IN DEPTH: Tax havens in the West hold trillions in dirty money from the developing world

Unless the West sets its house in order, the political ramifications of misguided economic dexterity could very well explode into a full scale populist revolt against the 15% of the world’s population that enjoys 75% of its resources.

Tax Haven

In late 2016, a Washington DC-based think tank released a study showing that since 1980, developing countries around the world had lost US$16.3 trillion dollars through broad leakages in the balance of payments, fake trade invoicing, and dubious financial transfers. The study, jointly conducted by Global Financial Integrity (GFI) and Research Council of Norway, had sent shockwaves through the developing world.

According to the findings of GFI, developing countries had, over the course of more than three decades, served as net-creditors to the rest of the world as tax havens in developed countries played a key role in the transfer of unrecorded capital. The report, released on December 5, demonstrated that in 2011, tax haven holdings believed to be from the developing world stood at US$4.4 trillion. This figure has now risen to US$7 trillion.

The American think tank stressed that these tax havens were responsible for exacerbated inequality in developing regions around the world and had also undermined good governance and economic growth, thereby paving the way for the rise of authoritarian regimes in some countries. These tax havens were directly held responsible for stashing the wealth of criminals and money launderers.

When Prime Minister Imran Khan, who came into power in Pakistan two years ago on a mandate that promised accountability and financial transparency with regards to government officials, stood before a high-level meeting at the United Nations and called for the world community to take action against illicit flows of money from the developing world, he was merely outlining the same points raised by GFI a few years ago.

PM Imran outlines agenda for financial integrity

Addressing a high-level panel on Financial Accountability, Transparency, and Integrity (FACTI) on the sidelines of the ongoing United Nations General Assembly session, the premier said on Thursday that the world community must take decisive actions to stop this bleeding of developing countries in line with FACTI reports on money flows. A FACTI report claims white-collar criminals take US$1 trillion from developing economies every year.

“We came with a robust public mandate to get rid of this menace (corruption) from our country. We have taken several initiatives, domestically, but what is needed, what is required, is strengthening international cooperation, to bring perpetrators of financial crimes to justice,” PM Imran said during his address to the panel.

“US$20-40 billion flows out of developing countries in the form of bribes and kickbacks taken by white-collar criminals. US$7 trillion is parked in tax havens around the world that are stolen from the developing countries. US500-600 billion in taxes is lost each year in tax avoidance by multinational companies,” the premier lamented. “This bleeding of the poor and developing world must stop and the international community must act,” he remarked.

PM Imran added that Pakistan appreciated the initiatives of Nigeria and Norway to establish panels on international financial accountability. He also outlined the ten steps that the international community could take to stop the flow of illicit money across borders. “What we see with the current migration crisis will be dwarfed by what we see in the future if the gulf between the developed and developing world keeps growing,” he stressed.

The points raised by the premier in his speech correspond directly to the internal and external challenges faced by Pakistan. From passing landmark legislation against money laundering and terror financing to backing sweeping accountability measures aimed at tackling white-collar crime in domestic politics, PM Imran has shown that he wants to stay true to his brand of politics, both at the international and national level.

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The points raised by the premier in his speech included:

  • Stolen proceeds from developing countries, including proceeds of corruption, bribery, and other crimes, must be returned.
  • The authorities in charge of tax havens must impose criminal and financial penalties on their financial institutions found involved in receiving and utilizing such money and assets.
  • The enablers of corruption and bribery, such as accountants, lawyers, and other intermediaries, must be closely regulated, monitored, and held accountable.
  • The beneficial ownership of financial companies must be revealed immediately upon inquiry by interested and affected governments.
  • Multinational corporations must not be allowed to avoid taxes. A global minimum corporate tax could prevent this practice.
  • Revenues from digital transactions should be taxed where the revenues are generated.
  • Unequal investment treaties should be discarded and revised and a fair system of adjudication of investment disputes setup.
  • All official and non-official bodies set up to monitor illicit flows must include all interested countries.
  • The UN should set up a mechanism to coordinate the working of bodies working for financial integrity across the world.
  • Developing countries must be allowed to protect and preserve their precious resources.

‘Stolen proceeds must be returned’

To put the comments of the Prime Minister into perspective, it is important to understand that white-collar crime in the developing world often moves money across borders for safe disposal in tax havens around the world. These tax havens exist in numerous places, including the Caribbean, the European Union, and the Americas. The governments of these countries are aware of the existence of these places but do not regulate them.

Indeed, these havens act as a source of revenue for these governments. According to GFI, the charitable contributions of developed nations to the developing world, in the form of foreign aid, direct investment, and other capital flows, are only a fraction of the amount of the money flowing out of the developing world. The gap is widening to a point of no return, as the latest figures from the FACTI report suggest.

In the year 2012, for example, the peripheral countries (poorer south), clocked in $1300 billion in assistance from abroad, which included foreign aid, investments from multinational corporations, and the income generated via trade with the rich nations. Through the same fiscal year, a net amount of $3300 billion was transferred out of these countries to the rich ones. Put simply, the south lost twice the money received.

Some of these unrecorded capital flows out of the developing world are the proceeds of corruption, bribery, and other white-collar crime. In April 2016, a stack of documents leaked from a firm based in Panama – a tax haven – revealed that twelve world leaders were among 143 politicians known to have been using offshore tax havens. The list included then-Pakistan Prime Minister Nawaz Sharif.

Sharif and members of his family were later arrested in multiple corruption cases as the state cracked down on illicit money flows out of Pakistan. Although not formally convicted of corruption, Sharif now resides in London. PM Imran Khan, who won elections in 2018 and replaced Sharif, has maintained that the former premier laundered hundreds of millions of dollars through tax havens outside the country.

In the Panama Papers, a $2bn trail lead to Russian President Vladimir Putin. The Russian president’s best friend – a cellist called Sergei Roldugin – was at the centre of a scheme in which money from Russian state banks was hidden offshore. Some of it ended up in a ski resort where, in 2013, Putin’s daughter Katerina got married. Several other world leaders also made the list of corrupt officials in the papers.

These included Ayad Allawi, ex-interim prime minister and former vice-president of Iraq, Petro Poroshenko, president of Ukraine, Alaa Mubarak, son of Egypt’s former president, and the prime minister of Iceland, Sigmundur Davíð Gunnlaugsson. An offshore investment fund run by the father of British prime minister David Cameron was also implicated in the papers to a fierce outcry across Britain, according to English media.

‘Multinationals must not avoid taxes’

Another source of income for the richer countries is the direct investment they make into poor nations. Huge profits are made from this money, according to GFI. Multinational fast food chains, non-alcoholic beverages, mining companies operating in Africa, and the industry set up to compliment the services sector of the north’s economy all spring to mind in this regard. PM Imran highlighted this issue in his proposals for a way forward.

In addition to taxes, big investors also dodge authorities in developing countries. They misreport the true value of transactions to custom officials, making space to shift large amounts of money across international borders without suspicion. Most investors use this just to evade taxes, but some also use it to dodge capital control laws. GFI estimates placed the amount of money lost to this practice at around $1000 billion.

In the year 2012, a study focused on developing countries placed this total at around $700 billion. A lot of this unrecorded capital makes its way into tax havens all over the world. These tax havens are protected by laws wherein stolen money cannot be traced back to them, and have a net tax rate of absolute zero. The British Virgin Islands, Panama, and the City of London are a few prominent locations in this regard.

Pakistan has recently stepped up a drive to clamp down on tax evaders. Several new regulations have been introduced in this regard, including a decision to penalize businesses that have deliberately avoided the use of cashless transactions to dodge taxes. However, this taxation drive has yet to indict a big multinational corporation for tax evasion. The comments of PM Imran at the FACTI panel might be an indication of things to come.

‘Unequal investment treaties should be discarded’

Pakistan is presently involved in an investment dispute with Australian and Chilean mining firms over the mining rights to the Reko Diq project. In July 2019, an international arbitration tribunal slapped a $6 billion penalty on Pakistan for denying a mining lease to the TCC, a joint venture of Australia and Chilean firms. The decision raised eyebrows around the world since the penalty seemed huge for a country the size of Pakistan.

Perhaps this dispute was at the back of the mind of PM Imran when he asked the UN to discard unequal investment treaties that rob the developing world of wealth. According to GFI, interest payments on loans that developed countries have lent to developing ones under the International Monetary Fund or World Bank, total around US$4200 billion over the past three decades. Compared to this, the aid coming to countries has been minuscule.

The World Economic Forum (WEF) publishes the contributions of some of the world’s richest nations in official development assistance (ODA) to countries of the global south, as part of bilateral aid or through institutions such as the World Bank, every year. The top ten contributors collectively come up with a sum of over $100 billion in a single fiscal year, much like they do every year.

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The group that leads the pack includes the US ($30 billion), Germany ($20 billion), UK ($19.9 billion), France ($10.9 billion), Japan ($10.4 billion) and Canada ($4.9 billion). Scandinavian countries were also well represented ($13.2 billion). It is very easy to be impressed by these figures until one takes into account the gross national income (GNI) of these nations, and then compare it as a percentage against their ODA.

Surprisingly, the most generous donors fall way behind in this pack, with only the UK (0.71%) making the top ten list. Sweden (1.41%), Norway (1.05%) and Denmark (0.85%) all feature prominently. Another surprise is UAE, at 1.09%. Officially, the United Nations has been pushing the developed world to at meet a minimum target of 0.7% GNI spent on ODA. Few in the West have heeded the proposal.

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The solutions to these problems are not easy

It seems like there is little or no initiative from the rich countries to even begin to address some of these issues. Starting with clamping down on tax havens, the West could then move towards implicating certain well-placed individuals in the banking and finance sectors for fraudulent practices, economic experts say.

“The interest payments on loans to poorer countries who cannot afford to pay them back could be waived. There should be greater transparency in dealing with multinational corporations and any loopholes in tax regulations should be cleared up so as these companies have little space to cheat the government out of taxes,” an economic expert told GFI during the research on the report.

“If these measures are implemented without bias, the need for charity can be eliminated. The developing countries could probably do better for themselves without foreign aid,” the expert added. According to GFI, the delayed reaction to the economic crisis of 2008 has made it quite clear unless the West sets its house in order, the political ramifications of misguided economic dexterity could very well explode into a full-scale populist revolt against the 15% of the world’s population that enjoys 75% of its resources.

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