The wealth gap isn’t isolated to just the United States. There’s the rich and then the uber-rich, who despite their stratospheric wealth, are largely invisible to the rest of the world. In her new book, Spiderweb Capitalism: How Global Elites Exploit Frontier Markets, Kimberly Kay Hoang examines the shadowy, international web of political and economic elites and the secretive and corrupt practices they use to make and protect their money.
Fast Company talked with Hoang, a University of Chicago sociology professor, about this hidden economic web:
Fast Company: Tell us about this idea of “spiderweb capitalism.”
Kimberly Kay Hoang: Spiderweb capitalism is a complex web of subsidiaries that are interconnected across multiple sovereignties and are virtually impossible to identify. Offshore financial centers have enabled both economic and political elites—who in less-developed economies are often one and the same—to secure exclusive and quasi-legal opportunities for the accumulation of enormous wealth.
The web is so complex, and involves so many layers and actors, that it becomes challenging to trace. Every strand is connected by networks of financial, legal, executive, and public relations professionals, all of whom are hidden from one another. They purposefully obfuscate their relations with other parts of the web.
I call the ultra-high-net-worth individuals who control the web the big spiders. But those spiders use “agents” or “fixers” to cover close connections to transactions that would be considered “dirty” or corrupt.
This leads to the next question. You talk about how the ultra-wealthy often “play in the gray.” What does that mean exactly?
Playing in the gray was language that many of my interviewees used to describe how they finesse the boundary between legal and illegal activity, often by front-running the market and the law. Many said—and this was their language—”Yeah, this is all legal, but it’s morally reprehensible. I shouldn’t be able to get away with this. But, you know, this is just the way that financial markets operate.”
Playing in the gray is also about an emotion. In frontier and emerging markets, people are not making investments based off of highly sophisticated algorithms that calculate risk. Rather, it is based on a “gut feeling” garnered through a network of people who are providing investors with insider knowledge or access to deals that are not open to the public.
What are examples of these “morally reprehensible practices?”
I would go to conferences where government officials asked what they needed to encourage foreign investment. And the answer was to allow financial professionals to cowrite laws and policies around tax, transfer pricing, and other practices that allow foreign businesses to operate with little or no tax.
The ultra-wealthy often use offshore entities and shell companies to choose their legal jurisdictions and effectively legally avoid paying taxes both in the countries where they are making 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 charge investors with corruption or litigation with various business partners. They also enable the ultra-wealthy to conceal their identities by hiring other financial professionals to serve as the face of many of these deals.
One person I interviewed pointed out that I’m a professor on a W2, and that I pay more taxes than they do. They might only pay 5% taxes offshore in Hong Kong or Singapore, and 0% taxes in the British Virgin Islands or Cayman and Seychelles. Legally, they essentially claim liabilities or losses onshore where they have operations in Vietnam or Myanmar, and then they claim profits offshore in the vehicles that are sort of the holding companies of the onshore companies.
The other legal but morally reprehensible practice is “front-running the law,” or taking strategies that were highly profitable pre-regulation in developed economies and [using] them in frontier markets where they are getting ahead of formal regulations.
One example is business transfer pricing practices, where companies that are part of the same entity would charge themselves for services, consulting services, or intellectual property. They took those transfer pricing practices and brought them to China. And then once they were in China, they took those practices to Vietnam and Myanmar. They claim they’re imitating what slightly more developed economies are doing, and they keep moving it to more and more front-emerging markets.
How does the recent 1Malaysia Development Berhad scandal play into your book—and the fact that Goldman Sachs admitted to conspiring in a scheme to pay more than $1 billion in bribes to officials in Malaysia and Abu Dhabi to obtain lucrative business deals. Is this just the tip of the iceberg?
Yes, it’s just the tip of the iceberg. This is the part that I think is most fascinating. This world is so vast and so mundane that I cannot think of companies or individuals who can honestly claim that they are above these webs or outside of these webs.
As one of my interviewees said to 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 laid low? . . . He would have gotten away with it because [the governments of] Malaysia and Singapore would have written off the debt . . . to avoid a very public scandal that would tarnish their reputations.” Most of the people I interviewed lay low, and they operate with a strategy of operating in a stealth manner hidden behind these capital webs.
So the ultra-rich are hiding behind others. Your book quotes one source saying, “Behind every CEO is a chairman, who is so rich that they are nowhere and everywhere and are accountable to no one.” Tell us more about this.
This is where I uncovered the difference between the ultra-high-net-worth individuals and the wealthy financial professionals who manage their money. Many of the C-suite executives I interviewed told me that while they are often the face of a deal in newspapers and in the media, they are just managing the money of others who are often invisible in these webs.
These ultra-high-net-worth individuals syndicate all legal and criminal risks involved with navigating highly corrupt markets to C-suite executives.
Take for example, Timothy Leissner—former managing director at Goldman Sachs and chairman of the bank’s Southeast Asia division—in the deal involving Goldman Sachs for the case of 1MDB. People who I interviewed related to him tremendously because they saw him—and by virtue of their positions, themselves—as the fall person, when there are charges of corruption. And even in cases where someone like Leissner pays huge fines, the people behind him rarely must turn over their profits. That is an extreme case because, among the groups of people I studied, it’s rare for the chairperson to appear anywhere. They are everywhere because their money is everywhere, but legally they are also nowhere and are hard to see.
So who or what is the biggest culprit in this unethical web?
You can’t pinpoint one individual or one culprit. It’s systemic. People see themselves as just sort of a cog in the system.
But one contributing factor is that the financial professionals are choosing the legal jurisdictions and operating in less developed economies. I would even argue that in recent years under the Trump administration, political elites are also one in the same as financial elites.
In emerging and frontier markets, financial elites have very close ties with political elites who are choosing either not to create laws or policies to govern or regulate their financial activities or choosing not to enforce those laws.
I traveled with fund managers raising money for various investment projects in Vietnam and Myanmar, for example, and one of the ways in which they sold themselves was to say “we have access to these deals,” which means that they have political ties for licensing permits or access to state-owned enterprises that are privatizing all kinds of deals that are not available on the public market.
We started to see some glimmerings of this under the Trump administration, when Jared Kushner went to China and the Middle East, essentially selling his political connections to the U.S. What I thought was unique in these frontier-emerging markets are actually practices that may have always been happening in the United States and in developed economies.
You went into the research with one idea about the wealth gap and finished it with a different reality. Explain.
When I first started this research, I often thought about the Occupy Wall Street movement and a narrative that divided the United States between the 1% and the 99%. That movement began to open us up to seeing a shrinking middle class and a wide divide between the rich and the poor in America. This project showed me that there is a great deal of diversity across the top 10% and even more so in the top 1%.
What I did not anticipate was the global reach of this widening inequality. What I learned is that the wealthy in Ho Chi Minh City or Yangon in Myanmar have financial relationships with the elites of Newport Beach, California; New York, Toronto, and more. When the ultra-wealthy have access to the whole world, it means that they get to choose the legal jurisdictions that govern their financial activities. These financial markets are interconnected in a way where it’s not just a divide between the first world and third world.
What do you hope comes from this book?
I hope it will inform the broader public about how these systems and people work, and hopefully inspire talented people to help us put in place better policies and practices to govern these activities and to coordinate across governments. As the world becomes more and more unequal, and nobody’s governing the financial activities of billionaires, it’s going to create more social problems. I hope it opens up debate and inspiration for new ways of thinking about our deeply interconnected global markets. Ultimately, I believe that those of us who are locked out of these webs are just the prey caught in them.