ON AN UNUSUALLY rainy evening in Los Angeles this March, at the Thomas Mann House in Pacific Palisades, two investigative reporters from Germany gave a talk about a financial scandal known as “cum-ex.” Against the backdrop of a mid-century modern terrace, its polished cement looking dull and gray in the storm, the pair flashed through a series of slides about international tax embezzlement.
A relatively small drip of funds from the German cultural ministry sometimes supports talks like these in the name of Mann’s legacy. When the capital of German literary life was exiled to Los Angeles around the Second World War, the author built a home that now still hosts salons in the name of democratic cultural exchange.
The reporters began their story with a blurry image of a “stick” flying through the air—a tiny thumb drive packed with financial data. The stick, they said, was leaked to Felix Rohrbeck and Oliver Schröm when they were reporting for the newspaper Die Zeit: a heroic young woman at the tax authority blows the whistle, and then an editor at Die Zeit begins spying on the young reporter! The editor tips off his banker buddies that their scheme is about to be uncovered, but he can’t kill the story. The once-respectable Warburg Bank sends teams of lawyers to threaten the magazine. The international nature of the fraud brings together a team of journalists from across Europe—usually bitter rivals—for late-night sessions of data analysis and encrypted uploads over pizza. And now, after almost a decade, the facts of the abuse are known: cum-ex trades have robbed treasuries across the globe of upwards of $60 billion. One German banker is actually in jail.
In the United States and Germany, legal restrictions have tightened around the scam in question, and that banker, a senior executive at Warburg, was sentenced to more than five years in prison. This is mild progress, at least in comparison with the sketchy mortgage-backed derivatives that brought us 2008, for which few financiers faced any repercussions. But in the Palisades, the reporters ended their presentation with a caveat. They showed recent footage of a dramatic undercover sting operation in which Schröm posed as a billionaire for a meeting in the City, London’s financial district, complete with a luxury watch on his wrist and shell companies on the books. Hidden cameras from an investigative TV show were filming as Schröm sat down with a man who promised more profits from the trick, still being played in Dubai and London. When Schröm-as-billionaire asked if this deal was still called cum-ex, the man in the footage said, “I’d call it event driven …” The fraud, it was clear, was still going down.
The technicalities of the cum-ex fraud are complex. The nickname comes from the Latin for with and without, as in with and without a dividend tax (and it’s pronounced, ahem, to rhyme with womb-X). It worked like this: banks and traders find stocks that pay dividends to shareholders. The way many tax authorities deal with tax on dividends is to refund money to shareholders after the tax was paid elsewhere. So, traders found ways, using short sales and stock loans, to make it appear briefly that there were two owners for a single stock. And then the banks, in that brief window, got governments to pay the tax rebate on a single dividend stock more than once. The first tax refund on the stock is legal. But there were never two owners; there was just fancy financial footwork to create the illusion of multiple owners. And the second time the rebate gets paid out, it’s just theft. At their worst, scammers can get tax authorities to pay the rebate three times, or five times.
So, while tax evasion can also be illegal, and the derivatives in 2008 existed in an ethical gray area, cum-ex is straight-up fraud.
The cum-ex technicalities present just one example among many of the obscene fortunes available to those who exploit financial loopholes, in a global system riddled with mechanisms that allow for enormous secrecy. Call it “dark money” or “illicit financial flows,” “offshore finance” or “money laundering,” tax avoidance or tax evasion—however you refer to it—these things warp democracies. The dollar damage from cum-ex dwarfs California’s budget deficit this year. It’s not legal, and in the United States it’s even more outlawed than before, but in systems that reward and create vast flows of secret funds, the line between legal and illegal loopholes becomes not only blurry but somewhat meaningless. In many ways, loopholes define the lacy patterns of the entire fabric. Financial secrecy is woven so tightly into the texture of global capitalism today that pulling at any one thread tugs on every aspect of financial power.
The shenanigans needed to make cum-ex work involve using short sales and stock ownership certificates to make it appear as if multiple parties own a stock at the same time. It’s sneaky bookkeeping. When Rohrbeck and Schröm approached this situation, as storytellers, they knew that as soon as you start talking accounting details, especially to people who don’t stand to make millions from them, eyes glaze over. That’s why the Germans showed footage of Schröm posing in his ersatz billionaire’s sports jacket, with an ascot, in a bugged hotel room. It’s hard to give the victims of cross-border tax scams a face and a story. The numbers are mesmerizingly and disconcertingly large, so the Germans emphasized the thrill of the chase.
In France, Le Monde called cum-ex “the biggest robbery of the century.” But in the United States, there was little coverage. That night in the Palisades, I tried to convince Rohrbeck and Schröm to consider making a podcast version of the story. They seemed ambivalent: they kind of wanted to move on.
Cum-ex isn’t the biggest or even the most spectacular example of financial malfeasance in Raymond Baker’s new book Invisible Trillions: How Financial Secrecy Is Imperiling Capitalism and Democracy—and the Way to Renew Our Broken System. Not even close. In fact, it gets about a page, out of some 260 pages, in a chapter called “Broken Banks.”
Baker, founder and president of the think tank Global Financial Integrity, has spent decades pushing the world to address the issue of “illicit financial flows.” He’s one of the foremost experts on these matters and has been able to move the needle in Washington, DC, with GFI, which he started after his first book on illicit finance. “We’ve got to elevate this issue,” he told me. “I read stories for 50 years about drug dealers who then laundered their money. Throughout those 50 years, the flow of drugs into the United States has never been curtailed and the price of drugs has never gone up. Fifty years of stories haven’t affected the reality. They never got to the bigger picture, which is that we are facilitating the money that keeps these guys in business.”
When Baker said this to me, he could only be described as upbeat. He is an energetic figure who has played a major role in the passage of crucial legislation around foreign assets and money laundering. His fluency in the details of the existential threat, combined with his somewhat counterintuitive positivity, make him eminently persuasive.
For Baker, cum-ex is just another loophole in the lacework, more openly fraudulent perhaps but otherwise barely distinguishable from the rest of the porous mess. His final sentence about cum-ex in Invisible Trillions reads: “This stunning example of turpitude is likely to roll on through the courts for years to come.” On the next page, BNP Paribas gets a few paragraphs for violating US sanctions, and then Wells Fargo gets just shy of three pages for aggressive policies intended to abuse and cheat depositors. “A few more examples will illustrate the degree of depravity seen in recent years,” Baker writes, before devoting a few words to Goldman Sachs and the 1MDB scandal out of Malaysia. Invisible Trillions is a bird’s-eye view, in page by page snippets, of the planetary situation. But the challenge for all of these financial writers, whether they’re deep in a single scheme or high above at ten thousand feet, is how to delineate the inhuman scale of the problem while getting it to land in human terms. How do you make bookkeeping in Dubai seem important in Los Angeles?
Baker doesn’t pause on the lurid details of the 1Malaysia Development Berhad kleptocratic boondoggle because he’s not writing a financial thriller. He does call it “one of the biggest financial scandals of all time,” and this one you may remember. In the island nation of Malaysia, a financier named Jho Low gained control of a sovereign wealth fund. Working with the prime minister, the mild-mannered Low, sometimes described as an Asian Great Gatsby, pilfered billions of dollars from the Malaysian people. He squandered it on van Goghs and Monets and diamonds; on a see-through piano, a jet, and a white Ferrari he gave to Kim Kardashian; and on a yacht named Equanimity. Plus, in a supremely ironic move that seems too excessive to be real, Low funded Martin Scorsese’s 2013 film The Wolf of Wall Street, in which Leonardo DiCaprio plays a big-spending trader who’s indicted for money laundering and securities fraud, serves some country-clubbish prison time, and reinvents himself as a lavishly paid sales coach and motivational speaker. (A true story, of course.) After the case came to light, the Department of Justice repossessed some of Low’s paintings and yachts. DiCaprio returned a Picasso, a Basquiat, and Marlon Brando’s Oscar for On the Waterfront—all gifts from Low. A very small handful of executives at Goldman Sachs had to step down. The stunning turpitude continues to roll through the courts.
Low made headlines for his debauched evenings spent buying bottle service for Paris Hilton’s entourage, for the see-through piano that wouldn’t fit out the door of a model’s apartment in New York, and for the political donations funneled through one of the members of the Fugees. But Baker doesn’t have time for color reporting. He seeks to draw attention to the systemic distortion of which Low is only one small part.
Baker writes that 1MDB was a “hugely destructive scandal that took advantage of every particle of opacity available within financial secrecy structures.” He imagines that John C. Whitehead, Reagan’s secretary of state and former chairman of Goldman Sachs, is rolling over in his grave. Baker is sure, that is, that Whitehead stood for something fundamentally better, that this bastion of the Washington Consensus would have disapproved.
(It’s possible. On its good-hair days, the Washington Consensus looked like coordination among US institutions, the World Bank, and the International Monetary Fund, intended to help emerging or developing countries enter Cold War markets. On other days, its critics saw it as a means for the United States to keep everyone under the dollar’s thumb. Meanwhile, elements of the secrecy system were set up and strengthened by Reagan’s CIA during the Iran–Contra affair.)
Low flaunted his ill-gotten gains across Manhattan and Hollywood and had no problem finding friends at Goldman Sachs. But if you’re looking for the full picture of complicity and shamelessness, you have to pick up a financial thriller like Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World (2018). It’s by a pair of Wall Street Journal correspondents, Tom Wright and Bradley Hope, who paint a vivid picture of eager financiers shifting the shells around and helping Low create plausible deniability.
As with cum-ex, 1MDB was ultimately taken down by in-depth financial reporting from a number of intrepid journalists. The complexity of global finance today means that journalists must cooperate, often via secure online databases and across national boundaries. Before Wright and Hope, the environmentalist and anti-corruption advocate Clare Rewcastle Brown broke the 1MDB story on her blog Sarawak Report. For the journalists who do this kind of coverage, it takes more and more legwork to get these stories, with less and less glamor or payoff once you do. So, they work together in ways they never used to. Every now and then, someone buys the rights for a TV show. Today the rights to Billion Dollar Whale are evidently owned by the playwright David Henry Hwang and actress Michelle Yeoh.
Financial journalists make a living from thrillers like these, which bring attention to individual cases. But especially when made into TV shows, thrillers have a tendency to wrap things up with some kind of happy ending. For example, while Billion Dollar Whale highlights many systemic problems, it ends with the Department of Justice going after the stolen loot. And the DOJ did eventually recover $700 million of all that was stolen by Low. But if audiences feel that this means that the Malaysian people were made whole, then we are not focused on the system of financial secrecy.
In Invisible Trillions, Baker concludes his discussion of 1MDB by writing about the American lawyers who made money with Goldman Sachs on the way up and then profited from protecting the thieves on the way down. A couple of Goldman Sachs execs got slapped on the wrist, and the crooked prime minister got sentenced to some jail time. Things happened, to other people, while the lawyers walked away as usual. Any sense of an ending focused on the DOJ suggests that some kind of moral order has been restored.
Today, Jho Low is still free—and still has Equanimity. He was last seen floating somewhere near Macau.
Hope, the Billion Dollar Whale co-author, recently said in his Whale Hunting newsletter that Low has probably been working with the Chinese government, potentially spying, around their Belt and Road Initiative. China is one of the world’s largest sources of illicit money, and its “anti-corruption” campaigns can be hard to distinguish from moves to consolidate the Party’s authority. It has likely folded Low, the avatar of Malaysian kleptocracy, into its massive global infrastructural expansion. The Belt and Road Initiative is something like China’s version of the Washington Consensus, a push to place Chinese power and Chinese currency at the physical and financial center of international relations. Low is just a pawn in their game. But even if the Chinese eventually allow Low to be punished under US and Malaysian jurisdiction, Beijing is unlikely to take any broader bids for financial transparency kindly.
The United States is the biggest dog in the hunt for financial accountability, and at the same time, it’s the fastest growing sinkhole for invisible money. Even if, as Baker suggests, the US backs wider efforts to make finance more transparent, Beijing likely won’t take that as friendly good-government policymaking. Even if we elevate this issue, and especially if we shout it from the rooftops, any US actions against financial secrecy may well be perceived as international aggression.
Once it has metastasized through the whole structure, secrecy is just another form of financial power.
There are at least six or seven small sections of Invisible Trillions that summarize material other authors have laid out in entire books. The subjects of all three of David Enrich’s financial thrillers—the manipulation of the London Interbank Offered Rate, Deutsche Bank, and white-shoe law firms—get a few pages in Trillions.
Glencore, the octopus-like giant in mining and commodities, was the topic of veteran investigative reporter Ken Silverstein’s 2015 book The Secret World of Oil. Glencore remains in the news for its labor practices around the extraction of cobalt in the Congo.
Baker mentions the Panama Papers and the Paradise Papers, projects released by the International Consortium of Investigative Journalists as part of an international effort that made troves of leaked documents from the systems of secrecy available to reporters. Hundreds of reporters cooperated to make the data in these papers accessible to their respective markets—scores of teams like cum-ex’s in those late-night, pizza-fueled story sessions. Panama and Paradise were the focus of investigative reporter Jake Bernstein’s 2017 book Secrecy World, which was later made into a movie by Steven Soderbergh called The Laundromat (2019).
This epic trail of destruction or that greatest scam all become part of Baker’s larger list, illustrating that the Deutsches and the law firms and the laundromats of the world are still going strong.
By zooming in on particular people and cases, authors lure readers in and make the debauchery and the suffering real. By zooming out, Baker hopes to gesture towards solutions that might go beyond putting a lone trader in jail.
Underlying all of this is the fundamental question: how do you get people to care about something ubiquitous but invisible, something that’s everywhere and nowhere all at once?
The problem is hard to name. “Offshore” sounds like something peripheral and distant. It no longer captures the way that South Dakota and Wyoming have become centers of secrecy. “Illicit financial flows” is precise but a bit Latinate. “Secrecy world” and “invisible trillions” are mysterious but, like “flows,” can make the thing seem diffuse, impossible to pin down.
Try Moneyland—a place that exists outside of any one nation, outside of any one government’s ability to regulate a particular currency or market, but hovering wherever there’s great wealth. As long as you have enough funds to get Deutsche’s client services department on the phone, or to buy a passport from Malta, you can visit Moneyland. It exists between and above the laws, beyond any jurisdiction, but always within reach of a penthouse and a $22 cocktail.
The term comes from the British writer Oliver Bullough, whose approach to financial journalism combines fast-paced narrative with a metaphorical apprehension of the entire situation. “How do you get away from an inherently depressing and complicated story?” he said to me. “It’s spinach journalism, right? As in, it’s good for you, but no one actually likes it—it’s not necessarily what you want to pick up at the airport. So how do you put some butter in it?”
Bullough’s subtitle to his 2019 book Moneyland, The Inside Story of the Crooks and Kleptocrats Who Rule the World—or, in a different edition, Why Thieves & Crooks Now Rule the World & How to Take It Back—summarizes the goal of his efforts to map this elusive global space. Bullough quotes UC Berkeley economist Gabriel Zucman: “Our planet as a whole has a net debt, a net financial debt, which of course is not possible at a global level.” The inflows and outflows don’t match up. So, Bullough writes, “One more country is needed in the spreadsheet to make the columns match: let’s put it between Monaco and Mongolia. That seems apt.”
Moneyland begins with Paul Manafort. Manafort, like Jho Low, worked with a kleptocratic president, channeling money out of Ukraine for himself and spending it on luxury goods and real estate. And once Manafort became Trump’s campaign chair, this story had direct consequences for American and Ukrainian, rather than Malaysian, democracy. Bullough includes more character development and color than Baker in his book, but he too works to distance himself from the lurid details. He visits the dumpy offices of one of Manafort’s shell companies in a nondescript part of London. Instead of focusing on the “ostrich-skin jackets and luxury condominiums,” he writes that he wants to understand what links Manafort to the pedestrian part of the city, hiding behind its lack of glitz. This approach will give “a glimpse behind the personalities, into the hidden workings of the financial system, into the secret country that I call Moneyland.”
Bullough’s next book, Butler to the World: How Britain Helps the World’s Worst People Launder Money, Commit Crimes, and Get Away with Anything (2022), turns its attention to the history and the role of London’s financial center. It has the most lucid account of the Eurodollar that I have ever read. The book describes England as a butler to the kleptocrats who stepped into the power vacuums created by the end of the Cold War. All of the City’s sophistication and expertise, at the center of global finance, now cater to the desires of a small handful of men sucking money out of the periphery. “It’s become an incredibly competent well-spoken assistant,” he told me.
Butler’s account of the men and women whose actions created and consolidated the current system is itself exceedingly British, devastating in its wry understatement. “There is a saying,” Bullough writes in his account of “low white tax morale” in the colonies, “that if you’re accustomed to privilege, equality feels like oppression, and that is how many Europeans responded to the changes sweeping across Africa and Asia.” The story of England’s transformation into a financial butler is also the story of the postcolonial world slipping away from the promise of self-governance and democracy, bit by bit, as the sticky fingers of financiers reached around the globe.
Bullough sometimes puts his sense of humor to work running bus tours in London. Modeled on the star tours that gawk at actors in Hollywood, his tours map the web of fancy homes that reporters have identified as belonging to kleptocrats. These mansions, which stud London’s posh neighborhoods, usually sit empty, driving up prices by parking illicit financial flows in shell-company-owned, money-laundering properties. In February, Bullough told me in an email that they had another tour coming up, but he seemed fatalistic about it. He said it would only highlight “the failure to do much about oligarchs.” He warned me of another wave of EB-5 visas about to hit Los Angeles. The program is another source of dark money, and he warned of serious issues. A group of investors who used the EB-5 visa program is already in court with unpaid contractors on a mega-development, now sitting stalled, in Downtown L.A.
In 2011, the former editor of The Guardian, Peter Preston, reviewing Nicholas Shaxson’s Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens, called it “a dismaying Big Bang of a book: a chronicle of capitalism’s frailty and foulness that digs far beyond its tax haven title and indicts the system that renders such crookedness not merely possible, but entirely predictable.” Preston admired the book, to some degree, but wrote: “Really, we’re talking about a universal way of business life here, about a system so entrenched, so formidable in the lobbying, so familiar in its assumptions, that even 2008 can’t blast it away.” He criticized Shaxson for making “the conspiracy seem too vast and all-encompassing.” Preston basically felt that Shaxson’s book on financial secrecy and malfeasance was too depressing.
In 2011, Shaxson wrote: “Offshore is how the world of power now works.”
Sometime in 2002, I was introduced to Stephen Pizzo, a one-time real estate broker turned investigative reporter. I was trying to write about the collapse of Enron, the energy company and financial boondoggle built on weather derivatives. I wasn’t in a newsroom, but I wanted Pizzo’s advice. How could I go deeper on this kind of story?
I had reason to imagine he might have some helpful tips. When Pizzo bought the small-town Russian River News, he almost stumbled onto one of the biggest financial scandals of the 1980s. Savings and loans were major players in the financial world at the time, and like the recently failed Silicon Valley Bank, they came up against an asset liability mismatch. Pizzo, along with one of his staff and a reporter for the National Thrift News, co-authored the most important book about this early crisis, Inside Job: The Looting of America’s Savings and Loans (1989).
On the dry outskirts of Sebastopol, Pizzo and his wife rode up on a motorcycle to meet me and my boss at the time, but he wasn’t much interested in talking. Inside Job had been a national bestseller, sure, but Pizzo felt that the book hadn’t done much good. The banks got bailed out and the same cycles of deregulation and bad financial behavior rolled on. I don’t remember Pizzo seeming bitter, but he basically wished me luck and cruised away.
In March, Silicon Valley Bank’s uninsured depositors were made whole. Venture capitalists on Twitter, who had been trumpeting Elon Musk’s libertarian ideas about “disruption” as long as they were making a killing, suddenly had remarkably little shame about demanding state help. They evidently felt that, as “innovators,” they deserved the private profits until it came time once again to socialize the losses. Most of the big tech companies have money parked in secrecy world, in which crypto plays a new and amplifying role.
As Pizzo might have pointed out, there are so many ways that we have been here before.
I still think about Pizzo, but in a way, I’m not sure what I expected him to tell me. Nor am I sure what I hoped to hear from Baker or Bullough. They had written their books; what more can financial reporters do?
Many of the books mentioned here, and a slew of those unmentioned, focus on a specific aspect of the system, a single case where justice might be served, or a specific fix, and each one—mortgage-backed securities, student loans in higher ed, payday lending, inter-bank lending manipulation, cum-ex double-counted payments, misinvoiced trades—seems necessary. Solving any one of these issues might get us closer to a saner financial system.
According to Americans for Financial Reform, closing the carried interest tax loophole on private equity executives alone could raise between $1.4 billion and $18 billion annually. This one tax loophole seems worth a fight.
But whose fight is it? Each book, each issue, returns me to the question of how you get people to care. Those three words—carried interest tax—are eye-glazing by themselves. And with each loophole fixed, we know others will pop up, like Whac-a-Mole.
I hold Pizzo in my mind’s eye, riding off on his Harley.
The layers of secrecy created by anonymous shell companies permeate the global economy. Lobbyists from private equity, banking, oil, real estate—anything that Goldman Sachs has ever touched—would go to bat against any effort to peel these layers back. I put this to Raymond Baker as a question: If we try to shut down shell companies, won’t all of the rich and powerful rally against it? Because shell companies benefit all of the rich and powerful? He basically said sure, maybe. We gotta do it anyway. And the US, as the center of global finance, has to lead the way.
We can’t have both transparency and competition for incoming international flows. The race to a bottom lined with tax havens and economic development zones must be stopped.
It’s easy to call for doing everything everywhere all at once—zoom in, zoom out, take small steps towards overall change! But with each financial investigation and economic critique that I read, I risk being overwhelmed. There’s no one villain at the wheel, the problem is deeply systemic, and even when we identify capitalism itself as the source of the problem, the conspiracy can seem too vast. It’s clear that I’m not alone in feeling overwhelmed. When the sense of being powerless makes people feel too helpless, many turn to cult-like online communities, with violent solutions.
It seems pedantic to suggest that financial books and journalists should point to specific collective solutions, efforts being made to fight the issues raised. Pedantic but apt. Thus: A relatively large group of labor organizations and civil rights groups has rallied around the carried interest tax loophole, best represented by a group called the Hedge Clippers (in reference to hedge funds). The loophole almost got outlawed but was then kept open by politicians taking money from private equity PACs. This setback is disheartening, but the coalition behind the fight is not. And it has no reason to disband once that loophole is closed. The coalition itself elevates the issue.
Or maybe people should just start showing up at the registered address for shell companies in their neighborhoods. Even if the trillions are invisible, perhaps moneyland can be occupied.