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Why do the elite park their wealth abroad?

November 13, 2017

While Panama leaks corruption cases have consumed public attention and power yielders wrestle in courts, the business elite fears that Panama/Paradise leaks may further polarise society across the class divide and pollute the business environment.

The future strategy, businessmen said, should be to suppress the temptation of a witch-hunt. “Blaming and shaming should be a side business. The focus needs to be on opening channels and creating an environment where offshore account holders find repatriation of their wealth back in Pakistan to be the most economically viable option,” a businessman said.

They detested projecting all offshore account holders as scoundrels. They stressed upon the need for evolving some mechanism to distinguish fair operators from foul. The private sector and its sympathisers regretted the country’s environment that forced people to shift their assets overseas.

‘Blaming and shaming should be a side business. The focus needs to be on opening channels and creating an environment where offshore account holders find repatriation of their wealth back in Pakistan to be the most economically viable option’

According to initial estimates, the collective wealth of Pakistanis hidden overseas is around $300-$500 billion. Of this, about $200bn is said to be in Switzerland. Currently, GDP of the country, projected by the World Bank, is around $300bn.

Underplaying the astonishing volume of asset transfer and the income disparity dimension in Pakistan, free market advocates insisted that the real culprits were government’s unstable policies, the corruption/inefficiency of the tax machinery and the precarious security situation.

“Multiple factors combined to force the law-abiding elite to park wealth abroad. Who can feel safe in a country where sons of the prime minister, governor and generals get kidnapped? The sour memory of nationalisation is not forgotten. Why should we trust the leadership? The Federal Board of Revenue is lazy and corrupt, why should we pay for their inefficiency? The circumstances force high-net-worth Pakistanis to keep their wealth in tax havens in anonymous accounts,” a corporate lawyer from Lahore argued.

However, a former chairman of the FBR dismissed the businessmen’s plea as baseless justification for flouting laws. “How can they be allowed to blame their misconduct on anything but weakness of their character and their insatiable thirst to amass riches?” he questioned.

“The offshore investors clearly have more wealth than they and their children can spend in a lifetime, but it is not enough for them. It beats demands of logic. There is no defence for greediness,” he added.

Chief Economist Dr Nadeem Javed did not see an issue if transparency could be ensured. “We are for free flow of resources for optimal returns. As long as people see a comparative advantage they will be inclined to transfer their wealth to options that promise the best returns. It doesn’t mean indemnity from law. Within legal boundaries, everyone, rich and poor, should have the right of choice,” he said.

Naheed Memon, head of the Sindh Board of Investment, mailed a long complex response. “Most people do not care because they did not know and were not rich enough. In fact the motive to stash money offshore was different. Capitalism, rising inequality and increased calls for transparency have brought this method of tax evasion in the limelight. Hence the common citizen now cares because they believe it was theirs or the state’s money that has been misappropriated.

“It is not illegal but regulation, access to information laws and technology is cleaning up the grey areas. If you argue that putting money abroad increases global wealth that is then reinvested to improve human welfare through better business, you may think this crackdown is political and populist. I am a proponent of growth and progress but the idea of siphoning off wealth and running undisclosed businesses is, to me, bordering on unjust,” she concluded.

“Instead of celebrating success we tend to penalise achievers out of sheer contempt (sour grapes phenomenon),” commented a top businessman whose name was on the latest list. “If you want something good to come out of this global thrust for greater transparency you must try and be objective. Instead of jumping to conclusions, the situation demands evidence-based planning and adjustments,” he added.

As much as the private sector dismissed it there is little denying the fact that Pakistan is perceived to be a poor country with an astonishingly rich elite. The leaks of offshore accounts of Pakistani individuals and companies did highlight the anomaly. It also exposed the nexus between law firms and financial institutions and a web of complex transactions, all shrouded in mystery.

“The work of the journalist body is commendable in terms of providing actionable evidence to suspected wrongdoings of the rich and famous but I fail to see the element of surprise,” an aspiring economist said, attributing low-calibre debate around leaks in Pakistan to financial illiteracy. “Banks are not just about storage. Obfuscating wealth through a maze of tool is also one of its functions in today’s world. Actually, tax avoidance is the new elite sport.”

For clarity, it is important to answer some key questions, one at a time.

Where do the leaks came from?

The data originally came from legal service providers (Mossack Fonseca, active in Panama; and Appleby, which has offices in Bermuda, the Cayman Islands, the British Virgin Islands, the Isle of Man, Jersey, etc) in offshore industry, helping clients to set up companies overseas with low or zero tax rates.

These documents were obtained by a German newspaper. Under an agreement, it was forwarded to the US-based International Consortium of Investigative Journalists (ICIJ), which studied millions of documents to identify investors.

So far the list includes 643 Pakistanis, 450 in Panama Papers and 193 in Paradise Papers. They are estimated to own as much as five per cent of the total hidden $10 trillion global wealth.

What is peculiar about offshore accounts?

It is an overseas account operative at a place where Pakistan’s regulations are not applicable and through which individuals and companies can route and reroute money (profits, assets) to take advantage of lower taxes.

Why should we care?

First, the volume is humongous, entailing a very high opportunity cost in terms of loss of investible funds in a country struggling with low investment-to-GDP ratio.

Second, the burden of tax avoidance of rich in an expanding economy is borne by the poor and salaried class. “The government functions have to be financed. The government recovers what they lose from the rich and corporations by squeezing the vulnerable multitude through indirect taxation,” commented an economist.

Transparency is almost always good and lack of it is conducive to promoting and perpetuating injustice.

Who is hiding their wealth?

The full list of Pakistanis on Paradise Papers has yet to surface. Panama and the second list include names of politicians, businessmen, bankers, brokers, realtors, doctors, lawyers, management hierarchy, bureaucrats, and senior military men. Some names have already appeared in the press.

Is there a defence for tax havens?

The small island governments besides their local dimension say that they indirectly force governments to apply constraints in applying tax rates.

They say they facilitate the global circulation of wealth by offering services to asset owing entities.

Joseph Stiglitz, however, considered them a threat to global governance as they facilitate money laundering, corruption and an unacceptably high level of wealth inequality.

Published in Dawn, The Business and Finance Weekly, November 13th, 2017