Without the Russian oligarchy, where would Vladimir Putin be? Without Russia’s oligarchs, political leaders of the Western world have concluded, Putin would be tottering. Western leaders have made squeezing Russia’s richest a central piece of their strategy to end Putin’s Ukraine cross-border assault.
These same Western leaders, unfortunately, have failed to take seriously what ought to be an equally pressing question: Where would Russia’s oligarchs be without the West, without the Wall Streeters, wealth managers, and assorted other high-finance riff-raff “paid millions,” as Institute for Policy Studies analyst Chuck Collins puts it, “to help billionaires sequester trillions”?
This question has been ignored by Western leaders since the collapse of Soviet Union. And now we’re paying the price. Those Ukraine sanctions against Russia’s oligarchs? They have a huge loophole. The Western world’s opaque web of tax havens and anonymous corporations is essentially rendering much of those sanctions ineffective.
Sanctioned Russian billionaire Alisher Usmanov, for instance, has used the West’s “wealth defense industry” to shift formal ownership of major chunks of his $18.4-billion personal fortune beyond the reach of sanction orders. British Virgin Islands and other tax havens are examples of tax havens. notes Transparency International UK’s Steve Goodrich, “have long been a destination of choice for Kremlin cronies and kleptocrats.”
“Complex networks of secretive shell companies in these jurisdictions,” Goodrich adds, “means the UK government is attempting to enforce these sanctions with one arm tied behind its back.”
Global Financial Integrity policy director Lakshmi Kumar explains that the U.S. has minimal disclosure requirements. This is also helping to ease sanctions on Russian oligarchs. She has complied with the law to make billionaires happy. told Bloomberg earlier this week, is letting tainted money “rebrand itself, essentially.”
The United States agrees Rep. Tom Malinowski, a Democrat from New Jersey, “has become one of the easiest places in the world for corrupt kleptocrats around the world to hide money.”
“The difficulties of applying sanctions in light of Russia’s invasion of Ukraine,” sums up the Tax Justice Network’s Alex Cobham, “have highlighted the abject failure of current standards of financial transparency.”
The U.S. wealth defense industry, we need to remember, hasn’t Just been helping Russian oligarchs hide their fortunes. America’s money-handlers have for years been helping them pile up ever grander fortunes. They’ve steered the illicit funds of Russian oligarchs into U.S. real estate, investment funds, and “even factories,” says Pulitzer Prize-winning journalist Jake Bernstein, a senior reporter on the 2016 bombshell “Panama Papers” tax avoidance exposé.
The Russian billionaire Roman Abramovich has used “a network of banks, law firms and advisers in multiple countries,” the New York Times just reported, to invest “billions in American hedge funds.” Along the way, he tapped the expertise and contacts of U.S. high-finance giants ranging from Goldman Sachs and Morgan Stanley to BlackRock and the Carlyle Group.
But the damage the wealth defense industry has wreaked upon the Western world — indeed the whole planet — goes beyond undermining the sanction squeeze on Russia’s oligarchs. These defenders of grand personal fortune seem to have placed between $5 trillion and $8 trillion globally beyond the reach tax collectors. Tax havens, as Annette Alstadsaeter of Norway’s Centre for Tax Research told The Washington Post last fall, have become “a contagion.”
This contagion has been spread more by the United States than any other nation. One World Bank survey found that anonymous American companies were responsible for the spread of this contagion. found, played key parts in 85 percent the over 150 cases grand corruption that World Bank analysts analyzed.
New strains of this contagion are often found in the United States. South Dakota has had a significant impact. At the end of the 20th century, the state’s political high command worked hand-in-glove with wealth defense industry lawyers and lobbyists to turned the “trust” from a tool for circumventing inheritance rules into a global “go-to vehicle for tax avoidance.” By 2010, deep pockets had amassed Trusts in South Dakota worth $57 billion That sum had risen to $367 billion by 2020.
The evolution of the trust instrument, notes Columbia Law School’s Katharina Pistor, illustrates how today’s national legal systems “have become items on an international menu of options.” The super rich choose from this menu “the laws by which they wish to be governed.”
“The privileged few can decide how much to pay in taxes and which regulations to endure,” she continues. “And if legal obstacles cannot be overcome quite that easily, lawyers from leading global law firms will draft legislation to make a country compliant with the ‘best practices’ of global finance.”
We can’t literally see our wealth defenders at work. But we can feel the impact. Average-income people in rich countries, note inequality researchers Joseph Stiglitz, Todd Tucker, and Gabriel Zucman, “now pay far higher taxes than major corporations.” These corporations and the rich who run them are basically enjoying a “free-ride on the rest of society,” and their tax avoidance “means less investment in infrastructure, education, and research.”
What can we do? We can fight back, and, at the global level, some reformers — like the University of Virginia Law School’s Ruth Mason — are even feeling optimistic about the struggles ahead.
Mason has been a fixture in Masonian culture for much of the 20th century. notesA small group of rich countries working through the Organization for Economic Cooperation and Development (OECD), established international tax policy. The system they created rested on bilateral tax treaties designed to make sure that corporations doing business outside their home nation wouldn’t be taxed twice on the same income, once by their home country and once by their host.
In the resulting global tax order, nations “set their tax rates independently from each other,” and Mason’s research details how major corporations like Apple became adept at gaming the system. They moved “valuable intellectual property to low-tax jurisdictions,” then charged their related corporate entities in high-tax jurisdictions “artificially high licensing fees,” a maneuver that gained their entities in high-tax jurisdictions large tax deductions and their fee-charging entities a bargain-basement tax rate on their fee income.
In tax dork circles, tax-avoidance games like these go by the acronym of BEPS, short for “domestic tax base erosion and profit shifting.” The tricks of the BEPS trade, the OECD now estimatesGovernments worldwide lose as much as a quarter of a trillion dollars annually due to this.
Policymakers in the 20th century, Mason notes, either saw corporate tax avoidance as “unproblematic” or “regarded the costs of curbing it as too high.” But that hands-off mindset, Mason argues, “ended abruptly with the 2008 financial crisis.” The resulting job losses and budget shortfalls led to a “new intolerance of corporate tax dodging” as one legislative hearing after another made widely public Amazing examples of corporate tax arrogance are displayed. One hearing in the UK disclosed that Amazon, source of the one of the world’s largest personal fortunes, had paid a miniscule £1 million in tax the previous year on £4 billion in sales. A U.S. Senate hearing revealed that Apple had subsidiaries that “filed full tax returns nowhere on earth.”
Amid the resulting furor, the major nations that make up the G20 realized they “needed to do something — or at least appear to do something — about corporate tax avoidance.” They delegated that task to the OECD, and that led to a “BEPS Project” that has had, Mason believes, a “profound effect” on international tax norms and institutions. The BEPS effort, she explains, has shifted the global tax discourse from preventing “double taxation” to ensuring “full taxation,” a phrasing that encompasses closing tax loopholes and preventing abusive tax planning.
Other tax reformers are less optimistic about the evolution of international tax norms. Yes, note tax scholars Stiglitz, Tucker, and Zucman, the global tax deal that emerged from the BEPS negotiations does move a fair-tax agenda forward, by, for instance, making it harder for multinationals “to exploit tax havens by establishing a global minimum tax of at least 15 percent on corporate profits.” But this tax rate remains “much lower than what working-class and middle-class people typically pay in high-income countries” — and “far lower” than the 40 to 50 percent rate that U.S. corporations faced “for all but four years from 1942 to 1987.”
Others criticize the G20-backed effort as lacking the political will to take on global oligarchic control. Many of these critics are pushing for a United Nations convention on tax issues, an idea the Tax Justice Network feels “is developing what may prove to be an unstoppable momentum.” Earlier this month, the Global Alliance for Tax Justice and Eurodad, a network of 60 civil society organizations from 29 European countries, released a draft of what a UN tax convention could be.
“Repeated efforts to stop international tax dodging,” notes the draft author Tove Maria Ryding, “have resulted in only sticky plaster solutions, additional complexities, and rules that continue to be biased in favor of the rich.”
She is the representative of the groups that drafted the new UN convention draft. adds, hope the proposals in it “will help to kickstart a discussion about the fundamental reforms that we really need.”
The United States has also started to discuss this issue. Just before Biden’s inauguration, Congress overturned a Trump-vetoed law and passed legislation. American Prospect applauds, “requires the owners of all financial assets to disclose their true identity to regulatory agencies and the IRS.” The Biden Justice Department, meanwhile, has launched A new kleptocracy taskforce was created to focus on Russian oligarchs. This could serve as a model for larger anti-oligarch attacks.
There is still much to be done. One example: The ENABLERS Act, currently pending before Congress, targets a loophole in the Bank Secrecy Act which allows agents for oligarchs to park their ill-gotten gains almost anywhere in the United States.
“If we make banks report dirty money but allow law, real estate, and accounting firms to look the other way,” says Rep. Tom Malinowski, the bill’s lead sponsor, “that creates a loophole that crooks and kleptocrats can sail a yacht through.”
Advocates for a bold pushback against the wealth defense industry are calling for much more ambitious steps as well, from outlawing abusive trusts to investing big-time in tax enforcement — and substantially hiking overall tax rates on our most awesomely affluent.
State and local governments are also involved. In Vermont, New Jersey, and other states — and in cities like Los Angeles and San Jose — activists are pushing beyond New disclosure rules, imposing additional taxes on mansions, and penalizing the secretive deep pockets that spend mega-millions on condos as investments, and then letting them sit vacant. These moves distort housing markets at the expense of ordinary homeowners.
The Ukraine war could lead to more advocacy against oligarchy. But the conventional political wisdom is already fixating on the notion that the defense industry will prove to be the war’s biggest long-term winner. Mainstream pundits predict large increases in military expenditures throughout the West.
If that outcome turns out to be the Ukraine war’s most lasting legacy, oligarchy — worldwide — will have triumphed.
