Tackling the tax havens

The World Bank and IMF lead in global efforts to tackle money-laundering and corruption. Yet they disregard how tax havens facilitate crime, undermine efforts to reduce poverty and increase inequality.

Tax havens provide a ‘corruptioninterface’ between illicit and licit financial markets, undermining tax regimesand onshore regulation and distorting markets by rewarding free-riding (usingpublic infrastructure, goods, or services without contributing their costs) andmisdirecting investment. They function through collusion between banks andother financial intermediaries and the governments of industrialised nations. Themajor culprits include the USA, Britain, Switzerland and other European states whichpromote tax havens (the Tax Justice Network has identified 72) and preventefforts to clamp down on their activities – such as the OECD's project tocombat harmful tax competition, fiercely resisted by a coalition of USorganisations (funded by banks) and by tax havens themselves.

The defining feature of the corruptioninterface is secrecy, either in the form of banking secrecy laws or throughjudicial arrangements and banking practices. Crucially the techniques used for money-launderingand tax dodging involve identical mechanisms and financial subterfuges:offshore companies, trusts and foundations, correspondent banks, nomineedirectors, dummy wire transfers, and an absence of financial transparency.

US$11.5 trillion of personalwealth is currently held offshore worldwide. The annual worldwide tax revenuelost on the undeclared income from this wealth is about US$255 billion. Additionalrevenue is also lost to domestic tax evasion, tax avoidance on cross-bordertrade, and to pressures on national and local governments to compete forinvestment capital by offering unnecessary tax incentives.

In total developing countrieslose around $385 billion annually as a result of tax dodging and taxcompetition (this is a governmental strategy of attracting foreign direct investment and highvalue human resources by minimising the overall taxation level). This sum is more than twice the amount required toachieve the poverty reduction targets of the UN Millennium Development project.

An estimated US$1 trillion of‘dirty’ money flows annually into offshore accounts, approximately half originatingfrom poorer countries and over 50 percent of cross-border trade is transactedthrough offshore structures. Many analysts overlook the offshore economy intheir models of how globalised financial markets function, which explains theirinability to understand the ‘uphill’ movement of capital from poor to richnations – principally to the USA and Europe.

Secrecy creates a powerfulincentive for rich people to hold assets in offshore vehicles (includingoffshore bank accounts, trusts, foundations, companies, and bearer shares) designedto resist investigation and dodge taxes. Some rich people also engage in‘round-tripping’ exercises, using money held offshore to buy domestic assetsunder the guise of foreign direct investment, which is typically granted fiscaland other privileges.

March 2007 sees the fifthanniversary of the Monterrey Consensus, which identified the mobilisation ofdomestic resources for development as a priority for developing countries. Butthis will never move beyond a dream unless steps are taken to tackle capitalflight and tax evasion.

We must urgently revise ourinherited perceptions of the geography and nature of corruption, shaped to someextent by the Corruption Perceptions Index published by TransparencyInternational. The spotlight needs focus on governments which promote and protecttax havens, such as the USA, Switzerland, Britain and France.

Pressure also needs to be appliedto the associations of lawyers, bankers and accountants which regulate theactivities of those operating the corruption interface. The City of London and many British Overseas Territories and Crown Dependencies are major players in offshore activities,and British legal and accounting institutions shape legal and accountingregulation in many countries.

Britain is therefore wellplaced to assist developing countries in their struggle against corruption bytaking the lead in suppressing the activities of bankers, accountants, lawyersand other financial intermediaries who provide services from offshore taxhavens - an institutional infrastructure which uses British tax havens as a corruptioninterface for facilitating illicit capital flight, tax dodging and other corruptpractices.