International Financial Flows, Taxes, and Money Laundering Richard Gordon
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Texas A&M University School of Law Texas A&M Law Scholarship Faculty Scholarship 2014 Moving Money: International Financial Flows, Taxes, and Money Laundering Richard Gordon Andrew P. Morriss Texas A&M University School of Law, [email protected] Follow this and additional works at: https://scholarship.law.tamu.edu/facscholar Part of the Law Commons Recommended Citation Richard Gordon & Andrew P. Morriss, Moving Money: International Financial Flows, Taxes, and Money Laundering, 37 Hastings Int'l & Comp. L. Rev. 1 (2014). Available at: https://scholarship.law.tamu.edu/facscholar/99 This Article is brought to you for free and open access by Texas A&M Law Scholarship. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of Texas A&M Law Scholarship. For more information, please contact [email protected]. Moving Money: International Financial Flows, Taxes, and Money Laundering By RICHARD GORDON AND ANDREW P. MORRISS** Money "moves" internationally through electrons and physically among financial institutions and non-financial institutions as part of global trade in legitimate goods and services and as part of legitimate transnational capital investment, and, regrettably, as part of criminal enterprise. Some analysts argue that the movement of a large amount of these funds' through offshore financial centers (OFCs) suggests a problem with the financial system that puts "global financial capital. .. beyond the control of any one national government, able effectively to cast judgment on the fiscal and monetary policies of nation states themselves through the disciplinary fear of capital flight." 2 Many of these analyses purport to distinguish between "onshore" transactions that are "fully regulated and taxed" and "offshore" transactions "where * Professor of Law and Director of Financial Integrity Programs, Center for Business Law and Regulation, Case Western Reserve University. B.A. Yale; J.D. Harvard. The authors gratefully acknowledge research assistance from Brent Douglas and Joshua Brasfield, comments from Jim Bryce, Julie Hill, Matthew Christiensen, and Geoff Cook and research support from their respective deans and Jersey Finance. ** D. Paul Jones, Jr. & Charlene A. Jones Chairholder in Law & Professor of Business, University of Alabama; Research Scholar, Regulatory Studies Center, George Washington University; Senior Fellow, Reason Foundation; Senior Scholar, Mercatus Center at George Mason University. A.B. Princeton; J.D., M. Pub. Aff. The University of Texas at Austin; Ph.D. (Economics), M.I.T. 1. See, e.g., Mark P. Hampton & Jason P. Abbott, The Rise (and Fall?) of Offshore Finance in the Global Economy: Editors' Introduction, in OFFSHORE FINANCE CENTERS AND TAX HAVENS: THE RISE OF GLOBAL CAPITAL (Mark P. Hampton & Jason P. Abbott, eds., 1999) (noting claim that "as much as half the world's stock of money either resides in or is flowing through tax havens"). 2. Id. at 2; see also KERN ALEXANDER ET AL., GLOBAL GOVERNANCE OF FINANCIAL SYSTEMS: THE INTERNATIONAL REGULATION OF SYSTEMIC RISK 67 (2006) (asserting that OFCs "pose a major regulatory concern because they often lack adequate regulation and present numerous obstacles to customer identification"). 1 2 Hastings Int'l & Comp. L. Rev. [Vol. 37:1 some regulations and taxation are withheld." 3 Most recently, the Tax Justice Network caught public attention by arguing that, "[a] significant fraction of global private financial wealth ... has been invested virtually tax-free through the world's still-expanding black hole of more than 80 'offshore' secrecy jurisdictions"4 though they also ranked the United States in the top five in terms of financial secrecy.5 Similarly, the popular press often portrays "offshore" transactions as sources of criminal activity. To illustrate, following the revelation that Jean-Jaques Augier, the former campaign treasurer for President Hollande held bank accounts in the Cayman Islands, the French newspaper Le Monde printed a front page editorial entitled "The offshore system, this patent enemy of democracy." The piece attacked "fiscal paradises," generally interpreted as offshore centers, as a source for money laundering.6 Much of the discussion of international financial transactions revolves around arguments about "unfair competition" and "distortions" introduced into financial and legal arrangements by jurisdictions with tax structures that differ from developed world norms. For example, offshore critic Ronen Palan argues that what sets offshore finance apart is that "it drives economic activities into jurisdictions they should not have been in the first place." 7 As a 3. Ronen Palan, Offshore and the Structural Enablement of Sovereignty in OFFSHORE FINANCE CENTERS AND TAX HAVENS: THE RISE OF GLOBAL CAPITAL 18, 21 (Mark Hampton & Jason Abbott, eds., 1999). 4. James S. Henry, The Price of Offshore Revisited: New Estimates for "Missing" Global PrivateWealth, Income, Inequality, and Lost Taxes 5, TAX JUSTICE NETWORK (July 2012), available at http://www.taxjustice.net/cms/upload/pdf/PriceofOffshore _Revisited_120722.pdf. 5. Financial Secrecy Index, 2011 Results TAX JUSTICE NETWORK http://www.financialsecrecyindex.com /2011results.html (last visited Oct. 29, 2013). See also ROBERT KEATS, A CANADIAN'S BEST TAX HAVEN: THE US 7 (2012) (arguing that "The US meets virtually all the requirements of a good tax haven for Canadians."). 6. Editorial, Le systime offshore, cet ennemi patenti de la ddmocratie, LE MONDE, Apr. 4, 2013, at 1 (translation by the authors). 7. Palan, supra note 3, at 35. Places that economic activities "should not" be include the Cayman Islands, about which Palan says "[s]trictly speaking, it does not make economic sense for the Cayman Islands to serve as the world's fifth largest financial centre." Id. Thus, Palan argues: [Ilt does not make sense for the Marshall Islands, Vanuatu or Liberia to be the world's giant shipping nations. There is no obvious economic reason why small Pacific islands are at the forefront of the telecommunications revolution, nor why Guyana and Niue are the central routing areas for Internet porn. In direct contradiction to the theory of comparative 2014]1 Moving Money 3 result, critics contend that the existence of these jurisdictions "distort[s] the relocation policies of international capital."8 These arguments rest on a profound misunderstanding of how financial transactions occur.9 We argue below that much of this "tax justice" literature is driven by its incorrect assumptions about money, business, finance, and government. The assumptions are disguised by often overheated rhetoric and pseudoscientific, or completely unscientific calculations. Like a three card monte dealer rapidly shifting cards on a box while distracting his victims with rapid chatter, some proponents of "tax justice" divert debates over tax policy, global finance, and international business away from the economic underpinnings of financial transactions and the fundamental substantive policy differences that should be the focus of discussion. Although they seek to persuade policymakers that adopting their proposed policies will not limit the beneficial aspects of the existing financial system, what they are advocating is a advantage which assumes that economic activities tend to gravitate towards geographically relevant areas, offshore has the opposite effect. Id. In a similar vein, another critic, Sol Picciotto, argues that "[b]y providing a haven for routing global flows through the use of artificial persons and transactions, 'offshore' has helped to dislocate the international state system and induce its substantial reconstruction." Sol Picciotto, Offshore: The State as Legal Fiction, in OFFSHORE FINANCE CENTRES AND TAx HAVENS: THE RISE OF GLOBAL CAPITAL, supra note 1, at 43, 43. To some extent, all taxes have such impacts. Corporate taxes "cause capital to flow to unincorporated productive sector" and "distort investment and financing decisions, and may discourage the distribution of dividends." Emilio Albi, The challenges of corporateincome taxes in a globalized world, in THE ELGAR GUIDE TO TAx SYSTEMS 131, 162 (Emilio Albi & Jorge Martinez- Vasquez, eds., 2011). 8. Palan, supra note 3, at 35. Palan's analysis ignores a key element of such jurisdictions' appeal to businesses: their legal and regulatory systems. See, e.g., Tony Freyer & Andrew P. Morriss, Creating Cayman as an Offshore Financial Center: Structure and Strategy Since 1960, ARIZ. ST. L.J. (forthcoming 2014); Andrew P. Morriss, The Role of Offshore Financial Centers in Regulatory Competition, in OFFSHORE FINANCIAL CENTERS AND REGULATORY COMPETITION (Andrew P. Morriss, ed., 2010). To ignore comparative advantage in providing a legal and regulatory environment is a significant error in analysis. See ERIN A. O'HARA & LARRY E. RIBSTEIN, THE LAW MARKET (2009). 9. They are often made by "repentant sinners," such as former employees of consulting firms engaged in global finance who purport to offer an insider's knowledge of how greedy individuals deprive their governments of their share of those individuals' incomes. See, e.g., Henry, supra note 4; JAMES S. HENRY, THE BLOOD BANKERS: TALES FROM THE GLOBAL UNDERGROUND ECONOMY (2005); JOHN PERKINS, CONFESSIONS OF AN ECONOMIC HIT MAN (2005). As far as we can tell from their writings, none of these repentant sinners has offered to make reparations for their own shares of the ill-gotten gains they claim their former employers secured. 4 Hastings Int'l & Comp. L. Rev. [Vol. 37:1