Tax havens: Paradise lost
Abolishing tax havens would effectively put hundreds of billions of dollars back into developing nations – but African and OECD states are slow ?to end the practices that allow them to flourish
Read a profile of Mauritius, the ‘Switzerland of Africa’.
Whirring away unseen and discreetly in the background of the global financial architecture lie tax havens. They are essential to the global flow of ‘hot’money, and act as the transmission lines for international financial meltdowns. In the most recent crash, they were used as dustbins to park poorly performing loans linked to sub-prime mortgages.
But tax havens also act as the key infrastructure for corruption, a highway for capital flight and tax evasion, robbing already poor African states of vital public funds. Apart from some worthy exceptions, such as the South African Revenue Service, African administrations have been powerless in stopping corporations from using offshore accounting.
Tax, not aid, is the most sustainable source of finance for development. It is also the biggest: tax revenues in Africa were about ten times the size of aid flows in 2009, according to the African Development Bank and the Organisation for Economic Cooperation and Development’s (OECD) African Economic Outlook. If you take away natural resources, it is still twice the size. Aid makes African rulers accountable to donors; tax makes rulers accountable to their citizens; and oil makes them accountable to no one. Michael Waweru, Kenya Revenue Authority’s commissioner-general, puts it simply: “Pay your taxes, and set your country free.”
Amount held in tax havens worldwide
1/3 of global GDP
83 of the top 100 US companies have subsidiaries offshore
99 of the top 100 EU companies have subsidiaries offshore
Total illicit outflows from Africa from 1970 to 2008
For South Africa’s former finance minister Trevor Manuel, “it is a contradiction to support increased development assistance, yet turn a blind eye to actions by multinationals and others that undermine the tax base of a developing country”. In this light, it is astonishing that only 0.1% of aid budgets has been spent on getting African countries to improve their tax administrations.
James Boyce and Léonce Ndikumana – two researchers at the University of Amherst, Massachusetts – estimated in a 2008 study of 40 African countries that capital flight from 1970 to 2004 added up to $420bn, or $607bn if you account for interest earnings. That is compared to these countries’ external debts of “only” $227bn, making them net creditors, not debtors, to the rest of the world. But there is a snag, according to the report, and it is a big one: “The subcontinent’s private external assets belong to a narrow, relatively wealthy stratum of its population, while public external debts are borne by the people through their governments.” ?
The formula is simple: African countries borrow, wealthy elites steal a lot of the money and park it in tax havens. African citizens foot the bill in terms of poorer public services, higher taxes, weakened governance and more debt. Tax havens and rulers get richer. Countries have almost no hope of getting the loot back.
In June 2009, the World Bank organised its first senior-level global forum on stolen asset recovery and development, and pledged to help return the money to the countries of origin. This followed a meeting of G20 heads of state in April 2009, which declared: “The era of banking secrecy is over.”?
The World Bank and UN Office on Drugs and Crime’s Stolen Asset Recovery (STAR) initiative is not a bad thing in itself. The initiative calculates that developing countries lose $20-40bn a year to bribery, embezzlement and other corrupt practices. But over the past 15 years, only about $5bn in stolen assets has been returned to the country of origin – or $300m per year on average.
Compare that to estimates from the Centre for International Policy’s Global Financial Integrity programme, which say that developing countries are losing $850bn to $1trn in illicit outflows each year. Even if STAR catches every last cent lost to corrupt practices, it would be equivalent to just 3% of the other, real damage, of which two-thirds comes from commercial activity – meaning a net annual outflow of hundreds of billions of dollars.
At the G20 meeting, leaders took aim at non-cooperative tax havens, and mandated that the OECD lead the crackdown by putting together a black/white/grey list to shame and threaten jurisdictions into compliance. As Jeffrey Owens, the OECD’s top tax official, notes: “Tax havens have a bigger impact on developing countries than on developed countries … there is an enormous drainage of revenues to tax havens. This is equivalent to around 7–8% of GDP for the African continent and a multiple of the aid it gets from developed countries.”?
However, just five days after the G20 summit declared the death of banking secrecy, the OECD’s tax haven blacklist was empty. That fact should have rung alarm bells: but it gets worse.
Jurisdictions were able to get off the blacklist onto the grey list merely by promising to shape up. They could then skip from the grey list to the white list by signing 12 so-called Tax Information Exchange Agreements (TIEAs) with other countries. These are bilateral agreements whereby a tax haven (or another country) agrees, in principle, to provide information to another jurisdiction that wants to find out about whether its citizens have stashed tax-evading loot there.
The OECD publishes a list of jurisdictions that have signed TIEAs, which at the time of writing contains over 430 agreements, the large majority of which were signed after the G20 meeting. On the surface this looks like a success, but the maximum possible number of TIEAs – if each of the world’s 24 jurisdictions signed with each other – is over 58,000. This makes 430 a pinprick. And apart from Liberia and Mauritius, both of which are tax havens, not a single African country has signed a TIEA.
On top of that, with a TIEA you can only get information bilaterally and through a highly specific request. You have to show exactly the information you need, why it is relevant, and the taxpayer concerned. In other words, you already have to know what you are looking for before you ask for it – a Catch-22 situation.
Then there are the obstacles. For example, Singapore – a favourite of Angolan and other African leaders – has put in all sorts of “safeguards” to stop information leaking out. Tax havens say they are cooperative jurisdictions and sign these agreements, before their law courts routinely put obstacles in the way. They will occasionally help by handing over expendable small fry, but for the more important clients, they will make sure secrets are safe.
However, the OECD’s Owens says this is an unfair characterisation. Though he admits countries must have a case before asking for information, by improving the audit procedures and information at the domestic level, African countries help create the cases for revenue authorities. He also cites the peer review countries are now submitting themselves to, “and that mechanism is just asking one simple question: does that country have effective exchange of information? If it doesn’t, then it doesn’t pass the review stage. If Angola had an agreement with Singapore and was providing the information in the required format, then Singapore should be responding to that.”?
Tax havens are popularly imagined as tropical islands in the Caribbean or Alpine redoubts, but the two most important tax havens are the US and UK. The Financial Secrecy Index, the only objective ranking of tax havens according to secrecy and the size of cross-border financial services, also places Luxembourg, Switzerland and the Cayman Islands in the top five. Apart from the Caymans, all are OECD nations, though the Caymans is an overseas territory of the UK, which for all intents and purposes oversees its offshore sector. In fact, 15 of the top 20 jurisdictions are either OECD countries or those with close historical and political links to the City of London.
It constitutes an almost invisible, and yet much bigger, British version of what French-speaking people have called Françafrique: a post-colonial system whereby France nurtured deep and opaque relationships with the rulers of its former colonies (often via secrecy jurisdictions) that it was able to retain a good measure of political and economic control. By contrast, Britain kept making vast profits from Africa by virtue of its control, or semi-control, of a large part of the offshore system, from Mauritius to Jersey to the Caymans. The sun never set on Britain’s offshore empire.
The offshore system is growing. New tax havens are popping up all the time. From Africa’s perspective the most important one is probably Mauritius, set up as a tax haven by City of London interests in the 1990s. It is now a massive player in Africa, being the conduit for large quantities of Chinese investment into Africa, and large illicit financial flows out of Africa.
Now those interests are trying to push the offshore system deep into the African continent itself. Barclays Capital is helping Ghana set up its own offshore sector, which will target Nigeria and the sub-region. The prospect of a new African secrecy jurisdiction hoovering up illicit financial flows from this massively oil-rich zone should be a cause for concern.
And then there is Botswana, where the International Financial Services Centre (IFSC,) set up in 2003 and actively promoted by the City of London’s International Financial Services (with Barclays and Standard Bank playing starring roles), was modelled on the Dublin IFSC. Botswana offers the classic dirty-money recipe book: nominee accounts, where you have no idea who the real owner is; enforced bank secrecy; and an almost total lack of information exchange. The offshore erosion of Africa is gathering pace.