The Panama Papers created a huge buzz when they came out. Now, the Paradise Papers have increased that buzz to a roar. This month, Ian Wells of Ian T. Wells and Associates takes us inside these informational gold mines to learn about what they mean for the wealthy, and for those of us who research them.

Secrets of the Elite: What the Paradise Papers and the Panama Papers Reveal About the Rich

by Ian Wells

The recent disclosure of the Paradise Papers – a group of documents pertaining to offshore investments made by politicians, corporations, universities, and high net worth individuals – focused a spotlight on some of the more clandestine practices of the rich and famous.  When viewed in tandem with the Panama Papers that were released in 2016, these leaks jointly contain roughly 25 million documents regarding the investments of at least 334,488 entities.  Although teams of investigators and journalists will continue to dig through these documents well into the foreseeable future, it may be years before the full scope of these leaks is fully understood.

A few of the revelations from these documents have already forced the resignation of Sigmunder Gunnlaugsson, the former Prime Minister of Iceland, while others have embarrassed hundreds of politicians, celebrities, and organizations.  David Cameron, the former Prime Minister of the United Kingdom, was at the forefront of an effort to “fight the scourge of tax evasion and aggressive tax avoidance” at a G8 conference that was held in 2013.   We now know, however, that he is a beneficiary of Blairmore Holdings, Inc., a Panamanian corporation that was originally created by his late father and had $31 million in assets as of 2016.  Because of its status as a foreign company doing business in Panama, none of Blairmore Holdings’ profits have been subject to taxes in the U.K.

Despite the hypocrisy of calling for an end to tax evasion while simultaneously holding tens of millions of dollars in an offshore venture, it appears that Mr. Cameron’s investment activities did not violate either British or Panamanian law.  Indeed, Mossack Fonseca – the Panamanian firm at the heart of the Panama Papers – marketed itself to investors by offering creative wealth management solutions that allowed clients to skirt tax laws without actively violating them.  While there are scenarios in which the individuals and organizations named in these leaks have blatantly engaged in illegal activities such as money laundering, fraud, and bypassing international sanctions, there are many others in which investors participated in morally dubious yet technically legal schemes to reduce their taxable income.    

   

What may be of greatest interest to prospect development professionals are the insights these disclosures have revealed regarding the techniques some high net worth individuals (HNWIs) have used to minimize their exposure to taxes.  The wealth management techniques detailed in the Paradise and Panama Papers speak volumes about the people who have the means and the inclination to use them.  As researchers seek to attain a greater understanding of the lives of the rich and famous, there are some generalities that may be important to bear in mind.

 

1) The World is Not Enough

It has been said that “millionaires see the world as a playground, while billionaires see the world as a proving ground.”  During an interview with hedge fund legend Seth Klarman, a journalist once inquired why Mr. Klarman did not simply retire after earning more than $1 billion in income in a single year.  Mr. Klarman countered that such a mentality revealed why the journalist would never make $1 billion.  While someone living on a prospect researcher’s modest salary may be inclined to think that HNWIs have more than enough money at their disposal, many affluent prospects do not perceive themselves as being rich enough.  For many HNWIs, offshore investments provide a path for protecting their wealth from taxation, which is to be avoided as much as possible regardless of the funds at their disposal.

Queen Elizabeth II is no stranger to status or wealth.  In addition to serving as the Queen of the United Kingdom, she is also honored as the Head of the Commonwealth of Nations, a polity which consists of 2.4 billion citizens around the globe.  Her personal net worth was estimated at ₤360 million by the Sunday Times Rich List 2017, and she has use of The Crown Estate, which had assets worth an estimated ₤12 billion as of 2016.  It may be an understatement to suggest that Her Royal Highness enjoys a comfortable lifestyle.  Nevertheless, records from the Paradise Papers indicate that her private estate, the Duchy of Lancaster, invested roughly ₤5.7 million in the Dover Street VI Fund, a tax-sheltered limited partnership based in the Cayman Islands.  Furthermore, the Duchy of Lancaster invested an additional ₤5 million into a Bermudan nontaxable fund called the Jubilee Absolute Return Fund Limited.  In response to the controversy resulting from the Paradise Papers, Queen Elizabeth’s advocates correctly noted that she is exempt from the U.K.’s tax laws by virtue of being the kingdom’s sovereign, and that she was not involved in the day-to-day operations of her private estate.  Nevertheless, it is interesting that she entrusted her private estate to managers who hid some of her assets from the British government, and that she has clandestinely profited from these investments since 2005.

Queen Elizabeth is far from the only prominent individual named in either the Paradise Papers or the Panama Papers.  Madonna is reportedly a partial owner of an offshore company specializing in medical supplies.  Keira Knightly has invested in a real estate firm based in the tax haven of Jersey.  Soccer great Lionel Messi acquired a 50 percent stake in Mega Star Enterprises, a shell company through which he allegedly evaded €4.1 million in taxes.  Jackie Chan was listed as the owner of no less than six companies managed by Mossack Fonseca, the company at the heart of the Panama Papers.  Even Emma Watson of Harry Potter fame secretly purchased real estate through an offshore company based in the British Virgin Islands.

Offshore investments are not just appealing to affluent individuals, but to very successful companies as well.  Apple, a company whose annual revenue exceeds the gross domestic product of many sovereign nations, developed a complex system of offshore structures in Ireland to hide billions of dollars from taxation.  In 2015, when Ireland caved to pressure from the European Union to fix its corporate tax loopholes, Apple abruptly moved two of its Irish subsidiaries, Apple Operations International and Apple Sales International, to the U.K. Crown Dependency of Jersey.  Similarly, Nike transferred ownership of its famous “Swoosh” trademark to a Bermuda subsidiary, Nike International Ltd.  The transfer allowed the subsidiary to effectively hide what would have been otherwise-taxable royalty profits for a company based in Oregon, where the firm’s actual headquarters is located.  In 2014, Nike transferred ownership of the trademark to Nike Innovate CV, a limited partnership in the Netherlands, where a limited partnership’s principals do not owe any taxes if they do not reside in the country.

In their defense, corporations typically note that everything they do is legal, and that they have a duty to maximize earnings for their shareholders.  Some individuals that have been named in the leaks have stated they are either uninvolved in or do not understand the management of their investments.  After being accused of tax evasion, Lionel Messi testified to a judge: “I do not look at what I am signing when my father tells me to sign…I do so with my eyes closed.”  A representative for Emma Watson claimed her decision to invest in an offshore company was made solely for privacy purposes and had nothing to do with the tax benefits she received.  Whatever the truth of their respective claims, the defenses provided by some of the parties named in the Paradise and Panama Papers show no sense of guilt.  It is possible that many of the people so named do not perceive themselves as individuals who did not pay their fair share in taxes, but rather as people just trying to make the most of what they have.  

As prospect researchers evaluate the gift capacities of affluent constituents, it may easy to assume that someone with a net worth of $25 million or more knows that he or she is rich.  But all too often, we hear the same refrain echoed following a qualification visit: “they just can’t afford to make a gift right now.”  Perceptions of wealth may differ across income levels, and although a millionaire may seem rich in the eyes of a researcher, that same millionaire may think of themselves as “struggling” relative to industry peers and competitors.  Simply because a person is exceptionally wealthy relative to 99% of the population does not mean that person will feel like he or she is wealthy, particularly if that person is struggling to keep up with the remaining 1%.

2) Hiding Wealth Knows No Ideology

In today’s hyperpartisan environment, it may be easy to assume that the people named in the Paradise and Panama Papers may belong to one ideology or another.  Yet the people engaged in these offshore ventures come from all political, religious, and ethnic backgrounds.  There seem to be few shared philosophies that are consistent for all of the parties that were disclosed in the leaks.  In some cases, the only commonality between individuals is wealth.  

George Soros and Jean-Marie Le Pen do not have many political views in common.  The former is a survivor of Nazi-occupied Hungary who has provided billions of dollars in philanthropic support to progressive causes and initiatives to reduce poverty worldwide over the past four decades; the latter is a Holocaust-denier who called for the internment of people infected with HIV, complained that France’s World Cup team wasn’t White enough, and allegedly tortured Muslim civilians during the Algerian War.  Despite having almost nothing in common, both Soros and Le Pen see the virtue of protecting their personal wealth.  Le Pen allegedly used his former butler, Gerald Gerin, to establish a shell company called Balerton Marketing Ltd. in order to stash away millions of dollars of cash and gold bars in an offshore tax haven.  Soros established three ventures – Soros Finance, Inc. in Panama; Soros Holding Limited in the British Virgin Islands; and Soros Capital in Bermuda – whose financial ties to Manhattan-based Soros Fund Management LLC are murky at best, and Soros’ spokesperson has declined to speak on the matter.  It should be noted that, ironically, the International Consortium of Investigative Journalists that first obtained the Panama Papers has received some of its funding from Soros’ Open Society Institute.    

Paul Hewson and Wilbur Ross are two other individuals named in these scandals.  Mr. Hewson, who is better known by his stage name, Bono, serves as the charismatic frontman for the rock band U2, whereas Secretary Ross serves as the Secretary of Commerce for the United States.  Both individuals have been prominently involved in matters pertaining to debt, albeit from different perspectives.  Mr. Hewson, for example, has been a tireless advocate for debt relief for developing nations.  Secretary Ross, however, made his millions by acquiring heavily-indebted companies and then selling them each at a profit.  

Both Hewson and Ross have come under scrutiny as a result of the Paradise Papers.  Documents revealed that Mr. Hewson used a Maltese company called Nude Estates to acquire an ownership stake in the Ausra Mall in Utena, Lithuania in 2007.  In 2012, ownership of the company was transferred to a separate, Guernsey-based entity named Nude Estates 1.  As a foreign investor in a Maltese company, he would have only paid 5% tax on any profits.  Furthermore, no tax is paid on corporate profits for companies based in Guernsey.  Secretary Ross, meanwhile, was revealed to have invested in a shipping company, Navigator Holdings, that was tied to Kirill Shamalov, the son-in-law of Vladimir Putin.  These investments were particularly problematic due to the Secretary’s failure to disclose them during his confirmation hearings before the U.S. Senate.    

The variety of individuals named in the Paradise and Panama Papers prove that there is no single “type” of person who is involved in offshore investments.  Socialists, neo-fascists, rock stars, politicians, actors, and professional athletes have all been revealed to have participated in such tax-saving plans.  It is therefore impossible to make an educated guess as to whom may be active in making similar investments in the future.  When evaluating a prospect’s wealth, we cannot know for certain whether that prospect may be involved in similar ventures.

3) Dispelling the Myth of Calculating Net Worth

Perhaps the greatest takeaway that a prospect development professional can take from these financial disclosures is that we cannot presume that we can accurately determine a prospect’s net worth.  None of the financial revelations from the Panama or Paradise Papers would be known to the public if not for the leaks.  It reasonable to conclude that there are countless other figures involved in clandestine investments that have not been disclosed at this time.  If these prominent individuals could successfully hide their assets from the tax-collection agencies of sovereign governments, what chance does a plucky prospect researcher have of identifying and confirming all of a prospect’s assets?

This is not to suggest that we cannot share the net worth estimates that we find in the course of our research.  If a person’s net worth is reported to be a certain figure in Forbes, the Rich Register, or some other source, it is certainly noteworthy to share such information in a research report.  But we should not assume that we have the resources to determine a prospect’s true net worth simply by looking at visible assets such as real estate or stock holdings.  As the Paradise and Panama Papers have shown, there are many venues with which to hide one’s assets.  It is perfectly feasible that a prospect with $10 million in visible assets in the states may have untold assets secured through shell companies and offshore ventures.  The best that we can do is to base our capacity ratings off of visible assets, and underscore that the capacity rating is based on a minimum estimate of a prospect’s wealth.  As the revelations of these dual leaks have shown, affluent individuals have demonstrated the propensity and the ability to hide their wealth from the world’s most powerful governments for decades.  And although some people have been embarrassed or even implicated by these revelations, there are likely many others whose true wealth is known to only a select few.