Monday, April 4, 2016

Offshore Shadow Money: Network vs. Chaos

“The big surprise . . . is seeing how little effort some of the big players made to cover their tracks.” That’s what one observer of the Panama Papers told me privately after a cursory early look at them. When thousands of crime groups, tax-dodgers, and other investors wanted to turn their money into shadow money, they followed a well-trodden path, almost as if their guide was a magazine article entitled “Seven Clever Ways to Hide Your Assets Offshore.” The shell companies they rely on have the same fill-in-the-blank bylaws and minutes as thousands of other companies, a strategy about as subtle as walking around wearing a “hidden offshore assets” T-shirt.

That’s one way of looking at it, but it pays to take a moment to consider the opposing point of view. Investors thought their assets were so well hidden that they could never be found. That too is a reasonable point of view. After all, the vast majority of offshore shell companies, 98 to 99 percent of them, remain effectively anonymous. The lawyers and accountants who set up the offshore shell companies were relying on years of history when they believed they had done what was needed to keep assets hidden. The many recent investigations and the Panama Papers have unmasked only a small fraction of these shell companies. The future leaks and investigations that will unmask more of the world’s shadow money in the coming months remain unproven theories in this view. Those that have been uncovered were simply the victims of a bad roll of the dice.

How can there be two views so diametrically opposed? Pardon me if I lean on mathematics to provide the answer. I believe the shadow-money investors are having difficulty wrapping their minds around the mathematical network models that connect the dots to unmask them. To the investors, four to six layers of indirection ought to be enough to reduce the question of ownership to noise or chaos. You would look at the shell company and you say, “The real owners could be anyone in the world.” Chaos theory, of course, is another model or field in mathematics. I use the term very loosely here, but I think it fits. The way I think of it, the shadow-money investors and administrators are applying an intuitive understanding of chaos theory to obscure the ownership of assets.

It is the network model that wins out. The four layers of obscurity in the chaos model are like four thick layers of clouds that you are trying to see through. How will you ever see anything? In the network model, by contrast, the four layers of indirection are just four hops in a directed flow chart. You may even have seen some of these flow charts in the news reports on the Panama Papers. It’s not that hard to figure out. It’s true enough that a network model might require a supercomputer to solve, but so what? I’ve had a supercomputer on my desk for a decade, and essentially any current desktop (not laptop) computer that costs over $1,200 has this level of computational capacity. Besides, if you start with enough clues, as in the example of a sudoku puzzle, you can solve a network problem on paper without the need for a computer. The offshore asset-hiding business is, in a way, simply out of date. The layers of clouds that served in 1998 are too easily dispersed by the fans of 2016.

Technology changes the meaning of information, and in the same way, it changes the ability to hide information. None of us are as hidden from the world as we imagine, but that is especially true of those who are trying to hide sums of money that most people will never see in a lifetime. Besides the question of technology, it is effectively a human instinct to find money. Taking money to another place in the world does not mean it is well-hidden — not anymore.