having been the director of companies from which his Ministry bought US$150 million in liquified natural gas. He also claimed no conflicts of interest.

Finally, Avianca founder German Efromovich used an offshore firm as collateral with the Macri administration in a bid for aviation routes. Synergy Aerospace Corp, the Panama-based firm used in the bidding process, is the face of a network of at least 20 firms structured like a Russian doll. Not long before the bidding, Avianca had paid the Macri family US$10 million for MacAir Jet, thus gaining access to the Argentine airline market.

The Paradise Papers is helping journalists shine a light on a dark, but ultra-connected, corner of the global financial system. Banks, law firms, auditors, multinational corporations and billionaires are smarter, quicker, and better equipped than regulators, however. And that gives them the tools to remain at least one step ahead, always.

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Agustino Fontevecchia

Agustino Fontevecchia


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