Bloomberg Tax
Feb. 15, 2023, 9:45 AM

A Clear Through-Line From Financial Secrecy to Eroded Democracy

Don Griswold
Don Griswold
Digital Economist

How often do we pause to reflect on the socioeconomic impacts of financial secrecy and tax avoidance? During my decades as a corporate tax lawyer, the answer for me was: not at all. But last week’s inaugural meeting of the DC Forum attracted scholars, journalists, and civil society leaders who think about this question a lot.

Opening the forum, Sen. Sheldon Whitehouse (D-R.I.) warned that financial secrecy and tax avoidance are “degrading the rule of law.” Global Financial Integrity founder Raymond Baker developed that theme, as he does at length in “Invisible Trillions,” into a syllogism: Financial secrecy perverts capitalism by enabling its greatest beneficiaries (the super-rich) to place themselves beyond taxation and the rule of law. The success of representative democracy as a system of government is built on the rule of law. Therefore, financial secrecy is an existential threat to the great American experiment: democracy.

The George W. Bush Institute’s David Kramer picked up on the theme, noting that growth of authoritarian political structures parallels growth of financial corruption. Freedom House’s Mike Abramowitz warned that tax avoidance and financial crime undermine democracy by impoverishing nations and fueling populist anger.

If we continue to allow “a large portion of the world’s wealth to go dark and untaxed,” said AFL-CIO policy director Damon Silvers, “our American future will not be democracy; it will be a battlefield between authoritarianism and plutocracy.” Why? Because extreme economic inequality—America’s status quo—concentrates political power in the wealthy, who are then free to rig the rule of law in their favor.

Photographer: Stock photo/Getty Images

Measuring Hidden Wealth

I’ve referenced the economic modeling work of McKinsey’s former chief economist Jim Henry, who’s now with Yale’s Global Justice Program. Henry has been widely cited for estimating how muchwealth financially corrupt actors hide from authorites around the world. Known global wealth is $483 trillion today, and Henry’s latest estimate is that another 12% or more isn’t included in that number. More than $60 trillion of global wealth escapes the formal economy, he now reports, meaning it’s neither taxed nor regulated in a way that protects health, labor, climate, and other public goods.

A large part of that $60 trillion is offshore corporate earnings—profits shifted into tax havens along with earnings on those profits—but not repatriated back to the US. Slicing the data another way, Henry explains that about half of that hidden wealth is in financial assets, and most of the other half is in real estate.

Evaluating the Financial Criminal Justice System

Jack Blum, another giant of tax justice who’s a long-time legal advocate for victims of white-collar financial crime, explained the need for shoring up the international criminal justice system. He highlighted several reasons why tax evasion crimes are particularly difficult to prosecute.

The cross-border nature of international tax avoidance presents practical problems, such as lack of jurisdiction over parties or witnesses and limitations of investigating facts with written discovery instead of depositions. Voters have no political sway over tax haven-happy legislators in other countries, while local attorneys generally don’t make international financial crime investigations a priority when voters reelect them based on reducing local street crime.

There’s little fear of prosecution for these crimes because the schemes are so complex that even sophisticated investigators rarely figure them out, settling for pennies on the dollar with no admissions of responsibility.

Undermining Investigative Journalism

A panel of investigative journalists—including the Washington Post’s Dana Priest and leader of the International Consortium of Investigative Journalists Fergus Shiel—identified key trends that undermine the vitality of their efforts to shine sunlight into the darkness of financial crime.

Weaponizing legal liability of journalists, the aggrieved super rich now routinely forum shop, bringing frivolous libel suits from jurisdictions most likely to make it “personally ruinous” for reporters to continue their work. Ballooning costs of investigation and curation—identifying credible information sources and analyzing their broader context—further weaken economic viability. Meanwhile, social media platforms are exempt from legal liability for their failure to curate beyond mere aggregation. These trends are making credible investigative journalism nearly anachronistic, and “most of the eyeballs are attracted by unreliable social media.”

Priest foretells that nonprofit news will be the only viable locus for anti-corruption investigative reporting in the future.

Wealth Inequality and Anti-Secrecy Priorities

After Pascale Dubois, former vice president of integrity at the World Bank, said the efforts of anticorruption activists must evolve from siloed to intersectional, others agreed that soaring wealth inequality turns on multiple global wrongs—tax evasion, money laundering, terrorist financing, regulatory arbitrage, and more. They also agreed that these wrongs must be tackled together because all share a disregard for the rule of law, an intellectual infrastructure of amoral professional enablers, and an emphasis on financial secrecy.

What should be the immediate priorities for the anticorruption movement? First, panelists said, get the ENABLERS Act, which would curtail “complicity of US lawyers and accountants in money laundering for kleptocrats and global criminals,” across the finish line with Congress. (Blum shined some sunlight on the American Bar Association for touting defeat of this essential anticorruption law as one of its biggest successes last year.)

Elise Bean received a standing ovation from DC Forum participants for her successful persuasion of Congress, with Sen. Carl Levin (now deceased)to include a ban on US banks opening secret accounts for offshore “shell banks” in the 2001 USA Patriot Act, a response to the Sept. 11 terrorist attacks.

Calling trusts—which can exist simply as legal relationships between grantor, trustee, and beneficiary without being required to register their existence like corporations and other legal entities—the “getaway car” for super-wealthy tax avoiders, Bean urged including trusts in beneficial ownership transparency registry laws around the world. Gary Kalman, Transparency International’s US executive director, agreed and said real estate, which makes up almost half the globe’s $60 trillion of hidden wealth, also must be added to beneficial ownership transparency registries.

Continuing the sunlight theme, FACT Coalition Executive Director Ian Gary urged countries to adopt publicly accessible country-by-country reporting of tax information, which would reveal to tax authorities a trove of information on their tax avoidance and evasion activities.

Former Kleptocracy Initiative executive director Charles Davidson asked whether Adam Smith, the 18th century grandfather of trickle-down economics, was “turning over in his grave” because financial secrecy’s perversion of capitalism was eroding democracy. But he’s still resting in peace. Smith, who called tax audits odious and assured readers of the Wealth of Nations that an unregulated market of selfish actors would be led by an invisible hand to promote the common good, wrote in solidarity with “those unfortunate individuals who attempt unsuccessfully to evade the tax.”

Speaking on that panel, I was preceded by the Berggruen Institute’s Nils Gilman, who suggested that Shakespeare had already suggested the ultimate anti-corruption policy priority: “The first thing we do; let’s kill all the lawyers.” The context of Nils’ off-color joke is apposite, though. This line from “Henry VI, Part 2" is uttered by an impoverished worker in 15th century England who, “inspired by the spirit of putting down kings and princes” and for whom “beggary is valiant,” banters about escaping the kleptocratic nobles who ruled in place of a weak king.

It was tough to follow Gilman, but I started with my personal conversion story—three decades as a corporate tax avoidance enabler, followed by a recent conversion to tax justice activism and founding of Tech for Transparency. He reacted with generous kindness.

This is a regular column from public interest tax policy analyst Don Griswold, who’s also a senior fellow at the Digital Economist. Look for Griswold’s column on Bloomberg Tax, and follow him on LinkedIn.