It could be said that the Brothers Grimm wrote both fairy tales and nightmares at one and the same time. In such tales, Hansel and Gretel — innocent children abandoned in the woods at the behest of their stepmother — stumble on a delicious, edible cottage inhabited by a cannibalistic witch. Though they eventually outwit the witch, finding their way home, the moral of the story, as it relates to “toddler” or developing economies is clear: gingerbread cottages and idyllic countries-cum-tax havens such as Switzerland, serve as bases where the young are cannibalized, deposited by “fathers” of the nation and “parent” corporations.
According to Global Financial Integrity, $900-billion is “secreted” each year from underdeveloped economies, with an estimated $11,5-trillion currently stashed in havens. More than one quarter of these hubs belong to the UK, while Switzerland “washes” one-third of global capital flight. “The idea that Switzerland has a clean economy is a joke; it is a dirt-driven economy,” stated Richard Murphy, director of Tax Research LLP. The Swiss Bankers Association claims that four-fifths of the nation supports banking secrecy, revealing a society deeply embedded in a culture of impunity and exploitation, where the licit acts as a shield protecting the illicit in a terribly respectable manner.
Transparency International’s corruption perception index limits corruption to the “abuse of entrusted power” by Third World governments, rating Switzerland and the UK as the least corrupt nations in the world. It is a theme UK Prime Minister Gordon Brown has promised to address at next month’s G20 summit and one that Barack Obama has already begun to tackle. (Alas, Obama’s proposed framework is full of holes: the Geithner-Summers plan, for example, will bail out the corporates by overpricing toxic assets, secretly financed by raiding taxpayers via the Federal Reserve, while Brown appears to be overly comfortable playing the Swiss card, and conveniently blurring the lines between offshore financial centres such as London, New York, Sandton, and tax havens.)
The timing could not be better: the US Government Accountability Office recently reported that 83 of the top 100 corporations maintained subsidiary units in tax havens. Many corporations, including Citibank and Morgan Stanley qualified for the billions in bail-out funds subsidised by taxpayers, a pattern reflecting the IMF-imposed shift from corporate (fictive citizen) to consumer (flesh and blood citizen) taxation.
This policy is especially lethal for developing countries where the poor are now caught in tax brackets, courtesy of the IMF and World Bank’s structural adjustment programmes (SAP), instituting policies ranging from “tax holidays” to the privatisation of state services, carving out huge slices of natural capital at corporate auctions. SAPs were justified on the basis of outstanding debt, unilaterally contracted by corrupt and despotic regimes; a considerable portion siphoned in virtual suitcases almost on arrival. Africa has collectively lost more than $600-billion in capital flight, excluding other mechanisms of flight including ecological debt (globally estimated at a potential $1,8-trillion per annum), the cost of liberalised trade (just under $300-billion) … and the list goes on …
Even the World Bank knows it. Professor Patrick Bond, author of Talk Left, Walk Right quotes the bank’s data on resource depletion saying: “In the case of Gabon, income goes from $3 370/person GNI down to negative $2 241 once you correct for the implications of stripping out natural assets. Consider the non-renewable resources extracted from South Africa, which is Africa’s most industrialised country, and as you see, we go down from $2 837 per person to minus $2 per person, in a given year, 2000. It is actually much worse now with the higher prices. I tell my compatriots that we should have just stayed in bed that year, not gotten up go to work — because by working on extracting SA natural resources, we actually lost money at the end of the year.”
(This is a rather relevant issue in light of the estimated 360 million tonnes of titanium deposits, one of the largest in the world, sitting under a 22km stretch of Wild Coast soil. You can read more about that here.)
Despite this, the development model — justified on the basis of outstanding debt — continues to impose structural injustice via the “debt cancellation” trap of the Heavily Indebted Poor Countries initiative, where cancellation is more or less postponed until the satisfaction of completion points, instituting secrets memorandums of agreement, subsidies to foreign corporations and massive tax concessions (such as income tax, usage fees, property tax) — the primary source of revenue for “export-oriented” developing countries.
“Corporations prefer weak governments that are anxious to secure investments, and despotic governments,” said John Christensen, founder of the Tax Justice Network and former economic advisor to Jersey, one of the UK’s leading “crown dependency” havens. “Although multinationals influence the shape of global trade and investment by structuring trade in corrupt and secretive ways, these issues are generally marginalised during trade negotiations.”
“Hydrocarbon contracts in particular are very secretive, especially with regards to taxation, and it is difficult to get evidence of payment, with many political parties and politicians receiving payment on the side,” he said. When it comes to tax receipts and tax deals, the powers that be are only too happy to become Sicilian and go the path of Omerta. It’s simply not in their interest to repudiate odious debt, the midnight piggy bank of the Big Shiny Men (with fat wallets, fatter armies and the fattest of heads).
In 2006, developing regions owed $3,7-trillion in “odious” debt, servicing more than $570-billion per annum. An analysis by economist James Henry revealed that more than $1-trillion worth of loans “disappeared into corruption-ridden projects or was simply stolen outright”.
Tax havens, of course, are all in favour of it. According to Swiss banker Jacques de Saussure, “tax competition is the only agent of productivity for governments — it is the only competition they have”.
Yet it is impossible to ascertain the origin and destination of capital flight as the international financial community successfully lobbied to have automatic exchange of tax information scrapped from the IMF’s Article of Agreements, immunizing corporate and Third World corruption. Though Africa has been labelled as the world’s most corrupt region, generally 3% to 5% of total outflow emanates from the political elite, with 30% composed of criminal flight. Multinational internal mispricing makes up 60% of capital outflow, with corporations declaring profits in tax havens, as opposed to the country of performance.
Corporations and the capital exporting governments of the Organisation for Economic Co-operation and Development — also known as the “rich man’s club” — have trumpeted self-serving “solutions” by backing frameworks such as the Extractive Industries Transparency Initiative (EITI), but EITI is a gimmick easily circumvented by reducing taxable revenues to cash payments. Gabon, mentioned above, passed EITI with semi-flying colours, even as the country was mired in the Elf affair. Nicholas Shaxson, author of Poisoned Wells, wrote of the subject: “Magistrates discovered the money from Elf’s African operations financed French political parties and officials, and supplied bribes to support French commercial, military and diplomatic goals around the world. In exchange, French troops protected compliant African dictators.”
The solution/s to this conundrum is distinctly American (and Murphian — the night Murphy’s son finally fell asleep, the extra energy and time gave way to the eureka moment when he identified it). According to Murphy, the profits of the whole corporation must be taken into account, and taxed on the basis of “the formula of apportionment”.
“It already works in the US where states all have different corporate taxes,” he said.
The definition of corruption must also broaden to include tax havens as well as make mandatory the automatic exchange of tax information. It’s a move that will certainly ruffle a few feathers, but in doing so, the lifeline sustaining tyrannical regimes from Burma to Angola will be cut, effectively weeding out the real roots of terror.
March 25 (Tax Research UK)Tax Justice Network’s Richard Murphy, blogging from the House of Commons, outlines a seven point plan toward reforming the global financial architecture in response to a challenge by Michael Meacher MP in a classic ‘what would you do if you were Gordon Brown for a day…(or week).
‘I’m blogging from the House of Commons where I am speaking at a meeting organised by PCS and War on Want on tax justice.
I’ve just been challenged by Michael Meacher MP to outline a plan of what I would do if I was Gordon Brown between now and the G20, next Wednesday. My response was this:
1. The UK should admit that the Crown Dependencies and Overseas Territories are ours – as the current crisis in The Turks & Caicos have proven in the last week, and that we can therefore reform them;
2. Publish the terms of reference for the Foot Commission into UK tax havens so we know that reform is going to happen;
3. Announce that the forthcoming banking code will compulsorily ban banks from undertaking structured tax avoidance;
4. Announce that this ban will be extended to all UK companies through a general anti-avoidance provision being enacted in the UK;
5. Support the call for country by country reporting which will make all companies go on record about their use of tax havens;
6. Announce an end to HMRC redundancies so the resources are available to deal with automatic information exchange which we so badly need;
7. Announce unconditional support for the amended EU Savings Tax Directive which would shatter the use of offshore structures in many places – and that we will impose this on our own tax havens, as we can.
All of that is possible.
None require international support.
All would offer clear indication of leadership that would set an example to all at the G20, and all those watching it.
Cracking down on tax havens will feature prominently at the upcoming G20 summit. Your fixation on multinationals however, is misguided since multinationals also provide decent jobs, tax revenue and local and international business opportunities for millions of South Africans. Bi-lateral tax treaties is normally the vehicle through which countries mitigate double taxation and negotiate corporate tax issues. SA already negotiated numerous treaties already. Why aren’t they used to negotiate tax revenue?
Breaking the shadow banking system that shelters tax evaders, is high on the US and EU priority. Recently, Swiss bankers have been advised not to fly to the US or even neighboring EU countries. How is SA contributing? Can a Swiss banker fly freely to SA without the risk of detention? Most certainly, since many very wealthy, corrupt SA politicians have numerous Swiss bank accounts. Can you guess they are?
Addressing tax revenues is merely picking at the symptoms of a deeper underlying problem that you should be focusing on – the lack of transparency and corruption in the SA government, which directly impacts SA’s long term financial stability. For example, why won’t political parties reveal their sources of funding? What steps are being taken to make government more transparent? The effects of this non-transparency is highlighted by the surprising strange bedfellows, China and South Africa. This corrupting allegiance does more to alienate us internationally, compromise our stability and plunder our valuable natural resources than all the multi-nationals combined!
This is brilliant stuff. I am so pleased to have discovered your writing, and intend read all of it.
Pirates of the Caribbean (The Australian News)
http://www.theaustralian.news.com.au/story/0,25197,25247314-26040,00.html
It was Brown, during a decade as chancellor, who boasted of his “light touch” regulation of London’s financial district, stubbornly staving off European calls for greater regulation so that the freewheeling city could overtake New York as the most important financial centre. And it was under Brown, today’s scourge of tax havens, that Britain consolidated its position as the greatest operator of tax havens.
What Brown never mentions is that most of the financial centres listed by the OECD, from the Channel Islands to the Caymans or the Cook Islands, are or were British territories. Half of them still have the Queen as their head of state. Britain, Canada and Australia account for 90 per cent of the combined population of the 16 independent nations ruled by the Queen. Most of the other 13 are defined by the OECD as tax havens.’
Hi Vince, thanks for reading. I appreciate it.
Hi Dave – shadow economies are the primary problem, which begins not with ‘tax havens’ but with the ‘renters’ – offshore financial centers – the New Yorks, Londons etc The reason, for e.g. that we are having a global recession is primarily because of the debased financial architecture – derivatives operate outside of the normal framework, are not recorded and therefore cannot be tracked. The industry of money ‘making money’ delinked from production (and on another note, disassociated from natural ‘capital’ or nature-based assets is the primary crisis, unsustainable in every way)
I focused on multinationals are they constitute some 60% of global trade but this is entirely dependent on the legislation that allows for them to create shell companies in places such as Wyoming…
Manuel has created an anti-tax avoidance law that sets us on the right course, though Sandton is still a major haven for the venal elite.
Dave, as per your very valid point concerning political patrons, I agree that this should be a transparent system that is publicly accessible via an online database. But it will never be so, specifically not in the context of developing regions for the reasons that the article stated – the economic ‘development model’ is designed to auction off at a pittance the natural resources of developing regions, complete with tax holidays. Politicians always receive their cut. Sani Abacha for e.g. had a standing order to transfer some $15 million per day to his Swiss bank account. Obiang for EG had Riggs handle his…If the processes were transparent, a natural ‘sanction’ would be set in motion.
derivatives operate outside of the normal framework”
Actually Khadija, I disagree. These exotic financial instruments, derivatives being one category, all operate WITHIN the law. The problem was a lack of regulation, due to many reasons ranging from negligence to outright criminal activity on the part of many governments around the world. New financial regulation will prevent a repeat of this economic calamity.
Back to taxation of multinationals. Multinationals around the world operate to maximize profits. Very smart, highly paid, extremely motivated corporate accountants, lawyers etc. run tax departments as profit centers. The complexity of financial transactions cannot be avoided. Unlike laws enacted to catch individual tax cheats, multinationals operate on an entirely different level. Bi-lateral tax treaties allow individual governments to NEGOTIATE which country get what portion of tax revenues to prevent double taxation and some degree of fairness. Its up to the SA government to negotiate these treaties on an ongoing basis since the economic climate changes so rapidly.
Back to transparency, saying “it will never be so” is defeatist; not becoming of your profile
It pains me to see Africa being plundered with the help of corrupt politicians. Why else would we act as a lapdog to the Chinese? This root cause of many of Africa’s ills must be addressed to save SA from the same fate. Astute reporters like you Khadija, can help ordinary South Africans understand the need to DEMAND transparency in government to curb this corruption!
Khadija,
Nice article and seems to me more even handed than previous rants that blamed everyone except the venal political elite. I say bust everyone; do what can be done to squeeze tax havens but really, the most action can be done at home. Bust the crooks. Is this happening in SA? No chance.
Now write us an analytical (not general) article with facts and figures about one, maybe two individuals. Mzi Khumalo, Billy Rautenbach?
Thought provoking ideas! Well written.
Interesting article. Want to throw in a few alternative views here just before we all crucify the Swiss and write them off as evil capitalists.
The US have, after ignoring the Swiss for decades, suddenly teamed up with the EU in persuit of so called tax evaders. It seems like a good thing on the surface but why now (fin crisis?) and why not all tax havens? Why not start with Lichtenstein or the UK havens etc? Politics and money is behind this current surge, not ethics.
There is massive wealth and tax evasion going in trust structures. The trust is prolific in both the US and EU in a big way. Why not go after these first? Why not clean up your own back yard and then start on your neighbours? Why havens before trusts?
In clamping down on tax havens, you catch the evaders. You also close the only anonymous haven for innocent people who are trapped in countries with hostile regimes. During the second world war, much was made about the Swiss banks storing and keeping of Jewish gold. Not one word was mentioned about the countless thousands of people who dashed for the Swiss border and managed to escape the Nazis and survive the war.
Swiss neutrality and refusal to fight wars is exemplary. Imagine all countries adopted the same approach. The US could learn from them as could most of us in SA.
Something to think about just before we trash this age old democracy…
Hi Dave – thanks for the comment. The system is geared to facilitate corruption.
The OECD’s timid-ish framework (facilitating the shadow economy) requests only exchange of information on request (governments can override secrecy only if they have information in the first place), which is basically useless and does not apply to non-OECD countries. They have now targeted a list of small postcard island nations (the satellite tax haven office), marginalising the primary role of the tax haven/offshore hub/booking center – the londons, new yorks, sandtons. They have let corrupt economies off the hook, absolving them of their role, while targeting only the ‘symptom’ …
That blurry space merging the licit and illicit, is technically legal – as you mentioned, (just as corporate tax avoidance is technically legal) but operates outside the law, in ways that the law (and lawmakers) did not anticipate for e.g., the law does not require for derivatives to recorded…as such, they cannot be tracked, nobody knows who is accountable, or whether it is tied to real assets, where and when they are sold and resold tenfold, effectively delinking it from the (database of the) information economy. These spaces are legalised vacuums, providing technical loopholes.
The negotiations you mentioned are superficial, very little negotiating actually happens given the structure of ‘development models’ imposed on developing countries – a model happily endorsed by the venal elite. Transparency could kill corruption, but the powers that be will not have it.
Sorry, got cut there –
China itself does perceive Africa solely through the prism of resources, however, the Chinese influence is not as large as it seems. China is still a net recipient of FDI from corporations such as SAB Breweries, and though Asian investment has increased tenfold, India and Malaysia also dominate the market, but their presence is rarely reported as China is the ‘new’ enemy.
I don’t think political transparency regarding corporate patrons will ever happen, although you are correct in saying that this is a defeatist mentality (which I should focus on changing. The bulk of global trade (and mispricing via secret deal and internal trade) occurs within a culture of secrecy courtesy of the global economic architecture. That could change if country-by-country reporting was mandatory, but thus far, it is voluntary, a ‘soft’ law. Multilateral exchange of information would also go a long, long way.
Hi Grant – very valid points and thanks for reading. I don’t believe the Swiss were neutral. They effectively aided and facilitated Hitler by financing the war – a war waged by the unjust which may have ended years prior to, and weakened the regime. For this same reason, I believe that the banks that financed the apartheid regime, ranging from Barclays to Citibank – all the way up to 1989/1990, are not neutral but active participants who knowingly collaborate…These same banks financed a number of military regimes e.g. Burma via project investment, loans etc
What are you thoughts on the matter?
Khadija Sharife
I have just discovered your writing, and am truly inspired by it. We have a common interest in challenging corruption, but also in challenging the common narrow interpretation of it. I am preparing a workshop proposal for the 14th International Anti-Corruption Conference in 2010 along that line. Feel free to take a look at it, at http://corruptionresearch.net. I am looking for discussion and collaboration. Thank you, and keep up the incredible work. Gary in Canada.
I am reading your brilliant blog after having discovered your article on “Africa’s Missing Billions” on the website of http://www.financialtaskforce.org
I am interested in translating it into French and publishing. Foreign Policy apparently holds the copyright and is not cooperating much for the moment due to the small circulation (1500 ex) of our magazine, which is called Changer International and serves as communication means for the international NGO called Initiatives of Change, which has representative status with the UN and the Council of Europe and specialises in behavioural change and trustbuiding. Can you do something for us? We’d very much like to support the cause of GFI in our next issue.