Social Europe

politics, economy and employment & labour

  • Themes
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

The Pandora Papers and the threat to democracy

Katharina Pistor 12th October 2021

In demonstrating how some of the world’s most powerful people hide their wealth, the Pandora Papers have exposed the details of a global system.

Pandora Papers,trust
Andrej Babiš, Czechia’s fifth wealthiest man, lost the general election held days after he was named in the Pandora Papers

The ‘Pandora Papers’, a new investigation led by the International Consortium of Investigative Journalists, has fuelled outrage around the world. Politicians, businesspeople, sports stars and cultural icons have been caught in the act of hiding their wealth and lying about it. But how likely is a reckoning for the lawyers and accountants who helped them?

There is nothing new about the practices the ICIJ’s investigation uncovered. True, the sheer scale, sophistication and legal firepower deployed to allow today’s ultra-rich and powerful to game the law may be newsworthy. But the only truly shocking revelation is that it took more than 600 journalists from around the world to expose these practices, often risking their own safety and professional futures. The difficulty of that task attests to how well lawyers, legislatures and courts have tilted the law in favor of elites.

Centuries-old strategies

To hide their wealth, today’s rich and powerful have availed themselves of centuries-old legal coding strategies. In 1535, King Henry VIII of England cracked down on a legal device known as ‘the use’, because it threatened to undermine existing (feudal) property relations and served as a tax-avoidance vehicle. But thanks to clever legal arbitrage, it was soon replaced by an even more powerful device—‘the trust’.

Legally encoded by solicitors and recognised by courts of equity, the trust remains one of the most ingenious legal tools ever invented for the creation and preservation of private wealth. In the old days, it allowed the wealthy to circumvent inheritance rules. Today, it is the go-to vehicle for tax avoidance and for structuring financial assets, including asset-backed securities and their derivatives.

Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content.


We will never send you spam and you can unsubscribe anytime.

Thank you!

Please check your inbox and click on the link in the confirmation email to complete your newsletter subscription.

.

Functionally, a trust alters the rights and obligations to an asset without observing the formal rules of property law; it thus creates a shadow property right. Establishing a trust requires an asset—such as land, shares or bonds—and three personae: an owner (settlor), a manager (trustee) and a beneficiary. The owner transfers legal title (though not necessarily actual possession) over the asset to the trustee, who promises to manage it on behalf of the beneficiary in accordance with the owner’s instructions.

Nobody else needs to know about this arrangement, because there is no requirement to register the title or disclose the identities of the parties. This lack of transparency makes the trust the perfect vehicle for playing hide-and-seek with creditors and tax authorities. And because legal title and economic benefits are split among the three personae, nobody willingly assumes the obligations that come with ownership.

Favoured legal device

The trust became a favoured legal device for global elites not through some invisible hand of the market but rather by purposeful legal design. Lawyers pushed existing legal boundaries, courts recognised and enforced their innovations and then lawmakers (many of them presumably beholden to wealthy donors) codified those practices into statute. As previous restrictions were stripped away, trust law expanded its remit.

These legal changes ensured that an ever-greater array of assets could be held in trust and that the role of the trustee could be delegated to legal persons rather than honorable individuals such as judges. Moreover, fiduciary duties were curtailed, the trustees’ liability was limited and the lifespan of the trust became increasingly elastic. Together, these legal adaptations made the trust fit for global finance.

Countries which lacked this device were encouraged to emulate it. An international treaty, the 1985 Hague Convention on Trusts, was adopted with this goal in mind. In countries where lawmakers have resisted the pressure to sanction trusts, lawyers have fashioned equivalent devices from the laws governing foundations, associations or corporations—betting (often correctly) that courts would vindicate their innovations.


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

Tax and legal arbitrage

While some jurisdictions have gone out of their way to be legally hospitable to private wealth creation, others have tried to crack down on tax and legal arbitrage. But legal restrictions work only if the legislature controls which law is practised within its jurisdiction. In the age of globalisation, most legislatures have been effectively stripped of such control, because law has become portable. If one country does not have the ‘right’ law, another one might. As long as the place of business recognises and enforces foreign law, the legal and accounting paperwork can be channeled to the friendliest foreign jurisdiction and the deed is done.

National legal systems thus have become items on an international menu of options from which asset holders choose the laws by which they wish to be governed. They don’t need a passport or a visa—all they need is a legal shell. Assuming a new legal identity in this way, the privileged few can decide how much to pay in taxes and which regulations to endure. And if legal obstacles cannot be overcome quite that easily, lawyers from leading global law firms will draft legislation to make a country compliant with the ‘best practices’ of global finance. Here, tax and trust havens such as South Dakota and the British Virgin Islands offer the gold standard.

The costs of these practices are borne by the least mobile and the insufficiently wealthy. But turning law into a goldmine for the rich and powerful causes harm well beyond the immediate inequities it generates. By potentially undermining the legitimacy of the law, it threatens the very foundation of democratic governance.

The more that wealthy elites and their lawyers insist that everything they do is legal, the less the public will trust the law. Today’s global elites might be able to continue to conjure private wealth from law. But no resource can be mined forever. Once lost, trust in the law will be difficult to regain. The wealthy will have lost their most valuable asset of all.

Republication forbidden—copyright Project Syndicate 2021, ‘The Pandora Papers and the threat to democracy’

Katharina Pistor

Katharina Pistor is professor of comparative law at Columbia Law School. She is the author of The Code of Capital: How the Law Creates Wealth and Inequality.

Home ・ Economy ・ The Pandora Papers and the threat to democracy

Most Popular Posts

schools,Sweden,Swedish,voucher,choice Sweden’s schools: Milton Friedman’s wet dreamLisa Pelling
world order,Russia,China,Europe,United States,US The coming world orderMarc Saxer
south working,remote work ‘South working’: the future of remote workAntonio Aloisi and Luisa Corazza
Russia,Putin,assets,oligarchs Seizing the assets of Russian oligarchsBranko Milanovic
Russians,support,war,Ukraine Why do Russians support the war against Ukraine?Svetlana Erpyleva

Most Recent Posts

Gazprom,Putin,Nordstream,Putin,Schröder How the public loses out when politicians cash inKatharina Pistor
defence,europe,spending Ukraine and Europe’s defence spendingValerio Alfonso Bruno and Adriano Cozzolino
North Atlantic Treaty Organization,NATO,Ukraine The Ukraine war and NATO’s renewed credibilityPaul Rogers
transnational list,European constituency,European elections,European public sphere A European constituency for a European public sphereDomènec Ruiz Devesa
hydrogen,gas,LNG,REPowerEU EU hydrogen targets—a neo-colonial resource grabPascoe Sabido and Chloé Mikolajczak

Other Social Europe Publications

The transatlantic relationship
Women and the coronavirus crisis
RE No. 12: Why No Economic Democracy in Sweden?
US election 2020
Corporate taxation in a globalised era

Hans Böckler Stiftung Advertisement

Towards a new Minimum Wage Policy in Germany and Europe: WSI minimum wage report 2022

The past year has seen a much higher political profile for the issue of minimum wages, not only in Germany, which has seen fresh initiatives to tackle low pay, but also in those many other countries in Europe that have embarked on substantial and sustained increases in statutory minimum wages. One key benchmark in determining what should count as an adequate minimum wage is the threshold of 60 per cent of the median wage, a ratio that has also played a role in the European Commission's proposals for an EU-level policy on minimum wages. This year's WSI Minimum Wage Report highlights the feasibility of achieving minimum wages that meet this criterion, given the political will. And with an increase to 12 euro per hour planned for autumn 2022, Germany might now find itself promoted from laggard to minimum-wage trailblazer.


FREE DOWNLOAD

ETUI advertisement

Bilan social / Social policy in the EU: state of play 2021 and perspectives

The new edition of the Bilan social 2021, co-produced by the European Social Observatory (OSE) and the European Trade Union Institute (ETUI), reveals that while EU social policy-making took a blow in 2020, 2021 was guided by the re-emerging social aspirations of the European Commission and the launch of several important initiatives. Against the background of Covid-19, climate change and the debate on the future of Europe, the French presidency of the Council of the EU and the von der Leyen commission must now be closely scrutinised by EU citizens and social stakeholders.


AVAILABLE HERE

Eurofound advertisement

Living and working in Europe 2021

The Covid-19 pandemic continued to be a defining force in 2021, and Eurofound continued its work of examining and recording the many and diverse impacts across the EU. Living and working in Europe 2021 provides a snapshot of the changes to employment, work and living conditions in Europe. It also summarises the agency’s findings on issues such as gender equality in employment, wealth inequality and labour shortages. These will have a significant bearing on recovery from the pandemic, resilience in the face of the war in Ukraine and a successful transition to a green and digital future.


AVAILABLE HERE

Foundation for European Progressive Studies Advertisement

EU Care Atlas: a new interactive data map showing how care deficits affect the gender earnings gap in the EU

Browse through the EU Care Atlas, a new interactive data map to help uncover what the statistics are often hiding: how care deficits directly feed into the gender earnings gap.

While attention is often focused on the gender pay gap (13%), the EU Care Atlas brings to light the more worrisome and complex picture of women’s economic inequalities. The pay gap is just one of three main elements that explain the overall earnings gap, which is estimated at 36.7%. The EU Care Atlas illustrates the urgent need to look beyond the pay gap and understand the interplay between the overall earnings gap and care imbalances.


BROWSE THROUGH THE MAP

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us on social media

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube