Pandora Papers: The Dark Side of American Financial Regulation
Robert Cole
Globalization is a remarkable thing. Changes in the financial regulations of South Dakota, it turns out, can spark a global shift in tax evasion strategies. That appears to be one of the main takeaways of the Pandora Papers, the subject of a massive investigation led by the International Consortium of Investigative Journalists (ICIJ). It has been characterized as the “largest investigation in journalism history” and included journalists from 91 organizations in 117 countries working to comb through the 2.9 terabytes of data involved. This monumental effort exposed the dealings of high-profile members of the global rich and powerful, ranging from the family of Kenya’s president to that of the former British prime minister.
In the wake of the bombshell “Panama Papers” leak in 2016, there is likely little shock that global elites have been evading scrutiny into their finances via offshore companies and obscure ownership structures. The significance of this leak lies more in who was involved and the evident shift in where they were hiding money. The biggest names include the leaders of Kenya, the Czech Republic, Azerbaijan, Jordan, and Qatar. Already, the leak has caused a major shakeup in the Czech parliamentary elections, and will likely have political consequences in many of the other nations affected.
Perhaps the largest revelation however concerned the role of the United States as a destination for global dark money. The report by the ICIJ found that a number of US states, led by South Dakota, were prime locations for the offshoring of secret trust funds. Indeed, according to the report, fully “17 of the world’s 20 least-restrictive jurisdictions for trusts were American states”. Given the leading role the US has played in trying to force other nations to create better financial transparency in recent years, it is incredibly embarrassing for the funds from many of the nations under scrutiny to be flowing directly into US states. One study found that of 60 countries investigated, the United States came in second among countries that made it the easiest to set up a company without revealing ownership.
This presents a serious threat to global security and to the American mission of encouraging democracy globally by enabling corruption and protecting wealthy international tax cheats. Nor will it be easy for the US to continue its push for greater international financial transparency until it gets its own house in order. Beyond corruption, there is also major concern that a wide range of criminal organizations benefit from lax regulation in the US, particularly with regard to real estate. Even prior to the release of the Pandora Papers, there was concern that the US was becoming a leading destination for international money laundering operations through real estate. This would mean that American cities are playing host to the dirty money funding criminal organizations such as drug cartels that the government spends billions each year attempting to eliminate
The problem is one of both a lack of national regulatory leadership and the relative autonomy of American state governments. Places such as South Dakota have used the increasing scrutiny on competing offshore havens to attract billions in illicit funds that bring desperately needed jobs and revenue without necessarily having to directly pay the price for the consequences to national priorities. Lawmakers in state capitals have little incentive to choose international priorities over their constituents, and should not be expected to do so. If the US is serious about fighting international crime and corruption, the federal government needs to step in and ensure that untraceable funds do not make their way into the country, for the sake of global democracy and national security.