Tax Havens: The New Old Scapegoat - Again

The very recent hot top story in the news involving tax havens and offshore banking is of course the  Panama Papers shenanigan. A Panamanian law firm had their files hacked, their clients exposed and naturally the mainstream press is running with constantly changing new revelations and updates about corrupt politicians (politicians are corrupt? I am in shock!), famous celebrities, national sports heroes and a seemingly endless list of wealthy people doing black hat arrangements in the Caribbean to avoid paying taxes.  The truth of the matter is, it certainly is all about the taxes, but not under the context that you think or what is being portrayed.  If you think all this is really about tax dodging and ethically challenged law firms, you are missing the big picture.  In addition, misery does love company (and I am not referring to Panama).

The race to sway public opinion so even more new unneeded legislation and self important committees can be formed has already started.  An April 4, 2016 edition of the BBC touts a headline that reads Panama Papers: Leaks Spur Global Investigations.  Another headline reads: Mossack Fonseca Leak Prompts Call For Tax Haven Crackdown.  Yes we must have those global investigations.  We must crackdown (obviously we must crackdown albeit 100 years later).  We must root out money laundering, nefarious criminal elements, unpatriotic tax exiles and all the other social malcontents.  Funny thing is though, Panama can trace it's own roots as a tax haven going back 100 years when it started off helping Rockefeller's Standard Oil with oil tanker registration in 1919 and thus enabling a resulting tax benefit.  The creation and use of anonymous incorporated companies started a few years after that, but of course no one seemingly knew this was going on, or at least that is what it would appear they want us to believe.  What a surprise!  However, according to the recent revelations and list of names, it would seem there are a great many politicians that knew exactly what was going on as some themselves personally were involved in use of such offshore companies, trusts and the like.  Another big surprise!

Switzerland, Lichtenstein, The Isle of Man, Channel Islands, The Cayman Islands and The British Virgin Islands all have deep roots when it comes to tracing their respective births as a tax haven (and may I remind you these jurisdictions are either British Overseas Territories or in the least members of the British Commonwealth).  They have been doing their thing for a very, very long time.  The BVI is especially successful and reportedly takes in US$200 Million yearly for company registration fees.  That is quite a bit of fried conch fritters my friends. 

Ironically, the United States is one of the best tax havens in the world if you happen to be someone that is not a US citizen or legal US resident.  The Tax Justice Network, an organization that ranks countries based upon a number of criteria including tax legislation and reporting (or lack thereof) ranks the US as number 3 worldwide for financial secrecy in their 2015 Financial Secrecy Index.  In other words, if you are foreigner and want to hide some money, the US is one heck of a good place to do it in (and we find it ironic that bad publicity about one tax haven, namely Panama, could steer business and benefit another tax haven, the United States)  Mr. Alex Cobham from Tax Justice Network is quoted as claiming: There is a double standard: many developed countries host or support jurisdictions where there is an absence of financial transparency.  And within the US, the two US states of Delaware and Nevada are especially attractive for this purpose.  Transparency International says that Delaware is a transnational crime haven.  A state inside the US, one of the original founding thirteen colonies is a transnational crime haven – can you imagine?  The current US President called an incorporation firm in the Cayman Islands the biggest tax scam on record back in 2008.  We think Barry might want to get his facts straightened regarding who really has the biggest tax scam on record (some places closer to home might qualify).  

According to History And Policy.Org: As early as the 1980s, Vincent Belotsky, a high-ranking U.S. Internal Revenue Service (IRS) official, noted that many countries, including the United States, fit the conventional definition of tax haven. The United States, he wrote, applies a zero rate of tax on certain categories of income, including interest received by a non-resident alien individual or a foreign corporation from banks and savings institutions. The line separating tax havens from other Preferential Tax Regimes is arbitrary.  The UK as well is considered by many to be a tax haven.

Mr. Ramon Fonseca, one of the founders of the law firm in Panama that is the focus of the so-called Panama Papers, is quoted as saying via a New York Times interview that:  I assure you there is more dirty money in New York, Miami and London than there is in Panama.  Backing up Mr. Fonseca's allegations is none other than United Nations advisor Mr. Eric LeCompte who opines via a recent article interview that: The United States remains a far greater hiding place than Panama for criminals and terrorists to hide their wealth through shell corporations.  The United States is a preferred location for setting up fake companies.  Say again Eric?  The global super power portrayed as champion of human rights, the rule of law, liberty, honesty and transparency is a haven for criminals.  No, can't be true (actually we think it is).

The Economy Stinks And They Are Going Broke (Misery Loves Company)

Mr. Gavin Hewett, chief correspondent for the BBC, recently commented briefly on the correlation between the economy in the US and Western Europe, government tax collection, unemployment and this new renewed attack on tax havens (one must realize and remember this is simply a continuation of the attack and complaint by the OECD awhile back claiming that the tax havens were guilty of so-called unfair competition because they had lower tax rates).  In an April 6, 2016 article he writes: Many of the new jobs are low-wage (created since 2008). In real terms the wages of the middle-class have fallen since the crash (of 2008). Unemployment, although gradually falling, has remained stubbornly high in Europe.  So in a time of insecurity, who pays what tax matters.

Indeed, and not just who pays what tax, but if there will be anyone remaining to pay taxes in the first place (the number of US citizens renouncing citizenship is at an all time high, along with legal residents in the US turning back their green cards too).  The true key issue behind all the disgruntlement with so-called tax havens, banking secrecy and reporting issues is tax collection for the welfare state.  Make no mistake about it (and this is blatantly declared).  But keep in mind the governments that have a welfare state paradigm in place want to claim the argument is all about illegal activities and unpatriotic tax cheats and not anything else.  However, the real issue is because the politicians and political hacks have so mismanaged and under funded the state welfare insurance systems that now they are in big trouble financially.  They are broke, to be more blunt.  As we spoke about in a recent article, the US Government (or the US Treasury Department to be more specific) has a record tax collection year in 2015.  They took in more tax money in 2015 than ever before in that nations 250 year history – and they still ran a deficit of US$400 Billion Dollars anyway.  Even with a record haul, they still cannot balance the books.  Would it not be just lovely for them if they could raid all of the so-called tax haven jurisdictions to plug their proliferate spending (and blame the lack of funds and lack of a balanced budget on the tax havens as well)?

So, the question indeed now is who gets to pay for all the people taking social welfare benefits because one of the traditional tax bases, the middle class, is now in the throws of being wiped out in both North America and Europe.  The multinational corporations are already gone, at lease on paper for tax purposes in many cases, and ironically it was the very same politicians that gave them the blessing to leave via exemptions or special privileges regarding tax treatment. We have to imagine they thought they would let the companies go and collect from the middle class instead (and let us also not forget who contributes the most to political campaigns, so favorable tax legislation that benefits those multinationals alone should not shock you).  But, the middle class is currently now taking social welfare benefits themselves, and are not in any position to be squeezed further (payday loans for welfare recipients aside).

Enter the tax exile bogey man or woman (let us not discriminate), scapegoat or whatever other term you prefer.  FATCA and the recent OECD Automatic Exchange of Information thing, scheduled to go into effect in 2018, is all about chasing the money to feed the government spending monster.  But with regards to this OECD information exchange thing, I myself am very curious to see if all the banks and financial firms in the US are going to start ratting out all their foreign clients to the respective home governments.  Of course once they do, that kills one of the incentives to bank or invest in the US – does it not?  If they shame Panama will they also begin to now shame Delaware and Nevada?  We doubt it.

The hypocrisy of it all is nothing short of unbelievable (but true).  But here is our take away or key points from this Panama leaks thing:

1. The organizations or entities in possession of this information are recipients of stolen goods, and they know it, and nothing has been said about that aspect of it.  The private data concerning clients from a private law firm was stolen, and thus obtained unlawfully by the current recipients in possession of this information.  In many countries, knowingly taking possession of stolen goods from another party is a criminal offense.  Edward Snowden was painted as a villain for obtaining and passing along data and information regarding cables and sensitive correspondence involving the US Government and or it's various agencies.  The man was criticized ruthlessly and was holed up in a Moscow airport for months living off of taco bell from the airport food court (which is punishment in and of itself).  So where is the concern about the identity and whereabouts of the Panama Leaks burglar?  Was this person a plant or a spy sent in there to obtain a job at the firm with this sole mission of stealing records?  If that were not the case, and it was a jilted lover trying to get back at the senior member of the law firm they were having a tryst with (as is one of the reported theories or rumors), then where is this person?  Did you know that under Panamanian law, anyone divulging private information about a client in any company (not only banks or law firms) faces a US$50,000 fine and 2 years in jail?  When you switch car insurance companies in Panama, the new insurance carrier cannot get information about you from your previous insurance company by law. So, why would anyone take this kind of risk, jilted lover or not?  Or did they know they would be protected and get away with it?

Another thing is, what if it was the credit card mainframe at Citibank that was hacked?  What if the mainstream media got the data regarding the account balances and spending habits of a number of politicians and wealthy individuals?  Would they print it?  Would they disclose that a politician running for election recently purchased a US$25,000 wrist watch and that the credit card account used for the purchase was promptly paid by a third party?  Don't know. Would it and does it make a difference that the victim was a law firm in Panama versus a bank in New York?  When is it morally, ethically and legally acceptable to make private data public, which was acquired by theft?

2. Do we believe there were clients of the Panamanian firm perhaps engaging in shall we say nebulous activities?  Absolutely.  The probability statistics alone make this a possibility.  Drug dealers use cell phones to conduct their business.  That is a fact.  And while there are millions of people that own and use cell phones everyday, the vast majority are doing so without the intent or for the purpose of something illicit or illegal.  And yet, the law of probability suggests there is some percentage of the general population that is indeed using cell phones to conduct or facilitate an illegal trade.  So, should all cell phone users to be vilified or subject to arbitrary wire taps because of it?

Do you know that the biggest drug problem in the United States today involves legal prescription pain medications?  Oxycontin is the favored and probably number one legal prescription drug currently being abused in the US right now, but there are others as well.  So, how it is possible that a medication controlled by prescription is able to makes it way into the hands of 14 year old kids?  There are three possibilities: 1. Someone working in the factory that makes it is stealing it off the assembly line and selling it to a dealer.  2. There has been a tremendous increase of pharmacy burglaries in the US and that is the source or 3. There are medical doctors in the US that are writing prescriptions knowing full well the fulfillment of the script is for sale and distribution in the black market, and are supplementing their income with a very profitable cash based activity.  Which of these three do you think is more likely and how does that apply to the topic of this article?  We vote for number three.  And assuming you would agree, where is the AMA and FDA (American Medical Association and the US Government Food and Drug Administration) in all this?  Why is there no aggressive and severe focus on people in the medical profession doing this?  Why are there no sting operations?  They have sting operations for everything else, so why not this?  The point is, there is criminality, dishonesty and outright illegal behavior everywhere.  And there are more pressing and more serious issues for society than the fact someone set up an offshore trust.   No one ever over dosed on a Panamanian shelf company.

3.  Fairy Tales are for the children and truth is for the grown-ups.  The current land mass on the map currently known as the nation of Panama used to be part of Colombia. Former US President Theodore Roosevelt wanted to take over the Panama Canal project from the French and have the US Government own it and control it.  The way he was able to do that was by sending the US military down to the Caribbean to force the Colombians to grant Panama it's independence (and thus immediately following the new Panamanian Government signed the canal treaty – what a pleasant surprise that was).  Panama exists as a tax haven because the US Government permitted it.  In fact, the back story regarding Panama getting into the anonymous shelf company business in the first place back in the 1920's was reportedly at the behest of the financial firms in New York.  Rumor had it that a 3 lettered acronym US Government agency used extensive use of Panamanian shelf companies (and bank accounts) for it's own activities and affairs (how do you think the money from the Iran-Contra affair was moved around?).  They loved Panama as a tax haven.  It suited them just fine.

Likewise, the Isle of Man, The British Virgin Islands, The Cayman Islands and The Channel Islands all became tax havens with the blessing of the United kingdom Government.  And it was an industry or business that provided jobs, local revenue and had no negative environmental impact on these jurisdictions.  Low start up cost white collar businesses, such as banking and incorporation services, that could allow these jurisdictions to become self sufficient or self financing in terms of economic support. 

What we are very curious about is the end game.  They have run up the national debt levels to proportions that are untenable to maintain.  The unfunded liabilities for the various social welfare programs are staggering to say the least.  Today's younger generation, the millennial generation, will probably be the first generation in a very long time that will NOT live as well or better than their parents.  Negative interest rates are a desperate move by the central banks to provide additional capital and revenue for the banks, because they serve no other legitimate and proven financial benefit to the overall economy as a whole.  And while the ranks of the former middle class have certainly been decimated economically, it is also true there exist the still solvent that already have or are in the process of getting the heck out, with maybe the case of some putting money in Panama and other beneficial locations.  And the era of Anglo Saxon banking as the dominant force in world finance seems to be coming to a close, which includes the tax havens that were set up and integrated into this system.   Are the Panama Papers leaks a purposeful and intended announcement to that end?  What will replace it?  How will it be replaced?  Perhaps someone will produce another hack and we can find out.