The name Nicolaus Copernicus is not usually mentioned in the same breath as corporate tax planning or Mossack Fonseca. This month, however, it probably should be. Six centuries ago, the Polish astronomer formulated a model of the universe that put the sun, rather than the earth, at the centre of the solar system. It was a paradigm shift that led to a transformation in the way that we view the universe.
I suspect something similar might be happening with global finance. This month, the International Consortium of Investigative Journalists (ICIJ) published some 11.5 million documents leaked from the Panamanian law firm Mossack Fonseca. Among other things, these gave details about offshore companies the firm created for the elite. The leak has already provoked a number of political scandals: last week, the Icelandic prime minister resigned after it emerged that he had an offshore company in Panama; and David Cameron, the British prime minister, has faced a steady stream of criticism about an offshore company created by his late father. Meanwhile, revelations about Chinese and Russian billionaires could spark further recriminations.
To my mind, it is not just the revelations concerning the rich and famous that make the Panama Papers so fascinating; after all, it is not illegal to create such companies, unless they are used to evade taxes or launder money. Instead, the most interesting issue is whether this leak will create something akin to a Copernican moment.
Think about it. Most of us vaguely know that money flows through offshore centres but the details of this world are very shadowy and opaque. Thus, insofar as any of us have ever tried to visualise the 21st-century “map” of global finance, we assumed that the visible onshore activity was the “sun” that dominated this universe — and offshore finance just a fuzzy little planet, that hovered on the edge.
But the Panama Papers have given contours to that fuzzy, offshore world. More specifically, anyone who wants to get a sense of what has been happening in Panama can now go on to the ICIJ website.
As further details tumble out, it’s not just more names that will be generated but numbers too. Even before the data were readily available, activist groups such as the Tax Justice Network had claimed that some $21tn-$32tn was being stashed in offshore centres, but they had no real way of verifying the figure. With the Panama Papers online, more precise figures could emerge — and with that the ability to compare them with the overall picture of global banking.
Could this spark a bigger policy change, such as a crackdown on tax avoidance or money laundering? A cynic might argue not. Remember, powerful vested interests are involved. But if you want to get a sense of what can happen when that mental map flips, think about how attitudes to shadow banking have changed in the past decade.
Before 2007, policymakers, journalists and voters typically ignored what was happening inside the world of murky credit markets and derivatives because this activity was so opaque and jargon-laden that it was hard to measure and discuss — and presumed to be a mere satellite to the official banking world.
But when the financial crisis exploded in 2008, this fuzzy non-banking land suddenly acquired a catchy, easy-to-pronounce name — “shadow banking” — and that made it far easier to discuss. Then geeks at the New York Federal Reserve and Financial Stability Board began to map it out, like Victorian explorers charting a new land. And when a gigantic map of shadow banking finally emerged, policymakers suddenly realised that this world was not only much bigger than they thought (an eye-popping $67tn) but also central to the system. A regulatory clampdown occurred.
Offshore banking is not quite at that point yet. But if groups such as the ICIJ keep digging — and if central banks and finance ministers share their own data — a proper “map” may emerge. Maybe policymakers and voters won’t object to the picture that emerges. Or maybe the size of offshore flows will shock us into reform. Either way, transparency may yet help promote a little more democracy. Call it, if you like, a Copernican moment for the cyber age.
Illustration by Shonagh Rae
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