Panama Read: transparency and concealment in global wealth management

April 28, 2016

By Karen Alter (political science, law) and Bruce Carruthers (sociology); directors of the Buffett Institute's Global Capitalism & Law research group

For many people, the month of April means tax season. Most people’s income comes from wages, with income taxes automatically withheld by an employer who also discloses their earnings to the IRS. But matters can work very differently among the rich and powerful.

Mossack Fonseca headquarters in Panama City, PanamaThis April also marked the massive Wiki-leaks style release of secret documents created by the Panama-based law firm Mossack Fonseca. Commonly known as the Panama Papers, the leak contained 11.5 million documents linked to over 214,000 offshore companies. As more and more people read the Panama Papers, they gain an extraordinary look into the world of the ultra-wealthy and uber-powerful.

The revelations have already forced the resignation of the Prime Minister of Iceland, embarrassed the British Prime Minister, and put political leaders and businesspeople on the defensive. More repercussions will undoubtedly follow as reporters continue to dig into the 2.6 terabytes of data, with even more data to be released May 9.

Governing a system that transcends national boundaries

Protesters in Iceland after the Panama Papers leakFinancial laws and regulations are (mostly) national, but commerce and banking are global. Even with a high level of international cooperation, it is easy for money to slip through legal cracks. This mismatch between national laws and global capital creates many tensions, not least between governments that want to collect taxes, stop money laundering, and bar financial flows to illegal and terrorist organizations, those who wish to conceal their activities, and those who want to track stolen funds and air dirty laundry. It takes significant resources to hide illicit wealth, and so it is often the rich and powerful who are best able to set up shell corporations, conceal their assets, and otherwise disguise income, with the paid assistance of highly professionalized bankers, accountants, and law firms.

There are, admittedly, many legal and legitimate reasons to set up a foreign-based corporation, or to shift money overseas. But as the Panama Papers demonstrate, the rich and powerful also squirrel money in offshore havens for legally and morally questionable reasons. The Panama Papers are likely to reveal how the global 1% avoid taxes and spousal support, and will provide information for law enforcement agencies tracking stolen assets, human and narco- trafficking, or illegal funding for the Syrian war and ISIS.

If the Panama Papers shine a light on the underbelly of global capitalism, the Buffett Institute’s Global Capitalism and Law research group focuses on ‘in-plain-sight’ aspects of global capitalism, investigating how domestic and international laws define and incentivize legitimate global business while attempting to constrain illegitimate behavior. The group seeks to better understand the global network of legal rules that try, with mixed success, to reach beyond the nation-state and regulate global flows of goods and money. This research group is also exploring how the global economy shapes national market policies. 

Harnessing global capitalism for good 

As an economic system, capitalism harnesses self-interest in the pursuit of profit. The public laws sustaining capitalism aim to channel profit seeking into legal activities (e.g. no selling heroin, even if it is highly profitable) and to balance the pursuit of private self-interest, with investment in basic public goods and the pursuit of various national objectives–education, a minimum standard of living, health care, environmental protection etc. While many Americans seem to prefer low taxes and a thin social safety net, Scandinavian countries opt for high taxes, redistribution, and more robust welfare programs. The research group extends its study of global capitalism and law to recognize the different policy choices that countries make. Yet, as the Panama Papers reveal, global elites can evade the rules that their home countries set.  

This most recent symptom of global inequality prompts a number of important questions. On the political side, how will the 99% respond– voting for extremist political candidates, refusing to pay their taxes, joining illegal enterprises, or taking to the streets? On the normative side, what moral and legal rules can best balance private and public interests? How do international laws and institutions reconcile national democratic choice with global legal rules and the actions of global institutions such as the IMF, the World Bank, the UN and the WTO?

In addressing these questions, our Global Capitalism and Law group believes that theorizing must be informed by economic and political realities. Because there is no one-size-fits-all set of national or global legal rules for capitalism to flourish, and because left to their own devices markets generate both the 1% and the Panama papers, we need to better understand the relationship between capitalism and law, and what makes institutional arrangements politically sustainable.

Americas, Europe, Law, US Foreign Policy