By Jeffrey D. Sachs
May 17, 2016 “Information Clearing House” – “Boston Globe” – The Panama Papers opened yet another window on the global system of financial corruption, showing how political leaders and businesses use shell companies in secrecy havens like the British Virgin Islands and many US states to evade taxes and hide corruption and other crimes. Yet the system of corruption depends on another factor beyond secrecy, one that is perhaps even more important: impunity. Impunity means that the rich and powerful escape from punishment even when their malfeasance is in full view.
Impunity is epidemic in America. The rich and powerful get away with their heists in broad daylight. When a politician like Bernie Sanders calls out the corruption, the New York Times and Wall Street Journal double down with their mockery over such a foolish “dreamer.” The Journal recently opposed the corruption sentence of former Virginia governor Bob McDonnell for taking large gifts and bestowing official favors — because everybody does it. And one of its columnists praised Panama for facilitating the ability of wealthy individuals to hide their income from “predatory governments” trying to collect taxes. No kidding.
Our major institutions, the ones that should know better, are often gross enablers of impunity. Consider my alma mater, Harvard University, and its recent nuptial with hedge-fund manager John Paulson. Paulson was the coconspirator with Goldman Sachs of one of the most notorious scams of the recent financial bubble.
Paulson and Goldman constructed and marketed a portfolio of toxic assets to sell to unwitting investors so that Paulson could bet against the portfolio. Goldman and Paulson thereby turned the sucker investors’ quick $1 billion loss into an equivalent $1 billion gain for Paulson, with Goldman collecting on fees. The SEC fined Goldman but left Paulson untouched. As one disillusioned SEC investigator put it: The SEC is “an agency that polices the broken windows on the street level and rarely goes to the penthouse floors.” Yet Harvard was delighted last year to take $400 million of Paulson’s ill-gotten gains, leave Paulson with the rest, name its engineering school after Paulson, and declare Paulson to be “the epitome of a visionary leader.”
Impunity. Paulson remains a much-celebrated figure on Wall Street. He has many kindred spirits, such as his partner in crime, Goldman CEO Lloyd Blankfein, who has described himself as just a banker “doing God’s work.” Or consider JP Morgan CEO Jamie Dimon, whose bank has paid well over $30 billion in fines while Dimon remains CEO with a $27 million salary for 2015. The hedge-fund industry itself is a case study of impunity. With few exceptions, it is domiciled in tax and secrecy havens, enjoys crass tax breaks brokered by cronies in Congress (such as Wall Street Senator Chuck Schumer), and pays itself billion-dollar-plus paychecks even while leaving investors with below-market returns or outright losses over the years.
The recourse to cheating within the financial industry now seems to be deeply ingrained, part of the corporate culture, and enabled by the prevailing impunity. An ingenious scientific study published in December 2014 showed the rot. Employees of a major international bank were divided into a control group and a treatment group. All subjects were asked to flip a coin 10 times and report truthfully on the number of heads, with more heads resulting in a bigger monetary prize. The treatment group was subtlety reminded they were bankers, while the control group was not. Simply reminding them that they were professional bankers was enough to induce the employees to cheat by exaggerating the number of heads they flipped.
Impunity is of course not limited to banking. Consider the poster-child of impunity in Big Pharma, Gilead Sciences. Gilead brazenly bought the patents on a life-saving cure for Hepatitis C and then gouged patients and taxpayers by charging $1,000 per pill — for a drug that costs $1 per pill to manufacture. Hundreds of thousands of Americans are unable to afford treatment, and many are dying, while Gilead earns far more in profits each year than it paid for the patents. Gilead adds to this deadly effrontery by booking its profits in an offshore tax haven.
Or consider another tech company in the health sector, Theranos, led by Elizabeth Holmes, until recently much lionized on Wall Street. Holmes, it now seems, may have been lying about Theranos’s supposed high-tech blood-testing technology and reporting faulty blood test results to boot. Yet when confronted with these serious concerns, Theranos board member and famed lawyer David Boies expressed his view that the board has “complete confidence in Elizabeth Holmes as a founder of the company, as a scientist, and as an administrator.” It seems not to have dawned on Boies and the board to call for an urgent, impartial, and complete investigation of the serious allegations swirling around the company.
Impunity is not an accidental or incidental defect of American society. It is a system foisted on us by the rich and powerful, and it continues to work its magic. It has enabled Hillary Clinton to come within reach of the presidential nomination without releasing the transcripts of her highly paid speeches to Wall Street banks. The Clintons long ago perfected the art of impunity, becoming rich and powerful by blurring the lines between their campaign fund-raising, public policies in office, Clinton Foundation work, big-money speeches, and off-the-record favors for foreign governments.
This week British Prime Minister David Cameron hosted an Anti-Corruption Summit in London in the wake of the Panama Papers. He was speaking accurately when he was caught on an open microphonetelling the Queen that leaders of two “fantastically corrupt countries,” Nigeria and Afghanistan, would be at the summit. Nigeria’s new president, Muhammadu Buhari, himself a corruption-fighter, concurred with Cameron’s assessment, but called on the UK to return the money stolen by Nigeria’s former leaders and deposited in British and other Western banks. He might well have added the historic role, for more than a half century, of Royal Dutch Shell in Nigeria’s oil-sector corruption.
Buhari is, in fact, making a much larger point. While there is enough top-level political corruption to go around — from Afghanistan and Nigeria to Malaysia, Brazil, South African, FIFA, and many more places — the channels of corruption and secrecy havens are largely owned and operated by the big boys — the United States and the UK — and depend absolutely on the gross impunity that prevails at the highest reaches of power and finance in the United States.