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EUROPEAN TAX HAVENS:
ILLEGITIMISING DEBT, CAUSING CORRUPTION
AND FACILITATING CAPITAL FLIGHT
John Christensen and Sony Kapoor
«The missing piece of the development puzzle is the
impact of illegal capital flight on global poverty. About
$50bn (€40bn) in aid flows to developing and
transitional economies from richer nations each year.
At the same time, roughly $500bn in dirty money - in
all its forms – flows in the opposite direction out of
poorer countries.
. . . a full, unflinching look at how dirty money*
sustains worldwide poverty would pay very rich
dividends.»
Raymond Baker & Jennifer Nordin, Financial Times, 13 October 2004
* dirty money is money that has been obtained, transferred or used illicitly
capital flows ‘uphill’
Over 50 per cent of the total holdings of cash and listed
securities of rich individuals in Latin America is reckoned to
be held Offshore.
Capital flight data for Africa as a whole is scarce, but
according to the African Union US$148 billion leaves the
continent every year because of corruption. [i]
[i] See UK Africa All Party Parliamentary Group (2006)
The Other Side of the Coin: the UK and Corruption in Africa (p14)
Most analysts agree that the outflows of illicit money
originating in Africa tend to be permanent, indicating that
between 80 – 90 per cent of such flows remain outside the
Continent. [ii]
[ii] 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.
Looting Africa
Around 80 per cent* of Africa’s external borrowings has
been captured by ruling elites and channelled offshore in
the form of capital flight. As a result, external debt
contracted by governments and private firms holding
government guarantees have been transformed into
private assets held in offshore accounts and companies.
* Ndikumana, L and Boyce, J.K. (2003)
Public Debts and Private Assets: explaining capital
flight from sub-Saharan African countries
World Development, volume 31, no.1
Africa’s revolving door
Despite the massive debt incurred in the past, the SubSaharan 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 stock of capital flight from SSA (estimated at $274
billion including interest earnings) was equivalent to 145 per
cent of the total debt owed by these countries in the mid1990s.
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
Edward Elgar, Cheltenham
Africa’s revolving door
transfer mis-pricing
60 per cent of trade transactions into or out of Africa are
estimated to be mis-priced by an average exceeding 11 per
cent, resulting in a capital flight component of 7 per cent
of African trade, totalling US$10 to 11 billion annually
(1999 prices)
The incidence of transfer mis-pricing to achieve capital
flight out of Africa has accelerated significantly. A study of
import and export transactions between Africa and the
United States found that between 1996 and 2005 net
capital outflows to the US grew from $1.9 billion to $4.9
billion (+257%) through the use of low-priced exports and
high-priced imports.[i]
[i] Pak, S.J. (2006) Estimates of Capital Movements from African countries to
the United States through trade mispricing (paper given at tax research workshop
at Essex University, England on 7th July 2006)
Defining characteristics of offshore tax havens :
 De jure or de facto financial secrecy arrangements
 Non-disclosure on beneficial ownership
 Low or minimal tax rates on income and capital gains
 Deliberate targeting of non-resident businesses and high networth individuals
 Minimal reporting and regulatory standards
 Hampton’s 4 spaces* – fiscal, political, regulatory and judicial
Hampton, M.P. (1996) The Offshore Interface: Tax Havens in the Global Economy
Macmillan
the dirty money tool box
1. Secret offshore bank accounts
• offshore credit cards
2. Offshore (i.e. non resident) companies
• Nominee directors
• Nominee shareholders
3. Offshore trusts and foundations
4. Tax havens – ring-fencing, banking secrecy,
non-disclosure of beneficial ownership,
judicial independence, minimal know-yourclient compliance, political autonomy
a culture of subversion
“Client is a private investment company
domiciled in the Bahamas used as a
vehicle to manage the investment needs
of beneficial owner, now a retired
professional who achieved much success
in his career and accumulated wealth
during his lifetime for retirement in an
orderly way.”
Money Laundering and Foreign Corruption: Enforcement and
Effectiveness of the Patriot Act – Case Study Involving Riggs
Bank. Report prepared by the Minority Staff of the Permanent
SubCommittee of Investigations, 15 July 2004, p28
the pinstripe infrastructure
1. Lawyers
2. Accountants
3. Bankers
4. Tax havens
Does supply of these financial services
stimulate corruption? In practice it is very
hard to shift substantial sums across borders
without using the banking wire systems.
And would corruption persist at such levels
without the sense of impunity once the
proceeds have been shifted offshore?
a shadow economy
hidden from mainstream economists
Half of aggregate world trade passes through tax havens, even
though these minor economies account for a mere 3 per cent
of global GDP. This anomaly arises because transnational
corporations record many intra-company transactions through
tax havens solely to avoid tax, with little or no basis in the
economic reality of their operations;
Over the past thirty years the number of Offshore Finance
Centres and tax havens has more than doubled to
approximately 70 centres. The Offshore Economy is a
significant and deeply embedded part of globalised capitalism.
It is estimated that Africa’s political elites hold somewhere
between US$700 to $800 billion in Offshore accounts outside
the Continent.[i]
[i] David Murray from Transparency International UK, quoted from oral evidence given
to the UK Africa All Party Parliamentary Group in December 2005.
The price of offshore
“ . .Wealth held in tax havens is costing governments
around the world US$255 billion annually in lost tax
revenues according to research published in March
2005. This sum is over three and a half times greater than
the highest estimate of the additional financial resources
required to meet the United Nations' Millenium
Development Goals. .”
TAX JUSTICE FOCUS
the quarterly newsletter of the tax justice network
Spring 2005 VOLUME 1, NUMBER 1
“Utilizing tax haven secrecy laws and practices that limit
corporate, bank and financial disclosures, financial
professionals often use offshore tax haven jurisdictions as a
‘black box’ to hide assets and transactions from the Internal
Revenue Service, other US regulators and law enforcement.”
“I believe the findings are explosive: the report blows
the lid off
tax haven abuses that make use of
sham trusts, shell Corporations and
fake economic transactions to help some
people dodge taxes . . . Tax havens have in effect
declared war on honest taxpayers”
Senator Carl Levin, Chairman
Senate Permanent Sub-Committee on Investigations
Corruption Perceptions Index: 2005
Country
rank
African
countries
2005 CPI
score
Country
rank
Tax Haven
countries
2005 CPI
score
5
Singapore
9.4
158
Chad
1.7
7
Switzerland
9.1
155
Cote d’Ivoire /
Equatorial Guinea
/ Nigeria
1.9
11
Netherlands /
United
Kingdom
8.6
151
Angola
2.0
13
Luxembourg
8.5
144
DCR / Kenya /
Somalia / Sudan
2.1
15
Hong Kong
8.3
16
Germany
8.2
137
Cameroon /
Ethipia / Liberia
2.2
17
USA
7.6
130
Burundi / Republic
of Congo
2.3
19
Belgium / Ireland
7.4
24
Barbados
6.9
126
Sierra Leone
2.4
25
Malta
6.6
28
Israel
6.3
INVESTIGATION – A Big Squeeze for Governments:
how transfer pricing threatens global tax revenues
«What is clear is that the potential for tax arbitrage that
results from globalisation creates a considerable and
continuing incentive for domestic companies to
internationalise their business. The pressure on the global
corporate tax base can only increase.
It seems likely that many national governments will be
severely disappointed if they look to the corporate sector to
mitigate their mounting fiscal problems. »
John Plender, Financial Times, 22 July 2004