Leak-driven law and administration

Imperfections, risks and benefits of using them

The latest leaked information case from Wikipedia, The Paradise Papers, has placed some 13.4 million documents from Appleby, an offshore law firm that has ended up in a German newspaper. The information included investments and funding structures of 120,000 businesses – highly valued companies – and individuals — monarchs, political leaders, others. The headlines of the International Consortium of Investigative Journalists (ICIJ) – a collaboration of 380 journalists – have propelled India among other nations to initiate official investigations. The role of media organisations as an agenda setter is not fully analysed yet though the push by the ICIJ has clearly appeared to be quintessential, while being funded by the Ford Foundation, Pew, and others, with their stories being carried by the BBC, Le Monde, New York Times, and several comparable others.

Nevertheless, to what extent could the leaked accounts be tested for legitimacy or otherwise? How long would the process take? This is the eventuality that a serious researcher has to investigate. Diane Ring of Boston University has been doing that with her co-author Shu-Yi Oei in their study, “Leak-Driven Law”. This new and interesting area of research on the horizon of the social scientist was recently presented at the London School of Economics. A gist of their findings and the discussions that followed, comprising a crucible of innovative yet practical research, should be of interest to an informed reader.

Leakers are often anonymous; and hackers, a heterogeneous potpourri of sources. Among imperfections of the leaks process may be cited their incompleteness, non-specificity, false positives, and risks involved. As an illustration, the ICIJ’s earlier Panama Papers claimed “real owners of opaque structures” — 214,000 offshore entities in 21 jurisdictions plus 100,000 additional offshore entities. This implied 11.5 million leaked files from Panama law firm Mossack Fonseca, creator of hard-to-trace companies, trusts and foundations. But the Papers apparently did not disclose bank accounts, emails or financial transactions in the documents. This incompleteness is a crucial point that the authors make, for the ICIJ seems to have released a fraction of available information; and it decided what to release. Was it possibly what would command the highest shock value?

It is important, therefore, to take stock of the risks. First, there is “agenda capture”, including when to leak the information, what and how much to leak, and what information not to leak, implying that the tax authorities themselves get filtered information. 

Second, specific pathways are likely to be chosen to determine agendas and interests. Thus, whether the mode of transmission is government or newspapers, would cause disparity in their effects and dynamics. Indeed, there is a complicated interplay of how government actions and media organisations interact which, in turn, determines the final transmission and use of leaked data on a global scale. For example, in the case of HSBC, a bank in which customers were found to hold undeclared accounts, there was assurance of secrecy in the use of data by the French authorities and in the data’s transmission to other country authorities but, in the event, there was little confidentiality that could be maintained.

And relatedly, third, the time delay between data release by source and obtaining the data by government recipients raises questions regarding possible strategic timing for release of the data.

Fourth, since leaks are high-profile shocks with immediate impact, they carry distinct hazards of trigger-happy government and the public, who tend to react more strongly than they do to systematically collected data.

Fifth, this leads to ill-advised legal and enforcement responses. Scholars in securities regulation, financial regulation, and corporate governance have observed that laws enacted as an impact of crises comprise overreaction.

To some extent, these are of course to be expected from the very nature of leaks. Rhetorically, note also that, if systematic data were good, then why is their productivity usually slow. Is there a built-in “let sleeping dogs lie” approach to tax administrations. If so, does this slow approach exacerbate the popular sensationalism attached to leaked data?

Illustration by Ajay Mohanty

Indeed, there are perceived benefits of using leaked data that cannot be ignored. Among them are: (1) Leaks providing tax administrations with a free audit of taxpayers reflecting new information, (2) a clearer picture of cross-border activities, and (3) a higher probability of detecting other evaders. Thus, (4) though less systematic than statistics, would not leaked data lead to more and faster legal change? From the taxpayers’ corner, (5) potential evaders would make a higher cost calculation of evasion. If that is so, (6) leaks could have positive distribution effects since they should reduce tax abuse by sophisticated taxpayers (through undeclared offshore assets, and complex corporate offshore structures).

Thus, governments are likely to use leaked data but, when governments use leaked data to change tax law or pursue tax evaders, the least that may be expected are: (1) A rational response to publicity rather than merely knee-jerk reaction; (2) sophisticated use of leaked data including quickly weeding out false positives; (3) commitment to transparency and minimisation of perceptions of unfairness and revenge; (4) an impartial analysis of any new tax laws’ collateral effects, including whether clearly laid out targets are achieved; and (5) consideration of less-costly, less-invasive alternatives. 

To conclude, given the inexorably growing concentration of wealth globally, and given the revealed inability of tax administrations to track globally stashed incomes or obtain tax revenue from them, it would be foolhardy to expect the exclusive use of systematically collected data to eradicate tax evasion and tax avoidance. Sensational data leaks are, therefore, likely to remain popular since they possess the promise as a conduit for significantly greater revenue collection across the world. Of course it remains uncertain if country tax administrations, in particular in emerging economies, actually follow the process to its true end or terminate it when political expediency so directs, especially if tax administrations are not fully independent, may themselves suffer from pockets of corruption, or are, effectively, putty in the hands of ruling politicians. There is no insurance against such dangers other than an economy’s steady economic growth and development with which maturity in civic affairs, processes and practices may be more confidently anticipated.