Tax havens, offshore financial centres and the current sanctions regimes

Author:Norman Mugarura
Position:Department of Research, Global Action Research and Development Initiative Limited, Barking, UK
Pages:200-222
SUMMARY

Purpose This paper aims to articulate the complexities posed by tax havens and offshore financial centres (OFCs) in the global fight against financial crimes such as tax avoidance and money laundering. It suggests possible measures to mitigate the effect of tax avoidance on economic development of countries, especially less developed poor countries. Design/methodology/approach Data were evaluated using examples and case studies drawn from tax havens and OFCs in newspaper... (see full summary)

 
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Tax havens, offshore nancial
centres and the current
sanctions regimes
Norman Mugarura
Department of Research,
Global Action Research and Development Initiative Limited, Barking, UK
Abstract
Purpose This paper aims to articulate the complexities posed by tax havens and offshore nancial centres
(OFCs) in the global ght against nancial crimes such as tax avoidance and money laundering. It suggests
possible measures to mitigate the effect of tax avoidance on economic development of countries, especially less
developed poor countries.
Design/methodology/approach Data were evaluated using examples and case studies drawn from
tax havens and OFCs in newspaper reports to demonstrate how illicit proceeds of crime are spirited out of
countries for safe custody in tax haven jurisdictions around the globe. The author also carried out a scoping
review of the literature to delineate the correlation between tax havens, OFCs and the growth in nancial
crimes such as tax avoidance and money laundering.
Findings There is a close correlation that bank secrecy laws in OFCs fuel the growth of nancial crimes
such as tax avoidance and money laundering around the globe. The ndings also suggest that while
imposition of sanctions on countries which transgress international nancial regulatory regimes is an
essential component in the international efforts against nancial crimes, they need to be enforced on all states
so that they are not seen as politicized and subsequently undermined.
Research limitations/implications It is important that states work in tandem to initiate desired
regimes to address nancial crimes but enunciating regimes alone cannot generate a far reaching impact
unless they are enforced against all transgressing states.
Practical implications The paper has practical implications for states, people, governments, oversight
institutions, markets and other stakeholders because it unravels varied issues relating to tax avoidance,
money laundering and policies that need to be adopted to address these challenges.
Social implications The paper draws attention to the impact of asymmetric information and data
generation capacity in some countries on tax avoidance and other nancial crimes and the need for
international harmonization of tax and AML regimes.
Originality/value The issues explored in this paper help to highlight the challenges posed by tax havens
and OFCs for economic development of countries. While the paper was undertaken by the review of primary
and secondary data, it offers important contributions that could potentially enhance the ght against tax
avoidance.
Keywords Tax avoidance, Offshore nancial centres, Sanctions mechanisms, Tax havens
Paper type Research paper
1. Introduction
According to a report in The Guardian newspaper (UK) (The Guardian, 2015), Africa loses
more than US$50bn (£33bn) every year in illicit nancial outows by governments and
multinational companies involved in fraudulent schemes that aim to avoid paying tax to
some of the world’s poorest countries (The Guardian, 2015). The research carried out by the
African Union (AU) in 2001 found that the number of illegal transfers of assets from African
countries had tripled since 2001, when US$20bn was estimated to have been spirited out of
the continent to offshore nancial centres (OFCs) (GFI, 2015). Zambia is a country endowed
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
JFC
24,2
200
Journalof Financial Crime
Vol.24 No. 2, 2017
pp.200-222
©Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-01-2016-0008
with rich copper resources, but these natural resources have not brought the country wealth;
far from it, Zambia has been getting poorer. All copper mines are virtually owned by
corporations and, in the past 10 years, they are reported to have extracted copper worth
US$29bn, but Zambia is still ranked as one of the 20 poorest countries in the world (GFI,
2015). The money that is lost as a result of corruption, money laundering and tax evasion
costs poor countries an estimated US$160bn a year, almost double of what they receive in
international aid. If this money were to be properly utilized within its originating countries,
it would be enough to save the lives of 350,000 children aged ve or under every year and to
buy retrieval drugs for HIV/AIDS sufferers. For every US$1 given in aid to a poor country,
US$10 is drained out of the economy to OFCs (GFI, 2015). In total, the report stated that the
continent lost roughly US$850bn between 1970 and 2008. An estimated US$217.7bn was
illegally transferred out of Nigeria during that period, while Egypt lost US$105.2bn and
South Africa more than US$81.8bn. Nigeria’s crude oil exports, mineral production in the
Democratic Republic of the Congo and South Africa and timber sales from Liberia and
Mozambique are all sectors where trade mispricing occurs on a regular basis. Difculties in
dealing with this challenge are exacerbated by criminal networks engaged in drugs and
human trafcking, animal poaching and theft of oil and minerals – which often means that
are many jurisdictions involved in law enforcement. The AU report also noted that more than
US$1tn was siphoned out of Africa through illegal schemes between 2007 and 2009, and the
total revenues lost by African countries amounted to 6 per cent of total gross domestic
product (GDP) (GFI, 2015). Illicit nancial outows from Africa are estimated to be in the
range US$30-60bn a year. The Organization for Economic Co-operation and Development
(OECD) has expressed serious concern that corruption and money laundering literally costs
Africa a fortune, and yet these issues are never considered a top priority for many African
governments (GFI, 2015).
2. Tax havens, offshore nancial centres and the current sanctions regimes
A tax haven jurisdiction is dened as “a country or independent area where taxes are
levied at a low rate” compared to other jurisdictions. They are often secretive and offer
a way for individuals and businesses to not pay taxes and refuse to co-operate with other
jurisdictions, especially with regards to exchanging information (The Guardian, 2011).
They are also characterized by very low or even zero tax rates and are attractive to those
who want to avoid paying the taxes to their respective tax authorities. These
jurisdictions routinely ring-fence their own economies from the facilities they offer to
protect themselves from their own offshore tricks. For example, a tax haven might offer
a zero tax rate to non-residents who bank their money within the jurisdiction, but tax its
own residents fully (The Guardian, 2011).
The paper unravels a multiplicity of issues relating to tax havens and OFCs in the global
ght against nancial crime and demonstrates the possible measures to mitigate their effect
on the economic development of countries, in particular, the less developed and poorer
countries in Africa. Data were evaluated using examples and case studies from different
countries to demonstrate how the illicit proceeds of crime are removed from countries into
safe custody and deposited in tax haven jurisdictions around the globe. There is a need for
the harmonization of international tax and anti-money laundering (AML) laws to abolish the
regulatory loopholes that make OFCs attractive to money launderers and corrupt political
leaders around the globe. There is a close correlation that bank secrecy laws in OFCs fuel the
growth of nancial crimes such as tax avoidance and money laundering worldwide. The
ndings also suggest that while the imposition of sanctions on countries that transgress
international nancial regulatory regimes is an essential component in the international
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Tax havens

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