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 Financial Times - 26 September 2003 * 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] [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] [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 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 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 mid- 1990s. 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

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] [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) Africa’s revolving door transfer mis-pricing

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 net- worth 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

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-your- client compliance, political autonomy the dirty money tool box

“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 a culture of subversion

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? the pinstripe infrastructure

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] [i] David Murray from Transparency International UK, quoted from oral evidence given to the UK Africa All Party Parliamentary Group in December 2005.

“.. 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 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 The price of offshore

“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

Country rank Tax Haven countries 2005 CPI score 5Singapore9.4 7Switzerland9.1 11Netherlands / United Kingdom Luxembourg8.5 15Hong Kong8.3 16Germany8.2 17USA7.6 19Belgium / Ireland7.4 24Barbados6.9 25Malta6.6 28Israel6.3 Corruption Perceptions Index: 2005 Country rank African countries 2005 CPI score 158Chad Cote d’Ivoire / Equatorial Guinea / Nigeria Angola DCR / Kenya / Somalia / Sudan Cameroon / Ethipia / Liberia Burundi / Republic of Congo Sierra Leone2.4

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 Financial Times - 26 September 2003