Corruption is widely recognised as harmful to sustainable
development. Less well recognised, however, is that secrecy
jurisdictions (also known as tax havens) and the bankers, lawyers and
accountants who operate from these jurisdictions, actively encourage
and support corrupt practices by facilitating illicit financial flows
through an ‘offshore interface’ between the illicit and
licit economies. Financial market liberalisation has contributed to
this problem by not addressing the ‘secrecy space’
comprised by banking secrecy, non-disclosure of ownership of
corporations and other legal entities, lack of accounting
transparency for multinational companies, and the lack of provisions
for effective exchange of information between national authorities.
The outcome of this failure to ensure sufficiently transparent
financial flows has been the creation of a criminogenic environment,
in which illicit flows are easily disguised and hidden amongst
legitimate commercial transactions, encouraging capital flight and
tax evasion on an awesome scale. Sub-Saharan Africa (SSA) has
suffered a net accumulated outflow of capital amounting to over
US$600 billion since 1975, and for every dollar of external debt
borrowed by SSA countries 80 cents has flowed outwards as capital
flight in the same year. The situation is deteriorating, not least
because the Government of Ghana has recently announced its intention
to support the development of offshore banking services in Accra,
which could contribute to a significant increase in the volume of
cross-border illicit financial flows in the West African region.
Unless this supply side of corruption is tackled there is little
prospect for an end to aid dependency and sovereign indebtedness or
the creation of economically stable and democratic states able to
provide food security, education and healthcare to their citizens.
Tax havens and illicit financial flows are shifting from the twilight
to the centre stage of the development discourse. Until Oxfam
published its report Tax Havens: Releasing the Hidden Billions for
Development, little attention had been paid to the role played by
tax havens in depriving developing countries of their domestic
resources through facilitating illicit financial flows and tax
evasion. This situation is changing rapidly. It is increasingly
recognised that steps to assist poorer countries to move beyond aid
and debt dependence will require measures to tackle capital flight,
tax evasion and unnecessary tax exemptions. It is also recognised
that international aid makes governments accountable to donors,
whereas tax enforces accountability to citizens (Bräutigam et
al., 2008), and tax evasion undermines this basic pillar of civil
accountability and reduces respect for the rule of law.
The scale of capital flight and tax evasion far outweighs aid flows
and debt relief programmes. The World Bank’s Stolen Asset
Recovery initiative reports that the cross-border flow of proceeds
from criminal activities, corruption and tax evasion amount to
between US$1 trillion and US$1.6 trillion a year: approximately half
of this flow originates from developing and transitional economies.
The British non-governmental organisation Christian Aid has
calculated that just two forms of tax evasion, transfer mispricing
within multinational corporations (MNCs) and falsified invoicing
between apparently unrelated companies, cost the developing world
US$160 billion a year in lost revenue (Christian Aid, 2008). That
figure alone represents more than 150% of the combined aid budgets of
all donor countries. Looking at a different part of the tax evasion
equation, the Tax Justice Network has estimated that if the income
from personal assets held in offshore accounts (and almost entirely
untaxed) were subject to tax at even a modest rate, additional
revenue exceeding US$255 billion a year would be available for, for
instance, poverty alleviation purposes (Tax Justice Network, 2005).
At the same time, it is also recognised that the corruption debate,
which until recently has largely focussed on the demand side, and in
particular on bribe taking and payments of commission kickbacks,
needs to widen its focus to include those who provide the supply side
of corrupt practices, including the financial intermediaries who
create and administer the elaborate legal structures through which
illicit cross-border financial flows are routed via offshore
financial centres (OFCs) into the mainstream banking system (Baker,
Christensen & Shaxson, 2008). Crucially, the secretive legal
instruments used by MNCs and high net-worth individuals (HNWIs) for
tax-dodging purposes are also used for a wide variety of other
criminal activities, including market rigging, insider trading,
payment of illicit political donations, embezzlement, fraud and
payment of bribes and commission kickbacks (Baker, 2005). This
underlines the role of tax havens in providing a supply-side stimulus
that encourages and enables grand-scale corruption by providing an
operational base for lawyers, financial professionals and their
clients to exploit legislative gaps and fragmented regulation
A number of international initiatives have been attempted to control
transfer mispricing and the activities of tax havens, but with little
success. The OECD guidelines for transfer pricing within MNCs using
the ‘arms-length’ pricing technique, which assumes a
world market price for bespoke products, services and intellectual
property rights, have introduced complexity without significantly
diminishing transfer mispricing. The OECD has also led the
international project to tackle harmful tax competition, launched in
1998, which amongst its goals included a radical transformation of
tax havens through increased transparency and improved information
exchange between national authorities (OECD, 1998). But the OECD
programme was met with fierce resistance and progress on improving
information exchange has been modest. Other attempts to combat illicit financial flows have been timid and
unproductive, largely because the international organisations charged
with tackling illicit financial flows have taken too narrow a
definition of what constitutes money laundering.
This paper explores the nature of tax havens and the ‘offshore’
economy, arguing that public impressions that tax havens are remote
from the mainstream political economy are erroneous and that, in
practice, these places are major and integrated features of
globalised financial markets, operating as a corruption interface
between licit and illicit cross-border financial flows. The paper
then considers how tax havens facilitate capital flight and tax
evasion, and how these linked activities undermine developmental
processes. This is followed by an examination of the scale of capital
flight and tax evasion in Africa, and the potential for the recently
proposed offshore financial centre in Accra, Ghana, to exacerbate
these problems in the West African region. The paper concludes with
policy recommendations for how to tackle capital flight and tax
Tax Havens and the Offshore Interface
Despite the evocative images conjured up by the term ‘offshore’,
it would be wrong to think of tax havens and offshore financial
centres (the cluster of banks, legal and other intermediary firms
that operate from these jurisdictions) as disconnected and remote
from mainstream nation states. Geographically, many 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 linked to major OECD states,
and the term ‘offshore’ is strictly a political statement
about the relationship between the state and parts of its related
territories (Palan, 1999). The City of London, itself categorised as
both a tax haven (Tax Justice Network, 2005) and a major offshore
financial centre, exemplifies this political relationship: the City
is powerfully represented in UK political affairs by the Corporation
of London, which is to all intents and purposes a state within a
state. The lobbying activities of the Corporation are supplemented by
other powerful actors, including banking associations, legal
associations, the Society of Trust and Estate Practitioners, and
other influential financial lobbies. Many of the banks, law firms and
accounting businesses located in London also operated out of
satellite offices located in British Overseas Territories and Crown
Dependencies. These jurisdictions project the impression of autonomy,
but in practice many, though not all, act largely as booking centres
for instructions issuing out of the City of London and other
financial centres, including New York, Tokyo, Frankfurt, Paris and
Zurich. Their primary use to major banks and their clients lies with
their permissive regulatory regimes, and zero or minimal tax rates
combined with secrecy arrangements –including non-disclosure of
beneficial ownership of companies and trusts–.
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.
Source:Tax Us if You Can, Tax Justice Network, 2005.
Until very recently scant attention had been paid to tax havens even
though it was recognised as early as 1961 that they attract ‘all
sorts of financial wizards, some of whose activities we can well
believe should be controlled in the public interest’. Almost 50 years later it has become evident that tax havens are major
players in the global financial markets: over half of all
international bank lending and approximately one-third of foreign
direct investment is routed via tax havens; 50% of global trade is
routed on paper via such jurisdictions even though they only account
for some 3% of world GDP;
over two million international business corporations and hundreds of
thousands, possibly millions, of secretive trusts and foundations have
been created in tax havens; personal wealth totalling US$11.5 trillion
has been shifted offshore by the super-rich (HNWIs, known in banking
circles as ‘Hen-Wees’), evading taxes of over US$255 billion annually.
Tax havens have also played a major role in the banking crisis that
emerged in 2007, providing an environment of lax regulation which,
combined with the opacity and complexity of structured investment
vehicles and collateralised debt obligations, has significantly reduced
the ability of the financial markets to assess and price risk.
Whilst there is a large academic literature on international finance,
most of it takes little or no account of the role of tax havens as
conduits for cross-border capital flows, and the activities of
offshore financial centres remained relatively unexplored until the
late-1990s. During the past decade researchers have discussed tax
havens in the Caribbean (Hudson, 1998; Roberts, 1999), the British
Isles (Hampton, 1996; Johns & Le Marchant, 1993) and Asia-Pacific
(Abbott, 2000; Van Fossen, 2002). Others have discussed the political
economy of tax havens (Palan, 2007; Vigueras, 2005) and the relations
between offshore financial centres and the state of the host
jurisdiction (Hampton & Christensen, 1999b; Mitchell, Sikka,
Christensen, Morris & Filling, 2002).
The proponents of tax havens argue that they ‘oil the wheels of
financial capitalism’, a splendid phrase with little meaning in
an age of liberalised capital markets and electronic financial
transfers, and as recently as 2007 a special review in The
Economist on tax havens came to similar conclusions:
‘OFCs... have by and large
done well out of globalisation. Two decades ago, they were mainly
passive repositories of the cash of large companies, rich individuals
and rogues. Some jurisdictions still ply this trade today and should
be put out of business. But the best of them –for example,
Jersey and Bermuda– have become sophisticated, well-run
financial centres in their own right, with expertise in certain
niches such as insurance or structured finance’ (The
This special review was written before the financial crisis, but long
before February 2007, when The Economist published their
review, critics were warning about the extraordinary risks hidden
within securitised debt obligations –a Jersey speciality–
and likewise the risk exposure of the insurance industry.
Other supporters of tax havens regard them as powerful disciplinary
agents on high-tax/high-spend governments, particularly the social
democratic governments in Western Europe and Scandinavia. The
Heritage Foundation, for example, through its associated Center for
Freedom and Prosperity, argues that tax havens:
‘Must aggressively defend
tax competition as a liberalising force in the world economy. They
should argue that tax competition has helped lower tax rates and
reduce discriminatory taxes on income that is saved and invested’
(Center for Freedom and Prosperity, 2003).
McCann defends tax havens on similar grounds:
‘Since taxation is a major
component in economic global enterprise, so also is tax mitigation –
and this explains why many financial centres benefit from being used
by taxpayers (ranging from individuals to multinational companies) as
components in tax mitigation strategies. No one is obliged to pay
more tax than is due. Consequently, taxpayers are entitled to use
financial centres to mitigate their tax if they so choose. Taxpayers
are not entitled to evade tax. Perfect positive correlation between
“Offshore” finance centres and the evasion of tax has not
been proved beyond reasonable doubt’ (McCann, 2006).
This statement needs careful unbundling to understand its underlying
politics. The language is obfuscatory: tax mitigation is a fancy term
for avoidance, which always, by definition, involves the exploitation
of loopholes to circumvent national tax laws. Using tax havens to
‘mitigate’ tax involves introducing artificial
structures, a process known as ‘aggressive tax avoidance’
since there is no real economic substance behind the transactions
routed through such structures. What McCann is defending might not be
illegal, but it is clearly abusive in so far as it challenges the
will of elected parliaments: directors wanting to pursue ethical
corporate practices would generally not regard tax avoidance as
acceptable practice and are therefore likely to resent pressures from
competitors who abandon ethics in favour of higher short-term
profits. Finally, there is no requirement under company law –anywhere
in the world– for company directors to minimise tax payments,
especially when this involves hiding actions which frequently
infringe national laws from the scrutiny of shareholders and national
The Organisation for Economic Cooperation and Development (OECD),
acting at the behest of the G-7 leading industrial countries, has
taken the lead in examining the role of tax havens in promoting
harmful tax practices (OECD, 1998), and set out to radically
transform tax havens through increased transparency and strengthened
arrangements for information exchange between national authorities.
This initiative ran into the sands in 2001, when the new
Administration in Washington withdrew its support, but even before
the Treasury Secretary Paul O’Neill removed US support, strong
resistance from small island jurisdictions, organised under a
lobbying group called the International Trade & Investment
Organisation, had reduced the political momentum of the OECD-led
project. Even progress on improving information exchange has been
modest. Other attempts to tackle illicit financial flows through tax
havens have been timid and unproductive, largely because the
international organisations charged with tackling illicit financial
flows have taken too narrow a definition of what constitutes
money-laundering. Civil society has also taken an increasingly critical view of the impact of tax havens on development processes and as ‘engines
of chaos in the globalised financial markets’. The British NGO
Oxfam led the way with its report on the impact of tax havens on
international development, which included an estimate that harmful
tax competition costs poorer countries US$50 billion a year due to
aggressive tax avoidance (Oxfam, 2000). Other development-focused
NGOs have also recognised the important role played by tax havens in
enabling capital flight, profit shifting, tax evasion, tax
competition and regulatory degradation (Sikka et al., 2005;
Christian Aid, 2008). The Tax Justice Network has explored the
connections between the lax or ‘light-touch’ regulation
offered by tax havens and the evolution of the off-balance sheet
shadow banking system that lay at the heart of the financial crisis
that emerged in the second half of 2007 (Tax Justice Network, 2008).
The combination of tax havens and offshore financial centres (ie, the
clusters of banks, legal and accounting firms, and other financial
intermediaries that agglomerate in these tax havens) creates a highly
secretive and under-regulated globalised infrastructure which
functions as an offshore interface between the illicit and the licit
economies (Hampton, 1996). Importantly, the majority of illicit
financial flows are transacted via complex structures involving legal
entities established in several different tax havens. This is a world
of smoke and mirrors, where a typical tax evasion strategy might well
involve an offshore trust created in jurisdiction A with trustees in
jurisdiction B, which is the sole shareholder in an offshore company
registered in jurisdiction C with nominee directors and shareholders,
with the company operating a secret bank account in jurisdiction E.
The ultimate beneficiaries of this structure will very probably have
no apparent connection with any of these jurisdictions (Christensen,
2005) and the entire structure, which is expensive to both create and
operate, will have been designed to prevent investigation. Worse
still, even when investigators are able to penetrate these hidden
structures, flee clauses written into trust agreements, and
re-domiciliation clauses in corporate memorandum and articles of
association, allow the structures to shift instantly to other
jurisdictions at the first sign of investigation: another instance of
legal mechanisms being used for illicit purposes. All sorts of
reasons are offered to justify these devices, including avoidance of
political risk and succession management, but tax evasion is almost
invariably an outcome of these actions, and banks are actively
engaged in providing the enabling mechanisms for dodging taxation.
This active collusion between banks and their clients in creating tax
evasion schemes is vividly demonstrated by the US Justice
Department’s investigations into the operations of the Swiss
bank UBS, a major player in the private banking market for HNWIs,
which discovered that:
‘... managers at the Swiss
Bank, including defendant Birkenfeld, assisted these wealthy US
clients in concealing their ownership of the assets held offshore by
assisting these clients in creating nominee and sham entities’.
The number of tax havens, and the scale of the offshore economy, has
increased dramatically since the period of financial market
liberalisation began in the late 1970s. One study enumerated 32 tax
havens in 1977 (IBFD, 1977), but research conducted in 2005
enumerated 72 (Tax Justice Network, 2005), and the number continues
to rise, suggesting that a powerful process of contagion is underway
as more jurisdictions compete for this lucrative activity. Precise
measurement of the growth in use of such jurisdictions is difficult:
cross-border illicit financial flows and abusive tax practices are
hard to define, heavily disguised and hidden within licit flows, and
protected from scrutiny by a pervasive culture of secrecy. An idea of
the growth of the offshore economy can be glimmered from data for the
British Channel Island of Jersey, which has prepared banking
statistics since the 1970s (see Figure 2). These show a remarkable
growth in the banking deposits held by non-residents, rising from
less than £1 billion in 1975 to approaching £200 billion
in 2008. The growth rate continues to rise despite efforts to
strengthen international cooperation in the exchange of information
between national authorities.
Figure 2. Banking deposits in Jersey, Channel Islands, 1975 to present
Source: States of Jersey Statistical Review, 2007.
The growing use of tax havens is closely linked to the liberalisation
of global capital markets and, more broadly, with policy measures
generally associated with the orthodox economic agenda: deregulation,
tax cutting, liberalisation of trade and investment flows, and
privatisation. Influential Washington-based interest groups closely
associated with neo-liberal policies, including the Cato Institute,
Americans for tax Reform, the American Enterprise Institute and the
Center for Freedom and Prosperity, publicly support tax havens and
have lobbied strenuously against international initiatives to
regulate their activities. Grover Norquist, a lobbyist closely
associated with the Administration of President George W. Bush, has
famously declared his goal as being to reduce government ‘to
the size where I can drag it into the bathroom and drown it in a
bathtub’, and publicly promotes the US as a tax haven: ‘The
US is a tax haven and this policy has helped attract trillions of
dollars of job-creating capital to America’s economy’. Tax havens have played a major role in advancing the neo-liberal
agenda, and have been strongly supported in this process through what
Naomi Klein identifies as ‘the intimate cooperation of powerful
business figures, crusading ideologues and strong-arm political
leaders’ (Klein, 2007).
The use of tax havens is actively marketed by financial
intermediaries to potential clients throughout the world. Mainstream
newspapers and magazines such as The Economist carry
advertisements promoting offshore structures and tax efficient
wealth-managements schemes. These advertisements are an open
invitation to capital flight and tax evasion. They reveal a major
fault line in the financial liberalisation process. Whilst capital
has become almost completely mobile, the ability to police
cross-border dirty money flows remains largely nationally based. The
vast majority of dirty money flows are laundered through the global
banking system via complex multi-jurisdictional ladders created and
operated by legal and financial professionals acting in collusion
with their clients. As the US Senator Joe Lieberman commented to the
US Senate Committee: ‘ranks of lawyers and financial
accountants have abused the law and their professional ethics simply
for the sake of huge sums of money to be made helping their clients
Secrecy, Complexity and Corruption
Capital market liberalisation has stimulated an extraordinary
increase in cross-border financial flows, which have increased
eightfold since 1990 to US$8.2 trillion in 2006 (McKinsey Global
Institute, 2008). Illicit financial flows constitute around one-fifth
of this amount, but by and large governments and multilateral
agencies have downplayed concerns about dirty money except when drugs
and terrorism are concerned. James Wolfensohn provides an exception:
during his presidency of the World Bank he suggested that illicit
financial flows might partially explain why the bank had failed in
its mission to tackle poverty. Speaking in 1996, Wolfensohn said the
Bank should give priority to tackling ‘the cancer of
corruption’, but whilst the Bank now considers corruption the
greatest obstacle to economic and social development, it has not yet
accepted that tax havens play a key role in providing an enabling
environment for corrupt activities. For the greater part, however,
anti-corruption initiatives have focused on bribery of public
officials and politicians, and looting by despots and their cronies,
rather than on the workings of a global financial system that
encourages and facilitates the laundering of dirty money.
Astonishingly, neither the World Bank nor the IMF have tried to
investigate or quantify capital flight and tax evasion.
Powerful states, notably Switzerland, the UK and the US, have acted
to thwart efforts to enhance global cooperation in tackling illicit
financial flows. The UK, for example, allows its Crown Dependencies
to persist with facilitating tax evasion, despite the fact that it is
ultimately responsible for ensuring the good governance of those
islands (Murphy & Christensen, 2006). Notwithstanding the ‘smoke
and mirrors’ appearance of quasi independence, all domestic
laws enacted by the governments of the Bailiwicks of Guernsey and
Jersey need prior approval from the Privy Council. It is therefore
safe to conclude that the UK Department for Constitutional Affairs,
which is responsible for government relations with the Crown
Dependencies, would resist any laws it considered contrary to UK
interests. Approximately half of all enumerated tax havens are
directly linked to Britain, either through Overseas Territory or
Crown Dependency status, or through membership of the Commonwealth.
When asked at the conclusion of her enquiries into the Elf scandal
whether corruption on a similar scale could occur in the UK, the
Norwegian anti-corruption campaigner Eva Joly singled out London as
the tax haven she found particularly obstructive to investigators:
‘The City of London, that state within a state which has never
transmitted even the smallest piece of usable evidence to a foreign
magistrate’ (Shaxson, 2007).
Eva Joly refers to tax havens as the principal target in the emerging
phase of the anti-corruption debate, arguing that: ‘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
Joly is not alone in pinpointing London and its offshore satellites as
important players on the supply side of the grand corruption equation.
In its report on the UK and Corruption in Africa, the UK Africa All
Party Parliamentary group commented that:
financial system is riddled with loopholes. Poor enforcement of
laundering regulations leads some experts to suggest there is as much
as $1 trillion of illicit cross border flows annually. Unfortunately
the UK, including the City of London and Overseas Territories and
Crown Dependencies, has been implicated in this practice’ (UK
These illicit flows persist despite the elaborate and very expensive
follow-the-money strategy introduced in the 1980s to tackle narcotics
trafficking but subsequently broadened in an attempt to pre-empt
terrorist attacks through tracking related financial flows. The logic
of this strategy, which began with the creation of a new offence
called money-laundering, was to make financial institutions and
intermediaries key players in the ‘wars’ on drugs and
terrorism by handing them responsibility for identification of the
originators and beneficiaries of financial transactions through the
‘know-your-client’ rules, whilst also requiring bankers
to inform the authorities of currency transactions exceeding a
certain level (Currency Transaction Reports) and any transaction or
transactor that raised reasonable suspicion in the minds of the
banking personnel involved (Suspicious Transaction Reports).
Notwithstanding these anti-money laundering initiatives, however, 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 (Baker, 2005). It is unlikely that
other jurisdictions perform any better. This is partly because of the
narrow focus on money related to illegal drugs and terror, which
account for only a small proportion of cross-border illicit financial
flows, but also because of the extraordinarily lax attitude in many
countries towards commercial trade mispricing and fraudulent
invoicing, which account for the majority of such flows. This laxity
also extends to tax evasion, which is treated as a predicate crime in
some countries, but not others, and is an area where developing
countries are particularly vulnerable (Baker, 2005). It is hard,
however, to judge the success or otherwise of the follow-the-money
strategy. One commentator concludes:
‘The result is a cumbersome and increasingly intrusive regulatory framework which has
imposed heavy cost on innocent parties. Yet, amazingly, to this day
there exists no sensible and defensible criteria by which its success
or failure can be judged’ (Naylor, 2007).
The ‘secrecy space’ (Hampton, 1996) offered by tax havens
creates an effective barrier to investigation of activities booked
through the secrecy jurisdiction, and facilitates the laundering of
proceeds from a wide range of criminal and unethical activities,
including fraud, embezzlement and theft, bribery, narco trafficking,
illegal arms trafficking, counterfeiting, insider trading, false
trade invoicing, transfer mispricing and tax dodging (Christensen &
Hampton, 1999b). Elaborate schemes are devised to ‘weave’
dirty money into commercial transactions and to disguise the proceeds
of crime and tax evasion using complex multi-jurisdictional
structures. According to one expert investigator:
‘Methods to launder money
vary dramatically from low-level, relatively simple to
highly-structured and complex business scenarios for 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 assets’.
US$1.6 trillion of dirty money flows annually into offshore accounts,
approximately half of which originates from developing countries
(Baker, 2005). Crucially, the techniques used for tax dodging and
laundering dirty money involve identical mechanisms and financial
subterfuges: multi-jurisdiction structures, 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
operations of tax havens, charitable trusts are regularly set up for
the purposes of owning ‘special purpose vehicles’ used
for international tax planning and for hiding both assets and
liabilities ‘off-balance sheet’, as happened with Enron
(Brittain-Catlin, 2005) and the collapsed British bank Northern Rock.
flows present regulators with a massive headache due to the problem of
distinguishing them from legitimate financial flows. Raymond Baker, an
expert on money-laundering at the Brookings Institute in Washington,
distinguishes between three categories of dirty money: (1) criminal
money, ie, the proceeds from crimes such as drugs trafficking, theft,
etc; (2) looted money, ie, the proceeds of fraud, embezzlement, bribery
and related practices; and (3) commercial money, ie, the proceeds from
trade mispricing and similar practices, and the associated tax dodging
that accompanies these practices. The latter category of dirty money
accounts for the majority of cross-border illicit flows and is by far
the hardest to detect and track (Baker, 2005).
It is time to turn the current focus on corruption and development on
its head. Who could disagree with African anti-corruption campaigners
who, whilst deploring domestic corruption involving bribe-taking,
fraud and embezzlement, are puzzled by the way in which the
corruption debate has focused on the demand side of the equation
whilst largely ignoring the crucial role of supply side agents:
‘the looting of (Nigeria’s) resources, which reached its peak during Sani
Abacha’s presidency in the 1990s, happened with the active
connivance of an extensive infrastructure of banks, lawyers and
accountants who provided the means for tens of billions to be shifted
offshore. Some of these aiders and abetters came from Jersey. They
would have been aware of the source of the funds and must have
profited magnificently from handling this stolen property’
It is disturbing, to put it mildly, that the prevailing corruption
discourse remains largely focused on pointing fingers at petty
officials and ruling kleptomaniacs. In terms of orders of magnitude,
the proceeds from bribery, drugs money laundering, trafficking in
humans, counterfeit goods and currency, smuggling, racketeering and
illegal arms trading, account in aggregate for 35% of cross-border
dirty-money flows originating from developing and transitional
economies. The remaining 65% comprise the proceeds from illicit
commercial activity, incorporating mispricing, abusive transfer
pricing and fake and fraudulent transactions account (Baker, 2005).
In these circumstances, equal emphasis should be given to corruption
in both private and public spheres, greater prominence should be
given to how corruption can reduce tax revenues by as much as 50% (UK
AAPPG, 2006) and the activities of tax havens should be very
carefully scrutinised to ascertain their harmful impacts on the
functioning of global markets and on the integrity of the rule of
law. As Baker notes in the concluding chapter of Capitalism’s
‘Illicit, disguised and hidden financial flows create a high-risk environment for capitalists
and a low-risk environment for criminals and thugs. When we pervert
the proper functioning of our chosen system, we lose the soft power
it has to project values across the globe. Capitalism itself then
runs a reputational risk. As it is now, many millions of people in
developing and transitional economies scoff at free markets,
regarding the concept as a license to steal in the same way as they
see other others illicitly enriching themselves’.
Regrettably, Transparency International (TI), 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. Year in, year out, since 1995 the
CPI has identified Africa as the most corrupt region of the world,
accounting for over half of the ‘most corrupt’ quintile
of countries in the 2007 index. African countries account for about
one half of the countries identified as ‘most corrupt’,
with Somalia ranking lowest amongst the 179 countries covered by the
index that year. 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 2007 as
‘least corrupt’ are tax havens, including major centres
such as Singapore (ranked 4th overall), the Netherlands
and Switzerland (7th), UK and Luxembourg (joint 12th),
and Hong Kong (14th). For good measure Barbados, Uruguay,
Malta and Qatar (all ranked as tax havens –Tax Justice Network,
2005–) also fall into the ‘least corrupt’ quintile.
Not a single African nation is ranked in the ‘least corrupt’
quintile. The perversity of this ranking situation is not improved by
TI’s other statistical tool, the Bribe Payer’s Index,
which lists Switzerland, that secret repository of vast quantities of
stolen and embezzled wealth, as the world’s ‘cleanest’
country. Clearly something is not quite right here.
This distorted geography of corruption may well arise from TI’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, including:
Jurisdictions which supply the secrecy space through will illicit money flows.
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 practices (US Senate, 2006).
Company directors responsible for illicit transactions that
contribute to capital flight, tax evasion and tax avoidance.
A radical change is needed in the public understanding of what
constitutes corruption. The focus needs to shift from individuals to
the systems and processes that encourage and enable corrupt
activities. Corruption always involves narrow interests, both in the
public and private spheres, who abuse the common good. It always
includes insiders using guarded information who can operate with a
high level of impunity. And it always corrodes public confidence in
institutions, laws, rules and systems that are intended to promote
the public interest. Thus, it might be more useful to define
corruption as ‘the abuse of public interest and the undermining
of public confidence in the integrity of the rules, systems and
institutions that promote the public interest’ (Baker,
Christensen & Shaxson, 2008). Broadening the definition of
corruption in this way creates room for a wider range of actors and
their facilitating activities. It widens the focus to encompass
activities such as insider-trading, tax evasion and avoidance,
market-rigging, non-disclosure of pecuniary involvement, embezzlement
and trade mispricing, all of which occur in the private sector and
are disguised through opaque and complex legal structures. Economic
crimes such as these are highly damaging to market economies and
pressure is mounting for tax evasion to be identified as a corrupt
practice within the scope of the United Nations Convention Against Corruption (Ban Ki-moon, 2008).
Welcome to a World Without Rules
Tax dodging deprives society of its legitimate public resource, but
despite widespread recognition of the scale of this problem
international efforts to tackle evasion have been thwarted at every
step by intense lobbying. 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’
(Reich, 1992). This group comprises wealthy individuals and high
income earners, plus a sophisticated pinstripe infrastructure of
legal and financial professionals operating out of tax havens with
compliant polities, judiciaries and regulatory authorities. Tax
evasion involves collusion between private and public sector actors,
who purposefully exploit their privileged status to undermine
national tax regimes by facilitating activities that straddle the
border line between the legal and the illegal, the ethical and the
unethical. To all intents and purposes these professionals, their
clients and the tax havens that accommodate their activities, have
declared a secret war on the national sovereignty of other jurisdictions.
The attitudes prevailing amongst professionals operating from tax
havens are captured in the following quote given to a national
newspaper in response to the 2004 financial statement by the UK
Chancellor of the Exchequer: ‘No matter what legislation is in
place, the accountants and lawyers will find a way around it. Rules
are rules, but rules are meant to be broken’. No matter how this statement is spun, it shows the extent to which
these elite groups regard themselves as beyond compliance with
democratic and social norms. Incredibly, none of the professional
institutions of lawyers or accountants promote ethical codes of
conduct on the marketing of non-compliant taxation behaviour or the
use of tax havens by their members. Accountants typically justify
their tax avoidance services on the basis that they promote economic
efficiency: some even suggest that directors have a duty to avoid tax.
Another frequently heard justification for tax avoidance is that tax
policies are overly complex and therefore impose unnecessary burdens
on business. The reality is that tax rules have become complex partly
in response to the increasingly elaborate tax planning strategies
used to avoid paying taxes. This is a chicken and egg situation which
has added unnecessary costs to both tax planning and tax collection.
A blanket anti-avoidance principle enshrined in law and accompanied
by purposive statements in tax laws would cut through this particular
Gordian knot, though in the long run it would be preferable to adopt
an international system to tax MNCs on a unitary basis, using agreed
formulary apportionment to divide profits between the countries where they arise.
In practice, much offshore tax planning involves practices which most
people would not regard as good corporate governance: hence the
secrecy in which these practices are conducted. In the words of the
report on tax havens published by the US Senate in August 2006:
‘Utilizing secrecy jurisdiction secrecy laws and practices that limit corporate, bank
and financial disclosures, financial professionals often use offshore
secrecy jurisdiction jurisdictions as a “black box” to
hide assets and transactions from the Inland Revenue Service, other
US regulators and law enforcement’ (US Senate, 2006).
European efforts to tackle tax havens, for example through the Code
of Conduct Group on Business taxation, are limited in scope and the
processes followed by that Group have been shrouded in secrecy. The
European Commission’s attempt at combating tax evasion through
the Savings tax Directive (EUSTD), which came into force in July
2005, was rendered virtually impotent by extensive lobbying and
political shenanigans. When it was disclosed in March 2008 that the
Commission was planning to revise the EUSTD to close existing
loopholes, Mr Jean-Claude Junckner, the prime minister of Luxembourg
(a secrecy jurisdiction) was quoted in the press as saying: ‘I’m
looking forward to many years of fascinating and fundamental
discussions.’ Similarly, attempts to move towards a common
consolidated corporate tax base for MNCs operating in Europe have met
resistance from countries like Denmark, Ireland and the United
Kingdom, and little progress is being made at present. Despite
intensifying tax competition and falling corporate tax rates in most
countries, there is little sign of any improvement in international cooperation in the foreseeable future.
Both the World Bank and the International Monetary Fund have
developed their own anti-corruption agendas, but significantly
neither has greatly concerned itself with banking secrecy other than
where it impacts on their restricted anti-money laundering
programmes. The Financial Action Task Force formed by G-7 heads of
state in 1989 to spearhead global anti-money laundering programmes
has resolutely turned a blind eye to capital flight and tax evasion,
and has probably worsened the situation by appearing to legitimise
tax havens which have cooperated with its efforts to track the
proceeds of drugs trafficking and terrorist funding. Significantly,
all have dropped their blacklists of tax havens, despite the
demonstrable effectiveness of these lists in forcing these jurisdictions to cooperate.
In addition to corrupting financial systems by encouraging and
facilitating illicit activities, secrecy jurisdiction corrupts the
capitalist system more generally by enabling company directors to
engage in aggressive tax planning to raise short-term profitability
(thereby enhancing share-option values) and gain a significant
advantage over their nationally based competitors. In practice, this
bias favours the large business over the small, the long established
over the start-up and the globalised business over the local (Tax
Justice Network, 2005). In every respect this bias works against the
operations of fair trade, fair competition and ethical enterprise,
but until now the use of tax havens has scarcely registered on the
Corporate Social Responsibility debate (Christensen & Murphy,
2004). Indeed, a business symposium hosted by the transnational
accounting firm KPMG in 2006 concluded: ‘tax avoidance does not
damage corporate reputations and may even enhance them’.
Capital Flight and Finance for Development
Tax havens encourage capital flight, exacerbate financial crises and
impose economic costs in the form of reduced investment, slower
economic growth and higher unemployment. Many orthodox economists
overlook the role of the offshore economy in their analyses, which
arguably underlies their inability to explain the capital flows
paradox –ie, the ‘uphill’ movement of capital from
poor to rich nations– above all to the US and Europe –despite
the predictions of their economic theories– (Guha, 2006).
Capital flight involves the deliberate and illicit disguised
expatriation of money by those resident or taxable within the country
of origin. Capital flight impacts significantly on the capital
accumulation and investment processes of many developing countries,
resulting in lower levels of domestically-financed investment and
reduced tax revenues for publicly-funded revenue and capital
expenditure. Capital flight also depresses economic activity and has
a negative impact on long-term growth rates (Lessard & Williamson, 1987).
Tax evasion is often a motive for the flight of capital
and the two are intricately linked, but other motives exist, including
seeking a secure location for cash resources, the avoidance of local
currency risk (even if that is illegal in the country in which the
taxpayer is resident) and avoidance of inheritance laws. For these
reasons, capital flight would remain a problem even if there were no
tax incentive implicit within it. What is certain, however, is that
capital flight impacts negatively on capital-scarce economies: the loss
of domestic savings leads to lower levels of internally-funded
investment, and the loss of tax revenues flowing from those savings
leads to lower revenues available for public expenditure on health,
education and public infrastructure. Additionally, use of external
borrowings to finance government deficits imposes a debt servicing
burden which impacts heavily on economic growth and social stability,
exacerbating perceptions of economic and political stability.
It is also important to keep in consideration that the tax loss from
capital flight is likely to be greater than that from domestic tax
evasion of initially similar value. This is because in the case of
domestic tax evasion the money stays in the country and generates at
least some tax revenue (for example, sales tax or VAT when it is
spent in the local economy) whereas capital that has fled offshore is
not invested locally and does not generate local tax revenue.
Capital flight has certain characteristics that help distinguish it
from normal monetary and resource flows. These are:
Flight capital is domestic wealth permanently put beyond the reach
of appropriate domestic authorities. Much of it is unrecorded due to
Because no (or little) tax is paid on wealth that is transferred as
capital flight, it is associated with a public loss and private gain.
Because tax evasion is illegal and subject to criminal sanction in
most countries, the management of flight capital is a form of money
laundering. Offshore secrecy arrangements play a crucial part in the
laundering process by enabling the origin and ownership of the capital to be effectively disguised.
It must be stressed that legal, well-documented and reported flows of
wealth on which proper taxes have been paid are a perfectly
legitimate part of everyday commercial transactions and do not
constitute capital flight. Legal international payments include those where:
The source of the wealth being transferred abroad is legal.
The outflows represent fair payment in a commercial transaction.
The transfer of wealth does not violate any laws of the country
relating to foreign exchange or capital control.
The taxes due on the capital being transferred have been paid in the
country of their origin.
The flows constitute a part of the official statistics of the
country involved and are properly reported, documented and recorded.
While capital flight often occurs through similar channels to those
used for the legitimate transfer of funds, it does not meet some (or all) of the characteristics listed above.
The prospect of financial crises might be a primary cause of capital
flight, but tax-free status creates a strong incentive for wealthy
domestic asset holders in developing countries to retain their assets
in tax havens. Doing this on an anonymous basis enables them to
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 once it has been
shifted offshore, typically by being transferred to the ownership of
a special purpose vehicle set up on behalf of the true beneficial
owner. This is a process known as ‘round tripping’. The
preferential treatment accorded to many foreign investors provides an
incentive to round trip. For example, many governments offer foreign
investors lower tax rates, favourable land use rights, convenient
administrative supports and a variety of direct and indirect
subsidies. They also enjoy superior property rights protection. These
investment incentives are discriminatory in so far as they provide a
significant financial advantage to external investors (even when in
practice the investors are locals who have round-tripped capital to
take advantage of these fiscal subsidies) and put local businesses at
a financial disadvantage. Round tripping also occurs when investors
see opportunities to buy domestic assets at bargain basement prices,
for example during privatisation programmes and after a devaluation.
Round-tripped capital is also involved in illicit funding of
political parties, bribery of public officials, market rigging,
insider dealing and other corrupt and illegal activities. The fact
that ultimate ownership of the capital is disguised through offshore
secrecy arrangements provides a very high level of immunity from
investigation by revenue and law enforcement agencies, and in most
cases even the major international commercial investigation agencies
find it difficult if not impossible to penetrate the
multi-jurisdictional structures created to perpetrate such crimes.
An inevitable outcome of this massive rupture of capital heading
northwards is that developing countries lose both their investment
capital and the tax revenues that would otherwise flow from this
capital being invested in the domestic economy. They 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
the pressures to compete for investment capital through offering
unnecessary tax incentives. In combination these issues are estimated
to cost developing countries approximately US$385 billion annually in
tax revenues foregone (Cobham, 2005). This clearly represents a
massive haemorrhaging of the domestic financial resource 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, reducing investment and slowing down growth.
Tax dodging creates harmful economic distortions which penalise
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.
It is clear that capital flight and tax evasion represent significant
barriers to the process of enabling developing countries to finance
their development from domestic resources. The 2002 Monterrey
Consensus highlighted domestic resource mobilisation in both public
and private spheres as essential to sustaining productive investment
and increasing human capacities. But domestic resource mobilisation
cannot succeed without major fiscal reform at national level to
strengthen revenue administration and remove needless exemptions:
‘In the long-run, a
sustained increase in the revenue capability of the public sector and
diversification of the tax base is critical for mobilizing resources
for development and meeting the Internationally Agreed Development
Goals, including the Millennium Development Goals. It has been noted
that there is scope in most developing countries to increase tax
revenues through more effective tax collection, modernization of tax
legislation and broadening the tax base’ (Ban Ki-moon, 2008).
At the same time, national sovereignty in tax matters remains under
threat from the lack of international cooperation in tax matters,
especially in respect of combating tax evasion and tax competition.
This has been recognised by developing countries, which in the run-up
to the Monterrey Review Conference in Doha, Qatar (end-November
2008), have been pressing for strengthened international cooperation
in this area and for the upgrading of the UN Committee of Experts on
International Cooperation in Tax Matters to inter-governmental status.
The Scandal of Africa’s Revolving Door
The missing piece of the Africa’s development equation is the
impact of illicit financial flows, including tax evasion, on capital
accumulation and public and private investment (Murphy, Christensen &
Kapoor, 2007). Capital flight contributes to financial crises and
carries costs in the form of reduced investment, unemployment and
slower economic growth rates (Stiglitz & Charlton, 2005). In
addition, tax evasion has negative impacts on equality, with wealthy
citizens escaping the tax burden and poorer citizens facing higher
taxation and cuts in public services. At the macroeconomic level,
this shift in the tax charge from capital onto labour and consumers
alters the cost ratio of the factors of production, rendering capital
less expensive relative to labour, and reducing job creation (OECD, 1998).
Developing countries are particularly vulnerable to illicit financial
flows, partly because of their heavy reliance on the extractive
industries and other natural resources and therefore their greater
degree of exposure to the risk of falsified invoicing and transfer
mispricing (Murphy, Christensen & Kapoor, 2007), but also because
their national administrations generally lack the resources to engage
in lengthy investigations into tax evasion cases. This administrative
constraint is illustrated by the fact that, according to one tax
expert, to date not a single African country has managed to
successfully conclude an investigation into transfer mispricing
(Murphy, Christensen & Kapoor, 2007). Africa, with its large
natural resource base, is highly vulnerable to capital flight and tax
evasion: the Democratic Republic of Congo (DRC), for example, lost an
estimated US$15.5 billion due to capital flight from 1980 to 2006
(GFI, 2008). Commenting on the rupture of financial resource, a former IMF economist, Dev Kar, noted:
‘If the DRC would have
been successful in stemming this capital flight through prudent
macroeconomic policies and better governance, not only would the DRC
have paid off its entire external debt at end 2006 (US$11.2 billion),
another US$4.3 billion would have been left to add to the country’s
foreign exchange reserves or used to invest in infrastructure and
human capital’ (GFI, 2008).
DRC also provides a case study of how MNCs have created opaque and
complex offshore structures to evade taxes in the resource extraction
industries. Greenpeace International, working with the Tax Justice
Network, has uncovered how a Swiss-based logging company, the Danzer
Group, has been exporting timber products at below world market price
to shift profits out of the Congo to its offshore subsidiary
Interholco (Greenpeace, 2008).
Estimates of capital flight from Africa vary considerably: according
to the African Union, US$148 billion leaves the continent every year
because of corruption (UK AAPPG, 2006). Other researchers have
estimated that Africa has suffered a net accumulated outflow,
including loss of interest earnings, amounting to over US$600 billion
since 1975 (Ndikumana & Boyce, 2008). Most analysts agree that
the outflows of illicit money originating in Africa tend to be
permanent, indicating that between 80%-90% of such flows remain
outside the Continent. Another study has estimated the volume of capital flight plus
accumulated interest earnings at 145% of the total external
borrowings by sub-Saharan countries in the mid-1990s: meaning that
despite its massive external debt burden, Sub-Saharan Africa is a net
creditor to the rest of the world in the sense that its stock of
flight capital held in privately-controlled offshore accounts exceeds
the stock of external debt either held or guaranteed by governments
(Boyce & Ndikumana, 2005). According to one study of the
sub-Saharan region there is a clear link between external borrowing
and capital flight: over the period 1970-1996, for every dollar
borrowed from outside the region 80 cents flowed outwards as capital
flight in the same year. As the authors note: ‘this suggests
that external borrowing directly financed capital flight (Ndikumana &
Boyce, 2003). What is certain is that the net flow of capital stock
is negative, meaning that more capital leaves Africa than enters, and
the gross sum of flight capital eclipses the value of aid and debt
relief promised to African leaders at the 2005 G-8 summit at Gleneagles by a significant margin.
The value of capital shifted out of West Africa over the past decade
is not known, but it has been estimated that Africa’s political
elites alone hold somewhere between US$700 billion to US$800 billion
in offshore accounts outside the Continent (Baker, 2005). Trade
mispricing accounts for a large proportion of capital flight from
Africa: as much as 60% of trade transactions into or out of Africa
are mispriced by an average of 11%, yielding a net outflow of capital
exceeding US$10 billion a year (Baker, 2005). Fake transactions are
estimated to account for an additional US$150-200 billion a year (UK
AAPPG, 2006). Unfortunately, the incidence of transfer mispricing and
fraudulent invoicing to achieve capital flight out of Africa has
accelerated significantly. A study of import and export transactions
between Africa and the US found that between 1996 and 2005 net
capital outflows to the US grew from US$1.9 billion to US$4.9 billion
(an increase of 257%) through the use of low-priced exports and high-priced imports (Pak, 2006).
Tax evasion amplifies the harm caused by this leakage of domestic
capital. According to one expert, tax evasion, tax avoidance and
other forms of corruption are estimated to reduce tax revenues in
some countries by as much as 50%, reducing the funds available for
public spending. Even the more sophisticated African countries are severely impacted
by tax evasion. The South African Revenue Service, for example,
estimates that the tax gap in that country ranges up to R30 billion
(45% of government revenue) largely due to evasion by rich
individuals and avoidance by companies. In 2005, the Kenyan Revenue Authority revealed that it was owed a
staggering US$1.32 billion in unpaid taxes, much of which, according
to KRA Commissioner-General Michael Waweru, was probably
unrecoverable. This sum represented approximately one half of the
total government revenues for Kenya, which at that time had external
debts amounting to US$6 billion (Guindja & Christensen, 2005).
In mid-April 2007, the Ghanaian President John Agyekum Kufuor
announced his government’s plans to proceed with setting up an
offshore financial centre in Accra in collaboration with Barclays
Bank, a British multinational banking business. In his announcement,
President Kufuor expressed hopes that the creation of an offshore
financial centre in Accra would make Ghana the financial hub of the
West African region. What he did not discuss, however, is how this
offshore financial centre can be prevented from worsening Africa’s
long-standing problems with capital flight, tax evasion and other
Barclays has had a presence in Ghana for over eight decades,
operating branches in several commercial centres, including Accra,
Cape Coast, Kumasi, Sunyani, Takoradi, Tamale and Tema. Barclays has
retained its foothold in Ghana and other countries in the West
African region since the colonial days, providing a range of retail
and commercial banking services, including private banking services
and foreign currency accounts. High net-worth Ghanaians are actively
encouraged to use Barclay’s private and business banking
services, which include offshore wealth management services. As the
bank’s website for Ghana explains: ‘Trade and exchange
rate liberalisation within Ghana are features of the reforms designed to facilitate international investment’.
In practice, the development of an offshore financial centre in Ghana
will provide a major conduit for illicit financial flows throughout
the region. As the author of a Bank of Ghana Working Paper on the development of an offshore financial centre points out:
‘The anonymity of
financial transactions, opaqueness of offshore corporations, and
legal protections in some OFCs make them attractive to money
launderers’ (Amediku, 2006).
The problem of banking secrecy is compounded by the fact that most
tax havens have few, if any, bilateral tax information exchange
treaties with developing countries, making it nigh on impossible for
national authorities to track capital flight and tax evasion. Ghana
has no tax information exchange agreements with any neighbouring
countries in the West African region, nor are the national tax
authorities in most countries in the region geared to handling the
extensive workload imposed when seeking mutual legal assistance in pursuing illicit financial flows and tax evasion.
The UK, and British banks like Barclays Bank, have played a major
role in providing the enabling environment for these dirty money
flows originating from Africa. Eva Joly, the Norwegian-born French
magistrate who successfully investigated high level corruption within
the French government (involving Elf Aquitaine’s West African
oil production operations), has described London’s role as a
financial centre at the heart of a global network of satellite
jurisdictions (including the Cayman Islands, the Channel Islands, the
British Virgin Islands, Bermuda, Gibraltar and others) which provide
secrecy as a core service to their clients. According to Joly, the UK
has maintained the competitive advantages of British companies by
allowing them to operate from tax havens linked to the City of
London. ‘The expansion in the use of such jurisdictions’,
she says, ‘has a link to decolonisation. It is a modern form of colonialism’ (Shaxson, 2007).
Some of the capital flight occurring within the West African region
involves cash and other portable valuables, including gemstones and
high-value metals, being smuggled across national boundaries. Its
geographical location makes Ghana an ideal conduit for smuggling
wealth out of neighbouring countries. Trade mispricing is an
alternative way of shifting capital across national boundaries,
particularly when large sums are involved. Trade mispricing can be
conducted in a number of ways, including mis-invoicing, transfer
mispricing, re-invoicing through an apparently unrelated trading
partner in an offshore territory, typically a tax haven, and other
fraudulent invoicing practices. Abnormally high-priced import
transactions are used to reduce the taxable profits in the country of
import. They can also facilitate money laundering and can be used to
disguise illegal commissions hidden in the inflated prices (Pak et
al., 2004). Investigation of these types of fraudulent activities
is made significantly more difficult by the opaque offshore
structures used to disguise the identities of the different parties
to the transactions. As the author of the Bank of Ghana’s
working paper cited earlier comments with notable understatement:
‘... the operation of IFSC
has implications for the Central Bank’s work on the promotion
of good governance because it can reduce transparency, including
through the exploitation of complex ownership structures and
relationships among different jurisdictions involved’ (Amediku, 2006).
Towards a New Financial Architecture for Tackling Illicit
The banking crisis which emerged into the public domain in mid-2007
has exposed one part of a larger systemic failure in the global
financial architecture. It is clear that lightly regulated or
unregulated financial markets have not acted as efficient
distributors of capital and, worse, that asymmetric information flows
have encouraged corrupt and fraudulent behaviour. In a Financial
Times article published in March 2008, the economics commentator Martin Wolf wrote:
‘Remember Friday March 14
2008: it was the day the dream of global free- market capitalism
died. For three decades we have moved towards market-driven financial
systems. By its decision to rescue Bear Stearns, the Federal Reserve,
the institution responsible for monetary policy in the US, chief
protagonist of free-market capitalism, declared this era over. It
showed in deeds its agreement with the remark by Josef Ackermann,
chief executive of Deutsche Bank, that “I no longer believe in
the market’s self-healing power”. Deregulation has reached its limits’ (Wolf, 2008).
The stage is therefore set for creating a new architecture that
protects public interest from predatory behaviour and places a far
greater emphasis on market transparency. Tax havens, which create the
opaque and laxly regulated financial markets within which complex yet
unstable financial structures have flourished, can have no part to play in a world of globalised capital markets.
Creating effective systems for information exchange between national
authorities should become a priority goal for the coming decade, with
a particular focus on extending the principle of automatic
information exchange beyond the confines of the EU to include
developing countries. This will require far swifter progress towards
developing personal identification numbers for information exchange
purposes and agreeing on data formats for electronic information transfers.
Financial and legal professionals need to be mobilised in the
struggle against capital flight and tax evasion. Too many bankers,
lawyers and accountants currently take the role of the wilfully-blind
professional in either supporting or ignoring these activities.
Financial intermediaries should be required to include tax evasion in their suspicious-activity reporting procedures.
A large proportion of capital flight and tax evasion involves trade
mispricing. An effective way of tackling this problem lies with
requiring companies to report on their activities on a
country-by-country basis. This would greatly increase accounting
transparency and reduce the opportunity for transfer mispricing between subsidiaries of a multinational company.
Another effective way of tackling capital flight would be to
introduce banking secrecy override clauses into information exchange
agreements. The OECD has already included such a clause in its Model
Agreement, and this approach should become the norm for all such agreements.
The International Monetary Fund should take a lead in tackling
illicit financial flows, starting with comprehensive enhancement of
its Reports on the Observance of Standards and Codes (ROSCs)
procedures to include reporting on jurisdictions which fail to
implement and support measures to tackle capital flight through
effective information-exchange processes. Such reporting should be
made a mandatory feature of ROSCs, and those jurisdictions that do
not demonstrate ability and willingness to implement effective information exchange should be blacklisted.
Tax evasion should be defined in national and international laws as a
predicate crime for anti-money-laundering purposes and the activities
of tax havens need to be factored into global anti-corruption
measures, leading to a wholesale reappraisal of what constitutes
corruption, who promotes it and how it can best be tackled. With this
in mind, the Tax Justice Network is currently developing a new global
index of corruption, the Financial Transparency Index, which will
highlight those secrecy jurisdictions that are most prominent in
supporting illicit financial transactions.
In a world of global financial markets there is no reason for
continuing to allow individuals to hide their identities behind
nominee directors and shareholders. This lack of transparency
encourages corrupt activities and creates asymmetric access to
important market data. Global standards are required for full public
disclosure of beneficial ownership of companies and trusts and other
legal entities, with minimal standards for annual reporting.
To add a bit of muscle to the process, international sanctions are
required against tax havens which fail to cooperate in the struggle
against illicit financial flows and tax evasion. Political and civil
society pressure needs to be exerted on the professional associations
of bankers, lawyers, accountants and other financial intermediaries
who profit from the activities of tax havens: codes of best practice
should be produced to assist professionals with understanding both
the technical and ethical procedures for combating capital flight,
tax evasion and tax avoidance.
It is depressing to note that not a single professional association,
anywhere in the world, has issued a code of conduct for their members
relating to the use of tax havens. This reflects a generally
anti-social culture which permeates the higher levels of these
associations. Civil society needs to act decisively against this
culture, making it clear that those who enjoy the privilege of
professional status cannot continue to abuse that privilege for
personal gain. In this respect, the proposal to adopt a United Nations
Code of Conduct on international cooperation in combating tax evasion
would be a major, and symbolically important, step forward.
Tax havens set out to undermine national sovereignty and democratic
forms of government. Their governments purposefully allow the
creation of asymmetric supplies of economic and legal information
which harms the efficiency of global markets. They knowingly
encourage and facilitate grand corruption, embezzlement and fraud.
Tax havens contribute to creating extremes of wealth inequality,
which can trigger economic instability and prolonged recessions (Batra, 1987).
Tax havens persist in a world of globalised financial markets solely
because they serve the economic interests of elite groups. Most of
the problems posed by tax havens could be remedied by strengthening
international cooperation. Policies such as those proposed above
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 the US and the UK, both of which
are leading tax havens. The reality of their commitment to
‘globalisation’ is that they want liberalised trade on
their own terms but continue to use lax regulation, secrecy and
fiscal incentives to distort the trade system in favour of their
domestic businesses and to attract capital from other countries.
The debates around development, accountability, corruption and
persistent poverty are undergoing a major shift. Increasingly, civil
society is looking beyond dependence on aid and debt, and the
conditionalities associated with aid and debt relief: the focus is
shifting to domestic resources, capital flight and tax evasion
(Oxfam, 2000; Christian Aid, 2008; Ban Ki-moon, 2008). The issues of
capital flight and tax evasion, which have gone largely ignored for
so long, are moving to the centre stage. 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 in each of these problems (Murphy, 2008).
In this context, the proposal to encourage the development of an
offshore financial centre in Accra raises a host of questions about
how a country like Ghana, with a relatively unsophisticated revenue
service and very limited regulatory experience and capacity, can
protect itself –let alone neighbouring countries– from
tax evasion and other corrupt practices. With the best of intentions,
laws and regulations can be placed on the statute book and regulatory
structures established, but effective implementation requires a
massive commitment of resources and political will, and good
governance in this area is often undermined because the state lacks
the power to resist pressures from special-interest groups.
There is a further issue to which the government of any prospective
secrecy jurisdiction must give careful consideration. Globally, the
fundamental attractions of tax havens –low or no taxation,
banking secrecy, non-disclosure of ownership, minimal financial
regulation and lack of information exchange– face a significant
threat of erosion from external intervention by states coming under
increased pressure to protect their tax bases (Hampton &
Christensen, 2004). Tax and regulatory competition between
jurisdictions is also eroding the financial returns that offshore
financial centres have enjoyed in the past. It is therefore likely
that newcomers will be forced to compete in an already cut-throat
market by offering very low costs and low standards of regulation.
Lacking in any particular expertise or comparative advantage in the
global financial services market, newcomers will be compelled to
compete by allowing non-residents to exploit fiscal or regulatory
advantages, or to use secretive structures for nefarious purposes.
Despite the potential for economic diversification outlined in the
Bank of Ghana working paper, the potential economic benefits are
unlikely to be significant, particularly in view of the high cost of
recruiting and retaining sufficiently trained and experienced
regulatory staff (Amediku, 2006). On the downside, however, given the
existing capital flight problem of the West African region, the omens
are not promising, as Raymond Baker commented in an interview with this author in June 2007:
nation serving as an offshore financial centre and secrecy
jurisdiction is surely the worst combination possible. Ghana’s
own wealth will inevitably get sucked into this black hole, driving
apart rich and poor and forestalling economic development. Opting for
such an unwise step should signal the end of any further need for foreign aid’.
Director of the International Secretariat of the Tax Justice
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