What’s the Taxcast?

The Taxcast is an entertaining and informative 15 minute monthly podcast with the latest news, research and analysis of events in tax evasion, tax avoidance and the shadow banking system. It has 3 segments: headlines, analysis with campaigning economist Richard Murphy (The Courageous State) and a mini-documentary.

It is largely people’s desire to to evade taxes that creates most of the so called ‘shadow economy’ that is hidden from officialdom’s view to make sure that tax is not paid.

In this report, we first estimate the absolute size of a country’s shadow economy based on its own published estimate of its GDP and recently-reported data on the size of shadow economies published by the world bank. This, and other data we use, is what we think the best currently available for the purpose of this report and, as such, should provide the best estimates possible.

By the definition used here, economic activity in the shadow economy of a country will be tax-evading. So we next calculate an estimate of the amount of tax lost as a result of the existence of that shadow economy. We do this by looking at how much taxes are on average in the state as a share of GDP, and then apply the same tax share to the shadow economy, to reveal our estimates of lost taxes by state. We then compare these lost taxes to health care spending in each country surveyed. This data has also been compared by continent.

Watch this video, then find out what tax havens are, why they’re so damaging and what we can do about it.

In the UK for instance, a staggering £69.9 billion a year is lost to tax evasion in the ‘shadow economy’ – that is, 56% of the country’s total healthcare spend.

Tax havens are a major part of the tax evasion problem – and these new findings come as the Tax Justice Network launches Tackle Tax Havens, a new campaign aimed at the general public that highlights the critical role that these secretive states play in corrupting the global economy.

The issue of tax collection is rising fast up the political and social agenda, as countries across the world make deep cuts in public spending and increase taxes in ways that hurt the poor and the middle classes the most.

This new research demonstrates how important it is to tackle tax evasion and the tax havens that help wealthy individuals and organisations escape from contributing to the services that directly benefit them – from the health and education systems that support their workforces, to the roads that ship their goods to markets, to the courts of law that enforce their contracts or to the police who protect their property.

But tax havens are not just about tax: they cause colossal damage on many fronts. Tackle Tax Havens aims to arm the general public with a solid working knowledge of the offshore system and the problems it causes — and to show what we can do about it.

Other key findings of the new report include:

• Europe as a whole loses the equivalent of 87% of its total healthcare budget to tax evasion, while Africa loses 98% and South America 139%
• Over the 145 countries surveyed, an unweighted average of 110% of the annual healthcare budget was lost to tax evasion
• 119 of the 145 countries surveyed are losing over half of their healthcare budget to tax evasion
• In 67 countries, tax evasion losses are larger than their entire health budgets
• In Bolivia, tax evasion is more than four times as large as that oil rich country’s health spending. In Russia, it is more than three times the size
• More than $1 in every $6 earned in the world is not subject to tax because those earning it have deliberately ensured that their income is hidden from the world’s tax authorities
• In Greece and Italy, where economic collapse currently looks possible, more than €1 in €4 is hidden in the shadow economy

Quotes:

John Christensen, Director of the Tax Justice Network:

“Tackling tax havens is a crucial part of ending the culture of tax evasion.  Tax evasion is crippling public finances across the world but governments aren’t doing nearly enough to end this cancer.”

“Tax havens are engaged in economic warfare against the tax regimes of sovereign countries, and these estimates reveal the human cost in terms of the impact on health services.”

Richard Murphy of Tax Research UK, who undertook the research for the Tax Justice Network:

“New data from the World Bank published last year on the size of countries’ shadow economies let us prepare this estimate of tax lost to criminal tax evasion annually. The findings add a new policy agenda to public debate on the world’s financial crisis. For example, Italy loses €183 billion to tax evasion a year. Its current debt of €1.9 trillion represents just over 10 years tax of tax evasion on this basis.  If only more had been done to tackle rampant tax evasion, Europe would not be facing a crisis today.”

“Tax havens can be beaten using three simple measures. First we demand that all tax havens put details of the ownership of all companies and trusts located there, and the accounts of those organisations, on public record. Second we demand that all multinational companies publish accounts that reveal their use of tax havens. Last, we believe that all tax havens should be required to exchange information each year on the income recorded within them belonging to the citizens of other countries with the places where those people really live.”

“These measures would shatter the secrecy of tax havens for good, and that means those committing tax crimes will no longer have places to hide the proceeds of their crimes. Nothing could make a bigger contribution than this to solving the world’s financial crisis right now.”

Please note:

• Tackle Tax Havens website: www.tackletaxhavens.com
• Campaign video: http://www.youtube.com/watch?v=4d5FZU64Bnw
• Twitter: @tackletaxhavens
• Facebook: www.facebook.com/tackletaxhavens
• Download full research findings and methodology: http://www.tackletaxhavens.com/Cost_of_Tax_Abuse_TJN_Research_23rd_Nov_2011.pdf
• To discuss the research findings please contact Richard Murphy of Tax Research UK who undertook the research on behalf of the Tax Justice Network richard.murphy@taxresearch.org.uk / +447775 521 797
• All other enquiries: please contact rich@taxjustice.net / +447968 082 921

The Tax Justice Network promotes transparency in international finance and opposes secrecy. TJN was initiated at in 2002, and is dedicated to high-level research, analysis and advocacy in the field of tax and regulation. Tax Justice Network Africa was launched in 2007 with the aim of bringing tax issues to the foreground of the broader development agenda. We work to map, analyse and explain the role of taxation and the harmful impacts of tax evasion, tax avoidance, tax competition and tax havens.

The Budget Advocacy Network (BAN) is a network of CSOs who believe in rights-based approaches to development, promoting pro-poor, inclusive, gender-sensitive and equitable generation and use of national resources through research, analysis, social mobilization and advocacy. BAN has conducted an analysis of policies and financial statements of the 2008-09 Budgets, completed a study on District Budget Oversight Committees, developed the ability to track the flow of resources in the health sector, and cultivated strategic relationship with oversight bodies.

The National Advocacy Coalition on Extractives (NACE) is a coalition of leading national and international non-governmental organisations . NACE envisions a Sierra Leone society where there is a maximum return and benefits from natural resources endowments (mining, forestry, marine). NACE advocates for the implementation of the extractive industry transparency initiative (EITI), empowering CSOs and building a critical mass of local activists to engage on government and mining companies policies and practices. As a national platform for policy dialogue on extractive issues, NACE has established a solid reputation on engaging with mining contracts reviews, influencing mining legislations and policies and publishes evidence-based research report to inform mining policies reviews for change.

The report itself draws on months of research conducted in June- July 2010 by Wilson Prichard and Samuel Jibao. The report was written by Wilson with enormous contributions from Samuel Jibao, Amadu Sidi Bah and Kadi Julia Jumu. We owe a debt of gratitude to all those who contributed their time and knowledge to this report. Finally special thanks are due to former Coordinator of BAN, Mr. Patrick Zombo, NACE coordinator, Cecilia Christiana Mattia for their valuable contributions and ideas that enriched the contents of the report. Our thanks also go to the Mr. Tijani Hamza, Ibis Country programme director and to Mr. Mark Curtis whose work on the mining sector provided significant data for the report. We would like to acknowledge the support provided by the Integrated Public Financial Management Reform Project Unit, the National Revenue Authority, the Ministry of Finance and the host of civil society organisations that participated actively during the validation exercise of the report. We also acknowledge with thanks that this report is produced with funding support from Christian Aid UK, Ibis, UK Department for International Development (DfID) and Tax Justice Network- Africa and Trust Africa.

mfairlady/Flickr

Cross-posted at the Tax Justice Network blog.

TJN is delighted that a long term investigation into how Eastern European criminals and politicians have been using secrecy jurisdictions to hide the proceeds from their crimes has been selected as one of the two overall winners of this year’s Daniel Pearl Award for cross-border investigative journalism. TJN has been involved in this investigation, along with our colleagues at Global Financial Integrity and Global Witness, and our Financial Secrecy Index, which placed the USA at the top of the ranking, and drew specific attention to how Delaware, Nevada and Wyoming provide offshore secrecy, is also cited in the report.

We have always argued that secrecy induces criminality and secrecy jurisdictions provide a supply side environment that encourages criminal activity. In social science terms, secrecy jurisdictions create a ‘criminogenic’ economy, in which criminal behaviour is significantly more profitable than productive activity. The markets adapt accordingly, which explains why so many major banks have been under investigation for supporting criminal clients. The journalists behind this project came to similar conclusions about how secrecy jurisdictions shape market behaviour:

“East European criminals and corrupt politicians have found in offshore havens a tool so perfect that it has permanently changed how business is done in the region. By using offshore laws that stress secrecy over everything else including crime prevention, they have been able to set up networks of offshore companies where they can hide their assets from police, launder their money and evade taxes all at the same time.”

Happy days for criminals, and also for the pinstripe mafia of bankers, accountants and lawyers who cash in magnificently on the fees charged for setting up the complex hybrid offshore structures. From our own experiences of investigating offshore, it is clear that these players are as culpable as the criminals they serve. Commenting on the top award going to the team behind the Organised Crime and Corruption Reporting Project (OCCRP), one of the judges noted how “Reporters from OCCRP went undercover, which allowed them to meet business agents, lawyers and others who advised them how to set up phony offshore accounts, cheat on taxes, even buy turnkey money laundering and tax evasion services.”

Taking a look here at the range of secrecy jurisdictions involved in this project shows just how widely organised crime spreads its activities across the globe, and also confirms our view that small islands are especially vulnerable to being abused by criminals wanting secrecy combined with lax regulation. OCCRP selected the Seychelles to demonstrate the ease with which offshore companies can be formed, but Jason Sharman, who is also cited several times in the report, has shown that lax know your client rules and weak disclosure requirements can also be found in major jurisdictions like the United Kingdom and the United States.

Unsurprisingly, the journalists involved in the OCCRP identify a range of solutions to these problems, and stress the importance of applying these solutions across the board, including to powerful players like the UK and USA. Here are their summary recommendations:

Needed are better laws addressing:

• Transparency of company ownership. Jurisdictions must have a way to find out who the really owns companies and a method to close loopholes that make shells operate, such as use of proxies or bearer shares.
• Regulation of agents who set up companies. The US and the UK have no rules on lawyers and others who incorporate companies.
• Imposition of restrictions on non-residents who want to set up companies in the US and the UK.
• International standards and cooperation. A mishmash of organizations that are involved in money laundering and economic transparency – from the Financial Action Task Force (FATF), the group of 20 major world economies known as the G20, and the wealthy countries’ club known as the OECD – need to get as tough on their own members as they are on traditional secrecy jurisdictions in the Caribbean.

All good stuff, and perfectly practicable if there were genuine political will on the part of G20, OECD, et al, to carry this agenda forward. Sadly, therein lies the problem: too many politicians tied – financially and otherwise – to the key actors in this process.

Anyway, to end on an upbeat, congratulations to the many journalists involved in the OCCRP for deservedly winning this prestigious award.

Image License: Some Rights Reserved by mfairlady

The FSI combines two measurements, one qualitative and one quantitative. The qualitative measure looks at a jurisdiction’s laws and regulations, international treaties, and so on, to assess how secretive it is.  The assessment is given in the form of a secrecy score: the higher the score, the more secretive the jurisdiction.  The second, quantitative, measurement attaches a weighting to take account of the jurisdiction’s size and overall importance to the global financial markets. In combining the two scores, we mathematically emphasise the secrecy score and de-emphasise the weighting, in order to give secrecy its due importance.

The Financial Secrecy Index website provides our main talking points and some analysis. However, it is backed by a second website, called Mapping Financial Secrecy, which contains a wealth of much more detailed research and data, along with a glossary

The 2011 FSI ranking cannot be directly compared to our inaugural FSI, published in 2009. Although the methodology is largely comparable to the last one, we have improved it in several respects and we include more jurisdictions than last time. One important change is that when combining the secrecy score with the weighting, we emphasised the secrecy score relative to the weighting even more than we did in 2009. Because of these changes, it makes little sense to say things like ‘x country has moved up/down five places since 2009.’ (See more details on this below.)

The FSI differs from rankings which focus on identifying corruption and governance problems within countries. In this sense, it is unique. Because the core business of secrecy jurisdictions is to facilitate criminal and other activities carried out elsewhere, in a world of global financial movements it makes no sense to focus only on what happens inside individual jurisdictions. So financial secrecy must be analysed according to how laws and regulations in one jurisdiction change the behaviour of others elsewhere.

The 2011 FSI ranks the jurisdictions most to blame for supplying financial secrecy, and provides pointers for global action.

Read a full description of how the FSI is calculated, in our full methodology here. Download the index here.

The case of BCCI, (referred to by many as “Bank of Crooks and Commerce International”), is possibly the biggest banking fraud in history. BCCI is a story of massive-scale money laundering, bribery, blackmail, and organised crime, operating through a secrecy network involving deceit, fraud, and the brokering of power and influence around the world.

We blogged an update recently, and you can see a report on the breaking open of the Sandstorm Report on the website of the Association for Accountancy and Business Affairs (AABA).

After a five-year legal battle the UK government has finally released most of the Sandstorm Report on 7 September 2011. The report was prepared by Price Waterhouse (BCCI auditors) for the Bank of England though it was never finalized. BCCI was the biggest banking fraud of the twentieth century. Some 1.4 million depositors lost $11bn. Unlike many other large corporate frauds and banking scandals the UK government did not appoint inspectors to prepare a report. No parliamentary committee has ever been given sight of the Sandstorm Report. UK legislators pass laws without knowledge of the facts or opportunity to interrogate wrongdoers.

Prem Sikka had first requested the information in March 2006 and after refusal by the UK Treasury and the Information Commissioner he pursued the matter through the courts. Throughout the case, he represented himself, incurred his own costs and did not have the benefit of any legal advisers. The government used taxpayers’ resources in a futile attempt to conceal identity of many people, including convicted criminals.

Ever since 1991, most of the Sandstorm Report has been publicly available in the US though it has been considered to be a state secret in the UK. This censored version was obtained by AABA and made publicly available in UK in 1999. However, critical information on names of wrongdoers and those implicated in the scandal was withheld, blanked out. The UK government “erected a wall of secrecy around the BCCI frauds.”

Prem Sikka has analysed and compared the previous censored version with the newly released information. On the AABA site you can access this in detail.

The use of offshore, secrecy jurisdictions, played a large part in the BCCI story. Elements of these connections were withheld. For instance, “The words ‘Grand Cayman’ were purged throughout the document”. Also, the name of a Turks and Caicos company was blanked out, as were certain connections in Bahrain.

Included in the concealed information were names of people with global political and business influence, and a number of financial and governmental institutions such as the Abu Dhabi Investment Authority, Bear Steans, Dubai Islamic Bank, ATB (a UK bank), Credit Suisse, Habib Bank, Government of Cameroon, National Bank of Georgia, National Commercial Bank of Saudi Arabia, Qatar Islamic Bank, Royal Bank of Scotland, Saudi Cairo Bank, Saudi National Commercial Bank (SNCB), Security Pacific and State Bank of India.

The BCCI case, and the massive cover up by the UK government and cronies, raises some issues of vital concern:

• The UK government did not withdraw ambassadors. The UK government did not seek extradition of the culprits, shut down foreign embassies, demand trade sanctions or regime change. It just covered up the names of wrongdoers and kept parliament and the people in the dark. How can anyone trust the Bank of England or the Treasury to tell the truth about the current banking crash?
• The release of the information has considerable relevance to the current banking crisis. The UK government can now be forced to publish reports. They can be forced to publish the names of the wrongdoers.
• The UK government secrecy meant that many financial institutions were unable to make appropriate assessments of risk. Under the UK (and many other countries) law, financial institutions are required to apply the “Know Your Customer” (or KYC) tests. Since the UK government shielded the names of many wrongdoers it did not enable the institutions to assess the risks. It would be recalled that BCCI indulged in money laundering. Many of the parties associated with are still active in the business world today.
• The Sandstorm Report prepared by BCCI auditors Price Waterhouse documents a catalogue of fraud which had been taking place over a long period of time. Yet auditors continued to give a clean bill of health to BCCI. All audit reports were unqualified.
• BCCI had all the paraphernalia associated with contemporary corporate governance: audit committees, non-executive directors, mission statements, internal auditors, external auditors, vision statements and corporate social responsibility statements. Yet no one spoke up. There was no independent investigation into the governance of BCCI. The investigation and lessons may have generated a debate about better banking regulation and governance, but that was not to be. We only speculate on how the current banking crisis might have been checked if the UK government was not so keen on cover-up.

As we also mentioned previously, for a description of the offshore nature of BCCI, see Treasure Islands, as well as various books included Peter Truell and Larry Gurwin’s book False Profits. A TJN senior adviser, Jack Blum, was a central player in breaking this case open in the first place.

Cross-posted with permission from the TJN Blog…

Pietro Naj-Oleari/European Parliament*

Jeffrey Sachs is back in the Financial Times with a fine article about the failed economic leadership of western governments, and tax havens feature prominently in his analysis.

“Tax havens”, he notes, “have proliferated even as the politicians have occasionally railed against them” we like the twist to the politician’s collective tails implied by the word ‘occasionally’. And he continues: “In the end the poor are doubly hit, first by global market forces, then by the ability of the rich to park money at low taxes in hideaways around the world.”

We have argued for many, many years, that tax havens are a major faultline in the globalisation project, and Sachs clearly shares our viewpoint. Not only has wealth cascaded upwards into the hands of a tiny, tiny minority – killing ‘trickle down’ theory stone dead – but tax competition has forced governments to concede to the power of big business:

The simple fact is that globalisation has not only hit the unskilled hard but has also proved a bonanza for the global super-rich. They have been able to invest in new and highly profitable projects in emerging economies. Meanwhile, as Warren Buffett argued this week, they have been able to convince their home governments to cut tax rates on profits and high incomes in the name of global tax competition.

Sachs makes a strong case for Europe and America to radically overhaul their fiscal policies, including tax hikes for rich people and on untaxed corporate profits shielded by loopholes and offshore structures in tax havens.

Read the full article here.

Editorial Note: Jeffrey Sachs will be delivering a keynote address at the 2011 annual Task Force on Financial Integrity and Economic Development conference this October in Paris.  For more information on the conference, click here. 

* Image license: Some rights reserved by European Parliament

Flavio Rucci/Flickr*

In a piece titled Dirty Money: Why does the international banking system make it so easy for corruption to flourish?, the People & Power series on Al Jazeera reports on kleptocrats, grand scale corruption, and the ease of channelling dirty money through the secrecy mechanisms of the global financial system,

Again, let’s drive the point home here, we’re talking secrecy – we are not disputing rights to due privacy – we are talking the kind of secrecy that allows criminals and tax cheats to profit with impunity, and to lead privileged lifestyles of excess at the expense of others.

The report observes that western governments are scrambling to find the hidden wealth of out-of-favour despots and freeze it, and then asks the question we have been asking: how, “as if by magic” did the assets get there in the first place?

“The answer involves hidden accounts, tax havens and shell companies, and a banking and regulatory system unable to see through the corruption and halt the flow of dirty money.”

Well, “unable to see through” does not describe the picture accurately, and the report itself goes on to show how banks are complicit in corruption and crime.

Martin Woods is interviewed. Martin worked as a senior anti-money laundering compliance officer for U.S. bank Wachovia (since taken over by Wells Fargo), in the City of London. When Martin identified suspicious transactions, and raised the alarm in both in the U.S. and in London, the reaction from his superiors at the bank was not what he expected:

“It was resentment because on the one hand, I was identifying issues that perhaps they should have identified and wanted to ignore – and on the other hand I’ve shattered a bubble … the money making venture that they are involved in has been shown up to be what it was – a dangerous and criminal enterprise.”

In fact, Martin had exposed a major Mexican drug money laundering operation that ran into $billions. (See here for more on Martin Woods’ story, and read Treasure Islands on the U.S. and the City of London as secrecy jurisdictions)

Jack Blum, a senior adviser to TJN, is interviewed and observes:

“There are always going to be a number of institutions, some of them quite large, that simply don’t play play by the rules and they have to be cracked down on. I think the critical thing is that when we catch somebody in the act the next time around, the punishment really should fit the crime, and perhaps they wind up losing a banking license or are very severely sanctioned, and that will send a clear message that this behaviour is no longer acceptable.”

The reporter comments that, alongside quite legitimate activities, a tax haven provides a cloak for illegal ones. Richard Murphy demonstrates just how quick and easy it is to open a shell company in a tax haven, and states how:

“It’s hiding what’s going on … that’s what they sell. It’s the secrecy they sell.”

Anthea Lawson of Global Witness outlines the impact:

“The best figures that are out there at the moment show that for every $1 in aid that goes into developing countries, $10 come out in illicit financial flows and end up back in banks in tax havens and in major financial centers. That consists of a mixture of corruption, so that’s state assets being looted, as well as tax evasion by wealthy individuals, and abusive tax avoidance by multinational companies seeking to stash their profits in offshore havens.

And points out:

“It takes two to tango – there is a real complicity in the perpetuation of corruption and dictatorship. It’s time that the financial sector took responsibility for its role in this.”

We agree. And it’s a globally intertwined power elite that runs the secrecy system and pulls the strings behind the banks’ activities and the secrecy jurisdictions. That’s why we need to keep shining the light in those dark corners.

You can watch the Al Jazeera report here.

Originally published on the Tax Justice Network blog.

*Image License: Some rights reserved by volvidejapon