Tax havens and corruption: A global struggle
Tax Justice Network
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 globalisation.
The stage is being prepared for one of the epic struggles of our times. Secretly
and audaciously, over the past half century, professional elites and their
powerful clients have constructed a parallel global economy – often referred
to as tax havens – to remove themselves from ‘onshore’ taxes and
regulation. This parallel economy provides an enabling infrastructure of banks,
legal and accounting businesses, minor legislatures and judiciaries, and related
financial intermediaries, which combine to serve as an ‘offshore interface’
between the illicit and the licit economies.
This interface has encouraged and facilitated capital flight from poor countries
to rich ones on a truly awesome scale. It has enabled tax dodging, shifting the
tax burden from capital to labour and significantly contributing to widening
inequality. It has undermined the integrity of tax systems and respect for the
rule of law.
Democracy itself is undermined by covert deals and special treatments. The
offshore interface has distorted global markets to the disadvantage of
innovation and entrepreneurship, and slowed economic growth by rewarding
free-riding and misdirecting investment. It is identified as a major causal
factor behind the growth of high-level corruption. It functions through
collusion between private sector financial intermediaries and the governments of
states which host offshore tax haven activities. The forthcoming struggle
requires a radical rethink of the nature and geography of corruption, forcing
civil society to tackle major flaws in the global financial architecture and
overcome the political power of major vested interests.
International tax abuse must become the next big front in the battles over
international development, corruption, inequality and globalization. Partly
because of the complexity of these issues, civil society organizations have
mostly shied away from some of the most important aspects of these debates,
leaving these fields to be colonized by highly paid experts beholden to powerful
and wealthy interests. The time has come for civil society to step up and take
Contrary to the evocative images conjured up by the term ‘offshore’, it
would be wrong to think of offshore as disconnected and remote from mainstream
nation states. Geographically, many of the offshore tax havens are located on
small island economies dispersed across the spectrum of time zones (see Table
1), but politically and economically the majority of tax havens are intimately
tied to major Organisation for Economic Cooperation and Development (OECD)
states, and the term ‘offshore’ is strictly a political statement about the
relationship between the state and parts of its related territories.
In the case of Britain, for example, the bulk of offshore transactions are
controlled by the City of London, even though many City financial intermediaries
operate from offices located in UK overseas territories and crown dependencies.
These jurisdictions project the impression that they operate autonomously, but
in practice they largely act as booking centres for instructions issuing out of
the City of London and other major finance centres. They are primarily of use to
the City because they offer zero or minimal tax rates combined with secrecy
arrangements (including non-disclosure of beneficial ownership of companies and
trusts) and regulatory regimes which are more permissive than those prevailing
onshore. Many tax havens are directly linked to Britain, either through overseas
territory or crown dependency status, or through membership in the Commonwealth.
When asked at the conclusion of her enquiries into the Elf scandal which
engulfed the French oil giant in the 1990s whether corruption on a similar scale
could occur in the United Kingdom, the Norwegian anti-corruption campaigner Eva
Joly commented that many of the world’s biggest tax havens, most notably the
City of London itself, are under British control, adding: “The United Kingdom
has maintained its privileges by allowing British companies to operate from
their own tax havens. The expansion in the use of these jurisdictions has a link
to decolonization. It is a modern form of colonialism.”
Joly refers to tax havens as the principal target in the emerging phase of the
anti-corruption debate, arguing: “There is nothing more important for those
who want to tackle poverty in the world than to make it possible to trace dirty
money flows and impose sanctions on those territories which don’t cooperate
with this process.”
Offshore secrecy, either created through banking secrecy laws or through de
facto judicial arrangements and banking practices, is a major barrier to tracing
dirty money flows and tackling corrupt activities. This ‘secrecy space’
creates an effective barrier to investigation of activities in the offshore
financial centre by external authorities,
and facilitates the laundering of proceeds from a wide range of criminal and
corrupt activities, including fraud, embezzlement and theft, bribery, drug
trafficking, illegal arms trafficking, counterfeiting, insider trading, false
trade invoicing, transfer mispricing, and tax dodging. Elaborate schemes are
devised to ‘weave’ dirty money into commercial transactions and to disguise
the proceeds of crime and tax evasion using complex offshore structures.
According to one expert investigator:
Methods to launder money vary dramatically from low-level, relatively simple to
highly structured and complex business scenarios or transfer of money offshore.
What is being increasingly identified is the infiltration of criminal identities
into otherwise legitimate business interests. None of these people could get
away with a lot of what they were doing if it wasn't for lawyers, accountants,
financial advisers, and the like, knowingly assisting them to launder and hide
TABLE 1. Tax havens of the world
The Caribbean and Americas
Antigua and Barbuda*
British Virgin Islands
St Kitts & Nevis*
Saint Vincent and the Grenadines*
Turks and Caicos Islands
US Virgin Islands*
São Tomé e Príncipe*
City of London
Isle of Man
Turkish Republic of Northern Cyprus*
Middle East and Asia
Indian and Pacific Oceans
The Cook Islands
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 during that period.
Tax us if you can, Tax Justice
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. According to a Swiss banker,
only 0.01% of dirty money flowing through Switzerland is detected.
It is unlikely that other offshore finance centres are any better. Crucially the
techniques used for tax dodging and laundering dirty money involve identical
mechanisms and financial subterfuges: tax havens, offshore companies and trusts,
foundations, correspondent banks, nominee directors, dummy wire transfers, etc.
Legal institutions granted special status and privilege by society have been
subverted to purposes for which they were never intended. For example, the
original purpose of trusts was to promote the protection of spouses and other
family members who are unable to look after their own affairs, and to promote
charitable causes. Incredible as it must appear to those not familiar with the
offshore economy, charitable trusts are regularly set up in offshore tax havens
for the purposes of owning ‘special purpose vehicles’ used for international
tax planning and for hiding both assets and liabilities offshore, as happened
with Enron and Parmalat.
The remarkable growth of the offshore economy since the mid-1970s reveals a
major fault line in the financial liberalization process. Whilst capital has
become almost totally mobile, the systems for tracking cross-border dirty money
flows remain largely nationally based. The unsurprising outcome has been a
massive increase in cross-border dirty money flows, often taking the form of
falsified trade invoicing and transfer mispricing between subsidiaries of
multinational companies. The vast majority of these funds are laundered via
complex offshore ladders operating through the global banking system. Huge sums
are involved, particularly for developing countries prone to capital flight.
Estimates of capital flight from Africa vary considerably, but according to the
African Union USD 148 billion leaves the continent every year through dirty
Most analysts agree that the outflows of dirty money originating from Africa
tend to be permanent, indicating that between 80% and 90% of such flows remain
outside the continent.
Another study concludes that Sub-Saharan Africa is a net creditor to the rest of
the world in the sense that external assets (i.e. the stock of flight capital)
exceed external liabilities (i.e. external debt).
The problem is that the assets are largely held in private hands, whilst the
liabilities belong to the African public.
Rethinking the nature and geography of corruption
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. Tax dodgers include institutions and
individuals who enjoy privileged social positions but see themselves as an elite
detached from normal society and reject “any of the obligations that
citizenship in a normal polity implies.”
This group comprises wealthy individuals and high income earners, plus a
‘pinstripe infrastructure’ of professional bankers, lawyers, and
accountants, with an accompanying offshore infrastructure of tax havens with
quasi-independent polities, judiciaries and regulatory authorities. This type of
corruption therefore involves collusion between private and public sector
actors, who exploit privileged status to undermine national tax regimes.
The failure to tackle these major flaws in the globalized financial system has
generated a spirit of lawlessness and corruption which acts as a cancer on our
trust in the integrity of the market system and democracy. Tax dodging by rich
individuals forces governments to switch the tax burden to the less well-off,
increasing inequality and harming development prospects by reducing the revenues
available for investment in education and infrastructure. Company directors
committed to good governance and ethical policies find themselves competing on
an unfair basis against corporate delinquents prepared to push tax planning to
the limits. Governments committed to equitable tax practices and fair trade find
themselves drawn into a wholly bogus process known as tax competition which
undermines their revenue base and increases inequality.
Regrettably, Transparency International, despite its commendable role in putting
corruption onto the political agenda, has undermined the efforts of reformers
through its publication of the Corruption Perception Index (CPI) which
reinforces stereotypical perceptions about the geography of corruption. The CPI
identifies Africa as the most corrupt region of the world, accounting for over
half of the ‘most corrupt’ quintile of countries in the 2006 index. African
countries account for about one half of the countries identified as most
corrupt, with Chad, Côte d’Ivoire, the Democratic Republic of the Congo,
Equatorial Guinea, Guinea and Sudan ranking amongst the bottom ten of the 163
countries surveyed. Ghana fares relatively well, ranking at a joint 70th
position in 2006, though the ranking score of 3.3 out of a possible 10 still
places Ghana at the low end (i.e. more corrupt) of Transparency
International’s corruption spectrum. But despite the attention given to the
CPI in the African and global press, these statistics provide a very partial and
biased perspective. A more critical examination of the index reveals that over
half of the countries identified by the CPI in 2006 as ‘least corrupt’ are
offshore tax havens, including major centres such as Singapore (ranked 5th
overall), Switzerland (7th), the UK and Luxembourg (jointly 11th), Hong Kong
(15th), Germany (16th), the USA and Belgium (jointly 20th). For good measure,
Barbados, Iceland, Malta, New Zealand and the United Arab Emirates (all tax
havens) also fall into the ‘least corrupt’ quintile. What do these rankings
tell us about the current politics of corruption?
This distorted geography of corruption may well arise from Transparency
International’s definition of corruption as “the misuse of entrusted power
for private gain.” Operationally, this has led to an obsessive focus on public
officials (politicians and state employees) and a lack of attention to other
elites, including company directors or financial intermediaries. Now the focus
must shift to the enablers on the supply side,
Governments of jurisdictions (not exclusively those categorized as tax havens)
which supply the secrecy spaces where corruption can take place.
Private sector agents, including and especially professional intermediaries such
as bankers, lawyers, accountants, company formation agencies and trust
companies, whose activities facilitate (or overlook) corrupt financial
Company directors responsible for illicit transactions that contribute to
capital flight, tax evasion and tax avoidance.
Public understanding of what constitutes corruption needs to be radically
shifted to encompass any activity which involves the abuse of the public good or
public confidence in the integrity of the rules, systems and institutions that
promote the public good. Insider trading, tax evasion and avoidance,
market rigging, non-disclosure of pecuniary involvement, embezzlement, and trade
mispricing would all be recognized as corrupt within such an analytical
An economic blind spot
Many economists overlook the role of the offshore economy in their analysis,
which arguably underlies their inability to explain the ‘uphill’ movement of
capital from poor to rich nations despite the predictions of their economic
theories. Political risk or the
prospect of financial crises might be primary causes of capital flight, but
tax-free status creates a strong incentive for wealthy domestic asset holders in
developing countries to retain their assets offshore. By doing this on an
anonymous basis, they can protect their wealth from potential currency
devaluation and from taxes. But not all the capital that flees developing
countries stays out. Some returns disguised as foreign direct investment. This
is the consequence of the flight money being re-cast offshore during the
laundering process prior to reinvestment in the country of origin: a process
known as ‘round tripping’. The preferential treatment offered to many
foreign investors provides an incentive to round trip.
In March 2005 the Tax Justice Network published a briefing paper – The
Price of Offshore
– which estimated the stock of private wealth held ‘offshore’ by rich
individuals, and largely undeclared in the country of residence, at about USD
11.5 trillion. The paper estimates that the annual worldwide income on these
undeclared assets is about USD 860 billion, and that the annual worldwide tax
revenue lost on such undeclared income is about USD 255 billion. That figure,
which has had huge media coverage since its publication, and which we consider
to be on the conservative side, significantly exceeds the annual funds needed to
finance the UN’s Millennium Development Goals.
Whilst the majority of this USD 11.5 trillion of undeclared assets originates
from developed countries, a significant proportion comes from developing
countries. For example, over 50% of the cash and listed securities of rich
individuals in Latin America is reckoned to be held offshore.
Data for Africa are scarce, but most analysts assume the ratio to be comparable
to Latin America or higher.
But the figure of USD 255 billion in tax revenue lost to tax evasion on assets
held offshore is only one part of the equation. Developing countries also lose
out to tax evasion in the domestic context (often from activities in the
informal economy), from tax avoidance on cross-border trade, and from pressures
to compete for investment capital through offering unnecessary tax incentives.
In combination these issues are estimated to cost developing countries
approximately USD 385 billion annually in tax revenues foregone.
This clearly represents a massive haemorrhaging of the domestic financial
resources of many developing countries, which undermines sustainability in a
number of ways:
• Declining tax revenue income from the wealthy and high income earners forces
governments to substitute other taxes (typically indirect) with a consequent
regressive impact on wealth and income distribution.
• Falling tax revenues force cutbacks in public investment in education,
transport and other infrastructure.
• Tax dodging corrupts the integrity of tax regimes and creates harmful
economic distortions which penalize those who follow ethical practice and
benefits those who bend the rules.
• Tax dodging undermines public respect for the rule of law and the integrity
of democratic government.
Declining tax revenues in developing countries have stimulated a vicious circle
of decline in investment in the human capital necessary to create an attractive
environment for both domestic and foreign investors. In a 2006 report on Latin
America, the World Bank argued that governments must give higher priority to
spending on infrastructure likely to benefit the poor and increase expenditure
on education and health care. In practice, a large proportion of government
spending in Latin America is skewed in favour of the well-off, and governments
are collecting far too little tax, especially from the wealthy. The World Bank
report concludes that “on the tax front, first items in the agenda would be
strengthening anti-tax evasion programs and addressing the high levels of
Civil society: wake up!
In April 2007 the author addressed a parliamentary session in London on the
subject of “Why are aid donors frightened of taxation?” Several reasons were
offered, including the complexity of the subject and fears about the future of
some small island economies which are dependent on their tax haven roles. But
other factors were also raised: Are some aid agencies compromised by their
relations with powerful governments? Do some of them have a vested interest in
preserving the aid industry? Are some too closely tied to corporate interests?
Whatever the reasons, it is astonishing that it has taken so long for these
issues to become the focus of attention for the development community.
Most of the problems outlined above can be remedied by strengthening
international cooperation. Effective information exchange between national
authorities would go a long way towards overcoming the problems of capital
flight and tax evasion. The barriers posed by banking secrecy could be overcome
by override clauses built into international treaties. The secrecy of offshore
trusts would be reduced by requiring registration of key details relating to the
identity of the settlor and beneficiaries. There is no reason why those who
benefit from the privileges conferred by using companies and trusts should not
accept the obligation of providing basic information about their identity.
Global frameworks could be agreed for taxing multinationals on the basis of
where they actually generate their profits. Policies such as these could be
implemented in a relatively short timeframe. The principal barrier standing in
the way of progress towards achieving these goals is the lack of political will
on the parts of the governments of the leading OECD nations, most notably
Switzerland, the USA and the UK, all of which are leading tax haven nations. The
reality of their commitment to ‘globalization’ is that they want liberalized
trade on their own terms but continue to use fiscal incentives to distort the
trade system in favour of their domestic businesses and to attract capital from
developing and emerging countries.
The debate around development and persistent poverty is undergoing a major
shift. Campaigners are looking beyond aid dependence and debt relief, and all
the associated conditionalities, and asking questions about the domestic
resources of developing countries. The issues of capital flight and tax evasion,
which have gone largely ignored for so long, are moving to the centre stage. At
the same time the corruption debate is shifting to focus on the role of enablers
and the tax havens through which so much dirty money is shifted en route to the
mainstream capital markets. Connections are being made between money laundering,
corruption, financial market instability, rising inequality and poverty. And tax
havens are being identified as a common denominator to each of these problems.
Addressing this issue in March 2007, anti-corruption campaigner Eva Joly spoke
of the need to shift the corruption debate to Phase Two, in which the role of
accountants, bankers, lawyers and offshore financial centres in enabling corrupt
practices comes under far greater scrutiny.
Tax Justice Network and financing
The 2002 Monterrey Conference on Financing for Development identified
capital flight and tax evasion as barriers to the achievement of this
goal. In 2003 the UN General Assembly agreed the creation of a Committee
of Experts on International Cooperation in Tax Matters, dedicated to
tackling these problems.
In Autumn 2008 the member states of the United Nations will meet in Doha
to review progress towards achieving the Monterrey Consensus on mobilizing
domestic resources as a principal means of financing development. We must
use the Doha summit as an opportunity to highlight the work of this
Committee and to push for a new agenda for this Committee, giving primacy
to pro-poor tax policies and enhanced international cooperation on tax
matters. For those of us seeking solutions beyond aid dependence and debt
relief, redesigning the global financial architecture to tackle capital
flight and tax evasion is a major priority. This is a struggle which
affects us all. Join us!
Offshore Watch: <visar.csustan.edu/aaba/jerseypage.html>
Tax Research LLP: <www.taxresearch.org.uk/Blog>
Tax Justice Blogspot: <taxjustice.blogspot.com>
Do we love globalisation?:
Tax Justice Focus – the corruption issue:
Tax Justice Focus – the tax competition
Tax Justice Focus – the inequality
For a detailed analysis of the origins of tax havens and their
linkages with the global economy see: Hampton, M. (1996). The Offshore Interface: Tax Havens in the Global Economy.
Palan, R. (1999). “Offshore and the Structural Enablement of
Sovereignty”, in Hampton, M.P. and Abbott, J.P. (eds). Offshore Finance Centres and Tax Havens: The Rise of Global Capital.
Quoted from “Pour Eva Joly: Le G8 ne lutte
pas vraiment contre la corruption”. Interview in La
Tribune, 6 June 2007.
Christensen, J. and Hampton, M.P. (1999). “A Legislature for
Hire: The Capture of the State in Jersey’s Offshore Finance Centre”, in
Hampton, M.P. and Abbott, J.P, op cit.
Detective Superintendent Des Bray, of the Commercial and
Electronic Crime Branch, interviewed in the Adelaide
Advertiser, “Lawyers helping to launder money”, 4 June 2007. Available
Dirty money is defined as money that is obtained, transferred or
Baker, R. (2005). Capitalism’s
Achilles Heel. Hoboken, New Jersey: John Wiley & Sons.
Ibid, p. 174.
Brittain-Catlin, W. (2005). Offshore:
The Dark Side of the Global Economy. New York: Farrar, Strauss and Giroux,
See “The Other Side of the Coin: the UK and Corruption in
Africa”. A report by the UK Africa All Party Parliamentary Group, March 2006,
Raymond Baker from the Center for International Policy,
Washington, quoted from oral evidence given to the UK Africa All Party
Parliamentary Group in January 2006.
Boyce, J.K. and Ndikumana, L. (2005). “Africa’s Debt: Who Owes
Whom?” in Epstein, G.A., Capital Flight
and Capital Controls in Developing Countries. Cheltenham: Edward Elgar.
Reich, R. (1992). The Work
of Nations. New York.
See, for example, UK Africa All Party Parliamentary Group, op
US Senate (2006). Tax Haven
Abuses: The Enablers, the Tools and Secrecy. Permanent Subcommittee on
Guha, K. (2006). “Globalisation. A share of the spoils: why
policymakers fear ‘lumpy’ growth may not benefit all”, Financial Times, 28 August, p. 11.
For more details about the MDGs see Joyce Haarbrink’s article on
sexual and reproductive health and rights in this Report.
Boston Consulting Group (2003). “Global Wealth Report”.
Cobham, A. (2005). “Tax Evasion, Tax Avoidance and Development
Finance”. Queen Elizabeth House
Working Paper Series No. 129, Oxford.
G.E., Lopez, J.H., Maloney, W.F., Arias, O. and Serven, L. (2006). Poverty
Reduction and Growth: Virtuous and Vicious Circles. The World Bank, p. 101.
(2007). “Tax Havens: Financial secrecy – profits from the laundry”. Vol.
48, No. 6, 16 March.