The Pandora papers are the latest in a long line on P Papers that have supposedly unmasked
the shady dealings of the global elite’s worldwide network of money laundering, tax
evasion and corruption.
You have no doubt seen the headlines, and if you are following the story closely you
are likely thinking that nothing will really come of this.
It’s been five years since the Panama Papers were released the world and since then they
have been followed up by the paradise papers, as well as a series of smaller leaks ultimately
confirming what everybody suspected was going on anyway.
Now to an outside observer it is easy to be a bit disheartened by all of this news and
simply resign yourself to the fact that these schemes will just happen forever and nothing
will really be done to punish the perpetrators.
This narrative would certainly be supported by the outlets publishing these stories too,
because to be honest… outrage sells.
But it’s not necessarily the case, and perhaps the best way to see this is to do what no
stories on this issue have been willing to do, and that is to unpack how this creative
international accounting actually functions.
So it’s time to learn How Money Works, to unpack the systems the super rich use to move
their money around.
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Alright, so there are really two things you need to know about these papers and what they
keep on uncovering.
The first is “how is it that these structures actually work”, and I think the best way
to show you that is just to teach you how to set up an international business networks
yourself, you never know when it might come in handy.
The other thing I think should be better explained is the question of whether this is all actually
legal…
The headlines that have come out can’t seem to decide if they have uncovered the greatest
fraud of our time, or whether they are just angry that all of this is… “technically
legal”…
So this whole thing is the result of basic corporate structuring taken to the absolute
extreme.
Limited Liability Corporations are legal entities which as their name suggests have Limited
Liability.
What this means is that if a company goes bankrupt the people that have put money into
that company cannot lose anymore than the amount they invested.
This is very important for modern finance because it means that investors can comfortably
put money towards risky projects without the fear of loosing their life savings if the
company itself goes under.
You would probably never invest into a company like Tesla in it’s early days if you were
liable to loose more than the money you invested into such an risky proposal.
Now companies are owned by shareholders, these shareholders can take one of three forms.
The first and most obvious is a human person, which accountants and lawyers will refer to
as a “Natural Person” so when you hear the phrase “natural person” think of squishy
meat sacks.
A shareholder can also be another company, think of something like warren buffets Berkshire
Hathaway which owns hundreds of smaller companies underneath it.
Finally, a trust can also be a shareholder.
Now trusts are similar to corporations in a lot of ways, they are both separate legal
entities, they can both hold assets, and they both have limited liability.
Now unlike a corporation a trust is much simpler in its operation.
While a company can do anything from manufacturing phones to building the next generation of
spacecraft, a trust is simply an entity that holds onto stuff for the benefit of a pre-determined
entity the “beneficiary” and is controlled by another pre-determined entity, the “Trustee”.
A simple example is that the beneficiary is some millionaire’s son who receives money
from his trust fund that daddy set up for him and the Trustee is the person that has
to explain to the pampered 35 year old man-child that he is not letting him withdraw a million
dollars from his trust to set up a jet ski jousting league.
If this all sounds confusing so far, don’t worry about it because the best way to understand
it all is to actually think of all of these different types of entities as building blocks
that can be put one on-top of another in almost any combination you could think of.
Now with that in mind I want to teach you about one of the most robust corporate structures
our there.
Let’s say you are a very successful businessman, legitimate or otherwise, let’s not ask too
many questions just yet…
You will have your company here, making lot’s of profits and generally doing what most regular
companies do by providing a marketable good or service.
The most basic way for you to own this company is just to be the direct shareholder of the
operation.
But if the company is big enough, you really don’t want to do that for two reasons.
The first is that if the company gets sued or goes bankrupt you lose everything.
Yes it is a separate legal entity so you won’t personally be liable for any of the companies
debts, but you still loose your business and your income stream.
Instead what you do is this.
Put your profitable company down here, and create a holding company to own all of the
shares in that business.
You can also put especially valuable business assets like a warehouse or a shopfront in
this holding company.
Now when your business pays a dividend, it does not go you you directly, it goes to this
holding company.
If the operation business back down here gets sued, it doesn’t matter, because it doesn’t
own anything that valuable, it can just declare bankruptcy and a new business can be made
under the holding company who owns the warehouse and everything else of value.
Now if you are asking what happens if the holding company gets sued you are starting
to think like a real businessman.
The thing is this holding company is far less likely to be sued than an actual operating
business because it basically doesn’t do anything other than own things.
It doesn’t enter into contracts, it doesn’t employ people, it doesn’t create products,
it doesn’t take on debts, it basically doesn’t do anything that could put it in a position
where it could be sued.
So this is great.
But we are not done yet, you want this holding company to in turn be held by a trust.
That means that when the holding company passes money up, it doesn’t go directly to you,
it goes to this trust, which will then in turn pass money onto you.
Now if you remember the trust fund needs a trustee, as in the person that decides when
and what the trust fund pays to you, the beneficiary.
For this you set up yet another company, this company will do nothing apart from decide
when money is paid out of the trust fund, it doesn’t even have the authority to decide
who it pays it out to, because that is all pre-determined in the rules of the trust itself.
Now this is starting to look crazy, but what does all of this actually do?
This makes you financially invincible.
If you actual operating business gets sued and goes bankrupt, oh well, it owns nothing
so you can just start another one a week later.
If YOU get sued and need to declare bankruptcy, that also doesn’t really matter.
Why?
Well because on paper you don’t own any assets of value.
Sure you keep getting money from the trust fund here, but you can’t own a trust it’s
just a pass-through entity.
The only shares that you actually personally own are the ones in the trustee company, but
they are worthless, all they do is determine when a trust disbursement is paid, and oh
by the way, even if those shares are taken off you, it doesn’t matter anyway because
a trust is required by law to payout any cash it has on hand at least once a financial year
to stop a situation where a rogue trustee can hold a beneficiaries money hostage.
All of the things of real value are held in this holding company here in the middle of
this corporate structure, which means these assets are protected from both sides by what
effectively amounts to limited liability corporate meat shields.
It doesn’t matter if anything that has any chance of going bankrupt actually does, because
the assets will be safe and sound here in the middle.
Now there is absolutely nothing wrong with this structure.
Almost every wealthy person in the world will employ something similar if not identical
to protect themselves financially because an unfortunate reality of getting wealthy
is getting sued.
But here is where things get really interesting…
There is no need for all of these entities to be registered in the same country.
An American business can be owned by a British holding company which feeds money into a trust
set up in Singapore which eventually feeds money to a Russian citizen.
Of course that’s just a random example and what the Pandora papers discovered was that
wealthy people were picking and choosing the countries to set up these businesses in EXTREMELY
carefully.
It’s a common joke amongst international accountants, that setting up these structures
is kind of like going shopping for everything that you want.
A bit of banking privacy from Panama, low corporate taxes from Ireland, and currency
stability from France.
Just snake your corporate structure through all of these jurisdictions and you will walk
away with all of these benefits stacked on top of each other.
Now here are where things start to get a bit grey.
It is specifically illegal in most countries to set up corporate structures like this with
the sole intention of avoiding taxes.
How a lot of international businesses get around this rule is by saying that there was
some other legitimate reason that it needed to be set up amongst so many countries.
These can include having multiple offices around the world for business functions, owning
multiple properties in different countries or even wanting to move money from a country
of operation to a country of residence.
If an American investor owned a coal mine in Brazil, there is no problem with them having
a Brazilian company owned by an American holding company.
Deciding what international corporate structures are built for legitimate purposes and what
structures are built for illegitimate purposes is where it gets difficult.
Some jurisdictions have more registered corporations than citizens so auditing every single last
one of them is just not feasible.
Even if it was, the guilty parties could very easily get around this issue by having a string
of multiple holding companies which are each in a country with strong corporate privacy
laws.
If the Singaporean authorities get suspicious about a domestic holding company which is
in turn held by another foreign holding company they would need to ring up the business regulator
from the country where that other holding company is domiciled and ask them for details
on that companies ownership structure.
If that company is set up in a place like Montenegro, then the Singaporean financial
authorities are likely to just get told to go duck themselves because local laws mean
that kind of information is kept secret.
You can start to see the problem here, and you can start to see why these data leaks
were such a big deal.
For the first time financial authorities and regular citizens alike had complete transparency
of the structures that had been set up by some of the wealthiest people in the world.
Again while none of this was illegal by itself, it’s pretty clear that someone putting this
much time, effort and money into making such a complex and opaque international business
structure is not doing it just for asset protection or business operations.
There is a common trend that was found amongst most of the more questionable leaked files.
The operating businesses were usually based in countries with less than stellar records
with corruption, the money from them would then be transferred to holding companies that
operated in much more politically stable jurisdictions.
London City, Singapore, and the Netherlands were all very popular choices.
It’s not worth going to all of this effort to hide and secure your assets if they just
get seized in some political revolution or economic meltdown.
These holding companies in these stable countries would then be owned by a string of trusts
and companies before ultimately been fed back to their owner in whatever country they lived
in.
So has anything actually been done about this?
Well yes, a few big things actually.
It is easy to get disheartened about all of this rampart corruption and tax dodging going
unpunished, but the information revealed in the Panama Papers and other subsequent leaks
has led to the arrest of dozens of high profile officials, the resignation of a prime minister
and the return of hundreds of billions of dollars to tax agencies all over the world.
The second thing it did was introduce widely recognized standards for registered companies
to list beneficial owners.
If you try to set up a new business today in most countries around the world a major
question you will get asked is who are the beneficial owners.
A beneficial owner is the natural person that receives the profits from the business at
the end of everything.
The need for it to be a natural person means that the endless cobweb of shell companies
does nothing because you still need to list an actual person at the end of it all.
The third thing it did was heightened the scrutiny placed on certain individuals known
in the industry as PEP’s or Politically Exposed Persons.
If the beneficial owner of a company is someone who holds public office or a senior position
in a large company they are liable to be involved in corruption.
It’s because of this that new international banking laws require that these individuals
declare themselves when doing so much as opening a bank account.
This means that countries know where to start when auditing new companies, minimizing the
chances that these individuals can hide their ill-gotten gains.
The final major thing is the push for a global minimum tax.
As I was creating this video, Ireland, a famous destination international corporate structures
agreed to implement a 15% corporate tax rate as part of the global minimum tax rate proposal.
This scheme would likely not have nearly the momentum it has today if it weren’t for
these leaks exposing just how big this issue was.
It’s easy to get disheartened by people saying that nothing will ever come of this,
but that apathy is exactly what these fraudulent operations want.
If people think nothing will come of these reports then people stop caring about the
reports, if people stop caring about the reports then media outlets won’t publish them, and
if media outlets won’t publish them then they will never by investigated in the first
place.
Now if you were thinking throughout this entire video that “if you can’t beat them join
them”, I like your style, go and watch my video on what to do if you get rich so that
you too can be an internationally condemned businessman.
As always, thank you to my channel members and patron on Patreon for making it possible
for everybody to keep learning, How Money Works.