The Ultra-Rich Are Building a Separate World Here on Earth

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1:22Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, did you see that story a few weeks ago about Andreessen Horowitz, the big VC firm, closing its Miami office? Oh, I did. Partially because you tweeted about it. See, my tweeting serves a purpose. It allows us to coordinate and be on the same page on topics. It gives us shared content, sure. That's right. But I found that story to be really fascinating because in 2020, or I think, yeah, around 2020, and obviously with COVID and people frustrated about things going on in San Francisco, it felt like there was this big effort to sort of manufacture an environment in a new city.

2:08So it's like, okay, Miami is nice and the standard of living, if you have a lot of money, it seems pretty good. Let's just see if by sheer force of will and money and tweets, et cetera, like whether we can relocate everything there. And there has been a lot. And we've talked a little bit about Miami and Citadel has obviously brought a ton of money to the city. But this sort of impulse to sort of manufacture cities and manufacture new physical networks is a very interesting phenomenon to me. Right. And I always find it's sort of the strongest whenever you see a city talk about becoming a crypto hub or something like that.

2:45And there have been so many. Right. So Miami was one of them at certain points. Eric Adams in New York has talked about it. Malta wants to be a crypto hub. Dubai wants to be a crypto hub. Its neighbor Abu Dhabi wants to be a crypto hub. And it kind of raises the question, can everyone basically repeat the same economic or financial model and become these sort of offshore wealth centers that foster new business and innovation? It seems like there are multiple cities or countries or locations that are trying to do the same thing. By the way, well, you lived in Abu Dhabi. I did. What do they do? What's the business there?

3:24What does everyone do? No, I'm serious. Like, I don't know what Dubai, I mean, I know there's a ton of money there, but I don't actually know what the big industries are in these places. So you must know. I'm trying to word this very diplomatically. I would say light touch regulatory environment. I mean, that's basically it. to start companies and pay low taxes and be able to do it in a fairly quick way. But the interesting thing about Abu Dhabi, and again, going back to the point of all these cities basically trying to do the same thing, is Abu Dhabi very, very, almost explicitly was trying to follow the model of Singapore.

4:05In fact, they even hired Richard Tang, who used to run the Singapore Monetary Authority, to come be head of ADGM. It was that explicit. it. It's very obvious what a lot of these places are trying to do. It seems to be working well. I mean, I know people always think like, oh, there's a bubble and it's all real estate and speculation or whatever. It's going to crash. But for the most part, I mean, there was something that happened in late 2009. One of them went bankrupt or something. But for the most part, it seems like it's been working. For certain countries, certainly. I mean, Singapore, again, is the big example of this.

4:37But I guess the more people and places try to imitate these particular business models, you know, not everywhere in the world can be an offshore financial center for obvious reasons. And I think like one man's loophole might be another country's comparative advantage. But there's a limit to how far you can push that. You think so? I wonder how far we are from the limit. Anyway, we're in an age, clearly, where there's just a lot of interest in cities. And people want to talk about, you know, on Twitter, they're like, what city should I move to? And where people have a ton of money and some people have a ton of money and they go to somewhere for some reason, maybe because regulation is low or taxes are low, etc.

5:18And essentially kind of be, I don't know, rootless. I remember during the pandemic when ostensibly I thought all of the borders were closed and you couldn't travel seeing, you know, friends on Instagram and stuff all over the world and places where there didn't seem to be any restrictions at all and on beaches. I'm very fascinated by the sort of parallel world that seems to be emerging and still growing where the ultra wealthy push up real estate prices, build giant towers branded by various brands like Porsche, etc. It seemed to live in a sort of just separate world than what I live in in New York City.

5:55Right. And we've talked about this primarily from a real estate perspective, but we haven't really gotten into the separate world of light touch, regulatory and tax regimes. So I'm excited. The separate legal world. Well, I'm very excited. We're going to be speaking with truly the perfect guest. We're going to be speaking with Atusa Araxia Abrahamian. She is the author of the brand new book, The Hidden Globe, How Wealth Hacks the World, talking about all of these different cities and legal regimes and the sort of separate parallel world that exists here on Earth for the ultra rich. So Atusa, thank you so much for coming on AdLots.

6:32Joe Tracy, thanks so much for having me. Absolutely. What's your book about? So my book is about this parallel world of loopholes. It's hiding in plain sight. It's all around us. And once you see it, you can't unsee it. So I hope that when you read the book, you'll start to see it and you will just see it at every turn. This world, much of it is territorial. Some of it isn't. So I start with my hometown of Geneva. I grew up in a very sort of stateless environment in Geneva, Switzerland. My parents were UN employees. I went to international schools for the most part. And it was just this big mix of people from all over the world who were always moving.

7:11I wasn't moving. I lived 18 years in Geneva, and I still don't feel like I know the place. It is the most mysterious place to me, even though my mother still lives there. And I started thinking about why that was. How can you live somewhere and still not really grasp it? And part of it is, yes, I was in this kind of international community, didn't really learn a lot about Swiss history. I have a Swiss passport, but I don't speak German. I don't speak Italian. I actually don't have a lot of Swiss friends. So that was definitely part of it. But the other side, when I kind of zoomed out and I thought of the legal topography of the place that I grew up in, it's like Swiss cheese.

7:53Geneva is this historic, beautiful city with an old town and old walls that are, you know, more ancient than like most of the things in the United States. At the same time, it has all of these pockmarks and black holes and mysteries. An example of that is the Geneva Freeport. You might have heard of that. I was going to say, you mentioned once you see these things, you can't unsee them. And I remember I read a book called Unruly Places, and they had a chapter on freeports. And that was the first time I'd heard of them. And ever since then, I haven't forgotten them. I can't get them out of my mind.

8:30What's the Geneva Freeport? What do you get to do there? Well, I have never been inside. And it's not for lack of trying, trust me. The Geneva Freeport is a warehouse. It was built a long time ago in the late 1800s. And it was originally built to store things like grain, things like supplies for wartime. And it was used for that. And the idea was that merchants could put their goods there, have them sort of hang out without declaring them to customs, without paying for taxes or tariffs or what have you, and then move them to their next destination. So for something like sacks of oats, there's a shelf life.

9:10You can't keep them there forever. they got to move. Otherwise, everyone's in trouble. But just to be clear, it serves a very specific purpose because if you want Geneva or if Switzerland wants to be a hub of trading, they don't want merchants to have to pay a tax or a tariff just if they're like stopping by. You got it. If you want a place to be an entrepot, you want to make it as easy as possible to be an entrepot, to leave your things there temporarily and then move on. Geneva was also a crossroads for trade. They had a big market, so it made sense. But as time went on and as, you know, the economy evolved and as Switzerland evolved, this became a place to store things like gold, things like jewels.

9:49Da Vinci paintings. And eventually things like very expensive paintings. And today it's estimated that billions of dollars worth of paintings and cars and wine and luxury goods are being stored there. Now, the difference between a sack of oats and a Da Vinci, apart from how expensive it is, is that now these places are super climate controlled, like humidity is monitored. Everything is very, very, very tightly controlled. And so there's no there's no rotting. Things don't go bad. Things can stay there perhaps forever. And it's a completely different game because if you're someone who wants to hide something or to just sit on something for a very long time without incurring tax or maybe declaring it to your ex-spouse, you can do that in the Geneva Freeport.

10:38So you touched on this when you were talking about the evolution of the Freeport. But one thing I often wonder with these sort of loophole liminal places is how deliberate are the choices to create them? So the Freeport started out as a place where you could store grain because it wasn't meant to stay there forever and you wanted to be a hub for trade. And then it gradually evolved to a place where you could stash things potentially forever. How did that decision come about? What were the choices that went into that outcome? In the case of Geneva, there is a somewhat organic or natural progression of things.

11:17I don't know that, you know, in like 1880, you necessarily would have anticipated the art market being just unbelievably full of speculation and using these places to enable that. So for one of these entrepots that's been around for a long time, the decisions are more in the lack of involvement of the state. So you have this rule for grain. Maybe you're not going to change it too much and have it apply for gold bars. But there are more freeports than just the Geneva Freeport. There are brand new ones that were built in the past 20, 30 years in Luxembourg, in Singapore. There was talk of creating one in Russia.

11:57And for the new ones that are being built, it's very clear what the intention here is, right? We're not talking about oats or salt or any foodstuffs. We're really talking about high-end goods that, you know, increasingly are one of the only ways to get around financial controls as well.

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13:19In addition to all that variety, EasyCater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform. Easy Cater, your business tool for food. To learn more, visit easycater.com slash podcast. For a country or a city like Singapore, what do they get from it, from the existence of a free port that explicitly is there so that people can have art and not declare it? I've been trying to figure this out. I'm not sure there's one exact answer. To be honest, I think a big part of it is branding.

13:56It looks good. It looks good to say that you have, you know, stashes of Picassos and the people involved in these enterprises will say, well, we are creating a hub. And when the paintings come, then the artists come and the dealers come and the bankers come. And so it creates a sort of a little ecosystem of art and art markets. I think that there's a more cynical way of putting it, which is that these types of places, free ports and so on, are ways to launder money when it's much harder to launder money through the banks. So you can have many reasons for this, and a country would be interested probably in both sides of this if the ultimate goal is to bring money to its territory.

14:44In researching and writing this book, did you observe any interesting examples of either free ports or other types of offshore centers competing with each other? And what happens when everyone is, you know, trying to do a similar thing and you have a free port here and a free port here and a free port there? Yeah, these places are always one-upping each other. I mean, how many, you guys work at Bloomberg, how many times have you read the headline, X is the new Switzerland? Right? I think Singapore has been the new Switzerland, Dubai has been the new Switzerland, Luxembourg has been the new Switzerland, although that was a while ago.

15:18One day Switzerland will be the new Switzerland. Well, and then Switzerland is always trying to be the new Switzerland, right? They were also trying to do this crypto valley thing in the canton of Zug. What's happening with that? So yes, there is always competition and they're always trying to one up each other. It's relentless. And that's why also for regulators who might want to crack down on this, it's like whack-a-mole. One jurisdiction might say, okay, we're going to put tighter controls on our freeport or on our crypto market, another one is going to pop up tomorrow to fill that void. I asked Tracy this, but maybe I should just ask you.

15:54Abu Dhabi and Dubai, what goes on there? Abu Dhabi and Dubai. I can speak to Dubai. I've not been to Abu Dhabi. Dubai has for its recent, I guess the past 20 or so years, made really, really concerted efforts to attract millionaires and billionaires. There is the real estate play here. Obviously, you've talked about this a lot. There are a lot of articles about these wacky things that they build and the developments and whatnot, the ski slopes in the malls. At the same time, there have been many reports that show from the think tanks and the OCCRP and the ICIJ that show that Dubai is really the center of the world of money laundering, criminality, and those types of offshore theatrics.

16:50So they are up to that too. Before Dubai was what we think of today as Dubai, this place with tall buildings and crazy stuff going on. There was a lot of smuggling and pearl smuggling and gold smuggling going on. It has a sort of long tradition of this, that this did not occur overnight when the Sheikh's passed a bunch of laws that said for the past 20 or so years, Dubai has made a concerted effort to create laws to attract businesses and people. Some of these laws involve carving out free zones within the territory of Dubai that cater very specifically to certain sectors. So you have a media city where ostensibly there's more freedom of speech and expression.

17:35There is an internet city that has world class infrastructure. I think there's a medical one and there's one for commodities. And all of these little zones, clusters, hubs, whatever you want to call them, have a kind of a bespoke legal regime. A lot of that is spin. A lot of that, they're sort of interchangeable. But by virtue of appealing to a certain type of business, I think there's something to be said for proximity and exchange. And that's real. This is why we like to go back to the office because you can talk to people. Anyway, all of these zones also have very preferable tax regimes. They make it easier to import workers.

18:15So the immigration side of things is a little more streamlined. And overall, I think now Dubai is on a big kick of reducing bureaucracy. We can all appreciate the idea of reducing bureaucracy. And I think that they actually do it. So that's another part of their play. You mentioned the legal regimes and the financial centers in Dubai and Abu Dhabi, DIFC and ADGM. They're really interesting to me because they essentially got to craft a whole new body of law and kind of cherry pick what they wanted to include in order to attract financial businesses. And they're obviously influenced by English law.

18:56It's an English law regime, but their systems are still different in various ways. What's the process that these types of new jurisdictions go through when they're crafting laws? And how much input do you think is overtly had by people who are perhaps looking to preserve loopholes? So I'll tell you about the story of the Dubai International Financial Center, and more specifically the Dubai International Financial Center's courts, which are within the Dubai International Financial Center, but their own thing. So the DIFC was established as one of these free zones that was going to be the center for finance, banks, traders, etc.

19:36As companies started to express interest in moving there, and as Dubai was, you know, making their pitch, come here, you're going to pay less tax, etc, etc. They ran into an issue, which was that the lawyers and the counsels and all the sort of legal infrastructure of the companies that they were trying to bring in were balking at the idea of having to deal with a whole new legal system, namely the Arabic language, Islam-influenced courts. Maybe they did this out of racism. Maybe they did this because they truly had no idea how these courts worked. We should talk a little bit about the history here.

20:14So the Emirates were previously protectorates of the UK, of England, and they had two systems of law. There were laws for Muslims, for natives, and then there were laws for Brits and expats. So that's the context out of which this is all coming. So the DIFC sets up in the early 2000s, and they decide, well, we need to have another set of laws because we don't want to scare away the big companies. And so they get to work thinking, well, how are we going to come up with this parallel legal regime? On the one hand, it's kind of a throwback to the bad old days, where the Brits had their laws for themselves and locals had their own laws, right?

20:59This is colonialism, to put it bluntly. So instead of just taking the old laws or just imposing their own native court system, they came up with a kind of a hybrid. And this is in the book, but there was one man who was really instrumental in building the system. His name was Mark Beer. He is an Englishman, really clever guy. And they kind of cobbled together a bunch of laws based in common law, which the multinationals are comfortable with, which the big banks are comfortable with, and essentially created a court that was sitting inside the DIFC that would serve the tenants of the DIFC. and that eventually expanded its reach to be this kind of opt-in jurisdiction.

21:48So anyone could say in their contracts, shouldn't dispute arise, we're going to have our day in court at the DIFC. The term at is doing a lot of work here because it is a place. There is a courthouse. There is a courtroom. But the judges don't all live in Dubai. They don't all show up for hearings at the DIFC. A lot of this was taking place remotely even before Zoom came to consume our lives during the pandemic. And so the notion that the law and the land are in any way tied together just doesn't make sense here anymore. It's a really new way of thinking about law. It's a little bit like Delaware in that sense, right, where it's like you everyone is like, OK, we want to be incorporated under Delaware law.

22:35but the company, and the judges are right there, but by and large, the companies have no meaningful - I'm sure Dubai will appreciate being called the Delaware of the world. Delaware of the world. In your book, I don't know what the grouping is, Dubai, Abu Dhabi, Singapore, Geneva, but in your mind, when you sort of think about these cities around the world, like how big are we talking about? How much money, how much wealth, or however you want to quantify it has flowed into these sort of preferential locations? Oh, that's a good question. I can't really put a number on it, but I can tell you that the oceans are another jurisdiction that I write about in the book, and something like 90 % of all goods are shipped through the ocean.

23:20And so that'll just give you a sense of scale. Things do not just happen on the national level. That doesn't make any sense. things are always moving and moving between places. So one thing you often hear when people are talking about establishing these new hubs or centers or whatever they want to call them, sandboxes maybe, people often talk in terms of innovation and creating new business opportunities and startups and maybe not falling behind in the brand new thing. And so I'm curious, how do you think governments or localities looking to set up these types of things are balancing the need for rules and regulation with that innovation impulse?

24:05Because no one ever says explicitly, this is just a money grab, and we want lots of income coming into the country. It's always about, you know, we're going to create this creative place where small businesses can flourish and things like that. I haven't heard the small business pitch so much. at least not in the jurisdictions that I've been covering. Balancing the sort of Wild West aspect with the regulatory aspect is obviously pretty tough. If we look at how crypto has played out and continues to play out, you'll see that the regulatory side has not been as strong as the more freewheeling, you know, quote unquote, innovation side of things.

24:44I think this really depends on the jurisdiction. Some have much higher tolerance for risk, some don't. I don't know that like Sweden is doing crazy things, but maybe, you know, a place like Palau, which is smaller and maybe a bit more niche, can do crazier things. I mentioned Palau because it comes up twice in the book. Once because they have been offering e-residency, but geared at people who want to transact in cryptocurrencies, but come from a country that doesn't allow it. So it's almost like a crypto passport. To be clear, you don't have right to live there. You don't have an address there.

25:26It's really just digital and virtual. What do you get? You get an identification card and number that you can sign up for crypto services with. Oh, I see. If you're in a country that has high restrictions on crypto activity, but you want to set up a fund that can trade and stuff like that, you basically incorporate there and your money is housed there and you can then legally transact from there. Is that kind of the idea? I don't even know that your money would be housed there. It's that you can have a kind of a second flag that you can fly under for the purposes of your crypto operation. Palau is an island country in Micronesia.

26:04I didn't know where it was. I had to look it up on Wikipedia. The thriving crypto center of Palau. They're trying. They're trying. Palau also has had some adventures in the maritime flagging industry, which is actually very analogous to these crypto passports or second passports. So most of the ships in the world do not fly the flag of their owner or of their parent company or of where their home port is. They're flying flags of convenience, places like Marshall Islands, Liberia, Panama. And Palau is a really interesting case because it's a relatively new flag. It's still relatively small, but it's growing tremendously because it is providing a service that more and more ship owners want, which is a deregulated way for the ship to die.