Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

There are more issues revealed by the Panama Papers leaks than just tax evasion. Some contrarian opinions on how to look at offshore banking.

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Image courtesy of DollarPhotoClub.com

Image courtesy of DollarPhotoClub.com

The primary focus in media coverage is on tax evasion. There are other ways to look at the offshore industry. There are more and deeper legal issues involved. The tax evasion concerns under discussion are just the starting point on the list of issues that ought to generate irritation.

Following articles provide a variety of alternative views of what is going on in the Panama Papers leaks. That the articles I mention contradict each other illustrates my point that there are more issues involved than just tax evasion.

4/7 – Jason Zweig at Wall Street Journal – Panama Papers: A History of Tax Evasion from Ancient Rome to the French Revolution to 19th-Century New Jersey

Question for you to ponder: Why have people been hiding their money for over 2,000 years?

In 1934 when Switzerland made it a crime for a banker to reveal a customer’s name, they were a bit behind the curve. Liechtenstein, Luxembourg, and Bermuda were tax havens a couple of decades earlier. As a depressing note, the Swiss offered confidentiality for a fee all the way back in 1789.

Article provides a brief history of hiding money stretching back to Roman times.

Bonus question: What pressures have created the need for people to hide their money for over two millenia?

4/9 – Holman Jenkins at Wall Street Journal – A Crooked World Needs Panama / It’s significant that only minimally corrupt Iceland has lost a political leader in the offshore scandal – Here is a different perspective for you to consider than what you will see in, oh, around 99% of the current coverage.

In most places around the world, if you are not the brutal big boss in charge of the country or one of his favored cronies, you are nothing more than prey waiting to be ripped off by the big boss or his cronies. If you should happen to have actually made serious money other than by being part of a corrupt inside deal, you might want to get your money out of the country so it won’t get stolen by anyone who has more power than you.

If you are one of the ruler’s current buddies, you still might want to discretely get some of your money out of the country to someplace with rule of law because you never know when you might fall out of favor and have all your money ripped off.

Mr. Holman says:

In much of the world, the distinction between criminal and politician is nonexistent, and there would be no economic activity at all if wealth holders couldn’t make assets hard to trace and at least somewhat protected by a semi-decent legal system.

He then goes on to point out the huge number of apartments on Fifth Avenue which never have lights on. What’s the deal? Parking money.

Those are offshore assets held by people from various places (he mentions Russia, China, Ukraine, and other oligarchies) where there is no rule of law. Each of those never-occupied assets reflects somebody parking their assets in the US where the rule of law provides protection.

He points out the journalists doing the research are only able to process the information through their ‘tax evasion’ worldview. He suggests they are not able to look at the issue of people needing to hide money from their own rapacious government to keep it from getting stolen.

If you want to dive deep into the article, look for the several ways different levels of government in the US are merely looking for ways to take money without trial or due process.

This is the same issue in the discussions of how to develop an undeveloped economy – if the legal system is broken, people have to develop some way of coping or they will be crushed.

4/6 – Megan McArdle at Bloomberg view – The Panama Papers Actually Reflect Pretty Well on Capitalism.

Seems to me the Panama Paper disclosures are taking on the form of a Rorschach test. Lots of people are imputing their previously held opinions into the headlines. One of the biggest threads is to say that this is a problem with capitalism. Or we should lynch every banker. Or the 1% is fundamentally corrupt.

Ms. McArdle’s article points out the first round of disclosures contain one American, who previously had no visibility on the national stage.

The overwhelmingly vast majority of headlines in the first week had been of names from Russia, Ukraine, Egypt, Iraq, and Pakistan. Even senior officials from China are in the list. Those are not countries that anyone would likely consider to be hotbeds of free-market capitalism.

How do you accumulate wealth in those countries? It isn’t by inventing some incredible service that consumers want. Instead those are places

…where kleptocratic government officials amass money not through commerce, but through quasi-legal extortion, or siphoning off the till. This is an activity that has gone on long before capitalism, and probably before there was money.

That form of wealth accumulation (note I said accumulation – that means theft of existing wealth instead of generating new wealth), is not capitalism.

Author tells of a debate that went sour. In a discussion of capitalism one person on the panel said that the incredible wealth in Saudi Arabia should be redistributed to their terribly poor neighbors.

Ms. McArdle’s discussion stopping question: how many troops are you willing to commit to force that redistribution?

Here’s the rub with redistributing their wealth. Saudi Arabia is a sovereign country. Taking their wealth away from them will require lots of military power. Redistributing it will require someone (such as white, elite Westerners like the panelist in this discussion) to make decisions on who “deserves” the money and how much each should get.

Could someone explain to Ms. McArdle (and me) why advocacy of military conquest of Saudi Arabia by the West in order to steal their oil and give it to someone the panelist likes better than the Saudis is in any way, shape, or form considered to be moral? Yet that is the path inferred by this panelist.

Thus goes the debate on “capitalism”, whether in that panel or reactions to the Panama Papers leaks.

Previous comments

Previously posted the following comments. They bear repeating in a post that describes contrarian perspectives.

4/4 – Kelly Phllips Erb at Forbes – What Are the Panama Papers – Article reminds us there are legal, moral, and legitimate reasons to have offshore accounts.

4/5 – Wall Street Journal – The Panama Papers in Perspective – Article raises some wonderful questions that aren’t getting enough attention.

For starters, how does it happen that career politicians who have worked in government jobs their entire lives gather so much money? How can so many politicians have possibly gathered enough investable assets to make it worthwhile to move funds into offshore accounts?

Here’s an extra: if the public interest is on illegal activity, why is the only focus tax evasion? There are major issues to be raised of evading US sanctions against doing business with bad people (as US officials choose to define ‘bad’). There are also serious issues of corruption and embezzlement.

4/4 – The American Interest – Big Leak, Big Corruption, Deep Rot – Article suggests there is something more important than the specific politicians and headliners who were routing money through the secret banking system.

The bigger issue is that such a system even exists and is operating on such a huge scale. Article says that reveals a moral rot amongst the senior leaders in politics, business, and society.

4/5 – Reason – Panama Papers Are About Government Corruption, Not ‘Tax Evasion’ – Article points out the far bigger issue that tax evasion is official corruption. Politicians caught with money in offshore accounts claim they pay taxes. That very well could be true. There far bigger motivation may be to hide from everyone other than the tax authorities that the money exists or hide from the public that they’re taking a position on a major public issue that is in radically contrary to their own financial interests. The prime minister of Iceland is a perfect example.

Written by Jim Ulvog

April 11, 2016, 8:02 am at 8:02 am

Posted in Economics, Fraud, Pondering

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