World
David Kerans
December 8, 2011
© Photo: Public domain


“The ugliest chapter in global economic affairs since slavery.”

— Raymond Baker, describing the offshore system

The strain Western state budgets have been experiencing in the aftermath of the financial crisis that exploded in 2008 has no parallel since the end of the Second World War, and has riveted attention everywhere to questions of taxation and budget expenditures. The measurement and assessment of income inequality has become a hot topic, and populations are becoming much more aware now of class divisions. Recent research has identified that inequality has intensified in recent decades, and that the consequences of inequality are significantly worse than expected. Inevitably, pressure to rectify the yawning wealth gap is building around the Western world, spearheaded by the Occupy Wall Street movement in the US and a wide variety of groups elsewhere.

As rapidly as societies are becoming conscious of the realities of the division of wealth in the age of globalization, one very large dimension of our economic order has gone largely unnoticed. This is the offshore system, which abets enormous transfers of wealth into the hands of a tiny minority of the rich and super-rich, by facilitating tax avoidance and illicit capital flight. As explained previously in this forum, the scale of the offshore system has been expanding rapidly since the end of the Cold War, shrinking the tax contributions of multinational corporations and wealthy individuals alike. Already by 2005 wealthy individuals had stashed about $11.5 trillion, or approximately one quarter of all individually held wealth in the world, in tax havens. This colossal capital flight was then depriving state revenue services of at least $250 billion per year. Corporate tax avoidance adds many more hundreds of billions to the bill ordinary taxpayers must shoulder.

Beyond the cost in lost tax revenues, the offshore system's secrecy features open the door to terrorist financing, money laundering by organized crime, and corruption on the part of dictators and highly placed officials. Here too the numbers are staggering. The drug business was netting a minimum of $400 billion, globally, in the early 2000s, with about $100 billion of that entering the financial system, and about five percent of the world's adult population abusing drugs. And organized crime in general has been an explosive growth industry in the last two decades. Meanwhile, the human toll of the offshore system is prodigious, especially in lesser developed countries, which are stripped bare by capital flight. For decades now, the volume of capital flight from lesser developed countries has exceeded inflows of aid from better developed countries by a ratio of 10:1 or more. UK-based Christian Aid estimates tax dodging costs the lives of about 350,000 children aged 0-5 every year in the poorer countries, all a function of the offshore system that enriches Western banking interests.

As alarming as all these figures may be, they dramatically understate the problem. The Tax Justice Network now reckons that the volume of money individuals have stashed offshore has nearly doubled from its $11.5 trillion estimate in 2005. In other words, well over 40 percent of all individual wealth is escaping taxation. Once we consider ancillary consequences of the offshore system, like the erosion of the integrity of the capitalist system itself from the rampant illegality of transfer pricing and illicit capital flows, we can easily understand the indignation French financial crime investigator Eva Joly expressed: “I see a respectable, established system of power that has accepted grand corruption as a natural part of its daily business.” Is anything being done about it?

The Role of the US

“You should open a branch in the Caribbean to capture your fair share of flight capital.”

USTreasury official, covertly advising a major bank to partake in the offshore system.

The US cannot be accused of authoring the offshore system. That distinction belongs to England's semi-autonomous banking sector, the City of London Corporation. But, as the greatest proponent of the free-market and globalization, the US has the most responsibility for monitoring the health of the world economic system, and leading the way to reform, when necessary. This is all the more obvious apropos the offshore system, where the country's record is darkly stained. The US financial sector and the Treasury Department have certainly encouraged the development of this system. The banks salivate over the inflows, and the Treasury Department appreciates this money as a corrective to the country's trade deficits (the US consistently spends more on imports than it receives in exports). Big business, for its part, has been all too pleased at the opportunities to shift profits to tax havens and avoid paying taxes–across the OECD, the effective average tax rate on corporations shrank from 40 percent in 1981 to 28 percent in 2001.

Unsurprisingly, therefore, the US has done more to obstruct than to facilitate international efforts to rein in the offshore system. The Treasury Department and the Congress took a series of modest steps to restrict illicit flows of money from the 1970s to the 1990s, and these efforts helped to establish the Financial Action Task Force (FATF), an ongoing international effort housed in the OECD, in Paris. The US regulations were entirely inadequate to the task, however. They did nothing substantive to control illicit capital flows channeled through non-US secrecy jurisdictions; they did not constrain transfer pricing abuses (explained in “Offshore, the Overarching Scourge”); they did not restrict US banks from accepting foreign-sourced money and protecting the owners' identities, no matter how criminal the funds' provenance. And the Treasury and Commerce Departments made it their habit not to enforce laws that would curb the offshore system. As a senior official of the Treasury Department put it to Raymond Baker:

“'With {existing statutes outlawing} mail fraud and wire fraud we can do anything we want to do.' When I asked why the United States chooses not to use these instruments to combat false pricing, he hemmed and hawed and backed away from the subject.”

When the FATF began to organize international efforts against tax havens from the late-1990s, the US, England, Ireland, and a variety of other more obvious benefactors of the offshore system dragged their feet and stymied meaningful reform. In May 2001 US Treasury Secretary Paul O'Neill rebuked the OECD's anti-tax haven proposals, and openly endorsed the principle of “tax competition” between nations (the thoroughly discredited idea that nations should compete for the relocation of corporations through lower tax rates, in the name of “efficiency”). O'Neill and the US were effectively advocating for extension of the offshore system, not reform. Fittingly, during deliberations over The Patriot Act that followed the terrorist attacks of 2001, the American Banking Association (and especially Citibank) actually lobbied against provisions designed to impede the movement of terrorist-controlled funds. This was an astonishingly brazen expression of selfishness from Wall Street, amounting to a prioritization of their profits over national security–right on the heels of 9/11, no less.

Over the last decade the US has not taken many steps to reform the offshore system. The Bush administration trumpeted numerous successes in shutting down Al Qaeda-related financial conduits, but these were phantom achievements, simply the sealing of particular channels that terrorists had already used. By the admission of US authorities, even now they are intercepting only about one-tenth of one percent of the escalating criminal money flows. According to a Congressional inquiry, the US now harbors more than $3 trillion in illicit capital. And so, in the absence of energetic cooperation from the US and other powers—including China, by the way–the OECD's efforts to control the offshore system are getting only trivial results. Despite the G20 announcing in 2009 a commitment to tackle tax haven abuse through the OECD, and declaring that “the era of banking secrecy is over”, the OECD claims responsibility for facilitating the collection of just $19 billion in taxes in 20 countries over the last two years.

Obama not to the Rescue

Leading specialists in the study of the offshore system foresaw momentous reform on the horizon with the election of President Obama in 2008. In 2007 Obama had, after all, co-sponsored Senator Carl Levin's Stop Tax Haven Abuse Act (a bill which would have initiated a long list of stern measures to combat offshore machinations). But on this issue, as on so many others, Obama changed his spots as soon as he entered office. His administration stood aside while lobbyists from Wall Street, the Cayman Islands, and other offshore centers persuaded Congress to emasculate the 2009 version of Senator Levin's bill. And Obama then formally sanctioned a huge Bush-era tax loophole that further fuels the offshore system. This loophole permits multinational corporations indefinitely to defer paying taxes on income earned abroad, and effectively costs the US Treasury dozens of billions per year (older regulations, dating from 1962, but scrapped in 1999 and 2006, severely limited this type of tax avoidance). Obama's Treasury Department has, we concede, taken stern action against wealthy Americans who hide money in secrecy jurisdictions so as to evade taxes. The US is now willing to hold foreign banks accountable for permitting this behavior—as regards American citizens–which is a step in the right direction. And from 2013, investment funds around the world may have to report on the holdings and profits of American citizens, on penalty of sanctions if they invest in any US assets. But the US is not closing its doors to inflows of illicit capital from abroad, and has not yet done anything substantive to undermine the global offshore system (it is now composing regulations that might meaningfully combat transfer pricing abuses).

Other Avenues of Reform?

Absent cooperation from the US and the UK, the scourge of offshore tax avoidance and illicit capital flows will not abate. Since international organizations atop the global financial order—the G20, the OECD, the IMF, and the World Bank—have not been aggressive about reforming the offshore system, civil society has slowly mobilized to exert pressure on them, through hundreds of progressive organizations the world over. These efforts have gradually begun to bear fruit. To begin with, France, formerly a ready participant in offshore machinations of many dimensions, has been showing that it can reverse course. From 2009, the French Bankers Association has come out in opposition to tax havens, and in 2010 Ile-de-France (the capital region) became the first jurisdiction anywhere in the world to refuse to do any business with banks who pursued tax haven-related business. France then made use of its Presidency of the G20 this year to ensure that discussion of tax havens was on the agenda.

At its summit in Cannes earlier this month the G20 formally declared itself “…committed to protect our public finances and the global financial system from the risks posed by tax havens and non cooperative jurisdictions, and added that: “The damage caused is particularly important for the least developed countries.” On October 24th The World Bank, for its part, issued by far its most strident denunciation of secrecy jurisdictions ever, fingering the US, Switzerland, the UK, among others, for complicity in facilitating corruption on a global scale, and insisting on real reform. And the IMF, the OECD, and the UN are all talking tougher.

As encouraging as all this may sound, the G20's efforts fell far short of what is needed to vanquish the offshore system, according to many experts, including—among others–the United Nations commission on reforming the international financial and monetary system in 2009. The world is still waiting for basic measures like automatic information exchange between countries (on foreigners' financial accounts), country-by-country reporting for corporations, and mandatory public registration of the owners of companies and trusts, among others. And so the illicit flows of capital continue to accelerate, as do their costs to society.

The views of individual contributors do not necessarily represent those of the Strategic Culture Foundation.
All Dark on the Offshore Horizon: Capital Flight Accelerates as Austerity Looms


“The ugliest chapter in global economic affairs since slavery.”

— Raymond Baker, describing the offshore system

The strain Western state budgets have been experiencing in the aftermath of the financial crisis that exploded in 2008 has no parallel since the end of the Second World War, and has riveted attention everywhere to questions of taxation and budget expenditures. The measurement and assessment of income inequality has become a hot topic, and populations are becoming much more aware now of class divisions. Recent research has identified that inequality has intensified in recent decades, and that the consequences of inequality are significantly worse than expected. Inevitably, pressure to rectify the yawning wealth gap is building around the Western world, spearheaded by the Occupy Wall Street movement in the US and a wide variety of groups elsewhere.

As rapidly as societies are becoming conscious of the realities of the division of wealth in the age of globalization, one very large dimension of our economic order has gone largely unnoticed. This is the offshore system, which abets enormous transfers of wealth into the hands of a tiny minority of the rich and super-rich, by facilitating tax avoidance and illicit capital flight. As explained previously in this forum, the scale of the offshore system has been expanding rapidly since the end of the Cold War, shrinking the tax contributions of multinational corporations and wealthy individuals alike. Already by 2005 wealthy individuals had stashed about $11.5 trillion, or approximately one quarter of all individually held wealth in the world, in tax havens. This colossal capital flight was then depriving state revenue services of at least $250 billion per year. Corporate tax avoidance adds many more hundreds of billions to the bill ordinary taxpayers must shoulder.

Beyond the cost in lost tax revenues, the offshore system's secrecy features open the door to terrorist financing, money laundering by organized crime, and corruption on the part of dictators and highly placed officials. Here too the numbers are staggering. The drug business was netting a minimum of $400 billion, globally, in the early 2000s, with about $100 billion of that entering the financial system, and about five percent of the world's adult population abusing drugs. And organized crime in general has been an explosive growth industry in the last two decades. Meanwhile, the human toll of the offshore system is prodigious, especially in lesser developed countries, which are stripped bare by capital flight. For decades now, the volume of capital flight from lesser developed countries has exceeded inflows of aid from better developed countries by a ratio of 10:1 or more. UK-based Christian Aid estimates tax dodging costs the lives of about 350,000 children aged 0-5 every year in the poorer countries, all a function of the offshore system that enriches Western banking interests.

As alarming as all these figures may be, they dramatically understate the problem. The Tax Justice Network now reckons that the volume of money individuals have stashed offshore has nearly doubled from its $11.5 trillion estimate in 2005. In other words, well over 40 percent of all individual wealth is escaping taxation. Once we consider ancillary consequences of the offshore system, like the erosion of the integrity of the capitalist system itself from the rampant illegality of transfer pricing and illicit capital flows, we can easily understand the indignation French financial crime investigator Eva Joly expressed: “I see a respectable, established system of power that has accepted grand corruption as a natural part of its daily business.” Is anything being done about it?

The Role of the US

“You should open a branch in the Caribbean to capture your fair share of flight capital.”

USTreasury official, covertly advising a major bank to partake in the offshore system.

The US cannot be accused of authoring the offshore system. That distinction belongs to England's semi-autonomous banking sector, the City of London Corporation. But, as the greatest proponent of the free-market and globalization, the US has the most responsibility for monitoring the health of the world economic system, and leading the way to reform, when necessary. This is all the more obvious apropos the offshore system, where the country's record is darkly stained. The US financial sector and the Treasury Department have certainly encouraged the development of this system. The banks salivate over the inflows, and the Treasury Department appreciates this money as a corrective to the country's trade deficits (the US consistently spends more on imports than it receives in exports). Big business, for its part, has been all too pleased at the opportunities to shift profits to tax havens and avoid paying taxes–across the OECD, the effective average tax rate on corporations shrank from 40 percent in 1981 to 28 percent in 2001.

Unsurprisingly, therefore, the US has done more to obstruct than to facilitate international efforts to rein in the offshore system. The Treasury Department and the Congress took a series of modest steps to restrict illicit flows of money from the 1970s to the 1990s, and these efforts helped to establish the Financial Action Task Force (FATF), an ongoing international effort housed in the OECD, in Paris. The US regulations were entirely inadequate to the task, however. They did nothing substantive to control illicit capital flows channeled through non-US secrecy jurisdictions; they did not constrain transfer pricing abuses (explained in “Offshore, the Overarching Scourge”); they did not restrict US banks from accepting foreign-sourced money and protecting the owners' identities, no matter how criminal the funds' provenance. And the Treasury and Commerce Departments made it their habit not to enforce laws that would curb the offshore system. As a senior official of the Treasury Department put it to Raymond Baker:

“'With {existing statutes outlawing} mail fraud and wire fraud we can do anything we want to do.' When I asked why the United States chooses not to use these instruments to combat false pricing, he hemmed and hawed and backed away from the subject.”

When the FATF began to organize international efforts against tax havens from the late-1990s, the US, England, Ireland, and a variety of other more obvious benefactors of the offshore system dragged their feet and stymied meaningful reform. In May 2001 US Treasury Secretary Paul O'Neill rebuked the OECD's anti-tax haven proposals, and openly endorsed the principle of “tax competition” between nations (the thoroughly discredited idea that nations should compete for the relocation of corporations through lower tax rates, in the name of “efficiency”). O'Neill and the US were effectively advocating for extension of the offshore system, not reform. Fittingly, during deliberations over The Patriot Act that followed the terrorist attacks of 2001, the American Banking Association (and especially Citibank) actually lobbied against provisions designed to impede the movement of terrorist-controlled funds. This was an astonishingly brazen expression of selfishness from Wall Street, amounting to a prioritization of their profits over national security–right on the heels of 9/11, no less.

Over the last decade the US has not taken many steps to reform the offshore system. The Bush administration trumpeted numerous successes in shutting down Al Qaeda-related financial conduits, but these were phantom achievements, simply the sealing of particular channels that terrorists had already used. By the admission of US authorities, even now they are intercepting only about one-tenth of one percent of the escalating criminal money flows. According to a Congressional inquiry, the US now harbors more than $3 trillion in illicit capital. And so, in the absence of energetic cooperation from the US and other powers—including China, by the way–the OECD's efforts to control the offshore system are getting only trivial results. Despite the G20 announcing in 2009 a commitment to tackle tax haven abuse through the OECD, and declaring that “the era of banking secrecy is over”, the OECD claims responsibility for facilitating the collection of just $19 billion in taxes in 20 countries over the last two years.

Obama not to the Rescue

Leading specialists in the study of the offshore system foresaw momentous reform on the horizon with the election of President Obama in 2008. In 2007 Obama had, after all, co-sponsored Senator Carl Levin's Stop Tax Haven Abuse Act (a bill which would have initiated a long list of stern measures to combat offshore machinations). But on this issue, as on so many others, Obama changed his spots as soon as he entered office. His administration stood aside while lobbyists from Wall Street, the Cayman Islands, and other offshore centers persuaded Congress to emasculate the 2009 version of Senator Levin's bill. And Obama then formally sanctioned a huge Bush-era tax loophole that further fuels the offshore system. This loophole permits multinational corporations indefinitely to defer paying taxes on income earned abroad, and effectively costs the US Treasury dozens of billions per year (older regulations, dating from 1962, but scrapped in 1999 and 2006, severely limited this type of tax avoidance). Obama's Treasury Department has, we concede, taken stern action against wealthy Americans who hide money in secrecy jurisdictions so as to evade taxes. The US is now willing to hold foreign banks accountable for permitting this behavior—as regards American citizens–which is a step in the right direction. And from 2013, investment funds around the world may have to report on the holdings and profits of American citizens, on penalty of sanctions if they invest in any US assets. But the US is not closing its doors to inflows of illicit capital from abroad, and has not yet done anything substantive to undermine the global offshore system (it is now composing regulations that might meaningfully combat transfer pricing abuses).

Other Avenues of Reform?

Absent cooperation from the US and the UK, the scourge of offshore tax avoidance and illicit capital flows will not abate. Since international organizations atop the global financial order—the G20, the OECD, the IMF, and the World Bank—have not been aggressive about reforming the offshore system, civil society has slowly mobilized to exert pressure on them, through hundreds of progressive organizations the world over. These efforts have gradually begun to bear fruit. To begin with, France, formerly a ready participant in offshore machinations of many dimensions, has been showing that it can reverse course. From 2009, the French Bankers Association has come out in opposition to tax havens, and in 2010 Ile-de-France (the capital region) became the first jurisdiction anywhere in the world to refuse to do any business with banks who pursued tax haven-related business. France then made use of its Presidency of the G20 this year to ensure that discussion of tax havens was on the agenda.

At its summit in Cannes earlier this month the G20 formally declared itself “…committed to protect our public finances and the global financial system from the risks posed by tax havens and non cooperative jurisdictions, and added that: “The damage caused is particularly important for the least developed countries.” On October 24th The World Bank, for its part, issued by far its most strident denunciation of secrecy jurisdictions ever, fingering the US, Switzerland, the UK, among others, for complicity in facilitating corruption on a global scale, and insisting on real reform. And the IMF, the OECD, and the UN are all talking tougher.

As encouraging as all this may sound, the G20's efforts fell far short of what is needed to vanquish the offshore system, according to many experts, including—among others–the United Nations commission on reforming the international financial and monetary system in 2009. The world is still waiting for basic measures like automatic information exchange between countries (on foreigners' financial accounts), country-by-country reporting for corporations, and mandatory public registration of the owners of companies and trusts, among others. And so the illicit flows of capital continue to accelerate, as do their costs to society.