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How Offshore Tax Evasion Schemes Are Hurting Us All

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Jack Bernstein, Tax Evasion

With Jake Bernstein, Pulitzer Prize-winning journalist, Author of Secrecy World: Inside the Panama Papers Investigation of Illicit Money Networks and the Global Elite

Steve speaks with Pulitzer Prize-winning journalist, Jake Bernstein, who was part of the team that broke the Panama Papers story.  Bernstein’s book, Secrecy World: Inside the Panama Papers Investigation of Illicit Money Networks and the Global Elite, addresses the world of tax evasion and offshore shell companies used by criminals and the global elite to hide or launder trillions of dollars of assets.

Mossack Fonseca Data Leak

Bernstein’s foray into this secretive world began with a phone call from the senior editor at the International Consortium of Investigative Journalists (ICIJ) about a data leak involving Mossack Fonseca, the world’s fourth biggest provider of offshore financial services.  The leak ultimately ran into 11.5 million documents covering money secrets of the likes of the Prime Minister of Iceland and Vladimir Putin.  Jake Bernstein saw this as merely the tip of the iceberg and decided to dig deeper, which led to his writing Secrecy World: Inside the Panama Papers Investigation of Illicit Money Networks and the Global Elite.

The Money Laundering Cycle

Jake goes on to explain the money laundering cycle.  While it isn’t illegal to have an anonymous offshore shell company, not complying with the legalities is where the trouble begins. A company with less than honest intentions can take advantage of what Jake Bernstein calls a superhighway of underground cash used by money launderers, criminals, and corrupt public officials through transactions across a web of shell companies in different tax havens to hide the money’s illicit origins.

U.S. Is Big Enabler Of Shell Companies

In his book, Secrecy World: Inside the Panama Papers Investigation of Illicit Money Networks and the Global Elite, Jake Bernstein notes that in 1997 more than half of the world’s wealth was controlled by offshore entities. What’s surprising is that the U.S. is a big enabler of safe havens for the ultra-wealthy with tax-friendly states such as Delaware, Nevada, and Wyoming allowing shell companies to hide millions of dollars while collecting over $1 billion a year in fees, with no incentive to clean-up their laws, find out who’s behind these companies, or demand more transparency.

Trump Porn Star Payoff

Delaware was also recently in the news because one of Trump’s attorneys set up a shell company to pay off a porn star who allegedly had a one-night stand with President Trump in 2006 after he was married to the First Lady, Melania Trump. Donald Trump himself is no stranger to this secrecy world, notes Bernstein, having admitted on the campaign to having over 515 separate companies, including 378 registered in Delaware.

Shell Companies Deprive Ordinary Americans By Not Paying Taxes

While most Americans are unaware of the issue of Delaware shell companies, Jake links rising U.S. real estate values—which make housing less affordable for average Americans—to the corruption caused by people using anonymous shell companies to buy up property with ill-gotten cash.

Moreover, no one pays taxes on money that moves into shell companies, which deprives local municipalities of taxes that could have been used for schools, healthcare, infrastructure, etc.

So why have governments been so ineffectual in stamping out these offshore abuses?

In Secrecy World: Inside the Panama Papers Investigation of Illicit Money Networks and the Global Elite, Bernstein dedicates an entire chapter to the IRS’s half-ass attempts to clamp down on offshore tax evasion by Americans, blaming it on bureaucracy and a lack of political will to fund such initiatives.

In closing, Jake highlights Vladimir Putin’s use of shell companies to mask his influence and tremendous wealth. To learn more about the insidious and hurtful world of tax evasion and our own government’s tacit encouragement of it, pick up a copy of Jake Bernstein’s Secrecy World: Inside the Panama Papers Investigation of Illicit Money Networks and the Global Elite


Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

Read The Entire Transcript Here

Steve Pomeranz: My next guest is Pulitzer Prize winning journalist, Jake Bernstein. He’s a former senior reporter of the team that broke the Panama Papers story. I don’t know if you remember that, but it was a story that investigated the world of the firm Mossack Fonseca, one of the largest providers of offshore shell companies and a key player in a secret economy that fuels trillions of dollars in tax evasion and criminal activity. The book is Secrecy World: Inside the Panama Papers Investigation of Illicit Money Networks and the Global Elite. Jake Bernstein, welcome to the show.

Jake Bernstein: Thank you so much for having me, Steve.

Steve Pomeranz: So how did you end up getting involved in this story, where did it start?

Jake Bernstein: It all begins with a phone call from a friend of mine who was the senior editor at the International Consortium of Investigative Journalists, and he said to me that they were working on something that was very interesting, that he thought I would be a good fit for, and he couldn’t tell me anything about it on the telephone. I had to come to Washington DC and meet with the director of ICI, Jay Derek Ryle, and his deputy, Marina Walker. And they told me that they had just begun to receive data from a leak involving a law firm, Mossack Fonseca.

And this was just the beginnings of it, it wasn’t a lot, what ended up being 11.5 million documents before it was all said and done, but this was just the first few thousands of documents. But they already knew that they had things like a secret company of the Prime Minister of Iceland and companies that were directly connected to Vladimir Putin.
So they were very excited, and as soon as I heard about it, I signed on. And then for the next year, I worked with investigative journalists all over the world. It ended up being about 340, all told, to investigate this data. But by the time it was done, I felt like there were still large parts of the story that hadn’t been told.

I mean, we really had only scratched the surface. And in particular, we hadn’t gotten the perspective of Ramon Fonseca and Jurgen Mossack, the people behind the firm. And so I decided to do a book and dig a little bit deeper.

Steve Pomeranz:
And you contacted those two individuals, and they were a source for the book, right?

Jake Bernstein: Yeah, they spoke to me at length, actually, they were eager to sort of get out their perspective, both about how their business had evolved and this secrecy world had evolved over time. And also who they thought were the real masterminds behind this industry.

Steve Pomeranz: Were they doing anything illegal, those two?

Jake Bernstein: The thing is that they end up operating in 21 different tax havens, right, even though they’re based in Panama. So what might be perfectly legal in Panama might be not legal in the Seychelles, and a lot of this is about compliance. It’s about vetting customers and due diligence, and it doesn’t really get enforced. So they were not following the letter of the law in the way that they were supposed to, we can definitely say that. There are criminal investigations of their activities right now, but it remains to be seen whether they themselves will be held personally liable for things that happened.

Steve Pomeranz:
Because some of this money comes from arms trafficking, oil, gas exploration, money being siphoned off even international soccer, that you mentioned. And governments were involved, you mentioned the Prime Minister of Iceland, who resigned. Give us a quick primer on how money gets laundered overseas.

Jake Bernstein: Sure, there’s all different kinds of ways, right?  We need to say at the outset that having an anonymous shell company is not in and of itself illegal, right. It is what purpose you are putting that company toward. And so, corporations and the mega wealthy use this system all the time to avoid taxes or for legal means.

And then that same sort of super highway of underground cash, if you will, is also used by money launderers and criminals and corrupt public officials and things like that. And there are lots of different ways to launder money through this system. Once you have the anonymity of a shell company and maybe a foundation or a trust, and you base it in multiple jurisdictions, you can do pretty much anything with it, and there’s very little scrutiny. So it’s being, I mean, the UN sort of puts the amount of money that is laundered worldwide as high as $2 trillion. And the US Treasury Department thinks it could be as much as $300 billion just in the United States every year.

Steve Pomeranz: I read a quote in the book that said in 1997, more than half of the world’s wealth was controlled offshore. We’re talking about an awful lot of money there.

Jake Bernstein:
It’s astounding.

Steve Pomeranz: What countries are we talking about that provide the safe haven for this money for the ultra-wealthy?

Jake Bernstein: Steve, that is a really good question because I think one of the biggest countries that does it is going to be a surprise to most of your listeners, and it’s the United States.

Steve Pomeranz: How’s that possible?

Jake Bernstein:
So most people think that tax havens are things that happen in places with tropical breezes and oceans and all that stuff.

And no, in fact, that some of the biggest players are Delaware, Nevada, and Wyoming, which pump out hundreds of thousands of these shell companies. And in fact, the Treasury Department and the State Department have complained bitterly that Delaware companies are being used by Russian mafia and transnational gangs and others.
But they don’t seem to be able to do anything about it, and it’s understandable why. Delaware pulls in more than $1 billion a year from its public registry. So they have no incentive into cleaning up and finding out exactly who’s behind these companies and demanding more transparency.

Steve Pomeranz: Well, Delaware was just in the news with this alleged one night stand with the President and a porn star. I believe a company was set up in Delaware, and, unfortunately, I think the attorney put his name. I mean, if you’re going to do this kind of thing, don’t put your name on it.

Jake Bernstein: Like 101, right?

Steve Pomeranz: Exactly.

Jake Bernstein: And the best people who do it sort of layer it, right?
You’ll have a trust that will be owned by a foundation, and the foundation will own the company. And then you can have nominee directors of the foundation, or even the company in some places, that are actual employees of Mossack and Fonseca. But just to tie this up, Donald Trump is no stranger to this secrecy world. He admitted on the campaign that he had more than 515 separate companies, including 378 registered in Delaware.

Steve Pomeranz: Mm-hm, so let’s get back to Mossack Fonseca, if I’m saying their names even close enough. How did they enter into the business, and really, what was their primary business? All right, let me do it another way. I come to them, and I’ve got a situation where I want to—I think there was an example—someone wanted to buy a home in Seattle, and I forget exactly the reason why they wanted it to be secret. But they ended up getting in touch with that firm in Panama, what happened next?

Jake Bernstein: Sure, the case that I talk about in the beginning of the book is a gentleman from Mexico who wants to buy a house in Seattle for his sister and his niece. But she’s involved in a divorce, and he doesn’t want the husband to know that he’s buying this house because he doesn’t want it to be subject of the divorce. So he goes to Mossack  Fonseca, and they help him set up a Delaware company. But again, he is…the Delaware company is going to buy the house, but he is associated with the Delaware company. Well, how do you get around that?

They also set up for him a foundation, and so the foundation is the one that owns the Delaware company. So if you look at the Delaware company that’s buying the house, all you’ll see is the Panamanian foundation. And the Panamanian foundation, the members are Mossack Fonseca employees. And so it’s all very neatly hidden, in this case, from the husband who’s part of the divorce proceeding.

Steve Pomeranz: In this particular case, though, those two low-level employees have to sign off on the transfer of the money. They have to say, we approve this journal or this wire to go out from the foundation to the seller of the house.

Jake Bernstein: And they did that because this Mexican businessman was buying the house in cash. So half a million dollars straight out, right, and actually, this is a major problem. Another reason Americans think that the system doesn’t really relate to them. But property prices are skyrocketing in our major cities, in New York, in Miami, in San Antonio, in Los Angeles, and places like that. And part of the reason is that people are using these LLCs, these anonymous shell companies, to buy up property for cash, and it’s raising the price of property for everyone else. And oftentimes, particularly on the high-end luxury market, these buyers, it’s either money laundering or they’re corrupt officials or they’re people who have gotten the money in some questionable way, and are parking it in property in the United States because they believe that it’ll be safe there, it won’t be confiscated, and there’s a chance it might appreciate.

Steve Pomeranz: The book is Secrecy World: Inside the Panama Papers Investigation of Illicit Money Networks and the Global Elite.

My guest is the Pulitzer Prize winning journalist, Jake Bernstein. So you also mentioned that it has a darker side too. And that is not only, are they parking this money, and they’re avoiding taxes because of these offshore entities or these Delaware entities, but that hurts local municipalities in terms of their ability to provide services for the city. So they’re getting the benefits of the city without actually having to pay any of the cost of these terrific benefits they’re getting.

Jake Bernstein: This is absolutely right, and I mean, everywhere, governments are saying, we don’t have enough money for education, for healthcare, for infrastructure, for police, for things like that.

And part of the reason is that this money is disappearing offshore. There’s a fascinating, extraordinary figure, which is that tax authorities worldwide have collected half a billion dollars as a result of the publication of the Panama Papers.

Steve Pomeranz: Wow.

Jake Bernstein: So this is just one firm, it was one of the top four or five in the world, certainly, incorporating these anonymous shell companies, but just one firm. And as a result of the publication of these stories and of the database that ICIJ put out on its website, icij.org, tax authorities have collected half a billion dollars in taxes that were evaded.

Steve Pomeranz: So why, in the past, and I guess this really doesn’t come from the IRS, this collection of money. Why have they been so ineffectual in stamping out these offshore abuses?

Jake Bernstein: And that’s an excellent question. In my book, Secrecy World, I have an entire chapter about the IRS. And in particular, the story of this incredible IRS agent named Joe West, who was actually given the time and resources to do a deep dive into offshore tax evasion by Americans and he goes on this journey, figures out exactly how it’s being done in different ways and presents his bosses with the whole menu of ways that they can go after this. They end up choosing only one option on that menu and are quite successful in some way. But Joe West is so sort of frustrated by the bureaucracy he has to battle through, just to do that, that he ends up retiring early.

So part of it is a lack of political will and sort of inertia and things like that that afflict big bureaucracies like the IRS. But part of it is also the fact that the IRS has been hogtied by Congress which has radically slashed its budget and made it almost impossible for the IRS to do its job.

So it’s a bunch of different factors, but clearly, it would be possible to go after this tax evasion if the political will existed.

Steve Pomeranz: So you mentioned earlier that the Panama papers implicated Vladimir Putin in certain ways, tell us about that.

Jake Bernstein: Well, this is an extraordinary story, we found a network of companies that were set up by this bank in St. Petersburg called Bank Rossiya, which goes way back with Putin, even before he was a political person, when he worked in the municipality of St. Petersburg. And this bank, the chairman of this bank has actually been called, by the US Treasury Department, Putin’s personal banker. So this bank sets up this network of companies, and two of the companies, the ostensible owner of these companies, is a classical cellist by the name of Sergei Roldugin.

And Sergei Roldugin, up until now, had never even been considered a businessman. He was not a financial guy at all, he’s actually a fairly well-known and renowned cellist. But he also happens to be the godfather of Vladimir Putin’s eldest daughter and one of Putin’s oldest friends. And so he is the owner of these companies that are doing incredibly complex financial activities, including the potential takeover of Russia’s largest truck manufacturer and major inroads into Russia’s media. And so they’re doing these things as part of a network of companies set up by this bank, through which billions of dollars are moving, including possibly billions of dollars from state-controlled banks in Russia. And it all revolves around a group of people connected and close to Vladimir Putin, including some of his oldest friends and oligarchs who have risen up with him, and who are protected by him. So for the first time, there’s been speculation for years that Putin actually might be one of the wealthiest people on the planet, which he has always denied. But we’ve never been able to see how his money moves and how it actually works. And it seems like a large part of it is going through this secrecy world, and to some degree, through Mossack Fonseca, although they use lots and lots of different firms, obviously.

Steve Pomeranz: And based on the political structure in Russia, nothing of significance, especially when it comes to this type of money movement, will be not under the eye of the grand master. He has that much control over the oligarchy, as you said.

Jake Bernstein: Well, it’s amazing, Steve, if you are a businessman of some size and influence in Russia, you want Vladimir Putin to have a piece of your business because he will provide protection.

Steve Pomeranz: That’s insurance.

Jake Bernstein: And so you’re happy if he takes an interest and wants to participate because it means that you will have this protection.

I mean, it is a kleptocracy, and that is how a kleptocracy works.

Steve Pomeranz: The book is Secrecy World: Inside the Panama Papers Investigation of Illicit Money Networks and the Global Elite. My guest is Jake Bernstein, and you can find him at www.jakebernstein.net. To hear this again, listen to the full show or get a summary of the vital info discussed here today, go to www.stevepomeranz.com.

And while you’re there, sign up for our weekly update, where we will send you the weekly commentaries and all the interviews from the show on a weekly basis. And we’ve included searchable archives now, if you think you’ve missed something. And that will come straight into your inbox weekly.

Jake Bernstein, thank you so much, great information.

Jake Bernstein: Thank you, Steve, have a good day.