Paradise Papers: Day 2

By: Diane Ring

The most recent big financial data leak, dubbed the Paradise Papers, is now in full swing in the media. On Monday, Shu-Yi Oei blogged the initial release and its immediate takeaways (including the revelation that U.S. Commerce Secretary Wilbur Ross continued to hold investments in a shipping business that had business connections to key Russian figures). But each passing hour brings new information and individuals into the public spotlight – and in the process sheds light on how such information is likely to be used and what the media and the public seem to find most noteworthy.

So what did Day 2 bring? . . .

In the U.S.

Political Donors: The front page on the ICIJ website leads with the article: “Wealth and Influence: Big U.S. Political Donors Play the Offshore Game”. (Note: ICIJ is the news consortium that presumably received that data from hackers and oversaw its processing and public release on Sunday.) The ICIJ article details how key Republican and Democratic donors appear in the Paradise Papers. Big names on the Republican side include: Sheldon Adelson (casino magnate), Steve Wynn (resort owner), Robert Mercer (hedge fund manager), Paul Singer (hedge fund manager), and Carl Icahn (private equity investor). On the Democratic side, the names include: Penny Pritzker (major donor and later U.S. Secretary of Commerce under President Obama) and George Soros (hedge fund manager).

This matters? Is this really surprising? Big donors are wealthy individuals, and wealthy individuals are the ones likely to have sufficient assets to warrant offshore planning and holdings (regardless of whether they are legitimate or not). It may be relevant, however, if the donors use their political influence to advance personal financial interests that were not apparent to the public (or perhaps even to some regulators).

Disarming the investigator: The ICIJ tells the story of Republican donor Warren Stephens (another name in the Paradise Papers) to make the point that transparency to the public matters. Over the past few years, Stephens has strongly advocated for stripping the Consumer Financial Protection Bureau of its rulemaking and enforcement powers (in part via his financial support for an advocacy group with that mission). As the 8^th largest Republican donor in the last federal election cycle, Stephens presumably had the ear of politicians. Why did he care about the CFPB? According to the released financial data, Stephens used family funds to take a significant stake in Hayfield Investment Partners (a Delaware Corporation). Hayfield was the parent of online payday lender, Integrity Advance, which was under investigation by the CFPB for deceiving customers and violating the Truth in Lending Act, the Electronic Fund Transfer Act, and Dodd-Frank. What is the offshore connection? Stephens’ stake in Integrity Advance (through Hayfield) had been obscured during the battles with the CFPB (even when ownership data was requested by the government). This link (and the likely motivations for Stephens’ attack on CFPB’s powers) became apparent when the Appleby files were revealed in the Paradise Papers leak. Hayfield had turned to Appleby for assistance in establishing offshore entities to expand its payday and online lending activities in anticipating of working with American Indian tribes entering the field. This example highlights that: (1) secrecy can be achieved domestically (via a Delaware corporation), (2) companies may still turn to offshore entities for increased assurance of secrecy, and (3) all of this can be revealed in a leak.

Apple, Apple, and more Apple: The icon of the global smart phone industry has been a fixture in the news (recall the Senate subcommittee tax hearings of 2013) for its use of offshore tax planning to reduce income tax paid in the U.S. and abroad. Most recently, the tech giant has garnered enormous attention for the adverse European Commission ruling that held Apple owes 13 billion euros (or approximately $15 billion) in back taxes to Ireland. This decision followed an investigation that began in 2014. One might imagine that after these bruising events, Apple would lay a bit low on the tax-planning front. The Paradise Papers suggest otherwise. Apparently, Apple has a strong tax stomach. Once Ireland began to tighten its tax laws and phase out key features of its tax system pivotal to the tax strategies of multinationals, Apple began hunting for a new tax jurisdiction. With guidance from Appleby, Apple identified Jersey as a suitable new location and moved two subsidiaries to this tax-appealing island in the English Channel.

Beyond the U.S.

More on the British Royal Family: After hearing about the Queen in the initial Paradise Papers release, Prince Charles has now come into focus. The data reveals that his private estate maintained an undisclosed interest in an offshore company. Why would that be important? The Bermuda company, Sustainable Forestry Management, reportedly stood to benefit from modifications of climate change agreements for which Prince Charles campaigned.

Abuse of Angola’s Sovereign Wealth Fund: According to the leaked documents, Jean-Claude Bastos, the asset manager for Angola’s sovereign wealth fund (and close friend of the Angolan president’s son who headed the fund) was paid over $41 million in a 20-month window during 2014-2015. The payments were made to Bastos’ Mauritius company and then in part paid on to Bastos’ British Virgin Islands companies through a series of less than transparent but seemingly tax-attractive transfers. This is not the first time a leak has shed some light on the Angolan sovereign wealth fund and its operations. The Panama Papers leak in 2016 revealed potential money laundering via the fund.

Data Control: As Shu-Yi Oei and I detailed in our paper, “Leak-Driven Law”, hackers, leakers and intermediaries such as the ICIJ control the leaked data and determine when, what, and to whom information will be released. This power of this point was brought home during an exchange Monday in the UK House of Commons Public Accounts Committee. The committee chair asked witness Jon Thompson, the chief executive and permanent secretary of HMRC, whether he knew the Paradise Papers leak was coming. Thompson replied that he had known for “some time” that a leak was coming but that he “does not have access to the material that has been provided by the [ICIJ] to the BCC and The Guardian.”

Thompson further stated that he had requested access to the information two weeks ago from the ICIJ and that

“[w]e have not received a reply. It is different from the Panama papers in 2016, which were published on a website in an unstructured way and you could inquire through those papers. In this particular situation, the papers have not been made publicly available; they are only available to those within the International Consortium of Investigative Journalists.”

The U.K. tax authorities were not the only ones reporting no initial access to the data. In an Australian Senate Economics Committee hearing on October 25, 2017, Michael Konza (Australian Tax Office Deputy Commissioner) stated in response to a senator’s inquiry about recent ICIJ activity: “We understand that it’s in regard to services provided by that law firm [Appleby] to taxpayers. The articles mention extensive use of various low-tax jurisdictions. It seems, from the bare details that we have, that it might be similar to Panama Papers where tax structuring has been exposed.”

After the announcement of the Paradise Papers, the Australian Tax Office (ATO) issued a statement on Monday reporting that in anticipation of this ICIJ announcement, it had been working with foreign and domestic partner agencies for several months. More pointedly, however, the ATO statement signaled the reality that the ICIJ has not shared the data: “We anticipate further data may published by the ICIJ and the ATO will continue to work closely with other tax administrators to share intelligence on advisers operating globally.”

Today, the ICIJ has declared its plan for data dissemination:

• Data released on its website: “Throughout November and December, ICIJ will release the names of tens of thousands of offshore entities incorporated by Appleby, Asiaciti and corporate registries and the people connected to them (as beneficiaries, shareholders or directors). The names — with links to 180 countries — will be added to the Offshore Leaks database (published in 2013), which already contains more than 340,000 companies that the ICIJ obtained in previous leaks.”
• Governments: “The long-standing policy of ICIJ is not to turn over such material [to governments].The ICIJ is not an arm of law enforcement and is not an agent of the government. We are an independent reporting organization, served by and serving our members, the global investigative journalism community and the public.”

Clearly, for the time being, the ICIJ and its media partners are maintaining control over the data and accordingly the power to shape discussion and debate that comes with possession of the data.

Some take-aways today:

• United States: In contrast to some prior leaks (including Panama Papers), there appear to be more U.S. names of interest this time around. As a result, it will be interesting to watch the leaks play out over the next few days and weeks in the U.S. to see what the impact will be.
• Repeat Players: Just because a party is identified in one leak does not mean that more information won’t be revealed in a later leak. As noted above, the Angolan Sovereign Wealth Fund came under scrutiny due to the Panama Papers, but is now back in the spotlight for the actions of its asset manager.
• Relevance: We are seeing an effort by the ICIJ and other news outlets involved in disseminating information about the Paradise Papers leak to articulate reasons why revealed data is potentially meaningful. On the one hand, that may be an attempt to justify data leaks to an increasingly sophisticated audience that has come to believe that many names caught up in the offshore leaks are doing nothing illegal or even inappropriate. On the other hand, it could be a reaction to perceived “leak-fatigue” – the idea that the public has become a bit inured to the hype of a leak qua leak—and that instead the public must be convinced of the data’s significance through explicit journalistic accounts of harm, illegality, or improper conduct. In our paper, “Leak-Driven Law”, Shu-Yi and I explore the ways in which subsequent rounds of leaks may cease to have the same impact – or may have a different impact – than the initial ones, as both producers and consumers of leaks become increasingly sophisticated. Based on how the early days of this latest leak are being covered in the press, we can see some evidence that this may be occurring.

The ultimate impact of this latest leak has only just begun to unfold. Stay tuned.