Explain Like I'm Five

The rich use a multiparty trick to stay rich:

1. Put their money in an offshore account that doesn't tax them based on wealth in the country. Typically the deal is the managers get some very small amounts, single digit percentages, to charge the customer for moving money in or out of the country. Then they never touch this money again unless it is an emergency.

2. The rich then use their bank account full of money as collateral for a loan that is much smaller, like a few million borrowed with a secured loan linked to the millions/billions in the account. The banks easily accept the terms because they can't lose - if the loan defaults the amount is pulled from the account. But the rich usually try to make their payments so that account money isn't touched.

3. The rich spend their loaned money and make payments from the dividends, annuities, funds, and/or interest on their principal amount. This way the bank gave the person money that they can spend and it's not income so they aren't taxed on it, unless there is a sales tax. It's basically free money.

As they spend this free money, the government for the country that they live in doesn't know how much money the rich person actually has so they are unable to create an accurate amount to tax them. This is partially why folks like Bezos and Buffet pay a few hundred thousand dollars on hundreds of billions in actual wealth. Stock valuations are an entirely other beast but functions roughly the same way as having wealth to borrow money against.

The rich stays rich and get free money because the banking system was made by them and they are educated by their accountants and financial advisors on how to pay the least amount of money they can to get the most out of each cent.

So let's say you own an insurance company, and you want to offshore all the profits. You establish a reinsurance company in Bermuda to underwrite all your policies and charge your insurance company billions for the privilege. Now it's a business expense so it doesn't count as income for the insurance company. You have successfully offshored billions of dollars.

There's law firms that specialize in this sort of thing. If you remember the Panama Papers from a few years ago, those were internal documents from one of these firms. Banks don't catch on because they like making money and pretending its not happening is often more profitable than calling the cops.

Yes, the banks know. Their cut is usually large enough for them to look the other way.

First, 99% of it is completely legal. Rich people write the tax laws. It's only when the money is coming from an illegal source that it becomes a crime and most big criminals know how to get around that.