By Julian Klinkhammer

The ‘Paradise Papers’ are making headlines since November 2017. Half a year later, the first conclusions have been drawn: What does this data leak reveal that we did not already know?

1. The ‘Apple’ case

At first glance, the publications paint a vivid picture of celebrities, the super-rich, politicians, and multinationals who are all using complex financial architectures to reduce their tax burden. Apple is one case in point. The name of the US technology icon appears in connection with expiring tax reliefs in Ireland. The Paradise Papers reveal how Apple searched for a new tax haven from 2013 onwards, and that it found the Channel Island Jersey. The company subsequently transferred the majority of its offshore cash holdings from about $ 250 billion there. Apple said in a statement that the company did not pay fewer taxes due to the relocation, but remained the largest taxpayer in the world and even paid corporate taxes in the amount of about $ 35 billion within a few years [1].

Sociologists from Cologne, who deal intensively with illegal markets, argue that the revelations from the Paradise Papers show mostly one thing: The moral outrage in the public about obscure economic activities regarding tax havens is disproportionate to their legal relevance [2]. In fact, the international state system itself created the legal prerequisites and thus the shady offshore world [3], which we can reconstruct from the diverse ‘data leaks’. But that does not mean that the distinction between legal/illegal is only a subordinate question of (tax) morality or that it does not matter at all. The example of Appleby shows how difficult it is for compliance managers to effectively tackle rule violations that generate profitable business for the company.

2. The ‘Appleby’ case

Appleby is one of the largest players in the offshore world with around 500 employees and the main source of Paradise Papers. It is also a paradigmatic case, since the prestigious law firm helps its clients to conduct their business legally through a variety of tax havens. The problem: Stolen assets and dirty money do not disclose their origin, and therefore the company has to know its customers in order to comply with international law. To this end, a KYC policy (acronym for: ‘know your customer’) had been introduced by Appleby and the company committed its employees to thorough customer due diligence.

The findings of journalistic investigations [4] give the idea of a normal, bureaucratic firm that combines effective control systems and dedicated compliance professionals who routinely draw attention to misconduct. Between 2005 and 2015, more than a dozen internal and regulatory reviews were conducted at Appleby sites, revealing legally relevant violations on the Isle of Man, the Cayman Islands, the British Virgin Islands, as well as in Bermuda and London. In 2005, an internal review at 5 out of 10 company locations revealed that only the Hong Kong office kept its documents ‘in good order’. Of the 45 customer files reviewed at the office on the British Virgin Islands, only one single record met Appleby’s policies. From the point of view of the responsible director of compliance, the firm could avoid around 80 percent of all compliance risks by rejecting some particularly lucrative customer demands ‘at the gate’. But in an internal training presentation he noted critically:

‘Some of the crap we accept is amazing totally amazing’ [4].

This closes the magic circle, in which not only tax burdens ‘magically’ disappear. Because the topic of the training was the fight against money laundering (according to presentation note: ‘A DIRTY CRIME’) and terrorist financing.

Despite many competent lawyers in respected law firms like Appleby that are referred to as the so-called ‘offshore magic circle’, the lack of transparency in tax havens also attracts rich customers with amazingly low integrity. Until a few years ago, Appleby’s office on the British Virgin Islands apparently maintained indirect business relations with a violent Ukrainian mafia gang from Odessa, which first laundered its money through shell companies offshore, and later invested them in London’s real estate market. The careful examination of these customers had been delegated to a London accountant, who was married to the sister of a mafia boss from Odessa. As late as 2015, Appleby terminated the cooperation with the accountant, after the authorities of the British Virgin Islands had inquired about the owners in the background in the wake of money laundering investigations [5]. 

Even if the facts of the case prove not to be punishable, the Appleby case shows how difficult it is to control deviance that could benefit the organization. The extent of this ‘organizational deviance’ varies with the institutional environment. It is therefore no coincidence that – in the Appleby case – the British Virgin Islands appear to be more vulnerable than Hong Kong, whose authorities are renowned as particularly effective in international comparison.

3. What’s new about these revelations?

What are we to learn from the Paradise Papers? The data set contains, i.a., over 13 million documents and has a total volume of more than 1400 gigabytes. The rather one-sided thematic focus on problems of taxation was explained by the International Consortium of Investigative Journalists (ICIJ) as a consequence of the data being ‘unstructured’ material, which is why any systematic investigation becomes extremely cumbersome. So far, mass media coverage has focused on prominent cases with an obvious public interest. The Apple case has shown that it is still too early to take stock of the Paradise Papers. In this case, as in many other legal proceedings, the last word will only be spoken in a few years – here it is the European Court of Justice where several lawsuits are pending [6].

From a sociological perspective, the new revelations show us the effective regulation of tax havens, even though they highlight numerous loopholes at the same time. The Appleby case reveals that the problem is not only situated at the level of tax laws, but also at the level of the organization, due to the large benefits that may be gained by circumventing the existing ‘rules of the game’.

However, what has to be criticized is, first, the selectivity of the investigative journalism. Even in the foreseeable future, the data will not be published as a whole, but only in excerpts deemed relevant to the public. This complicates the scientific scrutiny of journalistic investigations. Second, the concomitant shift of attention towards tax havens fraught with problems. In marked contrast, experimental studies by Findley and colleagues [7] have shown that it is much easier to circumvent international law in developed OECD member countries. Anyone who wishes to start a business by email and intends to remain anonymous while doing so must, according to the experiments, provide proof of identity to almost every second business service provider in the Bahamas – an average value by international comparison. In the US, this was only necessary on every fourth request.

• This article is the first in an irregular series on sociological insights that can be gained from the Paradise Papers.

 

Selected sources and suggestions for further reading:

[1] A good overview of the revelations (not only regarding Apple) and the relative size of this “data leak” is offered by the BBC [external Hyperlink, accessed on 1st June 2018].
[2] Palan, R., Murphy, R., & Chavagneux, C. (2013). Tax havens: How globalization really works. Cornell University Press.
[3] The sociological “point of view” by Jens Beckert and Matías Dewey: Was Recht ist, ist nicht immer richtig: Wenn Moral und Gesetz kollidieren. In: Gesellschaftsforschung 2|2017. Köln: Max-Planck-Institut für Gesellschaftsforschung 2017, 2-3.
[4] A British journalist shows excerpts from the Paradise Papers and reports on compliance issues at the Appleby law firm: ‘Offshore Magic Circle’ Law Firm Has Record of Compliance Failures (accessed on 1st June 2018).
[5] BBC Panorama: Paradise Papers: Ukraine crime gang hid proceeds in luxury London flats (accessed on 1st June 2018).
[6] Spiegel Online: EU-Kommission bringt Irland vor Gericht, accessed on 1st June 2018.
[7] Findley, M. G., Nielson, D. L., & Sharman, J. C. (2014). Global shell games: Experiments in transnational relations, crime, and terrorism. Cambridge University Press. [Global shell games book teaser]

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