Inside Story

Playing in the grey

A sociologist ventures into a largely hidden financial system beyond the reach of governments and regulators

Ryan Cropp 24 February 2023 1928 words

The key to doing business in this part of the world is the ability to work comfortably in the space between the legal and the corrupt. iStockphoto

Deep in the rainforests of South and Central America there exists a terrifying species of arachnid, Anelosimus eximius. These nightmarish creatures, or “social spiders,” live in large colonies where they amass tremendous eight-legged armies sometimes numbering into the tens of thousands. Together, they build towering communal webs, often several metres in length, a dark spidery vortex designed to entrap much larger bugs.

Under spider socialism, some arachnids are more equal than others. Dominant spiders control large parts of the web but the subordinate spiders do most of the work: building and cleaning, organising and subduing the prey. Crucially, though, no one spider has full knowledge or control of the whole structure. Each works with some degree of independence in its own small section or subsection. There is no middle, beginning or end, no single locus of power and responsibility.

I know what you’re thinking: this sounds just like foreign capital investment in frontier markets under twenty-first-century financial capitalism. And you’d be right. Every few years, when some Cayman Islands middle manager discovers his or her conscience and shares a new tranche of incriminating files with the Guardian and the New York Times, we are reminded that out there, somewhere, the world’s super-rich and their vast network of highly remunerated accountants, lawyers, investment managers and “fixers” have built an elaborate parallel financial system that hides and protects their wealth.

The key to this system is its opacity. The wealthiest people on the planet benefit from the work of their most far-flung subordinates, but most of the time it is nearly impossible to establish precisely where and how they are connected. Capital doesn’t flow directly from Country A to Country B, but circuitously, through an invisible network of tax havens and offshore financial centres, an economic black hole that allows multinationals and the super-rich to exist in a permanent elsewhere.

When stories about tax havens and the offshore economy appear in the press — if they appear at all — they often tend towards the sensational: the laundering of an astronomical sum of money here, the implication of a highly recognisable name there. In 2015, for example, it emerged that a businessman named Jho Low had used a system of offshore shell companies to siphon more than US$4.5 billion out of the Malaysian government’s sovereign wealth fund, 1MDB. In 2017, Shakira, Bono and the Queen were among those named in the Paradise Papers, a huge leak of offshore data from a law firm operating in ten different jurisdictions.

In Spiderweb Capitalism: How Global Elites Exploit Frontier Markets, University of Chicago sociologist Kimberly Kay Hoang argues that the real story is not to be found in these headline cases but rather in the many thousands of low-key, everyday transactions that take place outside the purview of journalists, state officials and the public. Jho Low was unrepresentative: he was too big, too flashy, too public. If you really want to understand the system, she writes, you have to look at the people who operate without anyone noticing, the “stealth spiders.”

In 2016 and 2017, Hoang set herself the task of understanding precisely how this offshore economy functioned, especially in risky underdeveloped markets like Vietnam and Myanmar. For nearly eighteen months she “embedded” herself in the Southeast Asian corner of the spiderweb, first as an assistant in a Vietnamese asset management firm then as a kind of intrepid journalist-professor, pursuing and interviewing more than 300 fund managers, state officials, “C-suite executives,” consultants, lawyers, accountants and financiers, from the Cayman Islands to Hong Kong, and San Francisco to Myanmar.

In style and presentation, Spiderweb Capitalism is sometimes stultifyingly academic, but the material is pure Michael Lewis. Take, for example, Will, a forty-two-year-old Vietnamese-German investor and former Lehman Brothers banker who spoke to Hoang at length about his business operations in Southeast Asia. After losing his job in the 2008 meltdown, he says, he cashed out his savings and moved to Singapore to look for new investment opportunities. Despite earning up to US$1 million a year in his former career, he testified to a feeling of precarity. He wanted to become, in his own words, “an owner of capital rather than a worker for capital.”

Making direct equity investments in large companies required considerable staff support, however, so Will joined a “family office” (Wall Street shorthand for a private wealth management company that looks after the pooled wealth of one or more ultra-high-net-worth individuals). His company manages over US$100 million in assets and generally takes on individual investments in the five to ten million dollar range: serious money, but not serious enough to attract significant attention from the press or the top levels of government.

Will admitted to Hoang that he has lost count of how many offshore structures he controls. The main fund in this carefully constructed maze is domiciled in Guernsey, in the British Channel Islands, which has no income, state, corporation or capital gains taxes. That company has a number of tax-exempt subsidiaries in the Cayman Islands and Singapore, from which it manages its “onshore operations” in Vietnam, Cambodia and Myanmar. Each investment is registered as its own separate company or “special purpose vehicle” (a paper company that allows the parent business to insulate its various investments from each other). Will’s company only moves funds onshore for operations. With a bit of creative accounting, they are able to book all their profits in low-tax Singapore.

Creating such structures is remarkably easy. In Hong Kong, Hoang accompanied a wealth manager to the dingy offices of a company specialising in the establishment of offshore subsidiaries, a kind of H&R Block for tax havens. In a bland, windowless room, crammed floor-to-ceiling with stacks of paper, they were presented with a menu of wealth-concealment options.

The “privacy package,” they were told, included a company secretary service, an office address, a certificate of incorporation, the appointment of directors, share certificates and a company seal. They were regaled with the relative benefits of registering their company in Samoa versus the Seychelles. They were even provided with a list of preapproved company names, such as “Lucky Star 7” and “Happymoon4.” And the price was just US$900.

These structures are useful for tax evasion, but the reasons for using them, Hoang explains, are usually more complex. For foreign investors, they are often the only viable way to manage the culture of bribery in Southeast Asian business relations. Few show many qualms about this practice. Among her interviewees, there is a basic consensus that payments to government officials are part of the cost of doing business in this corner of the world.

The most common form of bribery in Vietnamese business culture, for example, is what is known as “speed money,” an unofficial payment to a minor government official that serves as a necessary supplement to their meagre salary. These payments can be as little as $25 and up to several thousand dollars. If a person refuses to pay speed money, paperwork will simply sit on government desks until they change their mind. Those who do attempt to stay clean must accept long delays and, by extension, much lower rates of return on their investments.

Larger, more overt forms of bribery and corruption are common, too, though Hoang’s interviewees are understandably coy about discussing them in any great detail. Even so, Will, the former Lehmann Brothers banker, admitted to owning an entire company — heavily insulated from the rest of his businesses — whose exclusive function it is to distribute bribes. For large projects, this can involve paying college tuition fees for the child of a significant government official or making a gift of high-end luxury products like Rolex watches and Hermès handbags, which function as stores of value that can be traded for cash.

Given the complexity and ambiguity of this informal economy, local knowledge is at a premium. In most cases, it is close to impossible for a foreign investor to operate in Vietnam without a local co-investor. The entire enterprise thus comes down to the cultivation of relationships: between foreign investors and their local partners, and between local partners and government officials. If one of these relationships breaks down, an investment can fall apart. They must be carefully managed, or — in Hoang’s words — “lubricated.”

Some of the most eye-opening passages of Spiderweb Capitalism involve the explanation of exactly how this lubrication takes place. In this highly masculine environment, it can typically involve drinking games and dance shows. On some occasions, though, it extends to “orgy parties,” organised encounters between investors, government officials and sex workers designed to establish a relationship of “mutual hostage.” “We have to literally get into bed with each other,” said one investor. “If one goes down, we both go down.”

The investors Hoang interviews for Spiderweb Capitalism are remarkably open about their business practices, many of which are at best ethically dubious. Some speak with pride of the elaborate offshore structures they have built, or the cleverness with which they have managed their relationships with state officials. Others speak of their activities in terms of sacrifice or duty, something difficult, sometimes unsavoury but ultimately necessary. One man even confessed — with full knowledge that Hoang was an American university professor working on a book — that a lot of what went on with sex workers at Vietnamese “orgy parties” was non-consensual.

This openness likely derives from the fact that — in a legal sense — they are all pretty much in the clear. If you are smart and you know the right lawyers and accountants, you don’t need to break the law: you “finesse” it. The key to doing business in this part of the world, Hoang writes, is this ability to work comfortably in the space between the legal and the corrupt, in the areas where the rules can be massaged in your favour. She calls it “playing in the grey,” the kind of cowboy mentality that has always prevailed in places where the law is ambiguous and inconsistently enforced.

Are those further up the capital chain implicated in these dilemmas? It is a complicated question, and one that the spiderweb is deliberately built to obfuscate. The legal firewalls that separate ethically questionable business dealings in Southeast Asia from their financial beneficiaries in other parts of the world are there by design. The big spiders, safe in their airconditioned boardrooms and private airport lounges, have plausible deniability on moral questions and impunity on legal ones.

What makes the system work are the small spiders, the white-collar strivers who do the bidding of the ultrarich. They build and maintain these elaborate capital networks, and they do so willingly, taking on pretty much all of the risk in the hope that one day they too might find themselves sipping pina coladas in a safer part of the web. As with the South American spiders, it isn’t clear who is the exploiter and who is the exploited, where the web starts and finishes.

Spiderweb Capitalism doesn’t give a systematic account of the offshore system. It is a study not so much of the spiderweb itself but of the individuals who work to create and maintain it. In the spirit of C. Wright Mills’s 1956 classic, The Power Elite, it attempts to “give global capital a face.” Markets don’t simply exist, writes Hoang. They are made. Each new section of the web is always built by humans. The novelty of this book is that she has gone out and talked to them. •

Spiderweb Capitalism: How Global Elites Exploit Frontier Markets
By Kimberly Kay Hoang | Princeton University Press | $49.99 | 288 pages