Russia and Tax Havens

‘Tax havens are the mechanism by which the world’s dirtiest secrets, and most devastating evils are allowed to freely persist, without consequence.’

    When we think of Russian leadership, there is one name that immediately comes to mind: Putin. He has recently tightened his grip over power in Russia by holding a vote (just as dubious in its legitimacy as any other vote Putin has allowed to take place,) making it constitutionally possible for him to remain in power until 2036. But while Putin is the President, the Russian Federation is commonly referred to as an oligarchy. This simply means a government run by few. More specifically, Russia is a plutocratic oligarchy which means those “few” are running the government because of their wealth. I will not be detailing how the most famously communist government in the world, the Soviet Union, became the most extreme example of a crony-capitalist plutocracy; That would be a different topic, and there are many resources to dive into that history. What I want to focus on here is the relationship between the power structure in Russia and the global plight that is tax havens. 

    In order to be a successful oligarch in this sort of plutocracy, you have to acquire and sustain immense amounts of wealth. Beyond the obvious perks of being super-duper rich, the incentive for these oligarchs to amass and maintain such vast troves of wealth, is that their wealth is what gives them power and influence in the Russian government. These few who have the most wealth, these oligarchs, are the only ones in the country with the means to fund government initiatives and projects. But they don’t even necessarily need to be spending anything to maintain that influence. It is simply their exclusive capacity to do so that allows them to hold sway over government policy. Also, being Putin’s buddy definitely doesn’t hurt.

    I know I said I won’t be doing a history of the transition from communism to oligarchy, but just to explain how the oligarchs got all this cheddar in the first place, it starts with Boris Yeltsin selling off the previously communist government-owned state commodities, like oil and other natural resources. But in the decades since then, and especially since Putin came to power in the last decade, the coffers of these oligarchs have grown at a much greater rate than before. At the same time, the wealth gap between the top echelons of Russian society and the poorest in the country has deepened considerably. So, it isn’t as if the growing wealth of the oligarchs is going towards funding government programs to benefit the citizens of Russia. It is simply growing and growing. More curious still, is that the sources of this continued growth in wealth are not easily identified. This brings us to what I am suggesting allows this system to continue as smoothly as it has: tax havens. In order to understand how tax havens are relevant to the maintenance of Russian plutocratic wealth, we need to begin by understanding what they are and what effect their practices have on the world at a more basic level.

    So, what is a tax haven? The Tax Justice Network, who are the vanguard in the fight for international financial transparency, states on their website: “There is no generally agreed definition of what a tax haven is." (Oh. Great…) "The term itself is troublesome, because these places offer facilities that go far beyond tax. Loosely speaking, a tax haven provides facilities that enable people or entities escape (and frequently undermine) the laws, rules and regulations of other jurisdictions elsewhere, using secrecy as a prime tool. Those rules include tax – but also criminal laws, disclosure rules (transparency,) financial regulation, inheritance rules, and more.” Essentially, tax havens can act as ways for Multinational Corporations or MNCs, and the super wealthy to avoid paying taxes and to hide their immense wealth. They are also sometimes referred to as “secrecy jurisdictions”. 

    When MNCs hide their wealth in these tax havens and avoid paying their fair share of taxes, it means the government of the country that they really should be paying taxes to doesn’t get that money. When the government doesn’t get the money that it would be making from the massive amounts of taxes that a giant corporation ought to be paying, that money doesn’t get to go to programs that would help the working class and middle class. This becomes an even bigger problem when we’re talking about MNCs not paying taxes to developing countries. For example, the Zambia Sugar company, a subsidiary of the Associated British Food group, was discovered to be using “aggressive tax avoidance” practices with the help of tax havens to cheat the Zambian government out of unbelievable amounts of money in tax revenue. Sixty percent of Zambian citizens live in poverty and so therefore, the Zambian Government could really use the tax revenue it should be making from Zambia Sugar. But this is just one example of so many. 

    What really compounds the problem is that, by design, these aggressive tax avoidance practices, funneled through tax havens, are incredibly difficult to identify. That is why we need to make international financial transparency a priority. There have been steps taken to begin to tackle this global issue, and there are a number of fantastic organizations and groups that address and expose this problem like The Tax Justice Network, The Organization for Economic Cooperation and Development (OECD), and their Base-Erosion and Profit Shifting Action Plan, as well as the International Consortium of Investigative Journalists. The European Union has also taken steps to create a blacklist of countries that it defines as Off-shore Financial Centers. What needs to be done going forward is to continue these efforts by the EU and expand the OECD’s country-by-country reporting to be released publicly and not only to the relevant tax authorities in order to further increase transparency globally. But before you run off to support these efforts, we’ve only touched on part of this.

    So far, I’ve only touched on one portion of what the existence of tax havens allows to persist. I started with this aspect because it is actually the simplest to understand and the easiest to dig up some documentation and evidence of. MNCs and government resource extraction and transportation create at least some paper trail, even if they’re being funneled through shell companies in tax havens. Also, technically none of what I’ve mentioned so far is actually illegal. Where things get really murky and start to be considerably less legal, is another popular function of tax havens: money laundering. 

    The Corporate Finance Institute defines money laundering as “a process that criminals use in an attempt to hide the illegal source of their income. By passing money through complex transfers and transactions, or through a series of businesses, the money is ‘cleaned’ of its illegitimate origin and made to appear as legitimate business profits.” They go on to describe the three steps that make up the process of money laundering which begins to explain what money laundering really is:

1. “Initial entry or placement is the initial movement of an amount of money earned from criminal activity into some legitimate financial network or institution.” (tax havens)

2. “Layering is the continuing transfer of the money through multiple transactions, forms, investments, or enterprises, to make it virtually impossible to trace the money back to its illegal origin.” (multiple shell companies, registered in tax havens, moving the illicit money from one to the next until the origin is obscured)

3. “Final Integration is when the money is freely used legally without the necessity to conceal it any further.” (the money is now “clean” because there’s no way to identify whether or not it was used in illegal activity.)

Money laundering only becomes necessary if the original source of the money is from something scandalous. So, as unsavory as cheating developing governments out of the money in tax revenue they deserve is, it’s actually not illegal to use “aggressive tax avoidance”. What is blatantly illegal is collecting money from human-trafficking, drug-running, arms-dealing, etc. Let’s imagine you’re a criminal. If you were making money this way, you’d need to find a way to be discrete about the fact that this is where the money was coming from, but you’d also want to have the ability to spend that money. Time to find a clever and unscrupulous accountant to set up a few shell companies in tax havens! After the accountant moves the money around a couple of times, all of a sudden, you appear to be a successful real-estate mogul. As far as any tax regulation officials can tell, you have invested in several very expensive apartments in Manhattan, own an extravagant cruise ship docked in a port off the coast of a small island, and the paper trail for your luxurious purchases tracks back to a recently opened business with one employee and a P.O. box in the British Virgin Islands. That’s where the trail ends, and you get to spend your money any way you’d like because, for all intents and purposes, it’s perfectly legitimate.

    Now that I’ve given you some tips on how to be an international criminal, you may be thinking: ‘well thanks, but what does this have to do with the Russian government? Are you suggesting that all the money in the Russian government is from drugs and sex-trafficking?’ Not necessarily, no. Though, I am suggesting that it does raise questions about where your money comes from when you use what are technically legal “aggressive tax avoidance” practices. There is little denying that offshore tax havens are used by Putin’s oligarch buddies. Particularly after the release of the “Panama Papers” in 2016, which exposed political leaders and the extremely wealthy all around the world for having used offshore tax havens to hide their wealth/launder money, we know there are many culpable Russians among the exposed. Even after the Panama Papers revealed so much illicit banking, the Russian exposures have had little to no impact. This is because, even after discovering that they had used such practices, many of the transactions had been obscured even before being taken over by Mossack Fonseca, the unscrupulous accounting firm that failed to prevent the leak. So, even though we learned some specifics in terms of who in particular has been using these financial institutions and practices, we were left with even more questions than answers in terms of what Russian oligarchs do with, or how they acquired their wealth.

    What we do know is that publicly, Putin has made calls for “deoffshoreisation,” asking Russians to remove their money from banks and financial institutions outside of Russia. While this public statement was meant to convey some sort of legitimacy, there is little evidence to suggest anything has changed since Putin coined the ungainly term in his 2011 “State-of-the-Nation” address. These comments suggesting Putin’s intent for businesses to reinvest in the Russian banking system in order to revive the Russian tax base, were also apparently immediately met with literal laughter from the Russian business community assembled at the address. For Putin’s display of anti-corruption sentiment to be taken as a joke is very telling. The Russian financial community obviously knows how the Russian economy functions better than anyone. It is not really surprising that they would see this as a joke because as far as we can tell, Putin has complete control over how the business community operates, so he clearly tells them privately how to handle the Russian economy. Plus, it has been made clear through multiple examples of diligent financial reporting, that Putin himself has all of his billions of dollars of personal wealth tucked away in various offshore institutions hidden by creative accounting. So, shocker: it’s probably best to not take Putin at his word.

    While it may not be much of a surprise to hear that Putin is not necessarily the most trustworthy or honest leader the world has ever seen, it is interesting that he would want to make a public display of being against corruption. For anyone that has paid attention to Putin’s role in the Trump presidency, we know the guy has some serious cajones and revels in being coy about his role in international criminal conspiracy. He has multiple times been credibly accused of murdering, or attempting to murder political opponents through poisoning, and his response usually falls somewhere between Steve Urkel and Shaggy. So, for Putin to want to make even a half-hearted, vaguely sarcastic commitment to corruption-reduction, tells us a little something about how even the strong-man leader of an authoritarian plutocracy wants to give the appearance of financial legitimacy. Kinda’ makes you think that maybe, this might possibly be a sensitive subject, doesn’t it? 

    As I mentioned earlier, there are organizations and international bodies that have made some progress in the fight for international financial transparency and preventing the use of aggressive tax avoidance practices. But to say we are a long way off would be an egregious understatement. As great as it would be to put an end to the network of offshore tax havens, it turns out ‘the calls have been coming from inside the house.’ Probably the biggest threat to international financial transparency is Delaware. Yes, “The First State.” While there are other states, like Nevada, that have very “business-friendly” taxation laws, Delaware sports some of the ‘friendliest’. That’s why there are so many businesses registered there (like, for example, the company Trump’s lawyer used to pay off porn star, Stormy Daniels.) It’s a good place to do business you’d rather have fewer questions asked about. There are also countries, aside from small island nations with no other economy to speak of, that have similarly “business-friendly” tax structures, like the Republic of Ireland. So, even if what we normally think of as tax havens were somehow limited in their ability to operate the way they currently do, I’d bet telling a U.S. state how it should structure taxation would be a much greater hurdle to jump. We also know that Putin and various oligarchs have diverse assets in the U.S. that serve to effectively launder their clandestine finances. One oligarch even owns a large portion of the Brooklyn Nets. 

    Tax havens are the mechanism by which the world’s dirtiest secrets, and most devastating evils are allowed to freely persist, without consequence. Whether in Delaware, or the British Virgin Islands, the greatest wealth the world has ever seen is hidden, with only a handful of individuals knowing how much just their own portion of that vast treasure amounts to. Imagine if that money weren’t just sitting on an island, or tied up in a network of Delawarean shell companies. Imagine the taxes owed to a developing government were actually paid to that government and invested in infrastructure or social services for the most at need. Imagine if criminals had to keep piles of cash under their mattresses instead of being able to wash away their crimes and spend without any fear of consequence. Imagine if Putin was expected to release a document detailing his finances, (like how Joe Biden and *most* other U.S. Presidents do,) and a legitimate tax authority were able to examine them. My guess is that the result of the last one would be the end of the Russian government as it exists today. Do I have concrete evidence to support that? Nope, no one does. That’s the problem. If we were to make more significant steps to achieve a greater degree of financial transparency for the world’s wealthiest, all of this imagining could begin to be realized. While it’s a daunting task, perhaps the recent surge in support for anti-corruption political platforms across the world, spurred on by the 2007 financial collapse, and now further compounded by the global pandemic and subsequent recession, there could be a greater incentive to address this issue. But, I have a feeling Putin wouldn’t really be into that.