The wealth gap is not unique to the United States. There are the rich, and there are the super-rich who, despite their sky-high wealth, are virtually invisible to the rest of the world. In my new book Web Capitalism: How Global Elites Use Frontier MarketsKimberly Kay Hoang explores a shady international network of political and economic elites and the secretive and corrupt methods they use to earn and protect their money.
fast company spoke with Hoang, professor of sociology at the University of Chicago, about this hidden economic network:
fast company: Tell us about this idea of ”spider capitalism”.
Kimberly Kay Hoang: Web capitalism is a complex web of subsidiaries that are linked through multiple sovereignties and are almost 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 gain exclusive and semi-legal opportunities to amass enormous wealth.
The network is so complex and includes so many layers and participants that it becomes difficult to keep track of it. Each strand is connected by networks of finance, legal, executive, and public relations professionals, all hidden from one another. They deliberately hide their relationship with other parts of the network.
I call the ultra-high net worth people who control the network big spiders. But these spiders use “agents” or “fixers” to hide close ties to transactions that could be considered “dirty” or corrupt.
This leads to the next question. You talk about how the super-rich often “play at a loss.” What does this mean?
Many of my interlocutors used the expression “playing in gray” to describe how they blur the line between legal and illegal activities, often outperforming the market and the law. Many said – and this was their language: “Yes, this is all legal, but morally reprehensible. I shouldn’t be able to get away with this. But, you know, that’s how financial markets work.”
Playing in gray is also associated with emotions. In frontier and emerging markets, people don’t invest based on complex algorithms that calculate risk. Rather, it is based on a “gut feeling” gained through a network of people who provide investors with insider information or access to trades that are not open to the public.
What are examples of these “morally reprehensible practices”?
I went to conferences where government officials asked what they needed to encourage foreign investment. And the answer has been to let financiers co-write laws and policies on taxes, transfer pricing and other practices that allow foreign businesses to operate with little or no taxes.
The super-rich often use offshore structures and shell companies to choose their legal jurisdiction and, in fact, legally evade taxes both in the countries where they invest and in the countries where they live. These offshore structures also allow them to install legal firewalls to shield their assets from all sorts of criminal and civil risks and to protect their accumulated wealth from states that want to accuse investors of corruption or litigation with various business partners. They also allow the super-rich to hide their identities by hiring other financial professionals who act as front-runners in many of these deals.
One person I interviewed mentioned that I teach at W2 and pay more taxes than they do. They can only pay 5% tax offshore in Hong Kong or Singapore and 0% tax in the British Virgin Islands or the Cayman and Seychelles. Legally, they essentially claim liabilities or losses onshore where they have operations in Vietnam or Myanmar, and then they claim profits in offshore structures that are sort of holding companies for land-based companies.
Another legal but morally reprehensible practice is to “get ahead of the law” or use strategies that were very profitable before regulation in developed countries and countries. [using] them in frontier markets, where they are ahead of the formal rules.
One example is the practice of transfer pricing, where companies that are part of the same organization charge fees for services, consulting services, or intellectual property. They took this transfer pricing practice and brought it to China. And then, once in China, they transferred these practices to Vietnam and Myanmar. They claim to imitate what somewhat more developed countries are doing and continue to move them to more and more advanced markets.
How the recent 1Malaysia Development Berhad scandal affects your book and the fact that Goldman Sachs admitted to conspiring 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, this is just the tip of the iceberg. This is the part that I find the most exciting. This world is so vast and so down to earth that I cannot imagine companies or individuals who can honestly say they are above these networks or outside of these networks.
As one of the interlocutors told me: “Joe Lowe [the Malaysian fugitive businessman, wanted in connection with the 1Malaysia Development Berhad scandal] was a greedy narcissist. Can you imagine if he just hid? . . . He would get away with it because [the governments of] Malaysia and Singapore would write off the debt. . . to avoid a public scandal that would tarnish their reputation.” Most of the people I’ve talked to have gone to the bottom, and they operate with a strategy of stealth hidden behind a web of capital.
This is how the super-rich hide behind the backs of others. In your book, one source is quoted as saying, “Behind every CEO is a chairman who is so rich that he is nowhere and everywhere and accountable to no one.” Tell us more about it.
This is where I discovered the difference between super rich people and wealthy financial professionals who manage their money. Many top executives I have interviewed have told me that while they are often the face of deals in newspapers and the media, they are simply managing the money of others who are often invisible on those networks.
These super-rich people shift all the legal and criminal risks associated with navigating highly corrupt markets onto top executives.
Take, for example, Timothy Leissner, a former managing director of Goldman Sachs and chairman of the bank’s Southeast Asia division, in the Goldman Sachs 1MDB deal. The people I interviewed felt very strongly about him because they saw him – and by virtue of their position and themselves – as a fallen man when allegations of corruption arose. And even in cases where someone like Leissner pays hefty fines, the people behind him rarely have to recoup their profits. This is an extreme case, because among the groups of people I have studied, the chairman rarely appears anywhere. They are everywhere, because their money is everywhere, but legally they are also nowhere to be seen.
So, who or what is the main culprit behind this unethical network?
You cannot name one person or one criminal. It’s systemic. People see themselves as just a cog in the system.
But one of the factors contributing to this is that financial professionals choose legal jurisdictions and work in less developed countries. I would even say that in recent years under the Trump administration, the political elites are also one with the financial elites.
In emerging and frontier markets, financial elites have very close ties to political elites who either choose not to create laws or policies to govern or regulate their financial activities, or choose 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 they marketed themselves was to say, “We have access to these deals,” which means they have political connections for licensing. permits or access to state-owned enterprises that privatize all types of transactions not available on the public market.
We started to see some glimpses of this under the Trump administration when Jared Kushner went to China and the Middle East, essentially selling his political connections to the US. What I thought was unique in these frontier emerging markets is actually a practice that arguably always happens in the US and advanced economies.
You started your research with one idea of the wealth gap and ended it with a different reality. Explain.
When I first began this research, I often thought about the Occupy Wall Street movement and the narrative that divided the United States between the 1% and the 99%. This movement has opened our eyes to the shrinking middle class and the wide gap between the rich and the poor in America. This project showed me that there is a lot of diversity among the top 10% and even more so among the top 1%.
What I didn’t expect was the global reach of this growing inequality. I learned that the rich in Ho Chi Minh City or Yangon in Myanmar have financial relationships with the Newport Beach California elite; New York, Toronto and others. When the super-rich have access to the world, it means they can choose the legal jurisdictions that govern their financial activities. These financial markets are interconnected in such a way that it is not just a dividing line between the first world and the third world.
What do you hope to get out of this book?
I hope this will educate the general public about how these systems and people work, and hopefully inspire talented people to help us put in place better policies and practices to manage these activities and coordinate between governments. As the world becomes more and more unequal and no one controls the financial activities of billionaires, this will create more social problems. I hope this will open up discussion and inspire new perspectives on our deeply interconnected global markets. Ultimately, I believe that those of us who are trapped in these nets are simply prey caught in them.