Are you thinking about how the rich avoid taxes while the middle class get crushed under them?
Want to know how it all works?
The Pandora Papers are the most recent in a long line of leaks that have led to increased scrutiny about how the richest of the rich function. So what is it about these leaks that captures so much of the public’s attention? And what insight do these leaks give us into the murky world of corporate structures?
Well, for that you’ll have to stay with us till the end because today, we are about to descend to the murky depths of the financial deep sea where the wealthy hide their money.
To understand exactly how big of an impact insider leaks like Pandora and Panama Papers have had on the global financial system, we need to understand how this dark web actually functions.
And that is exactly what we’re here to answer today.
So pack in and pay attention because we’re about to unveil the structure that almost every wealthy person uses to become financially invincible.
Let’s Start With a Quick Overview
Most of you obviously remember the atmosphere after the explosive Panama Papers. That was the first time the public got their peek into the hidden world of financial manipulation that enables corruption, tax evasion, and financial mismanagement the world over. While the revelations led to some very famous heads rolling around the globe like Pakistan’s former prime minister, mayors and public office holders in Europe and Asia alike, it’s been five years and now people are starting to ask if all that hue and cry ever led to anything.
So before we get into the whole analysis, I’ll keep it simple and tell you all this is basically corporate structuring taken to the absolute extremes. Doesn’t make sense? Don’t worry. We’re here to help.
Corporate Structuring
It all starts with a limited liability company, or an LLC as it’s commonly known. What’s that? Well, it’s all in the name. What these companies do is make sure that in case of bankruptcy, the investors will not lose any more than the amount they initially invested into the company. What this does is allow people to take on riskier ventures without the fear that they will lose all of their life savings if the company itself goes under. I mean, would anyone invest in something like say, Tesla in its early days if they could lose everything in the process? Would you?
What this does is make sure no one loses more money than they invested into the company.
So how can you own a company?
All companies are basically owned by shareholders. These shareholders come in three types. The most obvious is having an actual person being the beneficiary owner. In accounting and legal terms, this is known as a natural person. Just a guy who is actually the shareholder of the company. Simple enough?
Another type of shareholder is actually another company, kinda like Disney owning multiple subsidiary companies these days.
Now, the third type is having a trust own the company shares. This is where it gets a little confusing.
Trust Vs. Corporation
Trusts and companies actually have quite a bit in common. They are both separate legal entities, they can own assets, and they generally have limited liability. But when it comes to complexity, a trust is much simpler than a corporation. You see, a corporation can make any product it wants to: electric cars, next-generation rockets, the cure for cancer, basically whatever you can imagine. A trust has one job and one job alone: hold money for an entity called the beneficiary. A trust is also controlled by a separate entity called the trustee.
Imagine this: the beneficiary is a trust fund kid at Yale whose billionaire dad keeps the trust fund well-stocked. And the trustee is the poor family firm explaining to the brat why he can’t take out a million dollars for a week-long frat fest in Los Angeles with his friends.
Now that we have an understanding of all these entities, it’s time to understand how the wealthy actually use them to evade everything from scrutiny to taxes. You can think of these entities like Lego bricks that can be stacked on top of each other in any conceivable way.
Now Take this Example of Corporate Structures.
To get a better insight into this, let’s look into one of the most common structures.
Start by assuming you’re a businessman with a company making oodles of cash. Good, right? Let’s not worry if you’re doing it legally or not. So you have a company making money right at the centre. It’s selling goods or services and raking in the profits like it’s supposed to. Now, you could do the simple thing and just be the primary shareholder of this company yourself. But with a large company, you don’t want that for two reasons. Firstly, if the company gets sued or goes bankrupt, you lose everything. Well, the company is still responsible for all its liabilities but you lose an income stream. So what do you do?
You create a separate holding company that is the primary shareholder of the first company. Now all this holding company does is own all the valuable assets as well as the shares of your company. In case the first company gets sued or goes bankrupt, it’s no big worry for you because the company doesn’t actually own anything. You could just start another company under the holding company and move as if nothing happened.
Now you might ask what would happen if the holding company gets sued. First of all, kudos for thinking of that. You have the makings of a true businessman. The way to ensure the holding company never gets sued by anyone is to completely insulate it legally. It does not enter contracts, it does not engage in business with other corporations, it doesn’t even create any products, it doesn’t even accumulate debt safeguarding it against almost all likelihoods of being sued.
This is all good but we’re not done yet. This can be made even better by having a trust which owns the holding company itself. Yes, this is like Inception but with finance, companies inside companies like a perverse set of Russian dolls. What this trust does is hold on to all the earnings transferred via the holding company for you, the beneficiary. So we’ve got all the ingredients except one: the trustee. For that, you create a special company that will act as the trustee. All this does is hold on to the money and transfer it to you in a predetermined manner.
After this, you’re basically financially invincible. Because even in the event that you get sued and your multi-million dollar lawyers can’t bail you out, you don’t even have that much money as it is all in the trust..that you are a beneficiary of. All you have are the shares of the trustee company that is essentially worthless as it doesn’t own anything of value. Even if you lose those shares, the trust is still required by law to make payments to you, the beneficiary.
With this genius move, you have all your assets safe and secure in the middle with little to no chance of it ever being touched. And the best part? It’s all perfectly legal. Yep, as crazy as it may sound, corporate structuring like this is perfectly legitimate.
What happens next is where it gets even murkier. The thing is that none of these entities is required to be set up in the same country, meaning you can spread your entities across the globe in places that favour you legally. For example, your holding company could be based in a tax haven in the Carribeans with a worth of millions but no product while your actual factory in America might be making millions worth of products but not have any assets to declare. By basing their companies in countries offering incentives, the wealthy actually manage to get away scot-free from any investigations into tax evasion.
What the Panama Papers and the more recent Pandora Papers did was give financial regulatory bodies and common people an insider peek into how these entities actually function. A big chunk of these companies are owned by politically active people in developing nations and are used to siphon off funds accumulated by misappropriation into offshore havens.
With the release of those papers we actually saw governments and regulatory bodies uniting to keep such entities under more stringent checks. But hey, at the end of the day, it’s all perfectly legal.