“Freed from democratic restraints.” It sounds like a phrase that could be used to describe the aristocracies of France and Imperial Russia. But according to Professor Brooke Harrington at Copenhagen Business School, the super rich essentially live in a parallel world beyond the reach of law, employing asset managers to hide their wealth in unfathomably complicated constructions of accounts, bonds and stocks.
In 2010, Oxfam released figures showing that 388 people possessed the same amount of wealth as the poorest half of the world’s population. Oxfam updated the figures this year and found that the number had dropped to just eight men. But Harrington argues that they couldn’t have achieved this without the wealth managers that enable them to bypass laws that apply to everyone else.
“The issue is how on earth something like that happens so quickly. I think attention has in some sense been misdirected at rich people themselves, and the misconception that they are the masterminds. They are not. To concentrate wealth that effectively through loopholes in tax laws, without blatantly violating the law, takes a level of skill and full-time effort that is impressive.”
While the debate has often focussed on the share of global assets owned by the richest one percent, the amount accumulated by these high earners isn’t a problem as long they are effectively taxed. Harrington argues that solidified concentrations of wealth that persist over generations, however, like the feudal system, are far more socially damaging.
“That is what wealth managers specialise in – making that pipeline from income to wealth, or of wealth reproducing itself, as untouched by laws and taxation as possible.”
Harrington, a sociologist, spent eight years researching wealth managers before publishing her 2016 book, Capital Without Borders. Her study of 65 wealth managers in 18 countries is a unique feat because wealth managers, whose products are shrouded in complete secrecy, are notoriously hard to access. So Harrington had to go to extreme lengths to learn about their business.
“People who do wealth management follow a code of discretion. Almost complete silence really, because the success of their tactics relies on secrecy. Wealth managers specialise in hiding money and assets offshore so that the assets become invisible to the law. Not just to tax authorities, but to anyone who might want a piece of those assets. That might be creditors who want to be paid back, divorcing spouses who want a share of marital assets, disgruntled heirs who think they are entitled to more, and so on. That means you can’t just call them up and ask to talk to them. So one way to learn about these folks – if you have 50,000 dollars and two years of your life to spare – is to enrol in wealth manager training school and get a certificate. So that’s what I did,” she says.
Harrington used the experience of becoming a wealth manager to access the shadowy world of the super rich. Her focus is not on the wealthy themselves, but on the inequality created by what she calls the “selective lawlessness” of the super rich.
“Wealth managers are the experts that make this inequality happen – that is my central thesis. From history we know that as long as there have been taxes, people have tried to evade paying them. That is nothing new. Inequality is nothing new. What is new is the scale. We have never seen what economist Gabriel Zucman estimates to be the $200bn dollars in unpaid tax worldwide. That doesn’t happen without professional intervention. The wealthy people of the world cannot be doing this by themselves, because that would require them to basically sit down and master the laws and tax codes of many offshore jurisdictions and their home jurisdictions. That is a massively complex task. I got a sense of it when I was in wealth management training school, and I guarantee you that there is no way that wealthy people are doing this themselves. They have people to pick up their dry cleaning, so of course they have people to create their offshore structures,” she says.
A guerrilla war
Countries are losing huge sums of tax revenue from the super wealthy thanks to wealth managers. So why haven’t lawmakers made it harder to hide taxable assets in secret bank accounts in places such as Jersey, Panama and the Cayman Islands?
Well, they have tried, but their opponents always manage to find a way to bypass the legislation.
“When I speak to the European Parliament or to lawmakers in Denmark or elsewhere in the world, they always ask me: ‘How do we close our legal loopholes?’ Or: ‘What new laws will shut down this abuse of the tax laws?’ I think these are the wrong questions, because we have basically been losing this battle for decades. I don’t see that changing, because the people you are up against spend their entire lives doing nothing but figuring out ways to get around the laws you put up to obstruct them. It reminds me of a guerrilla war,” she says.
A better strategy might be to use social pressure to appeal to those who abuse the spirit of the law, and get them to help design better legislation.
“Wealth managers are human beings who operate through the same principals as most other human beings, so they care about their public reputation. We know from social psychology that everyone likes to think of themselves as a good guy. Therefore we need to say to the wealth managers, ‘Here is your chance to redeem yourselves. Help us design smarter laws, so you can show us that you are the good guys you say you are. If you don’t, we will shut you down completely’. Obviously we need to leave a few loopholes open so that wealth managers can still provide their clients with a service, but this is a way to close most of the loopholes in legislation. The Israelis did this a few years ago, and it actually worked,” she says.
Harrington adds that while we have the tools to change public attitudes and crack down on tax evasion, no government has had the courage to put them to use.
“Wealth managers don’t have to be licensed, per se, but most wealth managers are trained as lawyers or accountants or something that does have to licensed by the state. Even corporations have to be licensed by the state. In theory, you could go to the wealth managers and say, ‘If you want to keep engaging in this practice, then we’re going to find some reason to pull your credentials to practice. You can still practice as a wealth manager, but you can’t call yourself a lawyer or a chartered accountant anymore’. That is a disgrace tactic that might not actually prevent someone from being a wealth manager, but will give them some explaining to do once the government removes some of their professional legitimacy. It is sort of a back-door way of using the power of the state, but it is not so much a legal crackdown as a social one, very much along the lines of what has happened with corporate tax avoidance,” she says.
While the Panama Papers and Luxembourg Leaks have drawn international attention to tax avoidance and wealth management, few people truly understand the scale of the issue, argues Harrington. Instead, political and media narratives are drawn to issues such as immigration and national identity.
“Most people don’t have a clear sense of who is responsible for social problems. That makes them very easily led by demagogues who say, ‘Look at those brown people over there, look at those refugees. It’s their fault – they’re taking your country away’. Look how that’s spread like wildfire – from Myanmar to the United States. And it is terrifying,” she says, adding that it is almost fundamentally impossible to shine light on a system that has been designed to be invisible.
“It has been made invisible on purpose by wealth managers so that their wealthy clients can be freed from democratic restraints. And if it is hard to speak to politicians about it, then it is even harder to speak to the large majority of people who vote for those ultra-nationalist politicians and say, ‘Look, there is this group of super-wealthy people to whom the law basically doesn’t apply’. People will die because of what is happening offshore. From every hospital that gets shut down, every old age home that can’t function anymore. People die because of those things because there isn’t enough money for the government to do its job. And why is that?” she asks rhetorically.
“The real leeches are the class of ultra rich people who come into your country, exploit its democratic systems, and use the laws to achieve what they want, which is usually not to pay their taxes and debts,” she says.
And for this to work, they need a professional class to help them – the wealth managers.
“They are the ones you should be angry at.” M