Tax havens and corruption: A global struggle
A minimum of USD 1 trillion of dirty money flows annually into offshore accounts, approximately half of which originates from developing countries. Despite the plethora of anti-money laundering initiatives, the failure rate for detecting dirty money flows is astonishingly high. Tax dodging corrupts the revenue systems of the modern state and undermines the ability of the state to provide the services required by its citizens. It therefore represents the highest form of corruption because it directly deprives society of legitimate public resources; this is the reason why international tax abuse has to become the next big front in the battles over international development, corruption, inequality, and globalization.
John Christensen to powerful and wealthy interests. The time has come arguing: “There is nothing more important for those Tax Justice Network International Secretariat for civil society to step up and take them on. who want to tackle poverty in the world than to make Contrary to the evocative images conjured up by it possible to trace dirty money flows and impose the term ‘offshore’, it would be wrong to think of off- sanctions on those territories which don’t cooperate shore as disconnected and remote from mainstream with this process.” The parallel economy nation states. Geographically, many of the offshore Offshore secrecy, either created through The stage is being prepared for one of the epic tax havens are located on small island economies banking secrecy laws or through de facto judicial struggles of our times. Secretly and audaciously, dispersed across the spectrum of time zones (see Ta- arrangements and banking practices, is a major bar- over the past half century, professional elites and ble 1), but politically and economically the majority of rier to tracing dirty money flows and tackling corrupt their powerful clients have constructed a parallel tax havens are intimately tied to major Organisation activities. This ‘secrecy space’ creates an effective global economy – often referred to as tax havens for Economic Cooperation and Development (OECD) barrier to investigation of activities in the offshore – to remove themselves from ‘onshore’ taxes and states, and the term ‘offshore’ is strictly a political financial centre by external authorities, and facili- regulation. This parallel economy provides an ena- statement about the relationship between the state tates the laundering of proceeds from a wide range bling infrastructure of banks, legal and accounting and parts of its related territories. of criminal and corrupt activities, including fraud, businesses, minor legislatures and judiciaries, and In the case of Britain, for example, the bulk of embezzlement and theft, bribery, drug trafficking, related financial intermediaries, which combine to offshore transactions are controlled by the City of illegal arms trafficking, counterfeiting, insider trad- serve as an ‘offshore interface’ between the illicit and London, even though many City financial interme- ing, false trade invoicing, transfer mispricing, and tax the licit economies. This interface has encouraged diaries operate from offices located in UK overseas dodging. Elaborate schemes are devised to ‘weave’ and facilitated capital flight from poor countries to territories and crown dependencies. These juris- dirty money into commercial transactions and to rich ones on a truly awesome scale. It has enabled dictions project the impression that they operate disguise the proceeds of crime and tax evasion us- tax dodging, shifting the tax burden from capital to autonomously, but in practice they largely act as ing complex offshore structures. According to one labour and significantly contributing to widening booking centres for instructions issuing out of the expert investigator: inequality. It has undermined the integrity of tax sys- City of London and other major finance centres. They tems and respect for the rule of law. are primarily of use to the City because they offer Methods to launder money vary dramatically from Democracy itself is undermined by covert deals zero or minimal tax rates combined with secrecy ar- low-level, relatively simple to highly structured and special treatments. The offshore interface has dis- rangements (including non-disclosure of beneficial and complex business scenarios or transfer of torted global markets to the disadvantage of innovation ownership of companies and trusts) and regulatory money offshore. What is being increasingly iden- and entrepreneurship, and slowed economic growth by regimes which are more permissive than those pre- tified is the infiltration of criminal identities into rewarding free-riding and misdirecting investment. It is vailing onshore. Many tax havens are directly linked otherwise legitimate business interests. None of identified as a major causal factor behind the growth of to Britain, either through overseas territory or crown these people could get away with a lot of what they high-level corruption. It functions through collusion dependency status, or through membership in the were doing if it wasn’t for lawyers, accountants, between private sector financial intermediaries and the Commonwealth. When asked at the conclusion of financial advisers, and the like, knowingly assist- governments of states which host offshore tax haven her enquiries into the Elf scandal which engulfed the ing them to launder and hide assets. activities. The forthcoming struggle requires a radi- French oil giant in the 1990s whether corruption on cal rethink of the nature and geography of corruption, a similar scale could occur in the United Kingdom, A minimum of USD 1 trillion of dirty money flows forcing civil society to tackle major flaws in the global the Norwegian anti-corruption campaigner Eva Joly annually into offshore accounts, approximately half financial architecture and overcome the political power commented that many of the world’s biggest tax of which originates from developing countries. of major vested interests. havens, most notably the City of London itself, are International tax abuse must become the next under British control, adding: “The United Kingdom Quoted from “Pour Eva Joly: Le G8 ne lutte pas vraiment big front in the battles over international development, has maintained its privileges by allowing British contre la corruption”. Interview in La Tribune, 6 June 2007. corruption, inequality and globalization. Partly because companies to operate from their own tax havens. Christensen, J. and Hampton, M.P. (1999). “A Legislature for of the complexity of these issues, civil society organiza- The expansion in the use of these jurisdictions has Hire: The Capture of the State in Jersey’s Offshore Finance tions have mostly shied away from some of the most a link to decolonization. It is a modern form of co- Centre”, in Hampton, M.P. and Abbott, J.P, op cit. important aspects of these debates, leaving these lonialism.” Detective Superintendent Des Bray, of the Commercial fields to be colonized by highly paid experts beholden Joly refers to tax havens as the principal target and Electronic Crime Branch, interviewed in the Adelaide Advertiser, “Lawyers helping to launder money”, 4 June in the emerging phase of the anti-corruption debate, 2007. Available from:
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01-Temas_ing (01-80).indd 58 14/9/07 15:11:40 Despite the plethora of anti-money laundering TABLE 1. Tax havens of the world initiatives, the failure rate for detecting dirty money flows is astonishingly high. According to a Swiss The Caribbean and Americas Europe Africa banker, only 0.01% of dirty money flowing through Anguilla Alderney* Liberia Switzerland is detected. It is unlikely that other off- Antigua and Barbuda* Andorra Mauritius shore finance centres are any better. Crucially the Aruba* Belgium* Melilla* techniques used for tax dodging and laundering dirty The Bahamas money involve identical mechanisms and financial Campione d’Italia* The Seychelles* Barbados subterfuges: tax havens, offshore companies and City of London São Tomé e Príncipe* Belize trusts, foundations, correspondent banks, nominee Cyprus Somalia* directors, dummy wire transfers, etc. Bermuda Frankfurt South Africa* British Virgin Islands Gibraltar Legal institutions granted special status and Middle East and Asia privilege by society have been subverted to purposes Cayman Islands Guernsey for which they were never intended. For example, Costa Rica Hungary* Bahrain the original purpose of trusts was to promote the Dominica* Iceland* Dubai* protection of spouses and other family members Grenada Ireland (Dublin)* Hong Kong who are unable to look after their own affairs, and to Montserrat* Ingushetia* Labuan promote charitable causes. Incredible as it must ap- Netherland Antilles Isle of Man Lebanon pear to those not familiar with the offshore economy, New York Jersey Macau* charitable trusts are regularly set up in offshore tax Panama Liechtenstein Singapore havens for the purposes of owning ‘special purpose Saint Lucia* Luxembourg Tel Aviv* vehicles’ used for international tax planning and for St. Kitts & Nevis* Madeira* Taipei* hiding both assets and liabilities offshore, as hap- Saint Vincent and Malta* Indian and Pacific Oceans pened with Enron and Parmalat.10 the Grenadines* Monaco The remarkable growth of the offshore econ- Turks and Caicos Islands Netherlands The Cook Islands omy since the mid-1970s reveals a major fault line Uruguay* Sark The Maldives* in the financial liberalization process. Whilst capital US Virgin Islands* Switzerland The Marianas has become almost totally mobile, the systems for Trieste* Marshall Islands tracking cross-border dirty money flows remain Turkish Republic of Northern Samoa* largely nationally based. The unsurprising outcome Cyprus* Tonga* has been a massive increase in cross-border dirty Vanuatu money flows, often taking the form of falsified trade invoicing and transfer mispricing between Note: This list excludes territories with some tax haven features but which are not commonly used as such. Territories marked with an asterisk (*) have developed their activities in the last 25 years, representing almost a doubling in the number of tax haven territories subsidiaries of multinational companies. The vast during that period. majority of these funds are laundered via complex offshore ladders operating through the global bank- Source: Tax us if you can, Tax Justice Network, 2005. ing system. Huge sums are involved, particularly for developing countries prone to capital flight. Es- (i.e. external debt).13 The problem is that the assets sional bankers, lawyers, and accountants, with an timates of capital flight from Africa vary consider- are largely held in private hands, whilst the liabilities accompanying offshore infrastructure of tax havens ably, but according to the African Union USD 148 belong to the African public. with quasi-independent polities, judiciaries and reg- billion leaves the continent every year through dirty ulatory authorities. This type of corruption therefore money flows.11 Rethinking the nature and geography involves collusion between private and public sector Most analysts agree that the outflows of dirty of corruption actors, who exploit privileged status to undermine money originating from Africa tend to be permanent, Tax dodging corrupts the revenue systems of the national tax regimes. indicating that between 80% and 90% of such flows modern state and undermines the ability of the state The failure to tackle these major flaws in the remain outside the continent.12 Another study con- to provide the services required by its citizens. It globalized financial system has generated a spirit of cludes that Sub-Saharan Africa is a net creditor to the therefore represents the highest form of corruption lawlessness and corruption which acts as a cancer rest of the world in the sense that external assets (i.e. because it directly deprives society of legitimate on our trust in the integrity of the market system the stock of flight capital) exceed external liabilities public resources. Tax dodgers include institutions and democracy. Tax dodging by rich individuals and individuals who enjoy privileged social posi- forces governments to switch the tax burden to tions but see themselves as an elite detached from the less well-off, increasing inequality and harming normal society and reject “any of the obligations that development prospects by reducing the revenues Ibid, p. 174. citizenship in a normal polity implies.”14 This group available for investment in education and infra- 10 Brittain-Catlin, W. (2005). Offshore: The Dark Side of the Global comprises wealthy individuals and high income structure. Company directors committed to good Economy. New York: Farrar, Strauss and Giroux, p. 55-76. earners, plus a ‘pinstripe infrastructure’ of profes- governance and ethical policies find themselves 11 See “The Other Side of the Coin: the UK and Corruption in competing on an unfair basis against corporate Africa”. A report by the UK Africa All Party Parliamentary Group, March 2006, p. 14. 13 Boyce, J.K. and Ndikumana, L. (2005). “Africa’s Debt: Who delinquents prepared to push tax planning to the limits. Governments committed to equitable tax 12 Raymond Baker from the Center for International Policy, Owes Whom?” in Epstein, G.A., Capital Flight and Capital Washington, quoted from oral evidence given to the UK Controls in Developing Countries. Cheltenham: Edward Elgar. practices and fair trade find themselves drawn into Africa All Party Parliamentary Group in January 2006. 14 Reich, R. (1992). The Work of Nations. New York. a wholly bogus process known as tax competition
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01-Temas_ing (01-80).indd 59 14/9/07 15:11:41 which undermines their revenue base and increases Public understanding of what constitutes cor- But the figure of USD 255 billion in tax revenue inequality. ruption needs to be radically shifted to encompass lost to tax evasion on assets held offshore is only one Regrettably, Transparency International, de- any activity which involves the abuse of the public part of the equation. Developing countries also lose spite its commendable role in putting corruption good or which undermines public confidence in the out to tax evasion in the domestic context (often from onto the political agenda, has undermined the ef- integrity of the rules, systems and institutions that activities in the informal economy), from tax avoid- forts of reformers through its publication of the promote the public good. Insider trading, tax eva- ance on cross-border trade, and from pressures Corruption Perception Index (CPI) which reinforces sion and avoidance, market rigging, non-disclosure to compete for investment capital through offering stereotypical perceptions about the geography of of pecuniary involvement, embezzlement, and trade unnecessary tax incentives. In combination these corruption. The CPI identifies Africa as the most cor- mispricing would all be recognized as corrupt within issues are estimated to cost developing countries rupt region of the world, accounting for over half of such an analytical framework. approximately USD 385 billion annually in tax rev- the ‘most corrupt’ quintile of countries in the 2006 enues foregone.21 This clearly represents a massive index. African countries account for about one half An economic blind spot haemorrhaging of the domestic financial resources of the countries identified as most corrupt, with Many economists overlook the role of the offshore of many developing countries, which undermines Chad, Côte d’Ivoire, the Democratic Republic of the economy in their analysis, which arguably under- sustainability in a number of ways: Congo, Equatorial Guinea, Guinea and Sudan ranking lies their inability to explain the ‘uphill’ movement of • Declining tax revenue income from the wealthy amongst the bottom ten of the 163 countries sur- capital from poor to rich nations despite the predic- and high income earners forces governments 17 veyed. Ghana fares relatively well, ranking at a joint tions of their economic theories. Political risk or the to substitute other taxes (typically indirect) with 70th position in 2006, though the ranking score of prospect of financial crises might be primary causes a consequent regressive impact on wealth and 3.3 out of a possible 10 still places Ghana at the low of capital flight, but tax-free status creates a strong income distribution. end (i.e. more corrupt) of Transparency Internation- incentive for wealthy domestic asset holders in de- • Falling tax revenues force cutbacks in public al’s corruption spectrum. But despite the attention veloping countries to retain their assets offshore. By investment in education, transport and other given to the CPI in the African and global press, these doing this on an anonymous basis, they can protect infrastructure. statistics provide a very partial and biased perspec- their wealth from potential currency devaluation and tive. A more critical examination of the index reveals from taxes. But not all the capital that flees develop- • Tax dodging corrupts the integrity of tax regimes that over half of the countries identified by the CPI in ing countries stays out. Some returns disguised as and creates harmful economic distortions 2006 as ‘least corrupt’ are offshore tax havens, in- foreign direct investment. This is the consequence which penalize those who follow ethical practice cluding major centres such as Singapore (ranked 5th of the flight money being re-cast offshore during and benefits those who bend the rules. overall), Switzerland (7th), the UK and Luxembourg the laundering process prior to reinvestment in the • Tax dodging undermines public respect for (jointly 11th), Hong Kong (15th), Germany (16th), country of origin: a process known as ‘round trip- the rule of law and the integrity of democratic the USA and Belgium (jointly 20th). For good meas- ping’. The preferential treatment offered to many for- government. ure, Barbados, Iceland, Malta, New Zealand and the eign investors provides an incentive to round trip. United Arab Emirates (all tax havens) also fall into the In March 2005 the Tax Justice Network pub- Declining tax revenues in developing countries ‘least corrupt’ quintile. What do these rankings tell us lished a briefing paper – The Price of Offshore18 have stimulated a vicious circle of decline in invest- about the current politics of corruption? – which estimated the stock of private wealth held ment in the human capital necessary to create an This distorted geography of corruption may well ‘offshore’ by rich individuals, and largely undeclared attractive environment for both domestic and for- arise from Transparency International’s definition of in the country of residence, at about USD 11.5 tril- eign investors. In a 2006 report on Latin America, corruption as “the misuse of entrusted power for lion. The paper estimates that the annual worldwide the World Bank argued that governments must give private gain.” Operationally, this has led to an obses- income on these undeclared assets is about USD 860 higher priority to spending on infrastructure likely to sive focus on public officials (politicians and state billion, and that the annual worldwide tax revenue benefit the poor and increase expenditure on educa- employees) and a lack of attention to other elites, lost on such undeclared income is about USD 255 tion and health care. In practice, a large proportion of including company directors or financial intermedi- billion. That figure, which has had huge media cover- government spending in Latin America is skewed in aries. Now the focus must shift to the enablers on the age since its publication, and which we consider to favour of the well-off, and governments are collect- supply side,15 including: be on the conservative side, significantly exceeds the ing far too little tax, especially from the wealthy. The • Governments of jurisdictions (not exclusively annual funds needed to finance the UN’s Millennium World Bank report concludes that “on the tax front, 19 those categorized as tax havens) which supply the Development Goals. Whilst the majority of this USD first items in the agenda would be strengthening secrecy spaces where corruption can take place. 11.5 trillion of undeclared assets originates from anti-tax evasion programs and addressing the high developed countries, a significant proportion comes levels of exemptions.”22 • Private sector agents, including and especially from developing countries. For example, over 50% professional intermediaries such as bankers, of the cash and listed securities of rich individuals in Civil society: wake up! lawyers, accountants, company formation agen- Latin America is reckoned to be held offshore.20 Data In April 2007 the author addressed a parliamentary cies and trust companies, whose activities facili- for Africa are scarce, but most analysts assume the session in London on the subject of “Why are aid tate (or overlook) corrupt financial practices.16 ratio to be comparable to Latin America or higher. donors frightened of taxation?” Several reasons • Company directors responsible for illicit trans- were offered, including the complexity of the sub- actions that contribute to capital flight, tax eva- 17 Guha, K. (2006). “Globalisation. A share of the spoils: why ject and fears about the future of some small island sion and tax avoidance. policymakers fear ‘lumpy’ growth may not benefit all”, Financial Times, 28 August, p. 11. 21 Cobham, A. (2005). “Tax Evasion, Tax Avoidance and Development Finance”. Queen Elizabeth House Working 15 See, for example, UK Africa All Party Parliamentary Group, 18
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01-Temas_ing (01-80).indd 60 14/9/07 15:11:42 economies which are dependent on their tax haven Addressing this issue in March 2007, anti-cor- roles. But other factors were also raised: Are some ruption campaigner Eva Joly spoke of the need to aid agencies compromised by their relations with shift the corruption debate to Phase Two, in which the powerful governments? Do some of them have a role of accountants, bankers, lawyers and offshore vested interest in preserving the aid industry? Are financial centres in enabling corrupt practices comes 23 some too closely tied to corporate interests? What- under far greater scrutiny. n ever the reasons, it is astonishing that it has taken so long for these issues to become the focus of attention for the development community. Tax Justice Network Most of the problems outlined above can be and financing remedied by strengthening international coopera- for development tion. Effective information exchange between na- tional authorities would go a long way towards over- coming the problems of capital flight and tax eva- The 2002 Monterrey Conference on Financ- sion. The barriers posed by banking secrecy could be ing for Development identified capital flight overcome by override clauses built into international and tax evasion as barriers to the achieve- treaties. The secrecy of offshore trusts would be re- ment of this goal. In 2003 the UN General duced by requiring registration of key details relating Assembly agreed the creation of a Commit- to the identity of the settlor and beneficiaries. There is tee of Experts on International Cooperation no reason why those who benefit from the privileges in Tax Matters, dedicated to tackling these conferred by using companies and trusts should not problems. accept the obligation of providing basic information In Autumn 2008 the member states about their identity. of the United Nations will meet in Doha Global frameworks could be agreed for taxing to review progress towards achieving the multinationals on the basis of where they actually Monterrey Consensus on mobilizing do- generate their profits. Policies such as these could mestic resources as a principal means of be implemented in a relatively short timeframe. The financing development. We must use the principal barrier standing in the way of progress to- Doha summit as an opportunity to highlight wards achieving these goals is the lack of political the work of this Committee and to push for will on the parts of the governments of the leading a new agenda for this Committee, giving pri- OECD nations, most notably Switzerland, the USA macy to pro-poor tax policies and enhanced and the UK, all of which are leading tax haven nations. international cooperation on tax matters. The reality of their commitment to ‘globalization’ is For those of us seeking solutions beyond aid that they want liberalized trade on their own terms dependence and debt relief, redesigning the but continue to use fiscal incentives to distort the global financial architecture to tackle capital trade system in favour of their domestic businesses flight and tax evasion is a major priority. This and to attract capital from developing and emerging is a struggle which affects us all. Join us! countries. The debate around development and persistent poverty is undergoing a major shift. Campaigners are looking beyond aid dependence and debt relief, Further resources
and all the associated conditionalities, and asking Offshore Watch:
23 Africa Confidential (2007). “Tax Havens: Financial secrecy – profits from the laundry”. Vol. 48, No. 6, 16 March.
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