SECTOR RESEARCH

SECTOR RESEARCH Sinks and Conduits: Identifying Offshore Financial Centres by using Big Data

By Javier Garcia-Bernardo, Jan Fichtner, F.W. Takes and E.M. Heemskerk, CORPNET, Amsterdam Institute for Social Science Research, University of Amsterdam

Th is article is based on J. Garcia- is composed of at least 828 legal to avoid corporate accountability and Bernardo, J. Fichtner, F.W. Takes corporate entities in 71 countries. public scrutiny of their operations, i.e. and E.M. Heemskerk, ‘Uncovering The largest brewing company regulatory arbitrage. Th ird, complex Off shore Financial Centers: in the world, Anheuser-Busch corporate ownership structures help to InBev, consists of at least 680 Conduits and Sinks in the Global minimise tax payments – especially for corporate entities involving 60 corporations that have many intangible Corporate Ownership Network’, countries. These complex corporate assets, such as intellectual property rights. Scientifi c Reports 7, article 6246, structures purposefully span Th us, OFCs are popular instruments 2017. Th e research illustrates that across countries and jurisdictions for multinational corporations to (legally) ‘off shore’ jurisdictions are much in order to increase competitive reduce their tax bill by moving wealth advantage by minimising costs and more complex than the traditional across borders in form of dividends, accountability. royalties and interests and taking notion of an island state secreting Corporations create complex corporate advantage of loopholes in the legislation. away cash. Th e University of ownership structures for at least three By playing out one state against another, Amsterdam researchers found reasons. First, corporations seek to corporations reduce their tax rate from that the off shore industry is in fact increase legal protection. By organising around 35 per cent to 15–25 per cent (and a complex network of fi nancial parts of their corporate structure in some much lower). For instance, Apple certain trusted territories with favourable used a combination of subsidiaries in conduits, which involve many of the legal conditions they can increase legal Ireland, the Netherlands and to traditional ‘onshore’ centres. certainty for their operations or for joint- strongly reduce its tax payments in Europe ventures. And by setting up subsidiaries to a stunning 0.005 per cent in 2014 Multinational corporations use in specifi c jurisdictions and using such according to the European Commission. highly complex corporate structures subsidiaries to invest in other countries, If profi ts would be accounted where of parents and subsidiaries to multinationals can hedge their investment the economic activity takes place, organise their global operations and against decisions of governments. multinationals would pay at least ownership structure. For example, Second, favourable regulatory regimes US$500–650 billion more on taxes, the Britain-based banking and in OFCs can be used by companies according to estimates by the Tax Justice fi nancial services company HSBC Network and the International Monetary Fund. From this, around US$200 billion “18 out of 24 sink-OFCs have a current or past relate to developing countries, which dependence to the United Kingdom, which highlights means that developing countries may be losing more wealth in the central role of London in offshore fi nance.” than they receive in development aid 61 (US$142.6 billion).

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Which Countries are Offshore Financial Centres? “The developed method to identify OFCs improves Given this contested role of OFCs previous attempts such as the list of alleged tax it is surprising that we still lack a havens published by the EU in 2015 ...” broadly accepted defi nition of what makes a country an OFC. Instead, the identifi cation of OFC jurisdictions has become a politicised and contested issue. International organisations such as the OECD or the IMF have published lists of alleged tax havens (OECD list, IMF list), but the chosen criteria remained heavily infl uenced by politics. To remedy this lack of transparency, we developed a novel, data-driven approach that identifi es OFCs. We simply asked which countries or jurisdictions play a role in corporate ownership chains that is incommensurate with the size and the fi nancing of their domestic economies (see Zoromé 20071). Hence, Figure 1: Sink Off shore Financial Centres (jurisdictions in blue have been under British sovereignty in the past or are still UK dependencies we study how OFCs cater to the needs of multinational corporations. Private individuals and private wealth structures such as trusts are therefore not covered by our study. Our results show that together of political economists and measures specifi cally aimed at measuring off shore fi nance is not the exclusive computer scientists in the CORPNET the extent to which a jurisdiction business of exotic, small islands far research group at the University of is a sink-OFC or conduit-OFC. We away. Countries such as the Netherlands Amsterdam made it possible to study furthermore introduce an entropy- and the United Kingdom play a crucial how corporations make use of particular based metric that can characterize the yet previously hidden role as conduits countries and jurisdictions in their specialization of an OFC in terms of to more specialised off shore fi nancial international ownership structures. which countries it services. centres. We analyse the entire global network Th e proposed network analytic of ownership relations, with information approach to identifying OFCs has a Using Big Data to Find OFCs of over 98 million fi rms and 71 million number of advantages. First, it makes Early attempts at OFC identifi cation have ownership relations. We consider that no a priori assumptions about the resulted in, for instance, the Tax Justice OFCs are not only places where wealth global economy and the countries Network’s ‘Financial Secrecy Index’ and is ‘stored’, but that they act as nodes in a involved; the possible identifi cation Oxfam’s list of the worst corporate tax complex network of international capital of a country as an OFC is purely data- havens. Jan Fichtner’s ‘Off shore-intensity fl ows. We suggest a novel approach for driven. Second, it does not rely solely on Ratio’ provides a helpful, rough yardstick identifying and classifying off shore aggregated macroeconomic indicators to judge which jurisdictions act as OFCs fi nancial centres based on the underlying that may introduce signifi cant noise and by describing the proportion between large-scale granular fi rm level ownership deviations, but on fi ne-grained data of foreign capital (such as FDI) and the size data. fi rm-level corporate ownership. Th ird, of the domestic economy. However, these Th e building blocks of our method for this fi rm-level data allows us for the measures are not able to identify whether identifying OFCs are what we call global fi rst time to quantitatively identify and foreign investment reported by Bermuda ownership chains, in which a series of distinguish between both, what we call originates in the Netherlands, or if in companies are connected in a chain if for sink-OFCs, and conduit-OFCs – with contrast, it originates in Germany and is each two directly subsequent entities A some surprising results. routed through the Netherlands. We still and B, it holds that fi rm A is owned by don’t know how off shore fi nance fl ows fi rm B, i.e., there is a link between them Introducing Sinks and across the globe. in the ownership network. Transfers of Conduits To overcome these problems we returns without taxation are typically only Sink-OFCs attract and ‘retain’ returns move from country level statistics to allowed through ownership links from from foreign investments. Our approach large scale company data. Th e coming subsidiaries to parents, meaning that identifi es 24 sink-OFCs, including value can fl ow from A to B. Based on the , Hong Kong, the British 1 A. Zoromé (2007), Concept of Off shore value (we use revenues as a proxy) going Virgin Islands, Bermuda, and the Financial Centers: In Search of an through these international ownership – the largest sink-OFCs 62 Operational Defi nition, IMF Working Paper chains, we propose two new centrality in terms of non-normalised sink-OFC

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centrality. Indeed this replicates earlier for the transfer of value to sink-OFCs. In London in off shore fi nance. Th e fi nance lists of supposed off shore fi nancial our detailed research article, “Uncovering minister of the United Kingdom has centres. But, in addition, our method Off shore Financial Centres: Conduits and speculated that the UK may become a tax confi rms for example that Taiwan is an Sinks in the Global Corporate Ownership haven of Europe aft er Brexit if not off ered ‘un-noticed .’ See Figure 1. Network” we also show that each conduit a good deal by the EU. Yet today, many of Using our method we can now also jurisdiction is specialised geographically the UK overseas dependencies (such as investigate which jurisdictions are used and in industrial sectors. the Cayman Islands, Bermuda, the British by corporations en route to sinks. Th ese Virgin Islands or Jersey) already act as conduit-OFCs are attractive intermediate Conclusion large off shore fi nancial centres. destinations and enable the transfer Prior work on OFC identifi cation Our approach identifi es, characterizes of returns without taxation. In other used either qualitative assessments of and ranks OFCs and as such helps to words, while sink-OFCs are the source of policies and regulations or a quantitative increase transparency of and insight in investments, conduit-OFCs facilitate the approach based on ratios of foreign highly complex international corporate movement of capital and returns between investment to GDP. We have developed fi nancial structures. Th e developed sink-OFCs and other countries. a novel method for OFC identifi cation method to identify OFCs improves Surprisingly, we found that only fi ve big by analysing the large transnational previous attempts such as the list countries act as conduit-OFCs. Together ownership network based on global of alleged tax havens published by these fi ve conduits canalise 47 per cent corporate ownership chains. Off shore the in 2015, where of corporate off shore investment from fi nancial centres are oft en portrayed as countries such as Luxembourg or the off shore fi nancial centres, according to small, exotic, far away islands that are Netherlands – the most prominent the data we analysed. Th e two largest diffi cult if not impossible to regulate. We sink-OFC and conduit-OFC – were not conduits by far are the Netherlands (23 show that many OFCs are in fact highly included. Th e European Union list also per cent) and the United Kingdom (14 per developed countries. Th is is particularly does not rank jurisdictions, giving the cent). Th ey are followed by true for the fi ve conduit-OFCs that we same status to the (6 per cent), Singapore (2 per cent) and identifi ed, led by the Netherlands and the and to Anguilla, while in fact 170 times Ireland (1 per cent). Importantly, these United Kingdom. more value ends in the former than in countries are also used extensively as 18 out of 24 sink-OFCs have a current or the latter. conduits to non-OFCs, indicating that past dependence to the United Kingdom, Results and details are available on the conduit-OFCs are not used exclusively which highlights the central role of dedicated website www.ofcmeter.org

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