Offshore finance and the Church’s warning about an emerging oligarchy

“It’s an ocean of wealth” is how one banker describes the money held by family offices, that is, wealth management teams (accountants, lawyers, finance types) dedicated to protecting and growing the fortunes of the wealthiest families (“Family Offices Blitz the Street,” WSJ: Anupreeta Das and Juliet Chung).

Much of this wealth is housed offshore. The topic of offshore finances was critically examined in Oeconomicae et pecuniariae quaestiones, the 2018 Vatican document applying Catholic social thought to the financial industry.

According to Brooke Harrington, author of Capital Without Borders: Wealth Managers and the One Percent (Harvard University Press, 2016), offshore is a tactic of wealth managers, “exploiting the conflicts and gaps between the laws of individual countries” (p. 127). Offshore does not always mean a tax-haven island in the middle of the sea; Switzerland remains the single largest repository of family wealth. It really refers to legal fictions that prevent governments, creditors, and even family members from looking into the holdings of ultra high net worth individuals (UHNWIs), typically men over 50.  The three favored fictions are trusts, foundations, and corporations.

Every so often news stories drop about charitable foundations that only disburse small amounts of money to the poor. Once you’ve read Harrington’s book, such stories are easier to comprehend, and it is more obvious why the Church casts a skeptical eye on foundations.

Many UHNWIs—and there are even ultra UHNWIs (people like Oprah, Murdoch, and Zuckerberg)—cloak their money inside charitable foundations. Capital gains tax in the US is currently 20 percent. When I cash in my 401K on retirement, that’s what I will pay. Foundations only pay 1 percent tax on their investments. But what’s in it for the rich to tie their money up in a foundation?

As Harrington explains, unlike regular businesses, foundations do not have the same financial reporting demanded of them by the state, and they cover the expenses of directors and staff (a.k.a., the founder and family members): private jets, hotels, rents, cars, restaurants, clothes, etc. A ruse of the rich—especially those in politics—is to report they take no salary from their foundations, but then omit to mention they do bill for expenses. The rich tie money up in foundations, but remain the lavished-upon beneficiaries (along with some of the poor). Hence the Church’s concern.

Harrington’s 400-page Harvard volume is the most complete academic study of offshore. It is important to look at, and it blunts some of the Vatican’s claims in Oeconomicae et pecuniariae quaestiones. The Church censures offshore as tax evasion and money laundering; this is true, sometimes, but it is only a part of the story. The other part is that wealth managers look after families, who, because of their wealth, are vulnerable.

The Vatican’s arguments against offshore are found in sections 30-32 of Oeconomicae et pecuniariae quaestiones and, to be frank, are not altogether convincing. The basic thrust of the document is surely right:

In fact, the markets know neither how to make the assumptions that allow their smooth running (social coexistence, honesty, trust, safety and security, laws, and so on) nor how to correct those effects and forces that are harmful to human society (inequality, asymmetries, environmental damage, social insecurity, and fraud). (para. 13)

Adam Smith himself agrees.

However, the Vatican document does not even try to give a full accounting of what wealth managers do, and a number of claims are wrong. We are told that offshore is a “financial space of exchange outside every official normative framework.” Not so: it is outside the neoliberal order, but not outside the legal island-nation jurisdictions that host these monies. There are plenty of reasons to be suspicious of the neoliberal order, as the Church herself points out (e.g., Laudato Si’). When the document speaks of “an alternative financial network,” it nods towards claiming offshore is criminal, but this is a mischaracterization.

“Where they unjustly subtract vital nourishment from the real economy, [offshore instruments] can hardly find justification both from the ethical point of view and from the point of view of the global efficiency of the economic system itself” (para. 30). This also is not right: the wealth is used as capital—the rich want to be even richer!—and does build up the global economy, to say nothing of the tremendous support it gives to island economies.

Harrington also details the origin of offshore in the medieval Church, which found ways to defend family property from rapacious monarchs. Church jurists created the legal fictions that contemporary offshore is built upon and which the Church now condemns. Elsewhere, I have discussed how Edmund Burke models his moral and political philosophy on trusts. The immorality of trusts is not straightforward and obvious. There’s many a church organ or tower bell in England sustained by a trust.

All that said, Oeconomicae et pecuniariae quaestiones, a rather dry document even by papal standards, is a vital intervention. It advances the novel argument that offshore is a tool cementing an emerging oligarchy (section 12). Accurately and potently the document observes, “more than half of the commercial world is orchestrated by noteworthy persons” (section 30). This is an acute comment because it really is true that a small number of people control much of the world’s wealth, many are household names, and they are politically ambitious.

Thirty-five percent of America’s wealth is held by 1 percent of its population, and that wealth has nearly doubled (increased 45 percent) since 2007. Eighty percent of Americans receive no inheritance, and the number who do has been shrinking for decades. The most glaring number of all: 1 percent of the world’s population owns 50 percent of its wealth (Harrington, pp. 200-202). Wealth equivalent to 10 percent of global GDP is housed offshore.

It is easy to think the economy impersonal. Certainly, it has abstract aspects, e.g., price. However, global inequality is such that there is a small number of actual persons—many well-known, others not—who stand atop the commanding heights of the world economy.

Many of these people are also politically dominant. Vladimir Putin is known to be heavily involved in offshore, Jeff Bezos owns the Washington Post, and J.B. Pritzker recently became governor of Illinois.  Pritzker is taking a leaf from the Rockefeller book: members of this family have been at the top of American politics for a long time. Donald Trump is, of course, the most astonishing example. Trump is also an outlier; today most of America’s uber-rich are liberal progressives.

Almost all of these men have family offices looking after their wealth. To have a sense of the scope of family offices, consider: family offices in the US alone have 4 trillion in capital, whilst hedge funds—which service the nation’s retirement accounts—have close to 6 trillion (“Family Offices Blitz the Street”). Ernest & Young estimates there are about 10,000 family offices worldwide, half of which were set up in the last 15 years. Matters are accelerating.

Emerging is what one financier calls insti-viduals: founders of family fortunes so large that the families are becoming institutions, their capital able to rival banks, their reach able to shape media and the messaging of political parties. Insti-viduals blur Aquinas’ distinction between public and private authority, and thus befuddle the axiom that a healthy polity is one of public-officeholders serving the common, not private, good.

Oeconomicae et pecuniariae quaestiones ends with the warning that capital is now far outstripping income, pushing the value of work to the margins of the economy. “Consequently, work itself, together with its dignity, is increasingly at risk of losing its value as a ‘good’ for the human person” (section 30). A new, radical asymmetry between capital and labor is afoot, and the cost is political dignity supplanted by the command of insti-viduals.