In conversation with RevDem editor Robert Nemeth, Dean Starkman, senior editor at the International Consortium of Investigative Journalists, talks about the Pandora Papers and how tax avoidance and secrecy endangers democracy.
Dean Starkman is a Fellow at the CEU Democracy Institute’s Center for Media, Data and Society, and senior editor at the International Consortium of Investigative Journalists, the Washington, D.C., based news organization. Since joining ICIJ in 2017, Dean has helped to lead projects including the Paradise Papers, the China Cables, the Luanda Leaks, FinCEN Files, and most recently, the Pandora Papers. He is the author of The Watchdog That Didn’t Bark: The Financial Crisis and the Disappearance of Investigative Journalism, published by Columbia University Press in 2014, an acclaimed analysis of business-press failures prior to the 2008 financial crisis that provides a groundbreaking theoretical framework for journalism’s past, present, and future. Previously, he ran the Columbia Journalism Review’s business section, “The Audit,” a web-based provider of media criticism, reporting and analysis. He was also Wall Street correspondent for the Los Angeles Times, reporting on the intersection of finance and society from New York. His work on finance and media has also appeared in The New Republic, The Nation, Mother Jones, Washington Monthly, among other publications. An investigative reporter for more than two decades, he covered white-collar crime and national real estate for The Wall Street Journal and helped lead the Providence Journal’s investigative team to a Pulitzer Prize in 1994. In conversation with RevDem editor Robert Nemeth, Dean Starkman talks about the Pandora Papers and how tax avoidance and secrecy endangers democracy.
Robert Nemeth: What is the Pandora Papers about?
Dean Starkman: The Pandora Papers is a global investigation led by the International Consortium of Investigative Journalists (ICIJ) where I work. It is based on a leak of 11.9 million documents from entities called off-shore service providers. These are companies that create shell companies or any kind of corporation, offshore. The investigation involved 150 news organizations and 600 journalists. The ICIJ’s model is one in which we report and write our own stories, but at least half the job is to manage these international consortiums, these massive collaborations of journalists around the world who heighten the impact both globally and within each nation.
The investigation revealed the full scope and scale of the offshore system.
This extra-legal, mostly secret, parallel financial system available exclusively for, and of the super-rich and multi-national corporations allows them to avoid taxes and hide wealth. It creates an almost incalculable number of follow-on social ills that the democratic world is trying to come to grips with.
Pandora Papers is not the first similar project of ICIJ. There were the Panama Papers, the Paradise Papers, FinCEN Files, etc. Could you please say a few words about them as well? Is the recent project in a way a continuation of them?
Yes, a continuation and culmination of them. But you may have missed a few, there have been so many offshore leaks, the Swiss Leaks, the Luxemburg Leaks, Rwanda Leaks and so on. Those earlier ICIJ projects chipped away at the wall of secrecy around the offshore system, but the Pandora Papers, which is a much bigger leak and from a much larger array of offshore service providers, basically blew it all apart. Now we can see the system in all its vastness, its importance, and its inextricable connection to the ‘legitimate’ financial system. It is a place where, if you are rich, powerful or a multi-national corporation, you can evade the rule-of-law in your own country and find a law that you like better.
All these projects expose tax avoidance and secrecy. Why are they harmful for democracy?
Let me first explain what is ‘offshore’.
Offshore is cloaked in mystery, it’s associated with palm trees and coconuts, buts it’s really not exotic and not particularly complicated.
These are jurisdictions, former British colonies and American and some French dependencies like the Bahamas, the British Virgin Islands, the Cayman Islands, the Seychelles, began to see profit in allowing people to come to incorporate and create a legal entity, often in secret. And that’s basically it. And that legal entity has enormous power, among other things it can open a bank account and own it in places like Estonia or Hong Kong.
At that point you could move the money from where you actually earned it or where you actually live, and, on paper, it would live somewhere else under a whole different set of laws and tax codes. And of course, these
offshore jurisdictions all passed laws that are super-friendly to non-resident corporate owners. Why? Because they get a lot of fees.
They created a lot of mini-financial sectors in their jurisdictions and that is their GDP. But they also exported all sorts of negative externalities to the rest of the world. So if you are a multi-national corporation and you are selling lots of, for example, Nike gym-shoes in France, you can set up an offshore company somewhere – in the case of Nike it was Ireland which has a low-tax jurisdiction. You sell your shoes in France, your Irish unit will charge your French unit enormous fees to use the Nike swoosh, all of your profits will disappear from France and be shifted to Ireland where there is very little tax.
What kind of real social gain has occurred? None. What real economic transactions have occurred? Zero. The real profit was made in France, but the income was booked in Ireland. That is what the offshore system allows you to do. It’s extremely powerful, and in many ways it is not really surprising that it grew to be a multi-trillion-dollar business because if Nike can do it, why can’t I, and why can’t everybody else?
The second aspect of this whole affair is that you can do it in secret. Instead of your own name appearing as the owner you could call it XYZ Corporation and you hire two people from the offshore service provider who sign their own people’s name on it and you are totally hidden. For a long time, and it is still the case in many places, you are even hidden from the place where the entity is incorporated. Until the Panama Papers changed everything, you could set up your company in the British Virgin Islands and even the BVI wouldn’t know who you are.
So you have created this super-secret place where a drug dealer, an international terrorist or a corrupt public official in, for example, Russia or Ukraine under the previous regime, or any other place, can put their money into the account owned by this anonymous company. If you go and look up who owns this company all you will see is names of personnel from these offshore service providers so
if prosecutors or tax authorities wants to find out where this wealth is, there is absolutely no way of doing it.
That is what the offshore system is and that’s why it has enabled two enormous problems in the world. One is de-funding legitimately elected governments around the world as trillions of dollars of profits of multi-national corporations can be shifted offshore. But it has also enabled the massive public corruption that we see, this modern incarnation of corruption that is looting entire state oil funds or state pension funds or health care systems and so on. The kind of wholesale corruption that occurs in Kazakhstan or Russia for example. That would not be possible without the offshore system, and that is why we think it is important that the public learn something about it.
To take this one step further, I would like to quote Bastian Obermayer and Frederik Obermaier, your colleagues and the journalists of Süddeutsche Zeitung who were among the first ones to have access to the Panama Papers, and have been part of the international team of journalists covering these stories. They recently wrote an op-ed on the website of Deutsche Welle, and they claim that such revelations can actually weaken democracy. They base this claim on the fact that “doing offshore business means not only fewer taxes but also the liberty to choose which laws to comply with. (…) Permitting a small number of people to choose the laws that apply to them will create a two-class society: the offshore world and the rest of the world. People will no longer identify with a society in which there are different rules for different individuals and in which “those on high” can follow their own laws. This poses a danger to our democracy, as it makes it easy for populists to garner votes.” What do you think about this? Do you agree?
Yes, I could not have said it better myself. To summarize their point, people will lose faith in liberal democracy and its institutions if they feel the system is rigged. Unfortunately, in this case, it actually is rigged. Democracy cannot tolerate a financial system where the game is rigged, where you can choose your tax rate and hide your wealth from tax authorities, prosecutors, civil claimants, and all legitimate authority. You do not have to obey their laws, that’s it, full stop.
If you want people to have faith in liberal institutions, they have to believe the system is not this colossal joke and the whole thing is just a game for rich people.
The way you convince them is to take steps to reform the system. Democracy is a hard thing to do, it’s a hard thing to pull off. One of the reasons is that it is easily manipulated and the freedom it provides allows the system to be gamed. If you are in the financial industry, you know the rules of the Security and Exchange Commission better than anyone else, and with great lawyers you can game the system to your advantage. If you are a major bank involved in offshore transactions, that’s big business and you have an interest in keeping the system exactly how it is.
I think people understand that democracy’s imperfect and it will never be perfect, and it wasn’t meant to be perfect, and Churchill’s quote about it being the worst of all possible systems except for everything else is quite accurate, and I think people understand that. But democracy’s least appreciated strength is its ability to reform itself.
When people see it trying to reform itself and trying to bring powerful malefactors to justice, at least people have a sense that they are invested in this system and can take part in it.
That is why it is critically important that this two-tiered system, one for aristocrats and one for everybody else is not sustainable. Bastian’s and Frederik’s point is well taken that people are not expecting a perfect system, but they do expect that democratic institutions will move in the direction of trying to perfect themselves and that is the least we can do.
Let’s talk also about the consequences of such leaks and revelations. Have you seen any policy consequences that could be attributed to the previous projects? Do you expect any now?
We get this question a lot; where are the prosecutions, where are the people in handcuffs, and that kind of thing, and it is not just about this investigation. People have this Hollywood idea that the newspaper publishes something and people get hauled before a grand jury, and I get that. But in this case the cynicism is misplaced. First, it’s been five years since the Panama Papers unleashed a global firestorm that led to many resignations including the Prime Minister of Iceland, and from memory, officials from Pakistan, Philippines, Canada and elsewhere, and it had far reaching and immediate consequences.
The policy implications have been pretty interesting as well because the US even has taken major steps
in policing its own citizens and passed laws that require foreign banks to report back to the IRS (US treasury) who has an account there and that has made a huge difference in policing Americans with accounts overseas.
Secondly, just this year, 2021, actually it was the Trump administration which helped to pass the Corporate Transparency Act which forces all owners of shell companies to report who the actual owners are to the US Treasury, to the agency called FinCEN. That will make a huge dent in offshore secrecy because the world runs on dollars and if you want a bank account you are going to have to report who the actual people are behind the shell company to the treasury. That must be very unnerving if you are a corrupt oligarch sitting on massive amounts of stolen money.
Right now we are in the middle of this move by the developed nations under the OECD and the Biden administration to impose a global minimum tax on multinational profits. You could argue that it is not big enough, and maybe there are some loopholes, but there are two points to the offshore as we discussed, secrecy and tax avoidance, and if you can’t avoid taxes by reporting profits from the BVI, why would you be in the BVI? There is no reason to be there, there are huge amounts of revenue reported flowing out of the BVI or the Cayman Islands, but there is nothing there.
These are policies that have huge implications, and I am telling you The Panama Papers had a huge impact on the global policy debate, it changed the game, it put the whole thing on the global policy agenda. It hasn’t been a steady march towards reform, but you could definitely argue that the policy debate is fully engaged at this point and it’s a moment of extreme tension about which way it is going to go.
The story of offshore is the story of the financial interests versus the public interests, full stop.
The financial interests are very powerful, they are banks based in New York, London and Frankfurt and they have enormous influence over the policies of their respective countries. And if you have enormous influence over the policy in Washington, you have a very big influence over how the whole global financial system looks. I am not going to say this is ‘game over’ but it is ‘game on’, and those representing the public interest have at least a better than even shot of prevailing here.
You mention that most people expect to see people in handcuffs, and I am sure many people in our audience have similar thoughts. So can we look at personal consequences? In addition to oligarchs, many political figures were also exposed by the leaks. There is for example Andrej Babis, the Czech Prime Minister, who lost the elections just a few days after the Pandora Papers had been published. Do you think there might be a connection here?
You would have to be a lot more plugged into Czech politics than me to answer that question, but it had to be something that Czech voters took into account when they headed to the poles. It is also clear that it is not just the Czech Republic, but half of Latin America is up in arms and politicians are in hot water, and the story has had a huge impact in Pakistan and elsewhere. That is really gratifying I must say.
But people talk about handcuffs, well, there are two points here. First, it depends on the strength of the rule of law in the nations we are talking about, for example, if Konstantin Ernst, chief image-maker for Vladimir Putin was found to have a secret stake in a billion dollar Moscow real-estate development and there are problems there, well that is an issue for Russian courts and it’s not something that we or anybody is going to influence, that is just a problem of rule of law in the respective countries.
Secondly, a big part of the problem with offshore is that it is legal, it’s not about it being illegal, the problem is that you can pick and choose which legal system you want to be under and where you want your money to be based.
That is why when Nike or Apple shifts profits from France to Ireland, it’s not a question of anyone breaking any laws, the laws themselves are the problem.
What is gratifying is that voters sense that this isn’t right, and they have two levers they can pull; they can go onto the streets and demonstrate, which they do, and they can go and vote. And what journalism is supposed to be doing is providing people with information that can help them decide who is best placed to govern them. And if we are able to do that, then I think we have done our job.
Let’s also talk about the background of doing this kind of job. Working on such projects requires substantial resources: not only human resources but also money. We also know that media haven’t really recovered from the financial crisis. What’s the funding structure of such projects?
I am so glad you asked that question because it’s the main problem facing journalism today. The crisis began in the second half of 2007 when the bottom began to drop out of the American newspaper industry and print advertising fell off the table and the digital advertising was all scooped up at that time by Google that was just coming onto the mainstream, and then Craigslist and now it is Google and Facebook dominating the entire trillion dollar industry of digital adverts.
Where does that leave journalism? Well not in a good place at all, because in the US 80% of our revenue came from printed adverts and 20% from subscriptions. Now that has completely shifted, and the cratering of the print advertising market led to the destruction of our business model. So how do we do it? We have not yet figured it out, and its 15 years later and this is a problem. I came up through local news in the US, in Alabama and Rhode Island, and when I got to New York, all those local institutions, all those really important civic assets were shadows of their former selves.
Right now journalism is relying on a few things, but none can support journalism of a scale that newspapers used to do.
To answer your question, we are philanthropically funded at ICIJ, and we are also funded by readers. We add pitches into every media page, find the ‘donate’ button and drop us a little donation – a little goes a long way. And because journalism is weakened globally, it has compelled everyone to join together to try and increase our power. And that is what ICIJ is able to do.
The way I think of us is not like we are a new model for journalism, but we are making the best of a bad situation. I don’t know the finances of newspaper companies, but I think it is safe to say that our partners are not necessarily thriving financially, say, Guardian, Le Monde, BBC, although the Washington Post is doing well. However, we are able to obtain documents, upload them securely onto a platform, organize this giant collaboration where everyone works behind the scenes for many, many months, and publish all on the same day, and make a much bigger impact than any single news organization could produce on their own. That’s how our model works, we work together with trusted partners who together can raise the level of their impact much more than they could on their own.
Do you think we can expect similar leaks in the near future?
The leaks themselves are a mystery even to me, they show up and I work on them, and that is how it is supposed to be.
The fewer people who know where these leaks come from the better.
ICIJ has done several rounds of leaks from offshore service providers and from institutions in banking and the offshore world. As I said at the beginning, Pandora Papers is the culmination of all our work, it’s the biggest on many levels, in terms of the number of public figures we have uncovered, 330, to the number of Russian oligarchs, 46, to the number of billionaires, 130, but who’s counting. And the number of beneficial owners is twice as much as in the Panama Papers – we have something 29,000.
This is the giant cymbal crashing of all these leaks, and I don’t know what our next project will be. But I do know that we want this one to really resonate. I don’t know how much more you need know about the offshore service system, it is much vaster that the fourteen service providers we have uncovered, there are hundreds of them. People have noted to me, where are the Americans? Where are the Chinese? Well that’s a good point, they didn’t happen to use the service providers that were the source of the leaks. This leak gives a really broad view into the system provides what you need to know in order to fix it. I will leave that answer there.
The transcript has been edited for length and clarity.
In collaboration with Karen Culver