The mythical character of Pandora is often shown with a box in her hand, symbolizing the evils of the world and the temptations that curiosity can’t resist. The International Consortium of Investigative Journalists’ (ICIJ) release of the Pandora Papers on October 3 similarly illustrates the evils of financial secrecy, transnational corruption, and money laundering, as well as the ability of politicians, high-net-worth individuals, and criminals to hide their money. It also shows the insatiable temptations of financial confidentiality and the growing knack of the ICIJ to expose financial secrecy.
What are the Pandora Papers?
The ICIJ’s release of the Pandora Papers follows an investigation of over 11.9 million confidential files. A team of more than 600 journalists from 150 news organizations spent two years reviewing the documents, tracing leads to expose misconduct and hypocrisy by politicians.
The Pandora Papers also show that so-called international financial havens are not limited to one part of the world. For instance, the documents show that in recent years many seeking financial privacy have moved from the Caribbean to South Dakota, where leading international trust companies have established offices. The family of Carlos Morales Troncoso, former Vice President of the Dominican Republic, benefited from such a move, having originally held their assets in the Bahamas. In December 2017, Guillermo Lasso, a former banker elected as Ecuador’s president in April, moved two offshore companies from Panama to South Dakota trusts. The move came three months after Ecuador’s national assembly enacted a law prohibiting public officials from holding assets in tax havens.
Similarly, the Pandora Papers demonstrate that, while U.S. authorities have used the Foreign Account Tax Compliance Act (FATCA) to force banks in Switzerland, Israel, and elsewhere to vet their accountholders and turn over information about U.S. taxpayers with undeclared overseas accounts, the United States has gained an enormous market share of these investments. In particular, Delaware, Alaska, Nevada, Wyoming, and New Hampshire have enacted and promoted new trust and confidentiality laws to attract money in violation of foreign tax and criminal laws.
The Pandora Papers capture the continuing role of gatekeepers, especially law firms, to facilitate financial privacy. In 2016, the ICIJ obtained documents, later known as the Panama Papers, from the Panamanian law firm of Mossack Fonseca to expose abuses of financial secrecy. The Pandora Papers show how U.S. based law firms, such as Baker & McKenzie and DLA Piper, helped clients with transactions taking advantage of financial privacy. In Belize, CILTrust, an offshore provider operated by Glenn Godfrey, a former attorney general of Belize, served as a leading service provider. In Cyprus, a law firm Nicos Chr. Anastasiades & Partners, served as an intermediary for wealthy Russians.
Lessons of the Pandora Papers
The lessons from the Pandora Papers are many. First, it is a fool’s errand to believe that one’s financial affairs will remain secret by routing assets through certain law firms or jurisdictions. The current trove of Pandora Papers come from no fewer than fourteen offshore services firms worldwide that set up mechanisms to help clients with financial privacy. The records have information about the business of nearly three times as many current and formerly country leaders as any prior leak of documents from offshore havens. The ICIJ is not the only entity that collects and publishes financial records. Wikileaks, ProPublica, and other entities collect and publish similar documents. As shown by the Pandora Papers, the ICIJ invests significant time in forensic research to analyze their significance.
Second, the Pandora Papers illustrate the lack of a level playing field in the regulation of international financial secrecy, money laundering, and taxation. While the U.S. uses international organizations, such as the OECD, the Financial Action Task Force (FATF), and informal groups such as the G7 and G20 to make and enforce standards, it is unsurprising that the United States is never on any grey list or black list. For instance, while the Pandora Papers discuss how Belize is sometimes slow in responding to requests for tax information from other governments, they do not mention that the FATF evaluation recently downgraded its rating of the United States for its tardiness in responding to foreign requests for information.
Double standard
One of the best ways to overcome financial secrecy is exchange of tax information. The U.S. started negotiating FATCA Intergovernmental Agreements (IGAs) to enable foreign governments to overcome laws preventing them from sharing financial information with the United States. Yet, the United States has told and continues to tell other governments that it cannot fully reciprocate the exchange of information due to restrictions in U.S. law. The FACTA IGAs state that the U.S. will endeavor to change its law. Eight years later, however, U.S. law remains unchanged and the executive branch has no plans to change it.
Similarly, under FATCA IGAs the signatories pledge to work towards a universal automatic exchange of information. In July 2014, when the OECD’s Common Report Standard became the universal standard for automatic exchange of information, the United States government refused to sign, saying it did not have legal authority to do so. Today, over 48 countries participate in the Common Report Standard, while the United States remains uninvolved.
The most important convention to exchange tax information is the 1988 OECD/Council of Europe Convention on Mutual Administrative Assistance in Tax Matters (MAATM). Although the United States is one of 26 countries to participate in the Convention, it does not accept the provisions regarding service of documents and collection assistance. The United States has also declined to join the 2010 Protocol to the MAATM, which has gained 105 signatures globally.
U.S. enactment of the Corporate Transparency Act, as part of the Anti-Money Laundering Act of 2020, passed on January 1, 2021, is a step in the right direction towards transparency. As the United States’ reluctance toward information sharing demonstrates, however, much work remains.
Improving transparency
To improve financial transparency, the United States should fully reciprocate FATCA Intergovernmental Agreements, join the protocol to the MAATM, and adhere to the OECD Common Report Standard.
On June 3, 2021, the Biden Administration issued a memorandum, making anti-corruption and transparency a core part of its national security strategy. Similarly, on June 13, the G7 Cornwall Communique listed anti-corruption, anti-money laundering, and transparency among its priorities. Anti-corruption was the theme of the Summit of the Americas in 2018. The United States is the organizer of the next summit, which, according to the White House, will take place in early summer 2022. The Summit will be an opportunity for the hemisphere, hopefully with U.S. leadership, to prioritize and take concrete action on transnational corruption, enhanced transparency and governance, and anti-money laundering.
Regionally, the Organization of American States and regional governments should strengthen the Inter-American Convention against Corruption. They should dedicate greater authority and resources to MESICIC, the implementing body for the Convention.
Internationally, an international anti-money laundering treaty and implementing organization would strengthen the effectiveness of anti-money laundering laws.
Meanwhile, countries can act bilaterally to improve anti-corruption and anti-money laundering cooperation. On October 19, 2020, the United States and Brazil signed a protocol on a limited trade deal that will facilitate commerce between the countries, strengthen regulatory practices, and improve anti-corruption measures. The new Protocol concerns trade rules and transparency, updating the 2011 Agreement on Trade and Economic Cooperation (ATEC) with three new annexes. Two consist of provisions on good regulatory practices, while another concerns anticorruption. It remains to be seen whether the protocol’s provisions will meaningfully improve anti-corruption and enhance transparency in trade regulation.
The Pandora Papers will not put an end to temptations toward greed and financial privacy. They will, however, hopefully inspire legislators and civil society to act to end those types of financial privacy that violate international law and standards, and move international organizations to develop a more robust anti-money laundering regime and fulfill the goals of a level playing field so that large countries, in addition to small jurisdictions, will play by the same rules. Only then will transparency and anti-money laundering rules have the legitimacy they need to be effective.
Bruce Zagaris is a partner with the Washington, D.C. law firm of Berliner Corcoran & Rowe LLP, founder and editor of the International Enforcement Law Reporter, and former lecturer at the Law Faculty of the University of the West Indies at Cave Hill, Barbados.
