A recent financial secrecy index published by the Tax Justice Network (TJN) implied that countries such as the US are regressing on transparency and international cooperation. IFCs such as the Cayman Islands moved down several places in the index following increased levels of regulation. Furthermore, MPs in the UK have highlighted that the Russia-Ukraine conflict has unveiled high levels of illicit finance in the country. This article considers the disparity between a crafted perception and reality in offshore finance.
First, who is the TJN? What are the motives behind the accusations? The TJN is manifestly a socialist organisation. They believe that the injustices of the world and society can be addressed by levelling higher taxes on the rich and that privacy and secrecy “… fuels inequality, fosters corruption, and undermines democracy.”[i] TJN is not an independent voice of reason but a well-funded campaigner for tax levelling. Most funding comes from GONGOs[ii] and foundations tied to socialism and environmental utopist ideals.
A report authored by Julian Morris for Cayman Finance dissected the TJN Tax Fairness Report of 2021.[iii] The findings were frankly stunning. In summary and edited for brevity:
Extremely distorted estimates – One of TJN’s founders, Richard Murphy, concedes that: a) TJN uses Bank for International Settlements (BIS) data that does not differentiate between personal and corporate deposits; b) TJN fails to recognise ‘that there may be commercial reasons for some of these deposits despite this referring to the fact in the methodology note’ and c) Offshore holding is not necessarily for tax abuse.
Similarly, shaky premises – TJN’s “own metrics for Banking secrecy show that Cayman is not a secrecy jurisdiction. Indeed, Cayman’s verified beneficial ownership registry combined with its tax information exchange agreements strongly disincentivizes individuals from attempting to use the jurisdiction to engage in tax evasion.”
TJN uses erroneous methods to derive estimates of tax avoidance and evasion. “As a result, it wildly exaggerates the extent of avoidance and evasion facilitated by Cayman. As long as TJN continues to use such erroneous methods, the State of Tax Justice cannot be relied upon as a credible assessment of the Cayman Islands.”
But let us set aside TJN’s bought and paid for higher tax and offshore rants. The essence of their assertion is that, but for International Financial Centres, there would be no financial crime or corruption, and we would live in a just world with less crime. Further, the only use of an IFC is for tax dodging.
I have been in finance for 40 years, began offshore work 36 years ago, and have been a licensed financial investigator for 32 years. I have a great deal of exposure to finance, IFCs and financial crime. I am also an avid reader of history covering crime and corruption throughout the ages.
IFCs exist as a catalyst for commerce. IFCs neither add nor subtract from a transaction, but IFC legal structures permit business transactions and combinations otherwise unlikely under legacy financial constraints. IFCs by their design, size and considerable brain power are more nimble than legacy financial centres. Has this caused some consternation? Yes, competition always causes consternation to the established order. Schumpeter was spot on in his description of creative destruction as “the process that sees innovations replacing existing ones that are rendered obsolete over time”. IFCs are concerned with financial product innovations to fit the needs of a market or an opportunity.
The reality is that tax competition has existed since there were taxes. The argument being put forward for more taxes in more places to fund spendthrift governments by defunding companies and people, to help reduce crime and corruption and support democracy, is a failed argument.
Where did that nonsense come from? It came from the OECD and the FATF in OECD, through the FATF’s initial effort to address “unfair tax competition.” Shortly after the terrorist attacks on the US and other locations, the concept of “unfair tax competition” morphed into stopping criminal money laundering and terrorist financing.
The OECD/FATF weight of persuasion is significant. The 38 members of the OECD represent about 63 per cent of the world's GDP. The treaty requires the member nations to implement OECD/FATF standards. The OECD also, through the FATF, monitors implementation and requires member countries to treat non-compliant, non-member countries in a pre-proscribed manner. This is the origin of the “lists.” If a non-member nation is not compliant, the OECD nations must follow FATF-issued warnings and cautions and not deal with those nations. The pressure is direct, and the financial stress imperils the non-members to comply. In time the non-member nations are economically cudgeled into compliance. Many of the standards dealt first with money laundering and now beneficial ownership. I’ll admit the OECD/FATF has had some success, but at what cost? These laws are a bit like using a hammer to kill a mosquito. It works, but then you have to patch the wall.
The accusation that IFCs promote crime is utter rot. The desire to get ahead is part of our nature. Yet our philosophers say it's not so great, and you're a fool to think that you should strive after material things. And then the same philosophers say that civilisation would not exist without that urge. This evil inclination, the inclination for greed and acquisition, and that we're never satiated; and if it were not for this inclination, we wouldn't have children, we wouldn't create cities. We would be living in caves wearing loincloths.
One of the tremendous under-examined aspects of business ethics is how and when one decides that duties to outsiders slip so low that one chooses to breach one’s responsibilities to one’s principle(s). This is the initial anatomy of the choices made for a corrupt or fraudulent transaction. The good of the whole is sacrificed for the wants of the one. This is our nature. Our nature existed long before IFCs.
From my research on corruption and fraud, I have found a few consistent markers:
The criminal can be a street vendor, the President of a Homeowner Association (HOA), a corporate executive, a politician, or the Chair of a non-governmental organisation (NGO).
Now, where are the crimes committed? When Willie Sutton was asked why he robbed banks, he replied, “Because that's where the money is.” The money is in larger corporations, governments and those companies that deal with governments. Organisations and governments with robust central control are susceptible to corruption and fraud. Thus, those in authority have the power to choose who gets the opportunity to get the money. The more money, the more power. The idea that anyone could amass any amount of money in this environment without well-compensated assistance is nuts. Further, these environments lack adequate controls. Controls would throttle the opportunity for enrichment.
The claim that the Russia-Ukraine conflict seems to have exposed illicit finance also utterly fails. There was always illegal finance in Russia and Ukraine. It was only after the conflict started that there was a serious look into how fortunes under a dictator were generated. The foundation of these fortunes has been there for all to see for years. It is just that many chose not to open their eyes. Countries do not go after illicit finance until someone has pointed it out to them, a victim, a whistleblower, or the opportunity created for a sanctions privateers’ bounty.
Crime, corruption, and tax avoidance have been with man since we settled into communities and dreamt up rules to live by. 8,000 years ago, Egyptians grumbled about corrupt judges; Jesus was betrayed for 30 pieces of silver; Roman General Crassus, the wealthiest man in Rome, built his fortune by wholly corrupt means and got away with it because he was one of Julius Caesar's favourites; and the mansard roof was designed to dodge taxes levied by the French government on the number of floors a building had.[iv] At no time between 8,000 BC and the 17th century were there OFCs.
The stated goal of the TJN and others is that low tax causes inequality, fosters corruption, and undermines democracy. So what is the level of taxation and regulation that will encourage a population to be more fair, just and happy? The answer is - tax has almost nothing to do with any of the stated objectives of the TJN.
The economic evidence is crystal clear throughout history that after the collective tax on income exceeds about 30 per cent, it contributes to inequality, fosters corruption, and undermines democracy as it concentrates the money in the hands of the government and those who feed off the government.
The money generated from illegal activities that flow through offshore financial centres is a minute fraction of the illicit funds. The percentage is on par with onshore financial centres. It is the criminal part that makes the news. IFCs are not a contributor to crimes. Crimes existed long before the first IFC was founded. The removal of IFCs will have zero impact on crime, corruption, equality, or the stabilisation of democracy.
The claims from the TJN et al. are bogus disinformation based neither in fact nor reality. Their approach is similar to suggesting the owner of a parking lot be arrested and indicted because illegal activity, unbeknownst to them, occurred on their tarmac.
The claim that any war or extra-normal event has exposed illicit finance is a modern financial reincarnation of the shock at Rick’s Café when Captain Renault has to shut the casino while collecting his cut.
IFCs do not contribute to crime nor will their removal erase crime, but it would severely impair world finance.
[ii] Government-organised non-governmental organisation
[iv] The dormers on a mansard roof only came into being when the tax on the number of floors was repealed.
L. Burke Files DDP CACM
Mr. Files is an international financial investigator and due diligence expert who has run cases in over 130 countries and has visited over 100 countries. Mr. Files has tackled investigations running from a few hundred thousand dollars to over 20 billion. Along the way, he became familiar with the knowledge of what people need to do, for due diligence, preventing corruption, and to avoid helping criminals launder money. He brings this experience of hands-on investigating and problem-solving experience to his lectures on Due Diligence, AML, and Anti-Corruption. Prior to founding FE&E, Inc., he served as the Director of Corporate Finance for American National an investment bank focused on development stage venture capital. He was also employed by Oppenheimer/Rouse as a commodities specialist trading customer accounts in Agri-Business, 24-hour gold and silver, and foreign currencies. Mr. Files has authored six books, and many white papers and articles. He has been quoted in major publications including The Guardian, The Financial Times, Forbes, US Newsweek, and more. He is the author of the award-winning book Due Diligence For The Financial Professional 2nd Edition. Mr. Files serves on the board of directors for several private companies, funds, and non-profits. The companies include Unicus Research a specialty advisory service for fund managers and family offices, SGS Glazing a specialty glazing design and estimating firm, and NSI a premium spirits company.