The wealth gap is not limited to the United States alone. There are the rich, then the ultra-rich, who despite their stratospheric wealth, are largely invisible to the rest of the world. In his new book, Cobweb Capitalism: How Global Elites Exploit Frontier MarketsKimberly Kay Hoang examines the shadowy international web of political and economic elites and the covert and corrupt practices they use to earn and protect their money.
fast company spoke with Hoang, a sociology professor at the University of Chicago, about this hidden economic web:
fast company: Tell us about this idea of “cobweb capitalism”.
Kimberly Kay Hoang: Cobweb capitalism is a complex web of interconnected subsidiaries across multiple sovereignties that are virtually impossible to identify. Offshore financial centers have enabled economic and political elites – which in less developed economies are often one and the same – to secure exclusive and quasi-legal opportunities to accumulate enormous wealth.
The Web is so complex and involves so many layers and actors that it becomes difficult to trace it. Each strand is connected by networks of professionals in finance, law, management and public relations, all of which are hidden from each other. They deliberately obscure their relationship to other parts of the web.
I call the ultra-wealthy individuals who control the web the big spiders. But these spiders use “agents” or “fixers” to cover up close ties to transactions that would be considered “dirty” or corrupt.
This brings us to the next question. You talk about how the ultra-rich often “play in the gray”. What exactly does this mean?
Playing in the gray was a language that many of my interviewees used to describe how they are refining the line between legal and illegal activities, often ahead of the market and the law. Many said — and that was their language — “Yes, it’s all legal, but it’s morally wrong. I shouldn’t be able to get away with this. But, you know, that’s just the way financial markets work.
Playing in the gray is also an emotion. In frontier and emerging markets, people don’t make investments based on highly sophisticated algorithms that calculate risk. Rather, it is based on “gut feeling” gathered through a network of people who provide investors with insider knowledge or access to transactions that are not open to the public.
What are examples of these “morally reprehensible practices”?
I attended conferences where government officials asked what they needed to encourage foreign investment. And the answer was to allow finance professionals to co-write laws and policies regarding taxation, transfer pricing and other practices that allow foreign businesses to operate with little or no tax.
The ultra-rich often use offshore entities and shell companies to choose their legal jurisdictions and effectively and legally avoid paying taxes both in the countries where they make capital investments and where they reside. These offshore vehicles also allow them to set up legal firewalls to insulate their assets from all sorts of criminal and civil risks and to protect accumulated wealth from states wanting to accuse investors of corruption or litigation with various business partners. They also allow the ultra-rich to conceal their identities by hiring other financial professionals to serve as the face of many of these transactions.
A person I interviewed pointed out that I am a teacher on a W2 and that I pay more taxes than them. They might only pay 5% tax abroad in Hong Kong or Singapore, and 0% tax in the British Virgin Islands or Cayman and Seychelles. Legally they basically claim liabilities or losses onshore where they have operations in Vietnam or Myanmar and then they claim offshore profits in the vehicles which are kind of the holding companies of the onshore companies.
The other legal but morally reprehensible practice is to “pass the law forward”, or to adopt strategies that were highly profitable before regulation in developed economies and [using] in frontier markets where they outpace formal regulations.
An example is business transfer pricing practices, where businesses that are part of the same entity would charge each other for services, consulting services, or intellectual property. They took these transfer pricing practices and imported them into China. And then once in China, they took these practices to Vietnam and Myanmar. They claim they are mimicking what slightly more developed economies are doing, and they keep moving it to more and more emerging markets.
How the recent 1Malaysia Development Berhad scandal plays into your book – and the fact that Goldman Sachs admitted to conspiring in a scheme to pay over $1 billion in bribes to officials in Malaysia and Abu Dhabi to secure lucrative business deals. Is this just the tip of the iceberg?
Yes, that’s just the tip of the iceberg. This is the part that I find the most fascinating. This world is so vast and so mundane that I can’t think of any companies or individuals that can honestly claim that they are above these webs or outside these webs.
As one of my interlocutors told me: “Jho Low [the Malaysian fugitive businessman, wanted in connection with the 1Malaysia Development Berhad scandal] was a greedy narcissist. Can you imagine if he just lay low? . . . He would have got away with it because [the governments of] Malaysia and Singapore would have canceled the debt. . . to avoid a very public scandal that would tarnish their reputation. Most of the people I interviewed kept a low profile, and they operate with a stealth operation strategy hidden behind these capital networks.
So the ultra-rich hide behind the others. Your book cites a source saying, “Behind every CEO is a president, who is so wealthy that he is nowhere and everywhere and is accountable to no one.” Tell us more about it.
This is where I discovered the difference between ultra-high net worth individuals and wealthy financial professionals who manage their money. Many senior executives I have interviewed have told me that while they are often the face of a deal in newspapers and the media, they are just managing the money of others who are often invisible on these sites. website.
These very wealthy people syndicate all the legal and criminal risks of navigating highly corrupt markets to the C-suite leaders.
Take for example Timothy Leissner, former chief executive of Goldman Sachs and president of the bank’s Southeast Asia division, in the case involving Goldman Sachs for the 1MDB case. The people I interviewed identified very much with him because they saw him – and by virtue of their position, themselves – as the person to go to when there were accusations of corruption. And even in cases where someone like Leissner pays huge fines, the people behind him rarely have to hand over their profits. This is an extreme case because, among the groups of people I have studied, it is rare for the president to appear anywhere. They are everywhere because their money is everywhere, but legally they are nowhere and hard to see.
So who or what is the biggest culprit behind this unethical web?
You cannot identify an individual or a culprit. It’s systemic. People see themselves as a kind of cog in the system.
But a contributing factor is that finance professionals choose legal jurisdictions and operate in less developed economies. I would even say that in recent years under the Trump administration, the political elites have become one with the financial elites.
In emerging and frontier markets, financial elites have very close ties to political elites who choose either not to create laws or policies to govern or regulate their financial activities, or not to enforce those laws.
I’ve traveled with fund managers to raise funds for various investment projects in Vietnam and Myanmar, for example, and one of the ways they sold themselves was to say “we have access to these deals” , which means they have political ties for licensing. permits or access to public companies that privatize all kinds of operations that are not available on the public market.
We started to see some glimmers of this during the Trump administration, when Jared Kushner traveled to China and the Middle East, essentially selling his political connections to the United States. What I thought was unique in these frontier emerging markets are actually practices that may still have been happening in the United States and in developed economies.
You entered the search with one idea about the wealth gap and ended it with a different reality. Explain.
When I began this research, I often thought of the Occupy Wall Street movement and a narrative that divided the United States between the 1% and the 99%. This movement began to open us up to a shrinking middle class and a wide gap between rich and poor in America. This project showed me that there is great diversity in the richest 10% and even more in the richest 1%.
What I hadn’t anticipated was the global reach of this growing inequality. What I learned is that the rich in Ho Chi Minh City or Yangon in Myanmar have financial connections with the elites in Newport Beach, California; New York, Toronto and more. When the ultra-rich have access to the whole world, it means they can choose the legal jurisdictions that govern their financial activities. These financial markets are interconnected in a way where it’s not just a first world/third world divide.
What do you hope to get out of this book?
I hope it educates the general public on how these systems and people work and hopefully inspires talented people to help us put in place better policies and practices to govern these activities and ensure coordination. between governments. As the world becomes more and more unequal and no one governs the financial activities of billionaires, it will create more social problems. I hope this will open up debate and inspiration for new ways of thinking about our deeply interconnected global markets. Ultimately, I believe those of us who are excluded from these webs are just prey caught in them.