Tue, Apr 2, 2019

Dealing with the offshore economy

Report by Alan Riley

Related Experts: Alan Riley,

Corruption European Union Financial Regulation Rule of Law Russia United States and Canada

Given that offshore tax havens are largely located in small, independent states or self-governing territories, it could be assumed that they have little connection to OECD states and major financial centers such as London and New York. This is not the case. The so-called tax havens are in fact part of a much larger network of financial and corporate services that depends on lawyers, accountants, and bankers located in major Western cities. Only one part of the havens’ business actually involves providing lower tax rates to individual foreign account holders.

These techniques originally developed to assist American executives and Belgian dentists, and later multinational corporations, to limit their exposure— sometimes lawfully, sometimes unlawfully—to their respective tax authorities. Today, they’re increasingly deployed to flows of tainted capital from developing countries, helping those funds transit from their home jurisdictions and ultimately to the West.

There are more capital flows into the offshore world from OECD states than from developing countries. The argument of this paper, however, is that while OECD origin capital flows erode the tax base and some of the flows amount to illegal tax evasion, the overall effect of the money coming from developing countries, especially the tainted flows, is more damaging from both an economic and a security perspective.

In other words, the West, with its rule of law and creation of the Western-governed offshore economy, has given corrupt elites in developing countries the tools and capacity to avoid ever establishing the rule of law in their own countries. They are the beneficiaries of the West’s firmly-established rule of law and can leverage that advantage against their own people to ensure that they never benefit from the rule of law themselves. This is the rule of law paradox.