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Pandora papers’ two lessons for transforming tax and financial laws

The fallout of the so-called “pandora papers” since their release by the International Consortium of Investigative Journalists (ICIJ) in October offers important lessons about how social perceptions of laws have evolved globally and the implications for the structuring of tax and financial laws going forward.

The pandora papers involved the largest investigation in journalism history, exposing intricate financial transactions carried out by the most powerful and wealthy people on the planet. The investigation involved almost 12 million financial records and other documents associated with high-profile personalities around the world, including politicians, celebrities, royal members, and generally, very wealthy and powerful people.

Almost nobody from these elite groups escaped the public scrutiny and the reactions did not wait to arrive. On the one hand, there were those defending the – apparently – absolute value of privacy, condemning the leak as a shameful example of a violation of it. On the other hand, there were those applauding the courage of a group of journalists who played their cards against the elite and its permanent (ab)use of the offshore industry.

However, and whatever side of this debate one ultimately decides to take, there is one feature of this leak, in comparison with previous ones, which emerges notoriously and with significantly more importance: almost all – if not all – of the financial transactions disclosed in the papers are within the scope of what we could denominate “legal behaviours” according to current laws.

The foregoing should not be taken as a justification of any of the conducts disclosed but rather as a wake-up call that allows us to understand that the legal and social implications of the pandora papers goes way beyond the legal debate between privacy and public exposure of financial information.

Indeed, in my view, the pandora papers provide us two more important lessons that may transform our laws in the near future. First, they demonstrate a global shift in the balance against the elite’s offshore industry, that is, how laws have been shaped thus far to prompt the outcomes disclosed in the leak. Second, they consolidate what I denominate the “cost of social shaming”, stressing its role and importance in promoting future changes in laws, and particularly, tax laws.

Global shift in the balance against elite’s offshore industry

Neither “offshore” nor “tax or financial structures” should be taken per se as synonyms of something illegal or out of the rule of law, after all it is the law itself that allows cross-border business and the establishment of offshore financial (and tax) structures to take place. In other words, it is not the traditional distinction between legal/illegal that is at stake here but rather who is actually making the laws and to what extent those laws are serving equally all members of a particular society.

As Katharina Pistor explains in her book The Code of Capital, some laws seem to be specially tailored for some elite groups of society, generally those with access to more information and wealth. This is precisely what the pandora papers have revealed to us, and perhaps, one of its more important contributions. That is, there is a pattern of how laws can work for the benefit of a few, and this pattern works relatively well. Therefore, the fact that the leak only, or mostly, contains legal behaviours is just a reflection of that pattern and should not be taken either as a defence of the illegality of the leak or as an argument to justify the content of it. On the contrary, this is a call to understand how the law-making process must change, because the current legal designs seem to be disproportionately balanced in favour of some, risking not only the trust that people have in their legal systems but also democracy as a whole, as Pistor has argued too.

Cost of social shaming

The second lesson from the pandora papers is what I would denominate the “cost of social shaming.” Indeed, the pandora papers have demonstrated how reputational impact matters, and how some have assumed this cost already. For example, it should not be a surprise to anyone that the prime minister of the Czech Republic lost his latest election due to the information released, or that the current president of Chile was threatened to face a constitutional trial before he finishes his mandate. This is just a consequence of social shaming.

Unlike other commentators, I believe that this is extremely positive, because “secrecy” as a commodity potentially marketed among jurisdictions does not only serve to hide money or assets to ultimately pay less taxes. Indeed, it may well serve the purpose of financing major international crimes, including terrorism, human trafficking, and others. Therefore, internalising the cost of social shaming represents a major step forward for countries to counteract and prevent international crime more effectively.

Nevertheless, we all know that the strategy of naming and shaming is not enough (it has never been). Indeed, it is fundamental that the reputational costs and the shift in the balance against the elite’s offshore industry introduced by the recent financial leaks can be materialised into major legal reforms worldwide. This is indeed the only way in which the current status quo can really change. In other words, it is not that the law has failed or that it should be blamed at all – indeed, the law did what it was designed to do according to what the social priorities were when it was enacted. It is us as a society, instead, that is to be blamed.

For this reason, it is important to learn that what the pandora papers reveal to us is precisely that social priorities have changed, and people are more aware of the moral component of laws, especially tax and financial laws. Therefore, it is time to reflect on that in our legislation, at least if we do not want countries to assume the cost of social shaming as a simple sunk cost to uphold their current legal systems.

All in all, therefore, we could say that the pandora papers do not represent just a bunch of private—not always—financial documents demonstrating isolated, and sometimes abusive, business transactions. They show us something more, that is, a pattern of how the laws work for the benefit of some groups over others in a society, ultimately revealing for us the forest behind the trees. It is now up to us, as a society, to decide what to do next.

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