By Brooke Harrington

The Guardian,

Wednesday 21 September 2016 01.00 EDT

They know more about their clients than the clients’ own wives. They are loyal in the face of appalling behaviour. They are the brains behind the most ingenious tax avoidance schemes. And there are more of them than ever

The Pritzker family is one of the wealthiest in the United States. Their assets, which amount to $15bn, are held in 60 companies and 2,500 trusts, using structures and strategies that Forbes magazine – normally a cheerleader for wealthy elites – describes with an unusual hint of moral distaste as “shadowy … constructed to discourage outside inquiry – and brilliantly exploitative of loopholes in the tax code.”

This complex asset-holding structure was created not by the Pritzker family itself but by its lawyers, accountants, tax specialists and investment advisers. In this respect, the Pritzkers are no different to tens of thousands of super-rich families and individuals worldwide, who use the services of wealth managers. These professionals not only shelter wealth from taxation but, in the words of one academic paper, serve to “obscure concentrations of economic power”, using vehicles that make it difficult, if not impossible, to identify the true owners of wealth.

The work of wealth managers has been described by some leading practitioners as a defence against the depredations of “confiscatory states.” Much of these professionals’ day-to-day practice occurs in an ethical grey area – a realm of activity that is formally legal but socially illegitimate. This includes the use of trusts, offshore corporations and similar tools to help clients avoid paying tax, debts to creditors or alimony to ex-spouses. Following the financial crisis and news stories such as the Panama Papers, these tactics – many of which are also used by corporations to avoid taxation and regulation – are attracting increasing public attention and condemnation.

The profession – whose main representative body is the London-based Society for Trust and Estate Practitioners (Step) – has been singled out for blame in several countries by government agencies concerned with tax evasion, money laundering, and growing worldwide wealth inequality. In its 2006 Seoul declaration, the Organisation for Economic Cooperation and Development (OECD) made special mention of the roles played by ‘‘law and accounting firms, other tax advisers and financial institutions” in helping companies and individuals find ways round international laws. In 2003, the now-retired Democrat senator Carl Levin complained to a US Senate subcommittee about the asset-holding structures created by wealth managers to obscure their clients’ assets: “Most are so complex that they are Megos – ‘My Eyes Glaze Over’ type of schemes. Those who cook up these concoctions count on their complexity to escape scrutiny and public ire.”

As world wealth has grown to record levels in recent years – to an estimated $241 trillion – inequality has also grown, with 0.7% of the global population owning 41% of the assets. Wealth managers are estimated to direct the flows of up to $21tn in private wealth, resulting in about $200bn in lost tax revenues globally each year. In effect, these professionals detach assets from the states that wish to tax and regulate them, creating a form of capital that is, like its owners, transnational and hypermobile. Doing so involves creating not just asset-holding and tax-avoidance structures but a new body of transnational institutions, which are expanding outside of any democratic process of checks and balances. In this way, the rise of the super-rich and the wealth management industry is creating an elite who are increasingly ungoverned and ungovernable.

The wealthy and powerful are notoriously difficult to study. Within this domain, wealth management presents particular challenges, as the profession depends on secrecy and is governed by a code of conduct that requires strict privacy.

As a sociologist intent on understanding the world of wealth management, I started my research by going back to school. In November 2007, I enrolled in a two-year wealth management training programme. My goal was to obtain a credential that is now the accepted global standard for practitioners: the TEP, or Trust and Estate Planning certification. To earn the credential, you need to pass five courses in key domains of technical competence: trust law, corporate law, investments, finance, and accounting.

Between 2008 and 2015, I conducted 65 interviews with wealth managers in 18 countries, including Switzerland, Hong Kong, Singapore, Mauritius, and British crown dependencies and overseas territories such as Guernsey, Jersey, the British Virgin Islands and the Cayman Islands. I also conducted interviews in the newer financial centres, particularly those serving the growing wealth of Asia, such as the Seychelles.

Only once my findings started to be published, about six years into the project, did anyone treat me with open hostility. In August 2013, I conducted a prearranged interview in the British Virgin Islands with a white British man in his 60s, who was a banker by training. He greeted me by saying that he had read my two recently published papers and found my work to be “left-leaning” and “disapproving of what the [wealth management] industry and wealthy people are doing”. He added that the islands’ wealth management community were all wondering what I was doing here. Although he graciously answered my interview questions, he was not done with the subject of my “agenda”. At the end of the interview, he crossed his arms, leaned back in his chair, and expressed his resentment that wealth managers and their clients had been “vilified” as being “immoral for not paying as much tax as some people think they should”. He added that one local wealth manager had suggested that I “should be thrown off the island”.

Activists in Berlin wear Panama hats in protest against tax avoidance,

after the release of the Panama papers. Photograph: Sean Gallup/Getty Images.

I was so taken aback by this statement that I simply thanked the man for his time, shook his hand, and walked back to the bar at my hotel to have a drink. I was unaware then of a precedent: just two years previously, the Channel Islands tax haven of Jersey had detained, deported, and ultimately banned a reporter from Newsweek magazine for investigating claims of illegal activity there. Even though the story had no connection to financial services, it was expected to bring negative publicity to the island, threatening its reputation as a quiet, off-the-radar place for elites to park their fortunes. Remarkably, the local financial authorities were so well connected that they managed to bar the reporter not only from re-entering Jersey but also from entering the United Kingdom, period.

Learning of this story made me view the conversation with the British Virgin Islands banker in a new light. Not only did it underscore the way that the wealth management profession can influence state authorities, at least offshore; it also highlighted the value of taking an immersive approach to my research. Had I tried approaching wealth management as a total outsider – like the reporter from Newsweek – this study would probably never have got off the ground.

The bonds that wealth managers develop with their clients are unusual. For one thing, they last a very long time. The legal scholar John Langbein once characterised wealth management in terms of “relationships of long and uncertain duration, usually measured in lives”.

Like a family doctor or lawyer, a wealth manager is privy to highly sensitive information. Unlike in other professions, however, these intimate details are not confined to one area of the client’s life. James, who is based in London, explained that clients “have to pick someone they want to know everything about them: about mother’s lesbian affairs, brother’s drug addiction, the spurned lovers bursting into the room”.

The wealth manager’s job is to protect clients’ money from risk: this includes not just from bad investments but other possibilities, such as spendthrift heirs burning through the family assets or relatives with embarrassing secrets that could make them vulnerable to blackmail. “It’s like being a voyeur … the client has to undress in front of you,” said Eleanor, an American working in Switzerland.

Elaine, an English wealth manager working in Dubai, said, “They tell you lots of secrets, these clients, things they would never tell their bankers. You are their confidant. You are so trusted – you have to be totally confidential. A client will say to me, ‘I want to leave money to my girlfriend, but I don’t want my wife to know.’”

The super-rich are often extremely sceptical about the motives of people around them. “People who have a lot of money can become very suspicious and isolated,” Robert, who works in Guernsey, told me. “They become convinced that everyone who meets them is trying to take advantage of them.”

Often this suspicion is justified. Many of the professionals I interviewed agreed that high-net-worth individuals often become targets for unscrupulous individuals. As Mark, an English wealth manager based in Dubai put it, “People want to con them, scam them, rob them, kidnap them.” What is more, these threats can come not just from strangers but from governments and even those closest to them.

James, from London, specialises in protecting elderly clients from exploitation by relatives. He told me: “I do deal with some tricky families … It’s about being there for the person and being someone they can rely on, often beyond the way that the person can rely on their own flesh and blood, because we don’t stand to get an inheritance from them.”

The air of paranoia that wealth can bring to the family dynamic is nothing new. According to the historian Scott L Waugh, documents from 13th-century England record court battles among nobles in which the proceedings are marked by “a widespread distrust of family wolves hungering after an inheritance”.

Some wealth managers liken their role to that of a cleric or confidant. Sherman in the British Virgin Islands said: “We’re a bit like the consigliere in The Godfather.” For clients, many of whom are surrounded by impatient heirs and yes-men, the opportunity to talk through their problems with someone discreet and honest is a valuable service in and of itself. Marian, who works in Los Angeles, told me: “My ex-husband always used to say, ‘She does social work for the rich.’”

Sometimes, after the death of a client, a wealth manager must break the news of a client’s inheritance plan to the potential heirs and sort out any family conflicts that may ensue. In other cases, they may end up in the role of detective, trying to piece together clues about aspects of the client’s fortune that were kept secret from everyone. Alistair, who is based in the Cayman Islands, recalled working with a “wealthy family in Jamaica” in which “the father died, not having told any single person all of his financial affairs. There was no one person who knew everything he had and where it was. He told each family member and a few trusted friends just little bits, but not the whole picture. And now, three years after his death, we’re still locating his assets.”

Determining whether a wealth manager is worthy of their trust is a key concern of elite clients. Several people in the profession told me that they had been asked to perform extraordinary acts of service in the early stages of their relationship with a new client, simply to prove that they were up to the job. For example, Eleanor told me of one person who called her office in Geneva and told her: “I’m outside a restaurant in London and I just lost a bracelet – I need you to find it.” In other words, the client was asking her to locate a missing piece of jewellery outside an unnamed building in another country. Eleanor somehow did this, billed for her time, and earned a loyal client for decades to come. “The very rich are willing to pay for that extra-special bespoke service – just like suits,” said Mark, who is based in Dubai.

David, a British wealth manager who is nearing the end of a 40-year career in Hong Kong, had a particularly impressive story: “I was phoned up from Osaka once, by a client who said, ‘I’m sitting across from Owagi-san, who speaks no English, but we are bowing to each other. He has just said to me through a translator that he needs a thousand sides of smoked salmon by Tuesday, and I’m relying on you to get them.’ I said, ‘I’m your wealth manager, not your fishmonger.’ And the client said, ‘Well, today you’re a fishmonger.’ So I had to ring up a friend who knew the guy from Unilever who runs the smoked salmon plant in Scotland. And the plant manager made it happen.”

From time to time, wealth managers may have to say no to their clients for legal reasons. Bruce, who works in Geneva, recounted one such case: “I had one Arab client who asked me to send him $100,000 from company funds so that he could buy a Ferrari. I had to say no, and he said, ‘What do you mean, no?’ I said, ‘This is a company and you’re a shareholder, so perhaps you’re requesting a distribution?’ I had to coach him on the right words to use, and said, ‘Would you please delete those emails you sent me requesting the cash for the Ferrari?’”

A century ago, wealth managers’ clients were known collectively as “the leisure class”, a group that probably numbered in the low four figures, concentrated in North America and Europe. These days they are far more diverse, and distributed all over the world. Today’s client base includes the world’s 167,669 “ultra-high-net-worth individuals” – people who, according to the 2014 World Wealth Report by the management consultancy Cap-Gemini, have at least $30m in investable assets.

A wealth manager’s daily work is similar to that of an architect, in that both design complex, multifunctional structures. The financial architecture created by wealth managers contains assets rather than people and the structures are composed of linked organisational entities, such as trusts, corporations, and foundations. These structures are often means to reduce tax, avoid regulation and control inheritance planning.

Unlike architects, however, wealth managers also need to maintain the structures that they create. As laws, financial conditions, and political climates change, so do the strategies needed to manage a client’s assets. Keeping up with all this is no easy feat – and that is exactly where wealth managers come into their own. One manual published by Step explains that their role is to be “part lawyer, part tax adviser, part accountant and part investment adviser all rolled into one”. For international transactions, wealth managers also need to assemble and coordinate a team of advisers. In this sense, wealth managers are more like general contractors: responsible for executing the client’s strategic plan, but reliant on a team of subcontractors for highly specialised parts of the job.

Though the precise details of such complex structures are rarely made public, we can get a sense of them from professional publications. The following is a typical client scenario from one of the Step training manuals:

The proposed settlor [client] is a Brazilian national, but has been living in Canada for the last 15 years where he considers his permanent home to be. The trustees are to be a trust institution in the Cayman Islands with a professional protector situated in the Bahamas. It is intended that the trust assets will comprise shares in two underlying companies: the holding company of the settlor’s Latin American business empire is incorporated as an exempt company in Bermuda; and an IBC [international business corporation] incorporated in [the British Virgin Islands] holding a portfolio of stocks and shares. The discretionary beneficiaries comprise a class of persons who reside throughout Europe and South America.

Three aspects of this scenario are worth noting to illustrate the dizzying complexity of wealth management. The first is the international scope: six countries and their respective laws are implicated in this asset-holding structure, not including the various states in Europe and South America where the people who will benefit financially reside. The wealth manager must coordinate with experts in each of those jurisdictions to keep abreast of changes in tax laws and other regulations. Second, there is a large cast of characters involved, including not just professionals – such as the trustees in the Cayman Islands and the directors of the international business corporation in Bermuda – but also the client and the beneficiaries.

Third, there is the mix of structures, with a trust holding shares in multiple underlying corporations. This trust-corporation configuration allows assets to be transferred back and forth in what Forbes once characterised as a “shell game extraordinaire”. Skilful wealth managers can use tools such as trusts, foundations and corporations to thwart the aims of the state almost indefinitely, without breaking any laws.

For some, this is one of the attractions of the profession. Bruce, an American working in Geneva, said that his primary source of job satisfaction was the “intellectual challenge of playing cat and mouse with tax authorities around the world”.

The Cayman Islands is a favourite offshore hiding place for the super-rich

Photograph: roberthardin/ REX/ Shutterstock.

But a much more common reason that wealth managers give for enjoying their job is that it is not just intellectually challenging, but emotionally fulfilling. As Sebastian, an Englishman based in Hong Kong, put it: “It’s not like being an investment banker, where you’re just filing papers for a company you care nothing about … Even if the clients are spoiled brats, and some of them really are, your work helps keep families together.” This was a common refrain: almost every participant in the study mentioned “helping families” as a major source of satisfaction.

Many wealth managers’ clients invite them to attend family weddings, to take holidays with them, and even to sit by their deathbed. A few members of the profession talked of crying at their desks after learning that one of their clients had died. As Sherman, the man I spoke to in the British Virgin Islands, told me, this intimacy with clients’ lives gives a depth to his practice that is unlike his previous experience in banking: “It’s very emotional. It’s very real.”

The quasi-familial role does have some downsides. The position of trust and intimacy that they develop with clients often makes wealth managers witness some of the worst aspects of family life. Many mentioned their distress at having to help clients disinherit their children and spouses.

In some cases, the fortune that holds the family together may also destroy it. A Step Journal article from 2009 noted that in addition to the threats that creditors and tax authorities pose to a family’s wealth, “the ‘enemy within’ needs to be considered. Putting it bluntly: how can you stop the family from pushing the self-destruct button?”

Nadia, who works in Panama City, said with tears in her eyes that over the past 30 years of her career, “I have watched families tear themselves apart over money. Tear themselves apart.” Several mentioned their discomfort in abetting deceptions and betrayals of clients’ family members. Alistair, in the Cayman Islands, said, “We may have a client with a mistress and children, who he wants to provide for, and it all has to be kept totally private from the wife. We have to just put up and shut up.”

When it comes to families, the particular responsibilities of wealth managers vary from region to region. On the Arabian Peninsula, they are now routinely asked to mitigate the disadvantages that Islamic law imposes on the inheritance rights of daughters. Since sharia also tightly limits testamentary freedom – the degree to which individuals can choose how their assets are distributed after their death – those who wish their daughters to have an equal share of the family fortune must find offshore alternatives.

Elaine, who works in Dubai, explained that her clients are increasingly turning to her for workarounds: “Arabs are getting their daughters educated, and they’re trying to protect them, since they’re taking over family businesses, sitting on boards of directors – in Kuwait they’re sitting in parliament. Typically, you’ll see sheikhas not walking behind their husbands, like before, but walking with their husbands, holding hands. So fathers are changing their estate planning: they’re creating trusts and taking out life insurance, which is kind of haram in Islam, but they do it because their sons are going to get the family business under sharia law, and they want their daughters to have an equal share.”

Within the world of wealth management, being obliged to honour debts, pay the costs of government, and otherwise obey the laws of the land are often seen as offences to liberty. One training textbook describes the claims of creditors as “risks”, rather than obligations that borrowers take on voluntarily. Other threats include the legal system itself, regulation and, of course, taxation.

The desire to escape these obligations explains the popularity of offshore financial schemes. In Treasure Islands, his study of offshore financial centres, Nicholas Shaxson describes this as a world of “members of ancient continental European aristocracies, fanatical supporters of American libertarian writer Ayn Rand, members of the world’s intelligence services, global criminals, British public schoolboys, assorted lords and ladies and bankers galore. Its bugbears are government, laws and taxes, and its slogan is freedom.”

The economist Gabriel Zucman has argued that the offshore financial system has grown to the point that it calls into question the future of national sovereignty. His argument is based primarily on tax avoidance, which he calls “theft pure and simple”. By allowing taxpayers to steal from their governments to the tune of $200bn in worldwide lost tax revenue each year, he argues, wealth managers dramatically undermine the power of the state.

Luxembourg, where nearly half the country’s production benefits foreign individuals and organisations, is more like a free-trade zone than a country. Others have made a similar point about Jersey: thanks to the economic and political dominance of wealth management, it is no longer really a sovereign state in any meaningful sense. In any ordinary sense of the term, the journalist Oliver Bullough has written, Jersey “is not a country”, rather, it is “45 square miles of self-governing ambiguity”.

With offshore, the wealthy, and the elite professionals who serve them, have created a kind of parallel world of selective lawlessness: selective in that the super-rich can continue to enjoy the benefits of laws that suit their interests while ignoring laws that inconvenience them. This parallel world operates largely unnoticed, except when it contributes to throwing the world that the rest us inhabit into chaos, as it did in the 2008 financial crisis.

Some might argue that it was ever thus. But the problem has grown to an extent that was previously almost unimaginable. The mobility of wealth and its owners, coupled with the legal and financial skill of wealth managers, makes it all too easy to violate the spirit of laws while adhering to them formally.

By now, it is abundantly clear that direct efforts to curtail the privileges of the super-rich have proven ineffective. If political leaders are interested in making elites pay their fair share of tax and submit to the rule of law, they should perhaps shift their attention from those who possess vast wealth and onto the people who serve them.

Brooke Harrington

This essay is adapted from Capital Without Borders: Wealth Managers and the One Percent, published by Harvard University Press on 29 September

About author: Brooke Harrington is an associate professor of sociology at the Copenhagen Business School. She is the author of Capital Without Borders: Wealth Managers and the One Percent, which is published by Harvard.(From The Guardian).

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