On the Pandora Papers (10/11/21)

Readers of this blog are aware of the major investigation and related articles about the “Pandora Papers.”  The Pandora Papers leaks arise from an investigation by the International Consortium of Investigative Journalists ("ICIJ"), here, which previously disclosed the Panama Papers.  The ICIJ page on the Pandora Papers is here.

I have not written on the Pandora Papers because the principal focus of the revelations has been disclosing hidden wealth, often from corrupt endeavors, in secrecy jurisdictions (often referred to as tax havens, tax being one of the principal reasons such secrecy jurisdictions attract wealth).  One previously identified secrecy-friendly jurisdiction is, unfortunately, the U.S. through certain states which have enacted corruption-friendly laws.

The Wikipedia entry for the Pandora Papers is here.  Wikipedia usually does a good job of updating with key information.

I offer some links to and excerpts from some articles I found helpful.  Some of the links may require subscriptions.  This is necessarily an anecdotal sample, but includes some that I thought particularly interesting and potentially informative to readers.

• Erin Adele Scharff & Kathleen DeLaney Thomas, Five myths about tax evasion (WAPO 10/8/21), here.  Excerpts:

Myth No. 4

Tax havens are all abroad.

            Portrayals of tax evasion tend to describe the problem as U.S. taxpayers transferring money overseas. The Tax Justice Network’s list of top tax havens, for example, focuses on countries (the British Virgin Islands, the Netherlands and Singapore, among others) where laws allow corporations to book profits in low-tax jurisdictions. Another list focuses on countries (including Taiwan, Bermuda and Liechtenstein) where foreign investment exceeds expected economic activity.

            As the Pandora Papers make clear, however, for foreign nationals the United States can serve as a tax haven. The rich can hide their wealth from local taxing authorities and the origins of that wealth from anti-corruption advocates. U.S. banking and trust laws make it hard to identify the owners of assets. For example, South Dakota allows virtually anyone to create a trust and name themselves as the trust’s beneficiary. The state also provides significant protection of trust assets from creditors and ensures the privacy of trusts.

            In fact, the Tax Justice Network ranks the United States just ahead of Switzerland in its Financial Secrecy Index. Of course, this is not the first time a trove of tax documents has shined a light on the United States’ role in hiding foreign assets. At the beginning of this year, Congress enacted new measures requiring more reporting of asset ownership, but states still have exceptional leeway to craft laws that help people avoid paying their share. 

• Kelly Phillips Erb, Pandora Papers’ Big Tax Reveal Is Hardly a Shock (1) (BloombergTax 10/6/21), here.  Ms. Erb notes the ease with which assets can be hidden in states like South Dakota which has become perhaps the first U.S. destination for hiding assets whether corrupt or not.  The ease of hiding assets, she notes,  has resulted in the U.S. being recognized as a player in international secrecy jurisdictions:

In 2020, the Tax Justice Network ranked the U.S. second in its Financial Secrecy Index, only behind Switzerland. A high ranking, the organization notes, doesn’t necessarily mean a country is more secretive, but does mean that “the country plays a bigger role in enabling wealthy individuals and criminals to hide and launder money extracted from around the world.”

* * * *

            The U.S. has traditionally resisted calls to reveal ownership of assets inside its own borders, despite our insistence that other countries, like Switzerland, do so. Nonetheless, earlier this year, Congress passed the Corporate Transparency Act, touted as an effort to shore up existing money-laundering laws to prevent bad acts. However, the reporting rules, as written, don’t appear to apply to all trusts and partnerships; the Secretary of the Treasury has until January 1, 2022, to issue detailed regulations.

• Jodi Vittori, Five Things the United States Can Do to Stop Being a Haven for Dirty Money (Carmegie Endowment for International Peace 10/7/21), here.  The five listings are (go to the page for the discussion of each:

• Back up the Corporate Transparency Act with Tough Regulations
• Improve U.S. Financial Intelligence Capabilities
• Place More Financial Enablers under the Corporate Transparency Act’s Rules
• Stop Exempting Real Estate from Many Rules to Combat Money Laundering
• Treat Corruption like a Core National Security Issue

• Ronen Palan, Pandora papers: ‘it’s time to pursue lawyers and accountants who enable tax evasion’ – offshore tax expert Q&A (The Conversation 10/4/21), here.  Some excerpts:

            Maybe it’s time to create something similar to what applies in medicine, so that, if enablers contravene certain standards, they can be prosecuted – even in countries who are not directly affected by their activities. If they went to such a country, they could be arrested on arrival. 

Should we create a new international institution dedicated to stamping out tax evasion?

            In practical terms, the three places that matter when it comes to creating international regulations are the US, EU and China. Unfortunately they are not agreeing with one another on much right now, so it will be difficult to reach an agreement about such an institution. Even if they did agree, they would be accused of imperialism by smaller countries, or of acting as dictators.

            Of course, these three players would still need to agree on an initiative to really go after enablers, so you can make the same criticism of this strategy, but it is at least more modest in its scope and therefore potentially more realistic.

Are all these revelations actually helpful?

            There’s certainly a danger of media saturation, in which the public knows about these kinds of activities and may be less interested by now. But we need to emphasise that the consequences are not going away: to run a modern state, it’s very expensive. To pay for a good education system, a good health system, properly functioning infrastructure and so forth, somebody has to pay for it.

            If the rich are avoiding paying their share, somebody else is picking up the tab, and that’s either the poor or the squeezed middle classes. So if the public are tired of all this scandal, it doesn’t change the fact that they are suffering because of it.

• Finally, on the subject of professionals/enablers, I have discussed previously the indictment of Carlos Kepke, a Houston lawyer, who allegedly assisted Robert Smith who received an NPA and Robert Brockman who was indicted.  I have discussed Kepke before.  See Houston Tax Attorney Indicted for Conspiracy and for Aiding and Assisting (Federal Tax Crimes Blog 4/15/21; 4/16/21), here; and Individual B, the Houston Attorney in the Smith NPA, Is Unmasked (Federal Tax Crimes Blog 12/1/20; 12/2/20), here.  Kepke makes an appearance in at least one article on the Pandora Papers, although it is not clear whether the information about him and his activities is from the Pandora Papers (all may be from public disclosures before the Pandora Papers).  In any event, here is the discussion I found (Debbie Cenziper & Will Fitzgibbon, Rogue Americans Stashed Assets Offshore, Eluding Victims and Impeding Investigators (WAPO 10/4/21), here. 

            Twice, federal prosecutors have identified Godfrey’s firms in court cases as offshore providers to Americans who have been accused of wrongdoing. [Glenn Godfrey is identified as a Belizean enabler]

            One was Jared Wheat, convicted of selling adulterated and unapproved prescription drugs over the Internet through a Belizean company set up by CILTrust. [CIL Trust is a Godfrey-related entity]

            The other was billionaire Robert F. Smith, who evaded millions of dollars in taxes through a trust established at CILTrust. Smith settled with prosecutors last year and was not charged. In April, the Houston lawyer who arranged to set up the trust on Smith’s behalf was indicted for allegedly conspiring to defraud the United States.

            The indictment referred to Godfrey’s firm 20 times, alleging that the lawyer, Carlos Kepke, helped Smith maintain a “false paper trail” to conceal assets from the Internal Revenue Service.

 * * * *

             In 2018, the Justice Department asked for financial records, ownership information, letters and other correspondence related to a 2000 trust established by CILTrust for technology investor Smith. Prosecutors alleged that Smith illegally set up the trust to hide assets from the IRS.

            In a statement that appears in the documents, Godfrey disclosed to the U.S. government that he had worked with Houston attorney Kepke to help Smith set up the trust. Godfrey, according to his statement, met Kepke in the mid-1990s at an asset protection conference in Houston.

            Kepke and CILTrust also helped to create two Belizean trusts for Smith’s financial backer and mentor, Robert T. Brockman, the records show. In 2020, the Texas software billionaire was indicted in what authorities describe as the largest tax fraud in U.S. history. Brockman pleaded not guilty; the case is ongoing.

            In his 2018 statement, Godfrey told U.S. prosecutors that he ended his firm’s relationship with Smith in 2009 — nine years earlier.

            “Cititrust was very concerned that it was in [the] dark as to what exactly Mr. Kepke and Mr. Smith were doing with assets,” Godfrey wrote.

            Smith last year agreed to pay $139 million in fines and penalties and is cooperating with prosecutors. In April, a grand jury indicted Kepke.

            Kepke did not respond to a request for comment. Smith declined to comment. In a letter to investors last year, Smith wrote, “I should never have put myself in this situation.”