Spiderweb Capitalism: Untangling the secrets of the super wealthy
Decoding the hidden networks, tactics and financial loopholes that fuel the elite.
TLDR: Over the last two decades, several shocking scandals have exposed wealthy individuals, including politicians and celebrities, using offshore accounts and “shell” corporations to hide wealth, evade taxes, and engage in financial secrecy.
Through this article, we uncover the mechanics behind the layered networks of lawyers, accountants, company secretaries, and fixers who facilitate the illicit movement of wealth across borders through a case study of the Panama Paper Leak and 1MDB scandal.
Background
An offshore company is an organization that's registered in a country different from where its main operations or owners are located. For many years, offshore companies have been a hot topic of debate. Locations like Bermuda, the Cayman Islands, and Switzerland are commonly chosen for establishing offshore companies for a wide array of reasons:
Although using such strategies for tax minimization is within the bounds of the law, ethical questions arise, particularly when wealthy individuals use these avenues for tax evasion. Interestingly, there are comprehensive guides and even whole agencies that facilitate this process.
“Tax evasion schemes are becoming so sophisticated that even expert auditors have difficulty locating offshore accounts, helping more of the top 1 per cent to hide their wealth than has been previously thought” - research by Daniel Reck has revealed.
When Legal Turns Illegal: Tax Minimization vs. Evasion
The boundary between the two often hinges on intent and transparency: Deliberate acts of concealment of transactions to deceive the tax authorities. There are three main ways individuals go about doing this:
Misreporting Income: Deliberately under-reporting income or exaggerating deductions.
Non-disclosure: Failing to reveal foreign-held assets to tax authorities.
Illicit Fund Transfers: Shifting money to offshore accounts with the specific aim of dodging taxes.
The IRS estimates that $1 out of every $6 of taxes that should be paid, is not paid. It estimates that around 60 percent of this "tax gap" comes from under-reporting of income on individuals’ tax returns.
Global efforts to reveal the problem
USA, 2008-2010 : the IRS in 2008 in tandem with the enactment of the Foreign Accounts Tax Compliance Act (FATCA) in 2010 resulted in thousands of U.S. taxpayers revealing offshore assets they had concealed.
Panama Paper Leak, 2016 :
11.5 million confidential files were released from Mossack Fonseca, a law firm based in Panama, with data spanning from 1977 to 2015. The International Consortium of Investigative Journalists (ICIJ), then coordinated over 400 journalists from 100 media outlets in 80 countries to analyze the documents.
Revelation: The files implicated over 214,000 shell companies, and the names that appeared included those of 12 current or former world leaders, 128 public officials, and a multitude of celebrities and business leaders. According to the ICIJ, the leak directly led to the recovery of over $1.2 billion in fines and back taxes worldwide as of 2020.
Impact: In Iceland, PM Gunnlaugsson resigned after the leak revealed his family had offshore accounts. In Pakistan, then-PM Nawaz Sharif was disqualified from holding office due to his family's undisclosed assets.
These events sparked an international debate about financial transparency, leading to regulatory changes. For instance, the European Union passed stricter transparency rules for tax advisers, and several countries ramped up their anti-tax evasion measures.
Case study : The 1MDB Scandal
Initially, 1MDB – an abbreviation of 1Malaysia Development Berhad (which means limited) – was nothing more than a Malaysian state fund, set up in 2009 to promote development through partnerships and foreign investments.
The fund soon became the center-piece of the biggest corruption scandal in Malaysia - leading to misappropriation of $4.5 billion to fund the extravagant lifestyle and political motivations of the then Prime Minister Najib and his allies.
Overseas, the money funded the ostentatious lifestyle of one of the consultants allegedly brought in to oversee 1MDB, Malaysian businessman Jho Low.
The 1MDB fund was used to bankroll purchases like $85m in Las Vegas gambling debts, a $3.2 million Picasso given to Leonardo Dicaprio, a birthday party for Low which saw the likes of Ludacris, Busta Rhymes, Chris Brown, Pharrel Williams and Britney Spears, $8 million in Diamonds for Miranda Kerr, and founding of a production company which financed ‘The Wolf of Wall street’.
The embezzlement of 1MDB money between 2009 and 2012 went unchallenged until 2015, when whistle-blower Clare Brown leaked 22700 documents detailing the depth of the fraud.
How did they manage to do it?
In 2012, Ng and Leissner, two investment bankers from Goldman Sachs attempted to raise funds for 1MDB. However, 1MDB had no credit rating, which made it harder to convince investors to chip in. In order to make the deal structure look better, Goldman Sachs used their credibility to pair-up 1MDB up with Abu Dhabi’s sovereign wealth fund , IPIC, which had $70 billion in assets and a solid credit rating.
Certain collaborators associated with the 1MDB scandal created fake documents and misled investors into believing the IPIC had provided guarantees for 1MDB’s bonds. These guarantees were supposed to secure the repayment of 1MDB’s debt.
In reality, IPIC had no such obligation and the guarantees were fraudulent. It was discovered that $3.5 Billion was misappropriated from 1MDB and directed to a bogus company with a similar name to an IPIC subsidiary. This fraudulent scheme involved collaboration of individuals involved in both 1MDB and IPIC.
“Jho Low was a greedy narcissist. Can you imagine if he just laid low? . . . He would have gotten away with it because Malaysia and Singapore would have written off the debt . . . to avoid a very public scandal that would tarnish their reputations. If that had happened, we would never know about this..”
These were the questions asked by Kimberly Hoang, the author of Spiderweb Capitalism, who believes the 1MDB scandal might just be the tip of the ice-berg which the general public is aware of.
Understanding Spiderweb Capitalism
Spiderweb capitalism refers to a complex network of interconnected subsidiaries and entities that spans across multiple jurisdictions, enabling the accumulation of enormous wealth by economic and political elites.
The individuals who control this complex web are often referred to as the "big spiders." They are ultra-high-net-worth individuals who benefit from the hidden opportunities and exclusive privileges offered by spiderweb capitalism. To cover their close connections to potentially questionable transactions, the big spiders employ "agents" or "fixers." These individuals assist in concealing the true nature of their dealings.
“Playing in the gray" is a term used by the spiders to describe their approach to navigating the fine line between legal and illegal activities in the financial markets. They engage in practices that are technically legal but acknowledged as morally questionable.
Another such way in which the spiders achieve this is by “Front-running the law”. This refers to the practice of using strategies that were highly profitable before regulations were put in place, and applying them in less-regulated frontier markets before formal regulations catch up.
Can this web ever be untangled?
This system thrives on the intricacy and opacity of its arrangements, facilitated by offshore financial centers and the involvement of various professionals. While operating within the bounds of legality, the moral implications and concerns surrounding spiderweb capitalism cannot be ignored.
Its impact on transparency, fair distribution of wealth, and the integrity of global financial systems raise important questions that need to be addressed. As we strive for a more equitable and transparent economic landscape, it becomes imperative to critically examine and regulate the spiderweb capitalism phenomenon, promoting accountability, fairness, and sustainable economic growth for all.