What are the Pandora Papers?
These are 11.9 million leaked files from 14 global corporate services firms which set up about 29,000 off-the-shelf companies and private trusts in not just obscure tax jurisdictions but also countries such as Singapore, New Zealand, and the United States, for clients across the world.
These documents relate to the ultimate ownership of assets ‘settled’ (or placed) in private offshore trusts and the investments including cash, shareholding, and real estate properties, held by the offshore entities. There are at least 380 persons of Indian nationality in the Pandora Papers.
What do the Pandora Papers reveal?
The Pandora Papers reveal how the rich, the famous and the notorious, many of whom were already on the radar of investigative agencies, set up complex multi-layered trust structures for estate planning, in jurisdictions which are loosely regulated for tax purposes, but characterized by air-tight secrecy laws.
The purposes for which trusts are set up are many, and some genuine too. But a scrutiny of the papers also shows how the objective of many is two-fold:
i) to hide their real identities and distance themselves from the offshore entities so that it becomes near impossible for the tax authorities to reach them and,
ii) to safeguard investments — cash, shareholdings, real estate, art, aircraft, and yachts — from creditors and law enforcers.
How is Pandora different from the Panama Papers and Paradise Papers?
The Panama and Paradise Papers dealt largely with offshore entities set up by individuals and corporates respectively. The Pandora Papers investigation shows how businesses have created a new normal after countries have been forced to tighten the screws on such offshore entities with rising concerns of money laundering, terrorism funding, and tax evasion.
The trusts can be set up in known tax havens such Samoa, Belize, Panama, and the British Virgin Islands, or in Singapore or New Zealand which offer relative tax advantages, or even South Dakota in the US, the biggest economy.
What is a trust?
A trust can be described as a fiduciary arrangement where a third party, referred to as the trustee, holds assets on behalf of individuals or organisations that are to benefit from it. It is generally used for estate planning purposes and succession planning. It helps large business families to consolidate their assets — financial investments, shareholding, and real estate property.
A trust comprises three key parties: ‘Settlor’ — one who sets up, creates, or authors a trust; ‘trustee’ — one who holds the assets for the benefit of a set of people named by the ‘settlor’; and ‘beneficiaries’ — to whom the benefits of the assets are bequeathed.
A trust is not a separate legal entity, but its legal nature comes from the ‘trustee’. At times, the ‘settlor’ appoints a ‘protector’, who has the powers to supervise the trustee, and even remove the trustee and appoint a new one.
Is setting up a trust in India, or one offshore/ outside the country, illegal?
No. The Indian Trusts Act, 1882, gives legal basis to the concept of trusts. While Indian laws do not see trusts as a legal person/ entity, they do recognise the trust as an obligation of the trustee to manage and use the assets settled in the trust for the benefit of ‘beneficiaries’. India also recognises offshore trusts i.e., trusts set up in other tax jurisdictions.
If it’s legal, what’s the investigation about?
This is a very valid question. True, there are legitimate reasons for setting up trusts — and many set them up for genuine estate planning. A businessperson can set conditions for ‘beneficiaries’ to draw income being distributed by the trustee or inherit assets after her/ his demise.
For instance, while allotting shares in the company to say, four siblings, the father promoter set conditions that a sibling can get the dividend from the shares and claim ownership of the shares, but not sell it without offering the first right of refusal to the other three siblings. This could be to ensure ownership of the enterprise within the family.
But trusts are also used by some as secret vehicles to park ill-gotten money, hide incomes to evade taxes, protect wealth from law enforcers, insulate it from creditors to whom huge moneys are due, and at times to use it for criminal activities.
From the investigation, some key tacit reasons why people set up trusts are:
i) Maintain a degree of separation: Businesspersons set up private offshore trusts to project a degree of separation from their personal assets. A ‘settlor’ (one who sets up/ creates/ authors) of a trust no longer owns the assets he places or ‘settles’ in the trust. This way, he insulates these assets from creditors.
This is best illustrated through an example: A real estate promoter sets up an offshore trust, which sits on top of four offshore entities holding some assets. Now, private equity investors drag various entities of the real estate group to the National Company Law Tribunal under the bankruptcy law. So do homebuyers who have invested in residential properties by this company. But the Pandora Papers show the promoter moved tens of millions of dollars in assets to the trust amid police complaints in Delhi by his foreign investors, alleging siphoning off funds to the tune of hundred-plus million dollars. His wealth moved to an offshore trust remains safe from creditors.
ii) Hunt for enhanced secrecy: Offshore trusts offer enhanced secrecy to businesspersons, given their complex structures. The Income-Tax Department in India can get to the ultimate beneficial owners only by requesting information with the financial investigation agency or international tax authority in offshore jurisdictions. The exchange of information can take months.
iii) Avoid tax in the guise of planning: Businesspersons avoid their NRI children being taxed on income from their assets by transferring all the assets to a trust. The ownership of the assets rests with the trust, and the son/ daughter being only a ‘beneficiary’ is not liable to any tax on income from the trust.
In many business families, children have one foot abroad, hence family patriarchs have increasingly looked at trusts to ensure a hassle-free transfer of assets into their children’s hands.
iv) Prepare for estate duty eventuality: There is pervasive fear that estate duty, which was abolished back in 1985 when Rajiv Gandhi was Prime Minister, will likely be re-introduced soon. Setting up trusts in advance, business families have been advised, will protect the next generation from paying the death/ inheritance tax, which was as high as 85 per cent in the more than three decades after its enactment (The Estate Duty Act, 1953). Although India does not have a wealth tax now, most developed countries including the US, UK, France, Canada, and Japan have such an inheritance tax.
v) Flexibility in a capital-controlled economy: India is a capital-controlled economy. Individuals can invest only $250,000 a year under the Reserve Bank of India’s Liberalised Remittance Scheme (LRS). To get over this, businesspersons have turned NRIs, and under FEMA, NRIs can remit $1 million a year in addition to their current annual income, outside India. Further, the tax rates in overseas jurisdictions are much lower than the 30% personal IT rate in India plus surcharges, including those on the super-rich (those with annual income over Rs 1 crore).
vi) The NRI angle: Offshore trusts, as noted earlier, are recognised under Indian laws, but legally, it is the trustees — not the ‘settlor’ or the ‘beneficiaries’ — who are the owners of the properties and income of the trust. An NRI trustee or offshore trustee taking instructions from another overseas ‘protector’ ensures they are taxed in India only on their total income from India.
Of late, NRIs are under greater scrutiny of the Income-Tax Department; they have been receiving notices to prove their non-resident status of past years, to check if they made the required disclosure of ‘foreign assets’ in years when they were ordinarily resident in India.
Recent Posts
The United Nations has shaped so much of global co-operation and regulation that we wouldn’t recognise our world today without the UN’s pervasive role in it. So many small details of our lives – such as postage and copyright laws – are subject to international co-operation nurtured by the UN.
In its 75th year, however, the UN is in a difficult moment as the world faces climate crisis, a global pandemic, great power competition, trade wars, economic depression and a wider breakdown in international co-operation.
Still, the UN has faced tough times before – over many decades during the Cold War, the Security Council was crippled by deep tensions between the US and the Soviet Union. The UN is not as sidelined or divided today as it was then. However, as the relationship between China and the US sours, the achievements of global co-operation are being eroded.
The way in which people speak about the UN often implies a level of coherence and bureaucratic independence that the UN rarely possesses. A failure of the UN is normally better understood as a failure of international co-operation.
We see this recently in the UN’s inability to deal with crises from the ethnic cleansing of the Rohingya Muslims in Myanmar, to civil conflict in Syria, and the failure of the Security Council to adopt a COVID-19 resolution calling for ceasefires in conflict zones and a co-operative international response to the pandemic.
The UN administration is not primarily to blame for these failures; rather, the problem is the great powers – in the case of COVID-19, China and the US – refusing to co-operate.
Where states fail to agree, the UN is powerless to act.
Marking the 75th anniversary of the official formation of the UN, when 50 founding nations signed the UN Charter on June 26, 1945, we look at some of its key triumphs and resounding failures.
Five successes
1. Peacekeeping
The United Nations was created with the goal of being a collective security organisation. The UN Charter establishes that the use of force is only lawful either in self-defence or if authorised by the UN Security Council. The Security Council’s five permanent members, being China, US, UK, Russia and France, can veto any such resolution.
The UN’s consistent role in seeking to manage conflict is one of its greatest successes.
A key component of this role is peacekeeping. The UN under its second secretary-general, the Swedish statesman Dag Hammarskjöld – who was posthumously awarded the Nobel Peace prize after he died in a suspicious plane crash – created the concept of peacekeeping. Hammarskjöld was responding to the 1956 Suez Crisis, in which the US opposed the invasion of Egypt by its allies Israel, France and the UK.
UN peacekeeping missions involve the use of impartial and armed UN forces, drawn from member states, to stabilise fragile situations. “The essence of peacekeeping is the use of soldiers as a catalyst for peace rather than as the instruments of war,” said then UN Secretary-General Javier Pérez de Cuéllar, when the forces won the 1988 Nobel Peace Prize following missions in conflict zones in the Middle East, Africa, Asia, Central America and Europe.
However, peacekeeping also counts among the UN’s major failures.
2. Law of the Sea
Negotiated between 1973 and 1982, the UN Convention on the Law of the Sea (UNCLOS) set up the current international law of the seas. It defines states’ rights and creates concepts such as exclusive economic zones, as well as procedures for the settling of disputes, new arrangements for governing deep sea bed mining, and importantly, new provisions for the protection of marine resources and ocean conservation.
Mostly, countries have abided by the convention. There are various disputes that China has over the East and South China Seas which present a conflict between power and law, in that although UNCLOS creates mechanisms for resolving disputes, a powerful state isn’t necessarily going to submit to those mechanisms.
Secondly, on the conservation front, although UNCLOS is a huge step forward, it has failed to adequately protect oceans that are outside any state’s control. Ocean ecosystems have been dramatically transformed through overfishing. This is an ecological catastrophe that UNCLOS has slowed, but failed to address comprehensively.
3. Decolonisation
The idea of racial equality and of a people’s right to self-determination was discussed in the wake of World War I and rejected. After World War II, however, those principles were endorsed within the UN system, and the Trusteeship Council, which monitored the process of decolonisation, was one of the initial bodies of the UN.
Although many national independence movements only won liberation through bloody conflicts, the UN has overseen a process of decolonisation that has transformed international politics. In 1945, around one third of the world’s population lived under colonial rule. Today, there are less than 2 million people living in colonies.
When it comes to the world’s First Nations, however, the UN generally has done little to address their concerns, aside from the non-binding UN Declaration on the Rights of Indigenous Peoples of 2007.
4. Human rights
The Human Rights Declaration of 1948 for the first time set out fundamental human rights to be universally protected, recognising that the “inherent dignity and of the equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world”.
Since 1948, 10 human rights treaties have been adopted – including conventions on the rights of children and migrant workers, and against torture and discrimination based on gender and race – each monitored by its own committee of independent experts.
The language of human rights has created a new framework for thinking about the relationship between the individual, the state and the international system. Although some people would prefer that political movements focus on ‘liberation’ rather than ‘rights’, the idea of human rights has made the individual person a focus of national and international attention.
5. Free trade
Depending on your politics, you might view the World Trade Organisation as a huge success, or a huge failure.
The WTO creates a near-binding system of international trade law with a clear and efficient dispute resolution process.
The majority Australian consensus is that the WTO is a success because it has been good for Australian famers especially, through its winding back of subsidies and tariffs.
However, the WTO enabled an era of globalisation which is now politically controversial.
Recently, the US has sought to disrupt the system. In addition to the trade war with China, the Trump Administration has also refused to appoint tribunal members to the WTO’s Appellate Body, so it has crippled the dispute resolution process. Of course, the Trump Administration is not the first to take issue with China’s trade strategies, which include subsidises for ‘State Owned Enterprises’ and demands that foreign firms transfer intellectual property in exchange for market access.
The existence of the UN has created a forum where nations can discuss new problems, and climate change is one of them. The Intergovernmental Panel on Climate Change (IPCC) was set up in 1988 to assess climate science and provide policymakers with assessments and options. In 1992, the UN Framework Convention on Climate Change created a permanent forum for negotiations.
However, despite an international scientific body in the IPCC, and 165 signatory nations to the climate treaty, global greenhouse gas emissions have continued to increase.
Under the Paris Agreement, even if every country meets its greenhouse gas emission targets we are still on track for ‘dangerous warming’. Yet, no major country is even on track to meet its targets; while emissions will probably decline this year as a result of COVID-19, atmospheric concentrations of greenhouse gases will still increase.
This illustrates a core conundrum of the UN in that it opens the possibility of global cooperation, but is unable to constrain states from pursuing their narrowly conceived self-interests. Deep co-operation remains challenging.
Five failures of the UN
1. Peacekeeping
During the Bosnian War, Dutch peacekeeping forces stationed in the town of Srebrenica, declared a ‘safe area’ by the UN in 1993, failed in 1995 to stop the massacre of more than 8000 Muslim men and boys by Bosnian Serb forces. This is one of the most widely discussed examples of the failures of international peacekeeping operations.
On the massacre’s 10th anniversary, then UN Secretary General Kofi Annan wrote that the UN had “made serious errors of judgement, rooted in a philosophy of impartiality”, contributing to a mass murder that would “haunt our history forever”.
If you look at some of the other infamous failures of peacekeeping missions – in places such as Rwanda, Somalia and Angola – it is the limited powers given to peacekeeping operations that have resulted in those failures.
2. The invasion of Iraq
The invasion of Iraq by the US in 2003, which was unlawful and without Security Council authorisation, reflects the fact that the UN is has very limited capacity to constrain the actions of great powers.
The Security Council designers created the veto power so that any of the five permanent members could reject a Council resolution, so in that way it is programmed to fail when a great power really wants to do something that the international community generally condemns.
In the case of the Iraq invasion, the US didn’t veto a resolution, but rather sought authorisation that it did not get. The UN, if you go by the idea of collective security, should have responded by defending Iraq against this unlawful use of force.
The invasion proved a humanitarian disaster with the loss of more than 400,000 lives, and many believe that it led to the emergence of the terrorist Islamic State.
3. Refugee crises
The UN brokered the 1951 Refugee Convention to address the plight of people displaced in Europe due to World War II; years later, the 1967 Protocol removed time and geographical restrictions so that the Convention can now apply universally (although many countries in Asia have refused to sign it, owing in part to its Eurocentric origins).
Despite these treaties, and the work of the UN High Commission for Refugees, there is somewhere between 30 and 40 million refugees, many of them, such as many Palestinians, living for decades outside their homelands. This is in addition to more than 40 million people displaced within their own countries.
While for a long time refugee numbers were reducing, in recent years, particularly driven by the Syrian conflict, there have been increases in the number of people being displaced.
During the COVID-19 crisis, boatloads of Rohingya refugees were turned away by port after port. This tragedy has echoes of pre-World War II when ships of Jewish refugees fleeing Nazi Germany were refused entry by multiple countries.
And as a catastrophe of a different kind looms, there is no international framework in place for responding to people who will be displaced by rising seas and other effects of climate change.
4. Conflicts without end
Across the world, there is a shopping list of unresolved civil conflicts and disputed territories.
Palestine and Kashmir are two of the longest-running failures of the UN to resolve disputed lands. More recent, ongoing conflicts include the civil wars in Syria and Yemen.
The common denominator of unresolved conflicts is either division among the great powers, or a lack of international interest due to the geopolitical stakes not being sufficiently high. For instance, the inaction during the Rwandan civil war in the 1990s was not due to a division among great powers, but rather a lack of political will to engage.
In Syria, by contrast, Russia and the US have opposing interests and back opposing sides: Russia backs the government of the Syrian dictator Bashar al-Assad, whereas the US does not.
5. Acting like it’s 1945
The UN is increasingly out of step with the reality of geopolitics today.
The permanent members of the Security Council reflect the division of power internationally at the end of World War II. The continuing exclusion of Germany, Japan, and rising powers such as India and Indonesia, reflects the failure to reflect the changing balance of power.
Also, bodies such as the IMF and the World Bank, which are part of the UN system, continue to be dominated by the West. In response, China has created potential rival institutions such as the Asian Infrastructure Investment Bank.
Western domination of UN institutions undermines their credibility. However, a more fundamental problem is that institutions designed in 1945 are a poor fit with the systemic global challenges – of which climate change is foremost – that we face today.