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The Paradise Papers
By George Tait Edwards MBE
1 Background
When I calculated that the world did not yet have its first trillionaire,
in an estimate on April 22 2017, I estimated, that the total offshore
funds might be between $30tr and $50tr, maybe more than the
annual GDPs of China plus the USA. What I said in
George Tait Edwards' answer to Are there any trillionaires?
was
“Traceable offshore funds are conservatively estimated to amount
to $11.5 trillion, more than half of the national income of China. And
that is probably understated by a large margin. But
“Tax Research and the Tax Justice Network published a report in
2005 entitled ‘The Price of Offshore’ Based on data from Boston
Consulting Group, McKinsey’s, Merrill Lynch/Cap Gemini and the
Bank for International Settlements, this document estimated that the
world’s High Net Worth Individuals (HNWIs) held around $11.5
trillion of assets offshore,..“
That is quoted at Tax Research’s paper “The direct tax cost of tax
havens to the UK” by Richard Murphy FCA (a Tax Research LLP
Paper).
2 Where The Money Of The Rich Goes
“Most of the discovered HNWI’s have registered foreign bank
accounts in their names. The really rich do not only do this, but also
they create nominee bank accounts or nominee companies which
totally anonymise part or most of their offshore assets and monies
but make these funds or asset holdings only visible to their lawyers
and available to their families in future.
The total foreign holdings of anonymous bank and asset-holding
companies is probably about somewhere between $30tr to $50tr,
maybe bigger than the total annual output of China and the USA put
together.”
The relatively rich have placed money in foreign banks accounts in
their own names. The really rich -the top 1% - have anonymised
their money by placing it in the equivalent of numbered bank
accounts or the names of foreign residents (e.g. John Smith
Account no23 in Luxembourg) to avoid current or future taxation
and death duties.
My calculation of total offshore funds as about $40tr plus or minus
$10tr was based upon the estimated level of “churn” of the continual
annual movement of offshore liquid assets towards the higher
available rates of interest. So that number does not include the
property assets held through foreign bank accounts and other
company holdings, which are much larger and which can now be
more accurately assessed.
3 The Significance of the Paradise Papers
The Paradise Papers indicate that the really rich have been doing
this on an unimaginable scale and for a very long time. My estimate
of total foreign assets in the string of largely British islands is only
equal to about twenty percent to 35% of world GDP. But if Oxfam’s
estimate that the richest 1% own as much as the other 99% is right,
the overseas assets of the very rich may be very much larger than I
previously took into account. The additional data now available
enables a better estimate, albeit one with larger error limits.
4 The Worth Of The World And The Possible Value of Total
Overseas Assets
The worth of the world in 2017 has been assessed as
Global Real Estate - $228 trillion (equal about 2.68 times annual
income)
Stocks, shares and debt -$170 trillion
Total Gold Mined - $6.5 trillion
Source: Savills World Research: How Much Is The World Worth? -
McGuire
So total real and financial assets - about $400 trillion
World GDP in 2016 (from CIA world Factbook) - about $120 trillion
in 2016 and about $124 trillion in 2017.
The information in the Paradise Papers, plus other flow of funds
data I have received from elsewhere, seems to indicate that the
total foreign assets held abroad might be somewhere between 80%
to 140% of world GDP. But there’s also a “mirrors and the money”
problem when money seems to to be placed in one location but is
owned by a trust in a second location which again is controlled by
an anonymously owned company in a third location. That’s why
some very rich people have said that the money “isn’t theirs.” They
have often moved it into a family trust where it cannot be taxed and
where its ownership cannot be directly ascribed to one person. It’s
difficult to take out this potential double and triple counting, but I
have tried. If there were no double or triple counting the implied
total of offshore assets climbs towards equalling 60% to 90% of the
total real and financial assets of the world, and that looks to be too
much, but it is an extreme possibility. If the very rich top 1% own
50% of world assets that’s $200 trillion and if they store about two-
thirds of that value abroad that’s $133tr of foreign funds (110% of
world GDP) and one-third in their name in the banks in their home
or other western countries, then that kind of re-estimated figure
maybe makes more sense. And if the rich stored 75% of their
money in foreign funds that would be $175 trillion or about 146% of
the GDP of the world.
Considering all the evidence and the likely range of calculations, it
seems very likely that the total value of offshore funds does lie in
the range of 80% to 140% of world GDP, or somewhere between
$100tr and $168tr. I further assess that about 40% of these funds
would be financial assets and about 60% relating to the ownership
of property. The financial assets produce the churn and the
ownership assets give a stable legal title to many of the fixed
property assets of the world.
The 13.4 million documents will take a long time to analyse
because you can see the offshore money is vast but not who owns
what, and the annual flows are as fascinating as the total amounts.
Here’s an interesting but obviously incomplete map about the
customer locations of offshore fund holders.
Nearly all of the above asset holdings are due to high net worth
individuals and not companies, although some companies have
huge holdings probably included in the above chart. American
companies have declared total holdings of about $2.6 bn abroad,
with the largest cash holdings being Apple at about a quarter of a
billion and Microsoft with an eighth of a billion dollars. That’s small
change in the scale of the above chart, although these amounts are
greater than the declared personal wealth of the richest man in the
world (Bill Gates, c $86bn). The Paradise Papers cover the period
from 1950 to 2016, the last two-thirds of a century. And these
Paradise Papers are unlikely to be a complete description or
specification of the total offshore funds. There’s probably much
more.
If the $400 trillion wealth of the world were shared equally, the
average wealth held per person would be that amount divided by
the 7.5 billion people of the world, or a wealth holding of about
$53,000 per person. If the Oxfam estimate that half the wealth is
held by 1% of the population of the world is correct, and it sounds
about right to me, then 99% of the world would have an average
wealth holding of about $26,500 and the richest 1% have an
average wealth amounting to 100 times that, or about $2.65 million
each. Of course these average figures are very unequally
distributed. The higher average wealth holdings per person are in
the developed countries and the highest net worth individuals are
the handful of oligarchs who are at the very top of the offshore
funds money mountain. These oligarchs could be trillionaires - it’s
impossible at the moment to calculate whether they are.
One percent of the world’s 7.5 billion people is 75 million people. On
the usual random distribution basis I would expect that about 25
million of these very rich people would have very high value
overseas assets most of which would be anonymised. Another third
might have partially transferred their wealth abroad, while the
lowest third would probably have kept most of their assets “at
home” in their domestic economy.
There were 120,000 people in the UK with foreign bank accounts in
their names. The UK has a population of 64 millions, less than one
percent of the population of the world. If the UK experience was
scaled up to reflect the world, one might expect about 14 million
such accounts. But much of the world is less financially
sophisticated than the British millionaires, and I assess that there
are probably about 7 million such accounts. More significantly, it
looks likely that there may be about 25 million very high net worth
individuals who have very large fortunes and complex holdings of
offshore assets.
These calculations confirm my view that the 120,000 customers
identified in the Paradise Papers are only the tip of an extremely
large financial iceberg.
These calculations are approximate and are “Fermi Estimates” but
by their very nature cannot be very wrong. Of course there are
extremely large family firms that often do not appear at all in wealth
estimates so these calculations may be a bit understated, but they
are inevitably of the right order of magnitude.
The remaining issue is the pattern of income distribution among the
extremely rich. If the BBC website is correct, and I think the
distribution numbers may be mainly an aspect of the Paradise
papers which have been released so far, then 80% of offshore
wealth belongs to the top 0.1% of households and 50% to the top
0.01% of households, then further calculations about the total
assets of these two groups seem possible. Assuming an average of
three people per household there are 2.5 billion households in the
world, and 0.1 percent of these is one in a thousand, so 25 million
households owning 80% of an amount between $100 tr and $168tr -
between $80tr and $134tr - about $3.2 million per household. If half
of the offshore wealth belongs to 0.01 % of households, then 2.5
million households have between $50tr. and $67 tr., or about
between $20 million and $27 million per household. That all looks
quite plausible and probable. It is clear from the offshore wealth
distribution we can see that the distribution becomes still more
unequal as the richest, at the peak of the offshore funds, are
approached.
5 Reactions to the Paradise Papers
Bernie Sanders is quite correct in being very alarmed by the
revelations in the Paradise Papers. The total offshore funds look
likely to be much larger than the monies available to nearly all
governments. See
Bernie Sanders warns of 'international oligarchy' after Paradise
Papers leak
His most significant comment is a warning that the world is moving
towards an “international oligarchy”
“in which a handful of billionaires own and control a significant part
of the global economy.”
So the world could become a bit like the UK in which 84% of the
funding of the Conservative party comes from 14 millionaires. And
democratic protest groups are funded to act as safety valves to
disperse the energy, and diminish the effect, of protesters.
The reaction in the USA, the UK and the EU is very interesting.
From
Bernie Sanders attacks billionaires and firms exposed by Paradise
Papers – live
you can read about another difficulty that the Trump administration
has, because
• “Donald Trump’s commerce secretary, Wilbur Ross, has
denied misleading Congress, after the papers exposed
details of his interests in a company doing business with a
Russian firm controlled by members of Vladimir Putin’s inner
circle. He claimed the papers revealed nothing improper.”
But there is a huge problem: the action of tax avoidance is legal,
because nobody is required to arrange their affairs to maximise the
tax due to be paid, but the frequently achieved result of a complete
tax evasion and the non-payment of any taxes is illegal. And in the
UK
• very predictably, the Party whose only concern is for the rich
has refused for the umpteenth time to promise a register of
offshore trusts - see
Paradise Papers: Theresa May refuses to promise register of
offshore trusts
It would be quite difficult for the Conservative Party to attack the
running of the string of offshore tax haven islands which are the
residual British Empire and where some senior British
Conservatives allegedly reside for tax purposes. The Paradise
Papers show Lord Ashcroft has foreign assets of $450m.
Mel Stride, the financial secretary to the UK Treasury, said there
were many “legitimate reasons” for using offshore trusts. Like
funding the Conservative Party from tax savings, perhaps?
I think it is likely that the major effect of the British Government’s
actions so far, by writing to the 120,000 UK residents who had
foreign bank accounts and requesting a tax return (which 10%
complied with) is to increase the shift from identifiable personal
foreign bank accounts into the non-attributable kind. And
“Pierre Moscovici, the European commissioner responsible for tax,
has said he was outraged but not surprised by the revelations”, and
called for “swift action” which the current British Government
apparently has no intention of delivering.
The Green MEP Eva Joly, the deputy president of a European
parliamentary inquiry on the Panama Papers, “has demanded the
UK be denied access to the European single market as part of the
Brexit negotiations until it tackles tax havens.” That would mean
when Britain left the EU that UK exports to the EU - 55% of current
exports by value - could face a 35% import duty if the UK does not
tackle tax havens.
If it’s a choice between protecting British industry or protecting the
wealth of its supporters, I don’t think there can be any doubt about
where the priorities of the current Conservative Party lie.
5 Final Comments
5.1 How Did This Crisis Come About?
This position has been arrived at by the political forces of
monetarism/Washington Consensus macroeconomics/neoliberalsm/
Austerity Macroeconomics. The right-wing Western governments
have been captured by the mistakenly called “free markets” of the
financial forces they have preferred and which they themselves
have created.
In the USA and the UK, governments since 1980 have acted
continually and almost continuously in the interests of the very rich
and the financial sector and have not acted in the interests of the
mass of their people and the manufacturing sector. The gains from
economic growth in these countries have increasingly gone to the
already rich, who have gushed that additional wealth abroad rather
than trickling it down to the poorer within these economies. That is
the major reason for the relative economic decline of the West. It is
a politically self-inflicted injury.
Economic understandings and the governments which support
these deserve to be judged on the basis of the results they produce.
This overwhelming result - that the Western system of Washington
Consensus Macroeconomics has produced oligarchs whose
financial power exceeds that of governments - is a natural result of
the political preference of the rich by Western governments.
The macroeconomics of the Tokyo Consensus Zone and of China -
Shimomuran Macroeconomics - has produced much better results
in rapidly rising living standards when it was practised by the three
nations in that Zone and in China, which continues mainly to
practise Shimomuran macroeconomic policies.
5.2 No Financial “Chips With Everything” and a Possible
Solution
I believe that the policy of microchipping citizens to enable their
easy and secure access to bank and credit card accounts and to
disable illegal funds outside the banks was partly halted in its tracks
by the billionaires who would lose access to their overseas funds by
that process. The real solution to offshore funds is not the Obama
proposals, useful as they have been, but the creation of identity
cards linked to domestic and foreign funds and universally used by
all banks under new international laws.
5.3 The Role Of Computers In Making This Crisis
The world’s rich clearly thought their ruses to avoid taxation were
going to work forever. It is the computerisation of banking systems
and the easy transfer of vast amounts of information which has
enabled the Paradise Papers revelations.
Those who thought they could win indefinitely by the anonymity
conferred by computer use may now lose immensely through that
same computer use. But the offshore funds in total appear to be
much larger than those available to governments. There is very little
that the truly rich cannot do, and do anonymously, given the likely
scale of offshore funds. The major immediate effect of the Paradise
Papers is an increase in the fees of international lawyers hurriedly
being consulted by High Net Worth Individuals (HNWIs) about what
to do next.
5.4 Possible Government Responses
But the very rich need to keep in mind that governments if pushed
to the limits can demonetise external funds. These funds have
sometimes been used to bet against the future value of a currency.
South Korea has the death penalty for that action if a South Korean
citizen can be proven to have tried to destabilise its currency.
Governments have the power to create and destroy credits, as
some high net worth persons have recently discovered in India,
when high value Rupee notes were demonetised.
5.5 The Legal Services Providers
The Paradise Papers show that Appleby Services is probably the
most active adviser of legal services to HNWIs with substantial
offshore funds. The Paradise Papers say part of this company (the
“fiduciary” arm dealing with trusts) has changed its name following a
management buy-out and is now relaunched as Estera. 6.8 million
of the 13.4m documents in the Paradise Papers relate to Appleby
transactions and here’s their website
The Estera Website is also interesting. See
We’ll all maybe see how this situation develops.
6 What do the Paradise Papers reveal about the world's
wealthiest individuals?
They reveal that the world’s wealthiest individuals thought both their
money was securely salted away and the tax-saving methods used
were concealed abroad, and that judgement was regrettable and
probably wrong, and likely to become a costly mistake, although the
UK Government might try to delay any real action so as to allow the
safe transfer of these funds into deeper and darker internet
locations.
I am very grateful to the dozen or so individuals who have
discussed this issue with me during the past few years.
© George Tait Edwards 2017