Who Are The Non-Celebrities In The Panama Papers?

In the first stories about the Panama Papers, we got the names of a bunch of politicians, a few criminals, sports and other celebrities and one or two names of rich people. But in focusing solely on this kind of person, we miss the major point about tax havens. They are used by hundreds of thousands of people, including many who are not billionaires and who are not famous or otherwise newsworthy. They are commonly used by doctors, lawyers, accountants, small business owners and those who inherited money from such people.

Here’s a chart from the New York Times showing the mix of people making up the top 1% in income in the US; the chart is from 2012 and uses 2007 data. The cut-off for this level is the Census Bureau figure of $380K, while other studies put it higher. The Fed Survey of Consumer Finances, a better survey, has it at $690K in 2007. The cut-off for the top 1% in wealth was estimated at nearly $8.4 million in 2007. Those numbers went down after the Great Crash, but recovered smartly. By 2013, the cut-off for the top 1% in wealth was back to nearly $8 million, and climbing.

Lisa Kiester of Duke University, a sociologist who has published on the 1% describes a group she calls the double rich in this article. These are people who are in the top 1% in both income and wealth. Their median wealth was about $12 million in 2010, and their median income was in the range of $1.2 million. Both have no doubt risen since then. Kiester does not give an estimate of the number of the double rich, but this New York Times article, using 2007 data, says that there is about a 50% overlap between the two groups. There were about 117 million households in 2010 according to the Census Bureau. From that we can estimate that there are about 560,000 households making up the double rich.

Kiester examines the lack of discontent with wealth and income inequality in this 2014 paper. She offers five explanations with supporting evidence from research:

!. Homophily, the tendency to hang out with people like us. We aren’t often exposed to the impact or the magnitude of wealth inequality.

2. People think things will get better because they always have.

3. There is some evidence of social mobility, and it’s even possible for people to think they could move into the top 1%.

4. People are too busy, distracted and stressed to care.

5. People focus on poverty, not inequality. Academics are concerned about inequality because they think huge wealth gaps lead to power imbalances that favor the rich at the expense of the rest of us. That’s completely outside the scope of most people’s worries about money.

Gabriel Zucman, one of Piketty’s collaborators, estimates that individuals have approximately $962 billion of unreported assets in tax havens. Source: Data figure 4 tab 1 from a spreadsheet found here; click on Tables and figures included in the book. The book is The Hidden Wealth of Nations. For a description of Zucman’s methodology see this by Cass Sunstein.

Kiester says that 56% of the top 1% by net worth were self-employed in 2010. These are people who have the means to move money into tax havens, as are the rest of the top 1%. There are hundreds of thousands of US citizens who would benefit from tax havens, and there is so much money out there by Zucman’s estimate that it must be that case that tens of thousands of them have done so.

The ICIJ and its participating groups name politicians, celebrities, and crooks who hide their wealth in tax havens, and who won’t be prosecuted, but at least are shamed. But what about the huge number of the 1% who hide their wealth abroad and are not even shamed for their corruption?

This kind of disclosure would help break through the mental barriers to making inequality itself a force in politics.

FBI’s Latest Story about the Hack of Farook’s Phone

There’s a lot that doesn’t quite make sense in Ellen Nakashima’s explanation for how FBI broke into Syed Rizwan Farook’s iPhone.

The FBI cracked a San Bernardino terrorist’s phone with the help of professional hackers who discovered and brought to the bureau at least one previously unknown software flaw, according to people familiar with the matter.

The new information was then used to create a piece of hardware that helped the FBI to crack the iPhone’s four-digit personal identification number without triggering a security feature that would have erased all the data, the individuals said.

The researchers, who typically keep a low profile, specialize in hunting for vulnerabilities in software and then in some cases selling them to the U.S. government. They were paid a one-time flat fee for the solution.

[snip]

At least one of the people who helped the FBI in the San Bernardino case falls into a third category, often considered ethically murky: researchers who sell flaws — for instance, to governments or to companies that make surveillance tools.

This last group, dubbed “gray hats,” can be controversial. Critics say they might be helping governments spy on their own citizens. Their tools, however, might also be used to track terrorists or hack an adversary spying on the United States. These researchers do not disclose the flaws to the companies responsible for the software, as the exploits’ value depends on the software remaining vulnerable.

Don’t get me wrong. I don’t doubt Nakashima is reporting what she learned; I know other reporters were working on a similar direction.

It’s just that the FBI’s currently operative story still makes no sense. For starters, why would the FBI pay someone selling zero days but not be willing to consider the solutions offered by (just as an example of one forensics person I know who offered to help) Jonathan Zdziarski?

And I still wonder why the government apparently unsealed the warrant in Farook’s case once before it unsealed it to compel Apple. Indeed, while Nakashima (and other reporters) says FBI “did not need the services of the Israeli firm Cellebrite,” I still think using them (or someone similar) as a middle-man might offer the best of all worlds: no official possession of this exploit, easy contracting, the ability to give (as FBI has been) conflicting stories without any of them being fully false. Just as an example, if Cellebrite told FBI it currently couldn’t crack the phone before FBI got an All Writs Act order obligating Apple, then FBI could fairly claim, as they did, that only Apple or FBI could open the phone (even if they hadn’t actually asked many other people who might be able to hack the phone). But if someone went to Cellebrite or even FBI with the exploit after that, then FBI would have a way of using the exploit without having it and therefore having to submit it to the Vulnerabilities Equities Process (though technically they should still have to). FBI would have a way of promising to keep the exploit hidden, which the vendor would require, because it would technically never be in possession of it.

There’s one more thing that is getting lost in this debate. Comey and others keep talking about the use of this for an intelligence function, as if to justify keeping this exploit secret. I know that’s the convenient part of using a terrorism case to raise the stakes of back dooring phones. But this is ultimately a law enforcement issue, not an intelligence one, no matter how much FBI wants to pretend we’re going to find out something going forward. And as such it should be subject to greater standards of disclosure than a pure use of an exploit for intelligence purposes would.

In other words, FBI is still playing word games.