3. BlackRock at the center of the tax loophole

With about ten trillion dollars under its management, BlackRock exemplifies the growth of the financial sector as a share of the global economy and its influence on the world’s governments. 

The US finance giant is the largest private creditor of developing economies, which makes the company a primordial negotiator in any attempt to cancel or reschedule debt in the Global South (see Eurodad and Jubilee Debt Campaign reports)

BlackRock was also the first global investor in fossil fuels and forest-risk companies in 2021, considered with Vanguard and State Street (the Big Three asset managers) to be the most central actors for the conservation of tipping point ecosystems across the globe. 

BlackRock has been widely criticized for its environmental record and for taking advantage of conflicts of interest, after building its brand and influence through contracts with public institutions to inform the regulation of the financial sector in the USA and the EU. However, the company has flown under the radar when it comes to tax avoidance and tax evasion. This is a little surprising, considering the numerous tax evasion scandals uncovered by journalists, such as the Panama papers, Paradise papers or Luxleaks, and the relative size of tax avoidance within the global economy. In 2007, the sum of wealth in tax havens was estimated at $5,6 trillions, but the current Tax Justice Network estimation is much higher. 

The first reason for this absence of mention of BlackRock in these affairs is practical. BlackRock doesn’t deal with personal finance, unlike banks which facilitate offshore accounts for wealthy individuals wishing to avoid taxes. Journalists usually seek to uncover tax evasion scandals involving famous individuals, because footballers and crowned heads bring more audience than bankers in gray suits.       

To understand the intimate and tumultuous relationship between BlackRock and tax avoidance, we need to take a look beneath the sheets to see how BlackRock works and the kind of financial products it is selling on US markets and the rest of the world. 

The assets managed by BlackRock, according to Business Insider, are owned for 60% by institutional investors. Banks, insurers, other asset managers, and private fortunes. This is the group of people that BlackRock first answers to, the same kind of financial giants who own most of BlackRock’s own shares. The remaining 40% of its assets are owned by smaller financial companies and private individuals, who trust BlackRock with their retirement savings. 

Although this second group is quantitatively smaller, the vast number of private individuals who count on BlackRock to maintain their living standards in their later life serve the company as a go-to validation of its business practice. In the case of Zambia’s debt, for example, BlackRock justified its refusal to reduce the overhanging debt to sustainable levels because “The money invested in bonds by asset managers is predominantly the money of ordinary people saving for retirement”. 

The first rule of the money manager is its "fiduciary duty". Which means that BlackRock's priority is to serve profits to its customers. Naturally, providing investments to regular people who save money to finish their days in a Florida bungalow sounds more legitimate than increasing the capital of financial corporations and their billionaire overlords. The former purpose, however, is blocking the view of the latter in BlackRock's public communication. 

BlackRock's star category of financial products are called ETFs, for Exchange Traded Funds. They are by large the most successful BlackRock business. ETFs are traded on the markets the same way as Apple or Tesla stock, but they are quite different from regular stock. An ETF is a package of several financial products that reflect an index, the list of companies traded on a stock market. The most common ETFs follow the New York Stock Exchange. When you buy this kind of ETF, you don't buy stock in one company indexed on the NY stock exchange, instead you buy a little bit of stock in every company listed on the index. ETFs rely heavily on technology and algorithms to follow the ups and downs of the markets and make sure BlackRock's customers receive the returns for the risks they signed up for. This type of "blanket" investment strategy is known as "passive", as opposed to "active" investment, where a real human being, possibly with impeccable hair and the occasional cigar, decides where the capital will go. The passive investment strategy has been incredibly successful. It turns out a machine with mechanistic directives is more profitable than a human with impeccable hair and the occasional cigar. Passive investment has been criticized by specialists because it increases herd-mentality of stock traders, which is perilous in a financial crash, but without a doubt, BlackRock and the other passive investors (Vanguard and State Street form the Big Three with BlackRock) dominate the markets with ETFs. 

There is more to ETFs than automating trade and outsmarting Wall Street. The public secret of ETFs is that they offer lucrative tax loopholes. At least in two different ways, according to Bloomberg and CNBC. The most well known is probably the practice of tax loss harvesting. The technical details are intricate (who said tax law is boring ?), but the idea is that ETFs can be used to decrease the tax bill of US citizens and corporations by leveraging gaps in the US tax code. It's a little bit as if the USA behaved as a tax haven for ETFs, or as if ETFs had been engineered to avoid taxes for their US owners. The ETF tax loophole is so well known that CNBC, a business news TV channel, dedicated entire consumer advice segments on how to use ETF's to save on taxes. 

BlackRock itself published a how-to guide to use the tax-loss harvesting loophole, disclaiming any malpractice while indicating precisely how to use the gray areas of tax law at one’s advantage. 

No estimation has been made on the missing income the ETF loophole has cost to the Internal Revenue Service, the US tax authority. Given the generalization of the practice and the size of the ETF market ($5,7 trillion as of 2023 according to BlackRock), the number is expected to be quite big. The natural discretion of tax avoidance makes it difficult to estimate the size of the fiscal gap, while there is little political will to pull off the bed sheets. One thing is certain, however. The ETF loophole is much more beneficial to the wealthiest 1% than to small savers who get their financial tips from CNBC. The loophole method relies on swapping ETFs around different funds, and shuffling them until the tax base for the IRS is reduced by some percentage. But the method is scalable to infinity, so the more ETFs one has at disposal, the more they are likely to reduce their taxable income, until they are virtually able to reach a zero tax rate on capital returns. 

Leagues of tax avoidance professionals are competing for the opportunity to serve the most privileged. When I searched the terms “Tax loss harvesting” on Google Scholar, I found that nearly all of the academic papers that mention the ETF loophole are actually dedicated to automatizing tax avoidance in algorithmic trading, as opposed to estimating the fiscal gap due to the generalization of the practice. I took it as an indication of the influence of private funding in US academia.  

The ETF market is so large it has become a structural element of the American financial sector. With ETFs, BlackRock is helping the wealthiest of Americans avoid paying taxes on a presumably massive scale, while avoiding accountability for the practice, since BlackRock’s customers are the legal owners of the assets managed by the company. 

BlackRock is in the process of expanding its ETF investments towards Europe. But Europe’s financial structure is very different from that of the US, in the absence of a unified tax system. The favorable tax regime in Ireland is probably why blackrock is selling most of its european ETF products with “domiciles” in Ireland. Various engineered loopholes in the Irish tax system make the country an important tax haven for global corporations.

Finally, I need to add that BlackRock’s asset management isn’t its only branch that is likely to facilitate tax avoidance. BlackRock is also a provider of technology to manage your portfolios, if you are a gigantic corporation with billions of dollars in liquid assets. Aladdin is the name of BlackRock’s artificial intelligence software, the key to its success. Aladdin is used by a select few very large customers, including BlackRock’s own competitors such as Vanguard, which is a source of concern for finance professionals. Aladdin concentrates too much power. It creates a blatant source of collusion of interest between competitors, while also creating the conditions for herd-like behavior in case of financial crash. But Aladdin is also used by some of the largest tax-dodgers in the United States, Big Tech. Considering that BlackRock’s ETFs are an established tax loophole for owners of large portfolios, it is not a stretch to presume that Aladdin is used by these companies to systematically dodge taxes. Meanwhile, the financial wisdom of Aladdin is also sought by public authorities in the United States and Europe to deal with economic crises, so it would be naive to consider that the ETF tax loophole is unbeknownst to them.          

Making sure that investors pay as little taxes as legally possible is part of BlackRock’s DNA, although the company would deny it for obvious reasons. No financier with a public profile would risk admitting to tiptoe around the rules, even if the practice of tax avoidance is generalized in the finance industry. 

This article is the third in a series: Sink logic: how BlackRock and tax havens worsen the climate and debt crisis