On Sunday, a team of investigative reporters working with the International Consortium of Investigative Journalists revealed one of the largest document leaks in history, from a Panamanian firm that specializes in shell companies used by individuals and corporations to deposit money while obscuring or outright hiding their ownership.
Such arrangements can be used as part of criminal money laundering or other shady dealings, though they are perhaps most often used for simple tax avoidance, which is not necessarily illegal, though it sure is unethical. My colleague Matthew Yglesias recalls a manager of offshore bank accounts who once told him, "People think of banking secrecy as all about terrorists and drug smugglers, but the truth is there are a lot of rich people who don't want to pay taxes."
But even if many or most of the people involved in this sort of scheme might be in it for these sorts of shady reasons, not necessarily all of them are. There are cases, though they are the exception far more than they are the rule, where using a shell corporation might be desirable — for example, an individual in an authoritarian state who might fear having their assets seized as a punishment for their politics.
And that's not to defend shell corporations, which after all subvert the global financial system in some serious and costly ways, but merely to point out that sometimes the relationship between individuals, states, and offshore accounts isn't as straightforward as we might think.
To understand these outlier cases, why they happen, and what they tell us about shell companies and the roles that they play in the world, I spoke to Margaret Peters, a political scientist at Yale. A transcript of our conversation, edited for length and clarity, follows.
Zack Beauchamp: Let me start from square one basics. Are there any times that people can choose to use tax havens where it's legitimate — maybe even sympathetic?
Margaret Peters: In authoritarian countries, yeah.
In authoritarian countries, there's no rule of law, so there's no real concrete legal system. It's much easier for the government, the ruling party, or whatever's in power to take money from individuals — especially those individuals who might be threats. People who might be threats [include] successful business leaders or other people who have a lot of money, who could spend that money to challenge the regime.
So we might think that successful business leaders might have a reason to hide their money — because they might be worried the government will come after them. In that case, we might think that it's legitimate for somebody who opposes the regime to move a lot of his or her money offshore.
ZB: Can you list some real-life examples of this happening?
MP: You've seen Vladimir Putin do this quite often, taking money from anybody who's tried to start a political movement against him.
A lot of people also talk about this current anti-corruption campaign that's going in China as not necessary just about corruption. [It's] also about targeting elites who might have power against the ruling members of the Communist Party.
Targeting those elites and saying, "Oh, they have all of this money" — there are lots of people in China who are corrupt and have lots of money who are not being targeted. But these individuals are being targeted, specifically, because they're somehow threatening to regime insiders.
ZB: So basically, this is a story about the arbitrary character of authoritarian governments. They can take your money whenever, so you feel like you need to devise some way to protect it.
MP: Yes — though I would say there are plenty of authoritarian governments where the vast majority of the population has typical rule of law. Think about a country like Singapore where, for the vast majority of people, there's a sort of standard rule of law that gets applied. You might think [tax havens there are] somewhat similar to the developed world; rich people are just trying to avoid paying their share of taxes.
But there's at least a subset of people in authoritarian countries who might be worried about their money being taken for totally illegitimate reasons — or for countries that are authoritarian and also have really low levels of rule of law. Think about the basket cases like the Democratic Republic of Congo; legitimately, you might be worried that the government will take your money for illegitimate reasons.
ZB: When we talk about these "illegitimate reasons," you've mostly emphasized government crackdowns on dissidents. But could people also just be worried about simple corruption: government officials extorting them for pure profit?
MP: Yes. That's totally something that happens in a lot of these countries as well.
The wealthier you get, the more of a target you become. It doesn't always necessarily need to be from the regime itself: In a lot of countries where there are armed groups, from cartels to militias to people fighting for independence or against the government, you might be worried that these people are likely to extort you and so might want to move your money offshore.
Now, just because you want to move your money offshore doesn't mean you want to use one of these shell companies. There are plenty of other ways, if you're worried about corruption, that you might be able to move your money offshore.
ZB: Talk to me about some of these more transparent offshoring methods, and why people might choose to use tax havens instead.
MP: You could, instead of using a shell company, just set up a standard bank account in your name in another country. In a lot of developing countries, there aren't many banks or secure financial institutions that people can use. A lot of foreigners have bank accounts here in the United States.
Of course, those bank accounts are subject to the taxes levied on anyone who holds money in the United States. If you want to save the most money and not pay taxes to a foreign government, you probably want to put it in one of these tax havens.
When we start thinking of shell companies, you can imagine in some authoritarian contexts, you're worried that the state is going to come after you — either because you're just wealthy and look like a good target or because you might oppose the government. In those cases, you might want to hide that money.
Whereas if it's really just a very low-capacity state where you're worried about people or armed groups taking your money, you might just put it in another country but not worry so much about hiding it.
ZB: So the "legitimate" purpose of shell companies and tax havens is minimizing your own wealth, to hide from a powerful state that you might have resources it wants to extort?
ZB: So what this really suggests to me is that in these authoritarian countries that lack rule of law, avoiding scrutiny isn't always corruption. The governments themselves are threats to your rights — causing you to think about your relationship with them in a very different fashion.
MP: Yes, that's true for some people at least. It depends on to what degree you're a regime insider.
So if you look at, say, Putin and his cronies who are hiding money in shell companies, some of those people might actually be worried that Putin might turn on them. But Putin himself, is he worried that he's going to turn on himself? I don't think he has that many psychological problems.
He's probably doing it because he wants to do it for some sort of image reason — he doesn't want people finding out exactly how much he has. Also on that list were various members of royal families; those families have been in power for a long time now, so I don't think they worry too much. They might be trying to hide it because they also don't want bad publicity — "look how much the leaders have stolen."
Then there's people who aren't so connected to the regime, who may be worried that the regime will turn on them some day. And then there are those who aren't so worried that the regime will turn on them, but are just worried that the regime is corrupt and will take money they've earned outside of normal taxes.
ZB: This obviously suggests that some authoritarian regimes are flushing money out of the local economy. How much does flow out of capital outward hurt the economies in these countries? Do we have any hard data?
MP: I have not seen really great estimates — for some developing countries, the data's so poor regardless that it's really hard. And since, in many cases, this is illegal activity, it's hard to get real data. I'd be very excited if actual numbers come out of this data dump.
But these are large sums of money. Of course it's going to have effects, especially in smaller economies or places that are less developed. The fact that people are pulling their money out and not using it for productive uses at home means there's less investment, less spending, just generally less economic activity.
For places like Russia, this has been a huge drag on their economy.