The latest report by ICIJ (International Consortium of Investigative Journalists) on 4 October, named the Pandora Papers, covers more leaked documents than the Panama Papers, and names 35 current or former leaders of countries, and, in total, 336 politicians from over 90 countries.
Offshore trusts and overseas assets are, per se, not illegal. But, in many countries, generally republics rather than monarchies, an elected politician's failure to declare all sources of wealth and assets is illegal.
Current leaders who have been mentioned in the ICIJ report include Czechia Prime Minister Babis, Lebanon Prime Minister Mikati, Kenya President Kenyatta and Ukraine President Zelensky, as well as the current finance ministers of Pakistan (Tareen) and Brazil (Guedes).
Our reaction to Pandora Papers covers five issues:
ESG country-risk for institutional funds;
The telling reactions of leaders;
The salacious red herring of royalty;
A developed as much as an emerging market concern; and
The quantification of corruption risk.
(1) ESG country risk
While these offshore trusts are not proof of illicit activity, they are the sort of vehicles used for those who wish to keep their wealth secret, which, in turn, can be a symptom of corrupt activity. ESG funds cannot do justice to the Governance part of their mandate without considering corruption in the countries in which they are invested.
(2) Leaders' responses
The reactions of leaders in countries where politicians have been named is revealing: for example, contrast the immediate response of Pakistan Prime Minister Imran Khan (who is not personally mentioned), welcoming the leaks and pledging an investigation of any citizens mentioned, as opposed to the many who have maintained silence.
(3) Royalty red herring
Mentions of monarchs, eg King Abdullah of Jordan or Sheikh Mohammed of Dubai, may provide some of the juicier headlines in the ICIJ reports but they are something of a red herring because monarchs are not bound by the same legal or constitutional constraints as (elected) political leaders in republican systems.
(4) A developed and emerging market issue
Developed markets are arguably as complicit in financial secrecy as emerging markets: ICIJ describe how trusts created in the US "have become a go-to vehicle for financial secrecy", holding assets for people from 40 countries outside the US, with over US$1bn in real estate in and bank accounts in Luxembourg and Switzerland, as well the Bahamas, Panama and Puerto Rico.
(5) Quantifying corruption
Below, we illustrate corruption data across emerging and frontier markets from Transparency International.
The underlying data for this chart is extracted from our Emerging Markets Investability Matrix, a curated data set covering over 50 emerging and frontier markets with close to 150 metrics, and is accessible via this excel file.
Related reading
ESG needs to focus on countries, not just companies, October 2021
Corruption: The latest Transparency International scores in Emerging Markets, January 2021
Corruption: FinCEN Files a reminder of challenges for EM and ESG investors, September 2020
Corruption: The ugly truth for EM and ESG investors, July 2020