The recent revelations of the so–called Panama Papers – a massive 2.6 TB collection of data concerning the hidden shell companies of the world’s leaders and other famed personalities – have sent waves of astonishment through societies around the world. Since the release of the Panama Papers on April 3rd by the Munich-based daily Süddeutsche Zeitung, in conjunction with the Washington DC- based International Consortium of Investigative Journalists (ICIJ), the fallout has continued to rattle various political regimes, as hurricanes of PR-aimed stunts, legal investigations, state-enacted Internet bans, and even the resignation of a prime minister have ensued. The fall-out of the event has been quite embarrassing and in many cases damaging for all parties involved.
As usual, fingers are being pointed at various individuals and organizations as the alleged culprits behind the leak that has been dubbed as the “greatest leak of the century” by some commentators. Although the leaker of the cache has been known simply as “John Doe” (arguably a rather dry pseudonym – why not something a bit more fierce-sounding like “FireFawkes”?), certain state intelligence agencies, such as the CIA have not been exempt from the accusation as well. This hypothesis takes into consideration that many of the affected states and individuals are viewed as “enemies” or “rivals” of the United States by Washington, while the leak has left the United States relatively unscathed. Major states revealed in the Panama Papers, such as the People’s Republic of China, Russia, North Korea, and Argentina, have had or continue to have some historic tension with the United States over ideology or over some global or regional designs. On the other hand, Moscow has been accused of being behind the leak due to the speculation that the hacker who leaked the archives to the German daily was suspected of having a Russian sponsorship.
All these speculations are fun to glance through. While the Panama Papers saga is apparently still only in its infancy stage – ICIJ has stated that the full archive will be made public in May – what seems to be a prime element in this quickly unfolding scandal is that it has functioned as a reminder that tax havens have been utilized not only as an instrument of tax evasion for wealthy CEOs and business leaders, entertainers, athletes, and corporations, but also as a medium for politicians and regimes around the globe to enact regional and global strategies.
Not just Islamic financial entities, but Western banking corporations have been implicated in massive scandals involving the use of shadow networks and tax havens.
It seems that many still regard the realm of geopolitics and that of global finance as two separate realms. Yet they are intimately linked, as wheels on a bicycle. The Global War on Terrorism that has been conducted since 2001 – which in essence is the resuscitation of the geopolitics of the Great Game – has been highlighted as one of the underlying causes of the destabilization of the financial world in 2008. The Patriot Act passed by the US legislature immediately after the terror attacks has led to a consolidation of state authority, not merely in the sphere of physical security, but also in that of financial transactions related to global finance as well, thus disrupting the post-Cold War financial trends by bleeding out investments from the Middle East-North African (MENA) region – an area where Islamic finance has been suspected of integration with terrorist fundraising operations. Ironically, this mass exodus of MENA investment capital from the US finance sector in order to avoid new monetary controls – amounting to something more than $US 1 trillion – contributed to the vast development of Dubai (aka ‘Vegas on the Gulf’) as a giant financial player. The web of Islamic finance is not only active in the West and the Gulf States but also as well from the Balkans and the Caucasus to Central Asia – regions renowned for political corruption and the growth of radical Islamist ideology.
This financial control measure taken by the US federal government had damaging consequences in global finances during the years to follow. According to terror finance expert Loretta Napoleoni, coupled with the US Federal Reserve cutting interest rates from 6% to 1.2% from 2001 to 2003, the Patriot Act created an environment conducive for stratospheric growth of subprime mortgage rates which triggered the crash of 2008. The state, in response, further strengthened itself by intervening in the financial realm by propping up corporations for the reason of being “too big to fail” – pumping public funds into private financial companies – thus inviting criticism that the end of American free-market capitalism was at hand. This string of events crossed oceans and triggered multiple financial crises in EU and in China.
Although state intervention in the financial realm via Patriot Act legislation contributed to the post-2008 Great Recession, it’s also true that the tragedies of the 9/11 terror attacks were partially financed through Islamic finance networks. This was done by exploiting off-shore tax havens as nodes for such transactions. The presence of off-shore havens – highlighted by the current Panama Papers scandal – was not only a peripheral part, but the core of the bloody event that essentially “kicked-off” the new geopolitical turmoil that has embroiled vast regions of Eurasia for nearly the past 15 years.
Not just Islamic financial entities, but Western banking corporations have been implicated in massive scandals involving the use of shadow networks and tax havens. And this has become more apparent in last several years. The financial industry has been long-known to incubate such corruption, and therefore this is no surprise. In 2015 alone banking giants such as HSBC and BNP Paribas have been caught red-handed in such corrupt practices. The 2015 HSBC revelation was part of what came to be known as Swiss Leaks, tax evasion scheme hatched inside of its holdings company using its subsidiary in Geneva. Even the CEO of HSBC – the British company which was implicated in narco-dollar laundering in 2013 and a new lawsuit pending since February of this year filed by victims of Mexican drug violence – was reported to be hiding £5 million involving an account in Switzerland, despite him promising reform of the company. In May 2016, BNP Paribas – a French-owned bank and one of the largest on the planet – was sentenced to five years probation for conspiring to violate sanctions and engaging in financial deals with Iran, Cuba, and Sudan.
The state, beholding such examples of perceived corruption for years (although some may argue that “the state is merely hating competition” with a shade of cynicism pointing to the CIA which used Panama itself as a conduit for money laundering during the Cold War era), has been implementing some measures to further increase the regulation of the financial industry, such as the passing of the Foreign Account Tax Compliance Act (FATCA) and advocating for more electronic transactions and limiting the use of paper money.
FATCA was enacted in 2010 by the US federal government and in order to curb money laundering and tax evasions by having foreign banks report to US government (i.e. Internal Revenue Service –IRS) any bank accounts exceeding $50,000. This federal law is global in scope. It involves over 80 states since 2013 and 77,000 institutions. Even some rival states of the United States have signed on to it. FATCA was part of the Hiring Incentives to Restore Employment (HIRE) Act, a 2010 US federal law passed in the aftermath of the Great Recession with the intent to increase US domestic employment. Dodd-Frank Wall Street Reform and Consumer Protection Act was also passed in 2010. This federal law is notable for its “Volcker Rule” which was proposed by the former FRB chairman Paul Volcker to restrict speculative investments that triggered the recession, thus linking these laws directly with the Great Recession, and in consequence, indirectly with the counter-terror financial control policies of the Patriot Act in the geopolitically turbulent post-9/11 era.
This effort of implementing financial controls is not something that is limited to the United States. Similar policies have been implemented across the pond in Great Britain and in EU in the wake of the aforementioned financial crisis. Great Britain established an inquiry in June 2010 – The Independent Commission on Banking – to stabilize the financial world in response to the Great Recession. Also known as “Vickers Reform” named after British Economist Sir John Vickers, this inquiry has led the EU bureaucracy to implement what is known as the Liikanen Reform in 2012 –led by Bank of Finland governor Erkki Liikanen. This seeks to regulate financial transactions in the EU. However, London and former British Overseas Territories and Crown Dependencies still remain some of the most active tax havens in the world – up to 25% of the total as recently acknowledged by EU authorities, and they are utilized extensively by US corporations. There are several reasons why this is the case, and most stem from London’s unique history and Great Britain’s legacy as a globe–spanning empire, discussion to which we will return.
There have been multiple backlashes to the state implementing new financial controls. Some banks overseas have been reluctant to conduct businesses with American individuals and companies, while contraction of the banking sector in the area of employment numbers has been noted, pointing out dramatic structural changes within the industry (Bank of America is planning on cutting 3,500 positions while the scandal-ridden HSBC plans on cutting 50,000 employees by 2017).
Another element of state pushback against the shadowy activities inside the financial sector is the increasing use of electronic transactions to phase out the use of cash transactions. Think debit cards, inter-bank electronic transfers, Apple Pay, and Venmo. Electronic transactions allow governments and private companies to monitor digital activities thus helping reduce number of illegal activities from ‘falling through the cracks.’ Phase-out of the anonymous cash for the electronic is being advocated by some economists, such as Ken Rogoff, Harvard economist who in his presentation at NBER Macroeconomics Annual Conference in April 2014 explored the pros and cons of the state-sponsored phase-out of paper currency. Israel has been taking a lead in this effort since 2013, establishing a committee headed by former director of Prime Minister’s Office Director General Harel Locker to explore even total cash elimination from society. Sweden also is taking the lead in transforming itself into a cashless society, and a 2013 study predicted that Sweden would become entirely cashless by 2030. France increased its monitoring of cash payments and bank transactions in the wake of Charlie Hebdo terrorist attack in January 2015, even taking the steps towards limiting cash transactions for both residents (max of €1000) and foreign visitors (max of €10,000) from September 2015. And Germany, where the use of cash is at 79% of transactions, is following suit.
This article is part one in a two-part series. The second part can be found here.
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