Private research funders court controversy with billions in secretive investments

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STEPHAN SCHMITZ/FOLIO ART

Private research funders court controversy with billions in secretive investments

A couple of years in the past, scientists funded by the Wellcome Trust, one of many world’s wealthiest personal philanthropies, revealed sobering findings concerning the lethal results of air air pollution. In a long-term research of aged residents of Hong Kong, China, these uncovered to greater ranges of smog—particularly tiny particles of soot produced by burning fossil fuels—had been extra prone to die of most cancers than individuals who breathed cleaner air.

The research, revealed in Cancer Epidemiology, Biomarkers & Prevention in 2016 by researchers from the University of Hong Kong and the University of Birmingham in the United Kingdom, is one in all many to focus on the well being threats posed by soot. And it is only one product of the intensive investments that Wellcome, with $29.Three billion in property, has made in environmental science. “We aim to stimulate research excellence and develop global collaborations to drive change,” the London-based philanthropy explains on an internet web page that highlights its dedication to creating “cities healthy and environmentally sustainable.”

The belief doesn’t spotlight, nevertheless, that among the greater than $1.2 billion it has handed out yearly in current years comes from investments in firms that contribute to the identical issues the philanthropy needs to resolve. Not lengthy earlier than the Hong Kong research was revealed, for instance, the belief turned an investor in Varo Energy, an organization based mostly in Cham, Switzerland, that sells gas to transport companies. One of Varo’s primary merchandise is bunker gas for marine engines: an inexpensive, sulfurous residue of oil refining that may be a main supply of soot air pollution. Particulates billowing from ship stacks contribute to the untimely deaths of 250,000 folks yearly, researchers estimate.

Wellcome did not make investments instantly in Varo. But in accordance with a trove of confidential paperwork generally known as the Paradise Papers, a lot of them leaked from a legislation agency that helped handle such offers, Wellcome dedicated $50 million to an offshore funding fund, Carlyle International Energy Partners, based mostly in the Cayman Islands. That fund, in flip, owns a stake in the power agency. (Wellcome declined to offer particulars on its offshore holdings.)

Large traders generally use offshore funds to maximise returns, in half by decreasing the taxes traders would in any other case pay to their residence nations. Though offshore investments might be authorized, they’re controversial—partly as a result of the funds’ actions are practically at all times tightly held secrets and techniques. And Wellcome’s funding in bunker gas illustrates a typical contradiction dealing with some main scientific grantmakers concerned in offshore investing. Specifically, offshore investments can have impacts that diminish or negate the high-minded social experiments, training, and research backed by science funders, in accordance with a Science investigation. And their routine use of offshore funds raises questions on transparency, accountability, and social accountability.

When cash flows offshore

The Paradise Papers and publicly accessible monetary statements reveal some, however not all, offshore investments and commitments by seven personal foundations which can be main funders of scientific research. (*Restricted and unrestricted internet property, as of most up-to-date audited monetary statements.)

FoundationEndowment property*Known offshore investments
Bill & Melinda Gates Foundation$51.Eight billionNone
Wellcome Trust$29.Three billion$926 million
Howard Hughes Medical Institute$20.four billion$891 million
Robert Wood Johnson Foundation$10.Eight billion$3+ billion
William and Flora Hewlett Foundation$9.9 billion$168 million
David and Lucille Packard Foundation$7.9 billion$140 million
Gordon and Betty Moore Foundation$6.9 billion$40 million
PARADISE PAPERS; FOUNDATIONS’ MOST RECENT TAX RETURNS AND AUDITED FINANCIAL STATEMENTS

Critics of offshore investing additionally say that foundations, by lending their sterling reputations to offshore methods, are serving to legitimize techniques that others broadly use to bend or break the legislation—together with traders keen to hide lawful however excessive tax avoidance in addition to criminals looking for to cover illicit earnings and launder cash. Such practices deprive governments around the globe of income, the critics word, worsening financial inequality and undermining efforts to restore crumbling infrastructure.

The secrecy surrounding offshore funds complicates efforts to doc precisely how a lot cash main research charities have moved into such automobiles—or the place the money finally ends up. Science gained some perception by reviewing publicly accessible tax returns and monetary statements and by looking the roughly 13.four million leaked paperwork in the Paradise Papers, greater than half of which got here from Appleby, a world legislation agency based in Hamilton, Bermuda, and one of many world’s main offshore dealmakers. (The papers had been shared with Science by the International Consortium of Investigative Journalists in Washington, D.C., which acquired them from the Süddeutsche Zeitung newspaper in Munich, Germany.)

Science examined seven of the biggest personal research funders and located that, in accordance with conservative estimates, they’ve in current years positioned and dedicated greater than $5 billion to funds in offshore tax and secrecy havens. Missing information and an absence of precision in many paperwork, nevertheless, counsel the philanthropies’ investments are bigger. Among the investigation’s findings:

  • Wellcome dedicated greater than $926 million of its holdings to a minimum of 57 tax haven funds, paperwork from the Paradise Papers point out. Other offshore investments had been proven in the inspiration’s tax returns. (Totals couldn’t be decided however in 2007, Wellcome’s offshore holdings had been so intensive that Appleby ranked the inspiration as its 14th largest shopper.) In an announcement to Science, Wellcome officers declined to debate the scale or placement of its property in offshore accounts, saying they “do not collect or keep” information referring to tax domicile.
  • The Howard Hughes Medical Institute in Chevy Chase, Maryland, which has $20.four billion in property, holds a minimum of $891 million in offshore funds, from which it earned $123 million in the yr ending 31 August 2017, in accordance with public paperwork. It declined to debate its investments.
  • The Robert Wood Johnson Foundation in Princeton, New Jersey, which has $10.Eight billion in property, has positioned a minimum of $Three billion in offshore havens. Foundation officers mentioned their investing practices with Science.
  • The Bill & Melinda Gates Foundation in Seattle, Washington, has no obvious involvement in offshore funds, in accordance with the Paradise Papers and public paperwork.
  • Three different personal research funders—the David and Lucile Packard Foundation, the Gordon and Betty Moore Foundation, and the William and Flora Hewlett Foundation, all based mostly in Silicon Valley in California—have made offshore investments of as much as $168 million every, in accordance with the Paradise Papers and public paperwork. In written statements, the foundations stated they comply with tax legal guidelines however declined to remark in any other case.

Foundation officers and philanthropy consultants say offshore funding can play an vital function in enabling these charities to fulfill their fiduciary accountability to nurture their endowments. But the observe additionally opens the foundations to intense criticism. “Foundations that invest in tax havens need to know that … they are alongside criminals, tax evaders, and kleptocrats,” says Gabriel Zucman, a University of California, Berkeley, economist who has studied offshore investing. Such foundations are serving to “normalize these practices and blow up the volume, so the infrastructure exists also for the illegal uses,” says Annette Alstadsæter, an economist on the Norwegian University of Life Sciences in Oslo. “They are robbing the taxpayers,” says economist and Nobel laureate Joseph Stiglitz of Columbia University, and “are giving life to an institutional arrangement which is basically nefarious and bad for our global society.”

Maximizing worth

For a minimum of a century, rich people and establishments have moved cash outdoors their residence nations—for instance, by parking it in the nameless numbered accounts made well-known by Swiss banks. In current a long time, nevertheless, the recognition and complexity of offshore investing has grown dramatically. Some small nations and territories—together with the Cayman Islands, Bermuda, and Malta—have aggressively moved to grow to be offshore havens by promising secrecy, mild regulation, and low or no taxes on earnings.

As of 2014, a minimum of 8% of the world’s monetary wealth—some $7.6 trillion—was invested in funds based mostly in offshore havens, estimates Zucman, who wrote a seminal 2015 e book on the subject. Offshore funds enabled firms to legally keep away from paying $130 billion in U.S. taxes annually, he estimates. And unlawful tax evasion involving offshore funds subtracted an extra $35 billion yearly.

In the previous, many philanthropies—which nationwide governments ordinarily exempt from most taxes as a result of they’re seen as offering a public service—would have seen tax avoidance as shameful, says Brooke Harrington, an economist at Copenhagen Business School. But no extra. In the United States, for instance, many basis officers regard minimizing taxes “almost as a necessity,” she says. “If you do not do this, you are not fulfilling your accountability to donors. Kind of the way in which company administrators will say: ‘It’s our duty to maximize shareholder value, and that includes reducing our tax payments to as close to zero as possible.’”

But some basis officers inform Science that, as a result of their tax burdens are already low, different components are extra vital to their choices to speculate offshore. For instance, fund managers enhance earnings for themselves and their purchasers by avoiding expensive regulatory pink tape, says Edmond Ghisu, chief funding counsel at Robert Wood Johnson. Offshore havens typically have minimal necessities on “how many records [funds] need to have” and “how open their books and records need to be to investors,” he says. The Cayman Islands, for instance, “has risen to the top” in recognition amongst cash managers as a result of it has scant reporting necessities, Ghisu says.

Foundations that make investments in tax havens must know that … they’re alongside criminals, tax evaders, and kleptocrats.

Gabriel Zucman, University of California, Berkeley

Offshore funds may also open doorways to a wider array of funding choices and prime advisers, who typically run the funds from workplaces in monetary facilities comparable to New York City or London. Ghisu, as an example, says his basis seems to be first for “the best managers, to maximize our returns so that we have resources that we can deploy in support of our mission.” Wellcome takes the same place. “Many of the best-performing funds have offshore domiciles,” it wrote in an announcement. “Our successful long-term investment strategy,” it added, “is based on exposure to a globally diversified range of asset classes.”

Normally, fund managers, not the foundations, select investments. But some foundations bar sure investments that they imagine would pose conflicts of curiosity. Robert Wood Johnson, as an example, says it has no involvement in firearms, alcohol, or tobacco. “For us to invest in, say, a tobacco company, would be so antithetical to what we want to do that it would be a travesty,” says Brian O’Neil, the inspiration’s chief funding officer.

Yet Robert Wood Johnson’s offshore investments and managers have nonetheless generated controversy. Tax returns present that since a minimum of 2014, the inspiration has invested closely in Cayman Islands funds managed by GSO Capital Partners, a unit of the funding titan Blackstone Group, headquartered in New York City. The basis’s most up-to-date submitting confirmed about $50 million in these funds. GSO has drawn harsh criticism for the way it handles credit score default swaps—a once-exotic kind of risk-hedging safety that turned infamous for contributing to the Great Recession. U.S. lawmakers and regulators have reined in the swaps, that are authorized, however they continue to be much less regulated elsewhere. “The hedge fund industry can’t do what it wants to do under the onshore regulations of the U.S. because it’s too risky,” Harrington says. “But the Caymans will let them do it.”

In specific, GSO has drawn scrutiny for swaps that contain distressed firms and a technique in which GSO gives a troubled agency an incentive to deliberately default on a mortgage, triggering a course of that permits GSO to comprehend hefty earnings. For years, such offers have attracted substantial media consideration and lawsuits. A current investigative story in the Financial Times stated such practices made GSO the business’s “biggest predator.” GSO informed the paper it has acted legally and in a way “consistent with the expectations of its sophisticated market participants.”

In April, the U.S. Commodity Futures Trading Commission took discover, decrying the sorts of actions taken by GSO as “manipulation” that “may severely damage the integrity” of the market. GSO then stepped away from a pending deal. At about the identical time, Robert Wood Johnson officers raised their very own considerations with GSO. O’Neil says the agency has “really backed off ” from the controversial swaps.

Critics contend that offshore machinations enhance revenue inequality by decreasing tax funds for public providers whereas shifting the tax burden from firms and rich people to the center class. And, as research funded by Robert Wood Johnson itself have advised, inequality can harm public well being. For instance, the inspiration underwrote a landmark 2015 research exhibiting excessive revenue inequality—reasonably than poverty alone—is a key contributor to ailing well being and shorter life expectancy. The basis has additionally funded grassroots campaigns to deal with such issues, together with a public-private partnership in Richmond, the place residents endure from among the nation’s worst revenue inequality. But O’Neil rejects the suggestion that the inspiration’s personal funding practices contribute to inequality. “I don’t think you can take the harm that is caused by that and impute it to us.”

A cargo ship steams by the Bosphorus previous Istanbul, Turkey. The Wellcome Trust invests by an offshore fund in a agency promoting ship gas, which is a significant supply of particulate air air pollution. It additionally funds research that spotlight the risks that particulate air pollution poses to human well being.

BULENT KILIC/AFP/GETTY IMAGES

At Wellcome, the place researching the consequences of local weather change has grow to be one focus of giving, officers contemplate environmental points when making funding decisions, the belief stated in an announcement to Science. But Wellcome declined to debate how these considerations have formed its offshore investments. And public information point out environmental points haven’t prevented the inspiration from taking hefty, ongoing, direct fairness stakes in fossil gas firms—together with Royal Dutch Shell of The Hague, Netherlands, and Schlumberger of Houston, Texas—whose operations have drawn criticism from local weather change, environmental, and human rights advocates.

Wellcome has resisted calls to divest from the companies, saying the investments function leverage to affect company practices. “Engaging with these companies will strengthen their commitments toward reducing carbon emissions more effectively than divestment,” it argued. The basis declined to explain the way it engages with the businesses or to what impact. But even when direct shareholders can wield affect by ethical suasion or proxy votes, critics of offshore investing word that such engagement isn’t attainable for traders in offshore power funds, which are sometimes structured to insulate homeowners from firm actions.

Wellcome additionally notes that its funding earnings—instantly from Shell or not directly by Cayman Islands funds that make investments in power companies—gas the belief’s good works, together with initiatives that struggle the impacts of world warming. But Dana Bezerra, a outstanding advocate for moral investing by charities and head of the Heron Foundation in New York City, questions that reasoning. “It’s a justice question,” she says. “I have yet to meet a community willing to trade off our ability to generate returns with their clean water and healthy soil, on the promise that we’ll be back to fix it with charitable dollars in the future.” (Heron, she says, screens its whole $307 million funding portfolio to make sure that it helps—or a minimum of doesn’t counter—the inspiration’s philanthropic purpose to struggle poverty.)

Canines in the Caymans

To some critics of offshore investing, its largest draw back is secrecy. The lack of transparency could make it tough for donors, grant recipients, and the general public to succeed in their very own conclusions about whether or not an offshore funding poses a possible battle.

Most offshore funds, for instance, carry obscure names that provide few hints about their function. For instance, Howard Hughes holds $187 million in “Coastland Relative Value Fund Ltd.” and “Cerberus HH Partners LP” (managed by an organization named after the mythological three-headed hound that forestalls the damned from escaping by the gates of hell). Robert Wood Johnson has $143 million in one other canine-inspired fund, “Hound Partners OS.” All three are based mostly in the Caymans.

The funds not often divulge to the general public the place they place investments—and usually additionally bar their traders from sharing that data. Both Wellcome and Robert Wood Johnson, for instance, say confidentiality agreements with fund managers prohibit them from making such disclosures. Fund managers typically wish to keep away from leaks of delicate data that would transfer markets or assist rivals.

Sometimes, even traders do not know the way offshore funds use their cash. O’Neil says in his expertise, there are “only a few funds that really don’t tell us anything.” But contracts revealed in the Paradise Papers specify that traders typically haven’t any “liability, obligation, or responsibility whatsoever” for the way a fund operates or any obligation to confirm that the fund has truly used its cash for deliberate investments.

Such opacity is just not applicable for charitable establishments, established for social profit, Bezerra says. “Not only should you [provide investment details], but you are compelled to because you are managing money in the public trust,” she says. “Shouldn’t we be more than a private investment company that uses its excess cash flow for good?”

Changing the incentives

To cut back moral conflicts, Stiglitz says policymakers ought to change charity governance guidelines to make it “a violation of fiduciary responsibility to engage in something that might have reputation risk,” comparable to investing in an offshore tax haven with a “sleazy” reputation.

Persuading policymakers to make such modifications, nevertheless, is prone to be tough, in half as a result of foundations usually function below a patchwork of nationwide and native legal guidelines. Instead, some observers imagine motion must come from basis board members and officers. One wanted reform, Bezerra says, is to finish—or a minimum of curb—the “perverse incentive” that foundations create for his or her funding officers, who make most of the day-to-day choices about how you can develop or defend a charity’s endowment. Their compensation is usually tightly tied to how properly their funding portfolio performs. And good efficiency is handsomely rewarded. In 2016, Wellcome’s Danny Truell (who retired final yr) made $5.Eight million and O’Neil made $1.Eight million; final yr, Landis Zimmerman of Howard Hughes made $Three million. Each was by far the best paid worker of his basis.

At Wellcome, the incentives are based mostly on efficiency of the portfolio as a complete. Robert Wood Johnson ties compensation for O’Neil and others to each funding efficiency and “alignment of investment objectives with foundation’s mission and strategic objectives,” comparable to maximizing returns and making certain that no funds are invested in tobacco, alcohol, or firearms.

Shouldn’t we be greater than a non-public funding firm that makes use of its extra money circulation for good?

Dana Bezerra, Heron Foundation

Requiring managers to position social, environmental, and philanthropic objectives—not simply funding returns—on the coronary heart of their funding decisions needn’t imply they are going to miss monetary targets, Bezerra says. Last yr, Heron’s holdings gained practically 16%, in accordance with the inspiration. In comparability, at Robert Wood Johnson—the foremost science philanthropy most closely concentrated in offshore funds—the portfolio rose by about 13%.

Such coverage modifications would in all probability require approval from a basis’s board of administrators. In common, nevertheless, board members typically desire to deal with grantmaking and barely grow to be deeply concerned in funding choices, philanthropy consultants say. At Wellcome, as an example, former board member Peter Smith says funding points arose just some instances throughout his 10-year tenure, from 2005 to 2014. In one case from 2013, he recollects, board members discovered from media reviews that Wellcome had invested in a payday lender accused of preying on the poor. The 13-member board in the end directed belief workers to divest from the corporate, says Smith, an epidemiologist on the London School of Hygiene & Tropical Medicine.

“There is a tension,” Smith says, “between the philanthropic mission that the trust has as a charity and the way in which it invests to maximize the income … which [charity officials] say they have a duty to do.” But the tensions surrounding offshore investments by no means got here up at any board assembly he attended, he says. Smith did not move judgment when requested whether or not the belief’s holdings in a bunker gas service provider contradict the charity’s objectives. But, “If there were things that were ethically dubious, then I would have expected it to be discussed at the board level,” he says.

James Gavin, a doctor and diabetes skilled at Healing Our Village, a well being care firm in Atlanta, who served as a trustee of Robert Wood Johnson a decade in the past, says that if offshore investing undermines the inspiration’s philanthropic objectives, “that would be of extreme concern.” But he, too, does not recall board discussions of the observe.

The elevated scrutiny surrounding offshore investing, pushed partly by the discharge of the Paradise Papers, is making it extra seemingly that charities—together with research funders—must grapple with the problem, observers say. That’s factor, says Dana Lanza, who heads the Oakland, California, nonprofit Confluence Philanthropy, which inspires foundations to align funding decisions with their philanthropic mission. Foundations that make investments closely in offshore havens, she says, must ask themselves a fundamental query: “Do you owe it to the world to be an ethical investor?”

The methodology for this story is available online. Jia You contributed reporting. The story was supported by the Science Fund for Investigative Reporting.



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