Part of the inequality problem, however, is that trillions of dollars are being shifted off the ledger, hidden from measurement and taxation. Some of this “hidden wealth of nations,” as Gabriel Zucman calls it, is kept in offshore tax havens like the Cayman Islands and Panama that function as secrecy jurisdictions with minimal transparency or reporting requirements. Trillions more has been hidden in trusts and other complex financial arrangements available only to the very wealthy.
New research suggests that households in the top 0.01 percent, those with wealth over $40 million, evade 25 to 30 percent of person income and wealth taxes—about 10 times more than the general population.
This process is aided and abetted by professional wealth managers who facilitate and lubricate the process of hiding wealth. Many of them work in private family offices that serve wealthy families. These are not mom-and-pop financial planners who help protect families from running out of money. We’re talking about the well-compensated professionals that serve the richest one-tenth of one percent of Americans.
To better understand the work of these wealth managers, and their effect on economic inequality, I spoke with sociologist Brooke Harrington, a professor at the Copenhagen Business School in Denmark, and the author of a new book, Capital Without Borders: Wealth Management and the One Percent. Harrington spent several years being trained as a wealth manager in order to gain firsthand insight into the the secretive world of this discreet profession. By obtaining professional certification through the Society of Trust and Estate Practitioners (STEP), Harrington built relationships, trust, and access with 65 wealth advisers around the world. To conduct interviews, she traveled to 18 countries, including notorious offshore tax havens like the Cook and Seychelles islands.
Chuck Collins: Why should we care about the role of wealth managers?
Brooke Harrington: One driver of inequality—economically, politically, and legally—is that so many wealthy people avoid taxation. In the United States, there are billions a year that could be invested in building roads, schools, and infrastructure. This level of tax avoidance wouldn’t be possible without wealth managers.
For as long as there have been taxes, going back to the early Greeks and Romans, there have been well-to-do people who haven’t wanted to pay their fair share and who deploy a variety of strategies to achieve that. As the stakes got higher, a whole professional class of people emerged to accomplish this goal. If wealth managers disappeared from the face of the earth, there would still be tax evasion. But it couldn’t happen on the grand scale that we are seeing today without expert intervention.
CC: Could we fairly say then that the wealthy themselves are becoming stateless?
BH: Yes. Wealth is not just detaching from states but from the nation-state system itself. You have these huge piles of private wealth floating around the world, untouchable by states or state authority, through the machinations of wealth managers. And people who own the wealth also detach from states. There’s a certain group of well-to-do people who don’t want to be subject to the laws that bind the rest of us. They don’t want anarchy, because that would be inconvenient. They still want roads and the rule of law. They want murderers to go to jail. They just don’t want the laws to apply to them, because it’s a bummer. So, with the help of wealth managers, they put themselves above the nation-state system by changing passports at will, having multiple residences, and bouncing around strategically to ensure that no national laws apply to them.
CC: Would there be a system of “offshore” tax avoidance without wealth managers?
BH: It would be much smaller. The “offshore” system requires expertise to understand the tax systems of foreign lands and which institutions to trust. And it’s not just learning to work in one country like the Cayman Islands or Switzerland or the Cook Islands. It’s managing wealth in a whole global ecosystem that is orchestrated by wealth managers who often write the laws in these places. It’s like a complex instrument or machine that only they know how to operate.
CC: What do you mean when you say that this “offshore” wealth-defense system is on a “collision course with civil society”?
BH: “Collision course” is a quote from a critical-accountancy professor named Prem Sikka, who talks about the ways that legal- and financial-accounting expertise have been developing counter to the common good for a long time. A segment of the very wealthy have been free-riding on the benefits of society while not paying their fair share. This threatens to unravel civil society itself. There are signs of this everywhere, including in a news story about how the city of Omaha, Nebraska, has stopped paving its streets because of insufficient tax revenue to fix potholes.
CC: In the profession of wealth management, you write that the formal training process is part information and part “socialization.” What kinds of people become wealth managers?
BH: The Society for Trust & Estate Planners (STEP) talks about this in their training manuals. Frankly, the people who have the easiest time getting into this profession are those “to the manor born”—those with the elusive skills that make them trustworthy to their clients. Historically, this means they were white and upper-middle class—the people born rich but not so rich that they don’t have to work.
In his book Old Money, Nelson Aldrich talks about the “curriculum of old money.” Being born into a family with wealth is not something that just happens to you. There is a training program that starts when you are a tiny child, with nannies, table manners, and private schools. All your life you are taught to interact with individuals and society in a particular way. That gives them an enormous leg up in becoming wealth managers and working with other old-money families.
CC: But the wealth-management profession is now global. Surely it is more diverse.
BH: Yes, and there are people who come from many other backgrounds, even working-class backgrounds, but they have a lot more to learn. And they don’t get that training through the STEP program. One guy I interviewed had worked as boat builder and then joined the crew of an America’s Cup team. He was stuck for days on boats with wealthy people and developed an ease with wealth that he didn’t have before. He said he became culturally bilingual. For example, if he went to a fancy restaurant with his client and the client was rude to the waitress, he would slap his client on the back in amusement. Then, as they were leaving, he would leave a huge tip—from the client’s money—and apologize to the waitress. His loyalties were in both places, and he was able to live in both worlds at the same time.
CC: Is part of the socialization a libertarian outlook about taxes, the perspective that the state is always hungry and coming after the money of the wealthy? How does this anti-tax ideology evolve?
BH: Yes, this is part of the socialization and one of the moral justifications for the job. Most of the people who enter into these wealth-management training programs are people who are working in the field. So they already have a point of view about taxation. But the STEP training manuals are very heavy-handed. When I was going through the program, I would just sit there thinking, “Am I seeing what I think I’m seeing? They can’t be serious!” It’s as if Mr. Burns from The Simpsons decided to write a personal philosophy of political economy. It’s dastardly!
In Capital with Borders, I quote passages of the STEP training materials. In several places the manual authors go off on rants about “unethical state taxation,” insisting that taxation is theft and a crime against wealth creators. I’m paraphrasing, but they say things like, Taxation is doubly immoral because it will be redistributed to the poor who then won’t learn initiative and will be deprived of the opportunity to bootstrap themselves up. That’s when it enters Mr. Burns territory.
About 25 percent of people I interviewed would absolutely endorse this view. They are true believers in this philosophy of libertarian anarchy—that all taxation is theft—and there is no such thing as the common good. They believe these “wealth creators” are the most oppressed people in our society.
CC: How do wealth managers rationalize what they do?
BH: Most wealth managers repeat a mantra as justification: “My work is helping families.” And of course, they are. But they’re just helping a tiny fraction of very wealthy families at the expense of all other families in the world. Some of them know this. They are smart people.
CC: You write how the natural life cycle of wealth disperses over generations, from “shirtsleeves to shirtsleeves in three generations.” Yet wealth managers arrest this process and contribute to the formation of wealth dynasties.
BH: We are witnessing a “re-feudalization” of modern economies, with wealth dynasties expanding. The founding fathers of the United States understood this really well. They came from places where for centuries, economic development had been hindered because nobles controlled most of the land. Which was passed down by primogeniture and entailment, generation after generation, to the eldest son. So wealth didn’t circulate at all. Part of the motivation to do away with noble titles and practices, like entailment and primogeniture, in the founding era was intended to prevent a repeat of the feudal concentrations of power of the old world. Wealth managers are creating the new feudal order by creating artificial constructions of trusts and foundations.
CC: Someone who is aspiring to build personal wealth may not see why this matters. Why should people care about these dynasties of concentrated wealth?
BH: It undermines fairness. In a competitive society, you’re starting a footrace with someone who has a 100-yard lead on you in a 500-yard race. You could be Usain Bolt and you’re still going to lose that race. Part of the problem is that people use their money to make laws and rules that favor the wealthy at the expense of other people who don’t have anything.
Many of the laws surrounding high-end taxes are purposely complex to create loopholes so wealthy people avoid contributing to society without breaking any laws. But first you have to have a ton of money and the resources to hire a wealth manager. They are not accessible to ordinary people.
CC: What’s the role of charitable foundations in protecting wealth dynasties?
BH: It can cut both ways. There are genuinely charitable foundations that accomplish enormous good, like Chuck Feeney and the Atlantic Philanthropies. The dark side is that the wealthy create large foundations and set themselves up as competitors with democratically elected governments. Charity enables some to do an end run around government, setting up parallel systems of governance, sometimes as a rebuke to democratically elected government. That’s really dangerous. You see this in the DeVos family, where they try to remake education to accord with their own ideology. Even the Gates Foundation is accused of undermining scientific progress by advocating narrow strategies instead of following the lead of scientists.
CC: Would imposing fines on planners for aiding and abetting tax evasion help solve the problem?
BH: I think we should explore the power of public stigma. We can pass laws and levy penalties, but they would have to be astronomical. These are experts who love to work around laws, whereas social stigma could be a pretty effective sanction on both wealth managers and their clients.
The Foreign Account Tax Compliance Act (FATCA), established in 2010, is surprisingly effective. It requires US taxpayers to disclose any assets held in overseas accounts if their value exceeds a threshold amount. It’s a real pain for wealth managers. The compliance costs eat away at their profit margins. Many wealth management firms won’t work with US passport holders as a result of FATCA. So you don’t always need fines. The European Parliament is trying to create a version of FATCA and make it more expensive, so that it cuts into business on the continent.
CC: The Israeli government did some things to change wealth management and cut down on capital flight.
BH: The Israeli government was savvy. They figured out who the real adversary was—the wealth-management industry—and they targeted the enablers. Without the legal and accounting advice, people wouldn’t be taking money out of the country. They approached three leading professionals and said, “We’re going to change the laws concerning taxation and expatriatization of wealth, and we will hire you to consult with us on how to do that effectively. We want to close some loopholes, but we will leave you some loopholes—they won’t be as big—so you’ll still be able to do your job.” The implied alternative was that if the wealth managers didn’t play ball, the government would make some rules they really wouldn’t like. So they got inside advice on how to close the worst loopholes that were costing Israel billions.
CC: Can wealth managers be educated or shamed about the harms of elite tax avoidance? Can they see the impact and develop an alternative code of conduct?
BH: The libertarian anarchists are not reachable. But I found another 25 percent of wealth managers are deeply troubled in their conscience. Some try to educate their clients from the inside about other options. One wealth adviser said, and I’m paraphrasing again here, “Obviously, what I’m doing is making the world a worse place. I’m taking tax revenue away from states and that’s bad. So I urge my clients to give generously to charity.” That is his way of atoning. I think many of these people are ready to change. If we can give them an alternative approach to their work, they would jump in a minute.
CC: Have you come across people who previously did this work, and chose to step away?
BH: I haven’t run into any turncoats, but I’ve met many potential defectors. We need more John Does, like the person who leaked the Panama Papers information from the Mossack Fonseca law firm in Panama. We want to welcome more turncoats and whistle-blowers.
The super-rich are often extremely sceptical about the motives of people around them. “People who have a lot of money can become very suspicious and isolated,” Robert, who works in Guernsey, told me. “They become convinced that everyone who meets them is trying to take advantage of them.”
Often this suspicion is justified. Many of the professionals I interviewed agreed that high-net-worth individuals often become targets for unscrupulous individuals. As Mark, an English wealth manager based in Dubai put it, “People want to con them, scam them, rob them, kidnap them.” What is more, these threats can come not just from strangers but from governments and even those closest to them.
James, from London, specialises in protecting elderly clients from exploitation by relatives. He told me: “I do deal with some tricky families … It’s about being there for the person and being someone they can rely on, often beyond the way that the person can rely on their own flesh and blood, because we don’t stand to get an inheritance from them.”
century ago, wealth managers’ clients were known collectively as “the leisure class”, a group that probably numbered in the low four figures, concentrated in North America and Europe. These days they are far more diverse, and distributed all over the world. Today’s client base includes the world’s 167,669 “ultra-high-net-worth individuals” – people who, according to the 2014 World Wealth Report by the management consultancy Cap-Gemini, have at least $30m in investable assets.
A wealth manager’s daily work is similar to that of an architect, in that both design complex, multifunctional structures. The financial architecture created by wealth managers contains assets rather than people and the structures are composed of linked organisational entities, such as trusts, corporations, and foundations. These structures are often means to reduce tax, avoid regulation and control inheritance planning.
Unlike architects, however, wealth managers also need to maintain the structures that they create. As laws, financial conditions, and political climates change, so do the strategies needed to manage a client’s assets. Keeping up with all this is no easy feat – and that is exactly where wealth managers come into their own. One manual published by Step explains that their role is to be “part lawyer, part tax adviser, part accountant and part investment adviser all rolled into one”. For international transactions, wealth managers also need to assemble and coordinate a team of advisers. In this sense, wealth managers are more like general contractors: responsible for executing the client’s strategic plan, but reliant on a team of subcontractors for highly specialised parts of the job.
Though the precise details of such complex structures are rarely made public, we can get a sense of them from professional publications. The following is a typical client scenario from one of the Step training manuals:
The proposed settlor [client] is a Brazilian national, but has been living in Canada for the last 15 years where he considers his permanent home to be. The trustees are to be a trust institution in the Cayman Islands with a professional protector situated in the Bahamas. It is intended that the trust assets will comprise shares in two underlying companies: the holding company of the settlor’s Latin American business empire is incorporated as an exempt company in Bermuda; and an IBC [international business corporation] incorporated in [the British Virgin Islands] holding a portfolio of stocks and shares. The discretionary beneficiaries comprise a class of persons who reside throughout Europe and South America.
Three aspects of this scenario are worth noting to illustrate the dizzying complexity of wealth management. The first is the international scope: six countries and their respective laws are implicated in this asset-holding structure, not including the various states in Europe and South America where the people who will benefit financially reside. The wealth manager must coordinate with experts in each of those jurisdictions to keep abreast of changes in tax laws and other regulations. Second, there is a large cast of characters involved, including not just professionals – such as the trustees in the Cayman Islands and the directors of the international business corporation in Bermuda – but also the client and the beneficiaries.
Third, there is the mix of structures, with a trust holding shares in multiple underlying corporations. This trust-corporation configuration allows assets to be transferred back and forth in what Forbes once characterised as a “shell game extraordinaire”. Skilful wealth managers can use tools such as trusts, foundations and corporations to thwart the aims of the state almost indefinitely, without breaking any laws.
For some, this is one of the attractions of the profession. Bruce, an American working in Geneva, said that his primary source of job satisfaction was the “intellectual challenge of playing cat and mouse with tax authorities around the world”.
our work helps keep families together.” This was a common refrain: almost every participant in the study mentioned “helping families” as a major source of satisfaction.
Many wealth managers’ clients invite them to attend family weddings, to take holidays with them, and even to sit by their deathbed. A few members of the profession talked of crying at their desks after learning that one of their clients had died. As Sherman, the man I spoke to in the British Virgin Islands, told me, this intimacy with clients’ lives gives a depth to his practice that is unlike his previous experience in banking: “It’s very emotional. It’s very real.”
The quasi-familial role does have some downsides. The position of trust and intimacy that they develop with clients often makes wealth managers witness some of the worst aspects of family life. Many mentioned their distress at having to help clients disinherit their children and spouses.
In some cases, the fortune that holds the family together may also destroy it. A Step Journal article from 2009 noted that in addition to the threats that creditors and tax authorities pose to a family’s wealth, “the ‘enemy within’ needs to be considered. Putting it bluntly: how can you stop the family from pushing the self-destruct button?”
Nadia, who works in Panama City, said with tears in her eyes that over the past 30 years of her career, “I have watched families tear themselves apart over money. Tear themselves apart.” Several mentioned their discomfort in abetting deceptions and betrayals of clients’ family members. Alistair, in the Cayman Islands, said, “We may have a client with a mistress and children, who he wants to provide for, and it all has to be kept totally private from the wife. We have to just put up and shut up.”
When it comes to families, the particular responsibilities of wealth managers vary from region to region. On the Arabian Peninsula, they are now routinely asked to mitigate the disadvantages that Islamic law imposes on the inheritance rights of daughters. Since sharia also tightly limits testamentary freedom – the degree to which individuals can choose how their assets are distributed after their death – those who wish their daughters to have an equal share of the family fortune must find offshore alternatives.
Elaine, who works in Dubai, explained that her clients are increasingly turning to her for workarounds: “Arabs are getting their daughters educated, and they’re trying to protect them, since they’re taking over family businesses, sitting on boards of directors – in Kuwait they’re sitting in parliament. Typically, you’ll see sheikhas not walking behind their husbands, like before, but walking with their husbands, holding hands. So fathers are changing their estate planning: they’re creating trusts and taking out life insurance, which is kind of haram in Islam, but they do it because their sons are going to get the family business under sharia law, and they want their daughters to have an equal share.”
Within the world of wealth management, being obliged to honour debts, pay the costs of government, and otherwise obey the laws of the land are often seen as offences to liberty. One training textbook describes the claims of creditors as “risks”, rather than obligations that borrowers take on voluntarily. Other threats include the legal system itself, regulation and, of course, taxation.
The desire to escape these obligations explains the popularity of offshore financial schemes. In Treasure Islands, his study of offshore financial centres, Nicholas Shaxson describes this as a world of “members of ancient continental European aristocracies, fanatical supporters of American libertarian writer Ayn Rand, members of the world’s intelligence services, global criminals, British public schoolboys, assorted lords and ladies and bankers galore. Its bugbears are government, laws and taxes, and its slogan is freedom.”
The economist Gabriel Zucman has argued that the offshore financial system has grown to the point that it calls into question the future of national sovereignty. His argument is based primarily on tax avoidance, which he calls “theft pure and simple”. By allowing taxpayers to steal from their governments to the tune of $200bn in worldwide lost tax revenue each year, he argues, wealth managers dramatically undermine the power of the state.
With offshore, the wealthy, and the elite professionals who serve them, have created a kind of parallel world of selective lawlessness: selective in that the super-rich can continue to enjoy the benefits of laws that suit their interests while ignoring laws that inconvenience them. This parallel world operates largely unnoticed, except when it contributes to throwing the world that the rest us inhabit into chaos, as it did in the 2008 financial crisis.
Some might argue that it was ever thus. But the problem has grown to an extent that was previously almost unimaginable. The mobility of wealth and its owners, coupled with the legal and financial skill of wealth managers, makes it all too easy to violate the spirit of laws while adhering to them formally.
By now, it is abundantly clear that direct efforts to curtail the privileges of the super-rich have proven ineffective. If political leaders are interested in making elites pay their fair share of tax and submit to the rule of law, they should perhaps shift their attention from those who possess vast wealth and onto the people who serve them.
This essay is adapted from Capital Without Borders: Wealth Managers and the One Percent, published by Harvard University Press on 29 September
Increasingly regressive state taxes