The Pandora Papers Spark Pandemonium and Potential Policy Change

Pandora’s box is a fictional artifact of Greek mythology. (Merriam-Webster). Pandora, the owner of the box, was told never to open the box. Id. However, she did anyway. Id. When she took the lid off the box, out swarmed all the troubles of the world, never to be recaptured. Id.

The recently revealed and appropriately named Pandora Papers have brought this Greek myth into a modern context, except evidence of global inequity swarmed out of the “box” in 2021. The Pandora Papers shocked many by describing how the ultra-rich hide money overseas to evade taxes. (Kelly Phillips Erb, Bloomberg Law). More surprising is the scale of the operation and how many well-known global figures participated in such dealings.

The Pandora Papers are comprised of “6.4 million documents, almost three million images, more than a million emails, and almost half-a-million spreadsheets.” (BBC). The International Consortium of Investigative Journalism (“ICIJ”) uncovered these documents in 2019 and 150 worldwide news organizations later joined in the investigation to review the documents. (ICIJ). Given the size of the project, it took two years to complete the full investigation. Id. The Pandora Papers revealed the secretive dealings of some of the world’s wealthiest individuals, implicating politicians, sports stars, famous musicians, sophisticated criminals, and many other well-known individuals. (Jason Beaubien, NPR). Among those listed were close associates of Vladimir Putin; former UK Prime Minister, Tony Blair; pop star, Shakira; Pakistan’s finance minister, Shaukat Fayaz Ahmed Tarin; supermodel, Claudia Schiffer; King Abdullah II of Jordan; and many more. (ICIJ). Elite institutions, such as multinational banks, law firms, and accounting firms headquartered in the United States and Europe helped set up many of the offshore accounts involved in illegal activities. Id.

To understand the importance of the Pandora Papers and the allegations that accompany them, it is important to understand how and why the rich use offshore financial accounts. In most countries, including the United States, it is not illegal to keep offshore accounts. (Tim Parker, Investopedia). However, to be legal, the holder of an offshore account cannot hide the account from their home country for tax purposes. Id. Even though these accounts must be reported, offshore institutions have a reputation for confidentiality and can help well-known elites avoid public scrutiny in their financial dealings. (Greg Miller, Washington Post). The wealthy accomplish this confidentiality by establishing offshore shell companies, which exist in name only. (BBC). Offshore accounts are then created and placed in the name of the shell company. Id. The companies are then used to perform a variety of financial transactions. Id. Offshore shell companies conceal the owner’s identity because the owner is removed from any transaction and the account itself is kept in strict confidentiality. Id. This allows a holder of a shell company to perform their financial dealings through an offshore account and out of the public’s eye. Id.

Offshore accounts can be useful, but they can also be used for illegal and immoral purposes. Most commonly, offshore financial systems are used as tax havens for storing and hiding assets from an account holder’s home government. (Greg Miller, Washington Post). While the confidentiality of offshore financial systems can be helpful, offshore assets do have to be reported to an account holder’s home government. However, many do not report their offshore assets and instead use offshore accounts as a means of concealing assets from authorities, creditors, and other claimants. Id. By concealing assets in offshore accounts, the wealthy avoid higher tax rates in their home countries and take advantage of lower tax rates in foreign countries. (Pandora Papers reporting team, BBC).  

The ICIJ estimates anywhere from $5.6 trillion to $32 trillion is kept in offshore accounts. (BBC). The International Monetary Fund has said tax havens cost governments worldwide up to $600 billion in lost taxes each year. Id. Taxes are used for implementing social welfare programs, ensuring education, providing national defense, and maintaining the operation of government. (IRS). The UK government put it best by stating tax avoidance "involves operating within the letter, but not the spirit, of the law." Id. This is why so many of the names listed in the Pandora Papers shocked the world. Listed were “35 current and former world leaders, more than 330 politicians, and public officials in 91 countries and territories, including the United States.” (ICIJ). Leaders of government are expected to act within the interest of their constituency, not against it, by avoiding taxes. 

Knowing the benefits that tax dollars can have, it may be surprising to hear that the United States has become a recognized haven competing with other offshore jurisdictions in low tax rates. (Greg Miller, Washington Post). Over the past decade, South Dakota, Nevada, and more than a dozen other states have morphed into jurisdictions with major tax incentives. (ICIJ). For example, in South Dakota, trust assets are not taxed before distribution to a beneficiary, and once distributed, the trust assets are usually taxed at the beneficiary’s own rate. (Kelly Phillips Erb, Bloomberg Law). South Dakota has also repealed the infamous “rule against perpetuities,” which forbids trusts from being held longer than someone’s life plus 21 years. (Oliver Bullough, The Guardian). By repealing this restriction, trusts can be held for excessive lengths of time while never being taxed. Id. These trusts are often called “dynasty trusts” because they can protect assets from taxation for generations. Id. As a result of these flexible regulations, some of America’s wealthiest citizens were not listed in the Pandora Papers. (Greg Miller, Washington Post). Financial experts say this is because America’s ultra-rich are able to take advantage of similarly flexible financial systems in the United States, like South Dakota. Id. With these options available in their home country, America’s wealthy tend to pay such low tax rates that they have less incentive to seek traditional offshore havens. Id. While many U.S. states have continued to transform into tax havens, most of the world has focused on reigning in “traditional” offshore havens such as the Bahamas, the Caymans, and other island nations. (ICIJ).

The United States government has been cracking down on unreported offshore accounts since 2008, and in the aftermath of the Pandora Papers, it is likely to continue to do so. (Jason Freeman, Forbes). The Internal Revenue Service requires United States citizens and resident aliens to report income from all sources, including foreign accounts. (IRS). Taxpayers are not permitted to use offshore accounts to avoid paying taxes. Id.

However, with many states becoming tax havens themselves, some United States lawmakers feel that more should be done. (Will Fitzgibbon, ICIJ). Just as United States citizens can offshore their money overseas, many wealthy foreigners have begun to open their offshore accounts in the United States to take advantage of lower tax rates. (Randall Chase, AP News).  In response to these issues, United States lawmakers introduced a bill called the Enablers Act. (Jason Freeman, Forbes). If passed, the bill would require trust companies, lawyers, art dealers, and others to investigate foreign clients seeking to move money and assets into the United States financial system. Id. Banks are already required to investigate their clients and sources of wealth; however, the law currently excludes many other common financial institutions from this requirement. Id. Passing the Enablers Act would eliminate these loopholes and hopefully strengthen the nation’s financial security. Id.

By leaking the Pandora Papers, the ICIJ opened Pandora’s box, and there is no going back. While many knew the practice of offshoring existed, the Pandora Papers revealed the grand scale of these tax avoidance practices. (ICIJ). For now, an increase in enforcement is likely. In the meantime, we will have to wait and see if there will be a change in the policy of how the United States handles offshoring.