The Pandora Papers are the latest data leak offering a glimpse into the ways in which powerful individuals and corporate entities manage their finances with the assistance and direction of third party, professional intermediaries such as company formation agents and trust and company service providers. The data leak consists of just under 12 million files from 14 companies that provide corporate services to wealthy clients. In this blog, Professor Nicholas Lord and his colleagues Professor Karin van Wingerde and Professor Liz Campbell discuss the recent leak and actions policymakers can take to tackle the problem of illicit finance.

• In this blog post, Professor Nicholas Lord and his colleagues highlight two key issues at the centre of the latest scandal: The limits of the sovereign state in dealing with ‘beyond state’ dynamics and ‘the Fallacy of Reductionism’.
• Illicit finance creates growing social inequalities, and these harms are often overlooked.
• Helpful policy interventions include actioning randomised enforcement/supervision trials in the short-term, and in the medium to long-term a UK Screening Authority should be set up.

We’ve known for some time how the financial arrangements outlined in the Pandora papers are organised – previous data leaks such as the Panama and Paradise Papers drew attention to this – and why they endure. The use of these mechanisms is a well-founded and common approach in business and wealth management that benefits a minority keen to preserve the status quo. Our earlier research has illuminated the ways in which the misuse of corporate vehicles provide their beneficial owners with an illusion of legitimacy and effective anonymity, examined the role and market of professional intermediaries who manage other people’s money, and made policy recommendations for better regulation and intervention. In these terms, it is a case of ‘as you were’, as the Pandora Papers do not reveal much that is new, but this is precisely the problem.

‘Beyond State’ Dynamics and the Limits of the Sovereign State

If the management of assets, finances and wealth, including illicit and criminal finances, was once a largely domestic issue, today the organisation of such financial arrangements is a cross-border phenomenon. But focusing on understanding the problem of illicit finance through the lens of the nation state has limited analytical and explanatory value given the legal restrictions that exist.

For instance, most serious financial crimes and their financial components are organised across borders, though little is known about why those involved opt for certain arrangements over others. Even the most local of financial crimes are connected to infrastructures that have global existence, such as the digital financial system.

The key implication here is that sovereign states are limited in their ability or capacity to respond effectively to the underlying criminal behaviours and corresponding illicit financial flows. Instead, transboundary issues require transnational solutions. As things stand, individual governments do not favour deep scrutiny of the ‘offshore’ industry, or desire systemic change. Instead, we see a preoccupation with situational responses, such as requiring robust business compliance systems, minor tweaks to legal and regulatory frameworks, the introduction of registers, and so on. This represents an attempt to respond to specific situations, rather than structural drivers.

The Fallacy of Reductionism

Some commentators have been keen to point out that many of the arrangements at the centre of the Pandora Papers are legal. This argument represents a fallacy of reductionism, that is, by emphasising the legality of particular behaviours the realities of the system can be overlooked. For instance, what is possible for one privileged individual is not possible for all societal actors. A series of seemingly lawful behaviours can together form part of a structure that systematically reproduces inequalities and harms and enables serious crimes to flourish.

The key implication here is that being legal or lawful is not the same as legitimate, and the perpetuation of a system that generates social injustice represents a crisis of legitimacy. The Pandora Papers illustrate that if the wealthiest maintain the double standard that everything that is legally possible and allowed should also be made use of they contribute to (or even facilitate) a system that facilitates serious crimes and harms for gain.

Final thoughts and recommendations for policymakers

The above issues imply a fundamental rethink of what kind of economic/business climate we want to offer in our respective countries, the UK, the Netherlands and Australia (and globally, for that matter). Our jurisdictions offer a very attractive business climate for companies, but for the same reasons are also attractive for all kinds of illicit financial flows.

In our view, the discussion should pay much more attention to the underlying problems and harms that the fight against money laundering and illegal financial flows is trying to combat. It is not just about illegal money or money laundering, but the funding of terrorist attacks, perpetuating the drug economy, as well as crimes such as human trafficking and exploitation. Ultimately, illicit finance creates growing social inequalities, and these harms are often overlooked.

We recommend several actions policymakers should take to mitigate the impact of illicit finance, to build a fairer financial system.

In the short-term policymakers should consider:

• Raising awareness about the nature and seriousness of corporate vehicle misuse.
• Randomised enforcement/supervision trials – we advocate for randomised enforcement operations and ‘dip tests’ that would target particular sectors or industries, followed by systematic evaluation of the intervention effects to provide valid ‘before and after’ data for evidence based policies.

Finally, in the medium to long-term policymakers should action the following:

• Creation of a UK Screening Authority – A sufficiently resourced centralised authority to regulate company registration data (including foreign ownership) and undertake due diligence on the creation of all corporate vehicles. This might also take the form of an independent multi-agency task force. In the first instance, the remit should be targeted towards public-related contracts and business to minimise fraudulent and dishonest interactions with public funds.
• Only licensed and/or regulated agents to be able to form UK corporate vehicles.
• Legislative change for the support of public-private data sharing for regulation, policing and research.
• Formal periodic reviews of strategy and operation.

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