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Africa: Where Does the Money Go?

AfricaFocus Bulletin
May 26, 2011 (110526)
(Reposted from sources cited below)

Editor's Note

"Current total deposits by non-residents in offshore and secrecy jurisdictions are just under US$10 trillion ... The United States, the United Kingdom, and the Cayman Islands top the list of jurisdictions, with the United States out in front with a total of US $2 trillion. ... such deposits have been growing at a compound rate of 9 percent annually over the last 13 years." - Global Financial Integrity

By definition, illicit financial flows are difficult to track. Ironically, however, methods to estimate illicit financial outflows from developing countries are more developed than those to estimate where the money goes. "Secrecy jurisdictions" where the money can be concealed include not only offshore banking centers in small countries, but also the banks of the major developing countries.

Although accurate analysis requires more transparency from these "points of absorption" of illicit financial flows, particularly to obtain breakdowns by both origin and destination of these flows, Global Financial Integrity has been able to identify the principal location of these funds.

Two reports appearing last year, "The Absorption of Illicit Financial Flows from Developing Countries: 2002-2006" by Dev Kar, Devon Cartwright-Smith and Ann Hollingshead, May 2010 (http://tinyurl.com/3qcy4og) and "Privately Held, Non-Resident Deposits in Secrecy Jurisdictions" by Ann Hollingshead, March 2010 (http://tinyurl.com/42he9qe), both provide estimates of the size and location of these funds and specific the transparency reforms needed for international financial institutions to provide more finely grained data.

This AfricaFocus Bulletin contains excerpts from the report on deposits in secrecy jurisdictions, including a list of countries serving as secrecy jurisdictions, and the list of the top ten in assets of non-residents held. In addition to the United States, the Cayman Islands, and the United Kingdom, the ten include Luxembourg, Germany, Jersey, the Netherlands, Ireland, Switzerland, and Hong Kong.

Another AfricaFocus Bulletin sent out today by e-mail, and available on the web at
http://www.africafocus.org/docs11/iff1105a.php, contains excerpts from the report by Global Financial Integrity for the UNDP on illicit financial flows from the 48 countries identified by the United Nations as "Least Developed Countries."

For a previous report on illicit financial flows from Africa, not limited to LDC's, see "Profiling Cash Drains," at http://www.africafocus.org/docs10/fin1004.php

For previous AfricaFocus Bulletins on economic issues, visit http://www.africafocus.org/econexp.php

++++++++++++++++++++++end editor's note+++++++++++++++++

Privately Held, Non-Resident Deposits in Secrecy Jurisdictions

Ann Hollingshead - March 2010

Global Financial Integrity

http://www.gfip.org

[Excerpts for full report go to http://www.gfip.org / direct URL: http://tinyurl.com/42he9qe]

In continuation of Global Financial Integrity's program focusing on cross-border illicit financial flows and their impact on the world economy, we are pleased to present our report, "Privately Held, Non-Resident Deposits in Secrecy Jurisdictions."

We find that such deposits are currently approaching US$10 trillion, with the United States, the United Kingdom, and the Cayman Islands each holding more than US$1.5 trillion. Our data sources include the Bank for International Settlements, the International Monetary Fund, the private company Datamonitor, and the central banks of each secrecy jurisdiction. Furthermore, we find that such deposits have been growing at a compound rate of 9 percent annually over the last 13 years, far faster than the growth in world GDP at 3.9 percent per year.

Illicit money is money that is illegally earned, transferred, or utilized. If it breaks laws in its origin, movement, or use it merits the label. Obviously, not all money deposited in offshore secrecy jurisdictions is illicit in origin, but a considerable portion of it does stem from commercial tax evasion, criminal activities, and bribery and theft by government officials. It is for the purpose of concealing its origin that much of it is directed into secrecy jurisdictions. We do not attempt to estimate the percentage that may be entirely legitimate in origin, though we regard this percentage as very much the smaller part of total deposits in secrecy jurisdictions.

The Bank for International Settlements reports data on privately held deposits in banks by citizens outside their countries of origin. This does not include deposits in custodial accounts, for example in most private banks. Thus, the figures we are analyzing here are conservative, substantially understating such cross-border deposits. While the Bank for International Settlements collects data on each country where such crossborder deposits are held, it releases this data only aggregated for all deposits emanating from each country. Thus, we can determine the total of privately held, non-resident deposits from Nigeria, for example, but we cannot determine where such deposits are held.

The combination of rapid growth in offshore deposits and growing opacity in the global financial system hampers tax collection efforts and worsens budget deficits for nearly every country. The beginning point in addressing this key global issue is the release of data currently collected but not made available, enabling the origin and direction of privately held deposits to be measured and monitored. Global Financial Integrity thanks Ann Hollingshead for her outstanding work in compiling this report.

Raymond W. Baker

Director, Global Financial Integrity

March 2010


Executive Summary:

Privately Held, Non-Resident Deposits in Secrecy Jurisdictions

Private, non-resident deposits are highly correlated with tax evading offshore deposits. As part of our work measuring illicit financial flows — of which tax evading monies comprise a significant component — Global Financial Integrity has developed a method to measure these private deposits into offshore financial centers by year and on a center-by-center basis.

1. Findings:

* Current total deposits by non-residents in offshore and secrecy jurisdictions are just under US$10 trillion;

* The United States, the United Kingdom, and the Cayman Islands top the list of jurisdictions, with the United States out in front with a total of US $2 trillion;

* Contrary to expectations of perceived favorability for deposits, Asia only accounts for approximately 6 percent of worldwide offshore deposits, although Hong Kong is the tenth largest secrecy jurisdiction by deposits in this report;

* Case studies of selected jurisdictions show measurable fluctuations in financial deposits correlated to events in which financial secrecy or overall market solvency were threatened. This study looks specifically at Iceland and Switzerland which both experienced significant events in the range of years examined for this study;

* The rate of growth of offshore deposit holdings in secrecy jurisdictions has expanded at an average of 9 percent per annum; outpacing the rise of world wealth in the last decade. This is likely a result of the increases in illicit financial flows from developing countries and tax evasion by residents of developed countries.

2. Methodology:

Using multiple data sources, including the Bank for International Settlements (BIS) and the International Monetary Fund (IMF), which provide statistics on bank deposits worldwide, this report designs and employs a proxy method to estimate country-specific private, non-resident deposits, by both year and quarterly. This paper then analyzes the data on worldwide, regional, and individual levels.

3. Terminology:

Tax Haven: The most widely recognized definition of a tax haven was developed by the Organization for Economic Cooperation and Development (OECD) in 1998 which considers a jurisdiction to be a tax haven if it satisfies the following conditions: 1) no or nominal tax on income; 2) lack of effective exchange of tax and income information; 3) lack of financial transparency; and 4) no substantial business activities.

Offshore Financial Center (OFC): The terms "offshore financial center" and "tax haven" are significantly related, as all tax havens (with the exception of Liberia) are also offshore financial centers, although not all offshore financial centers are tax havens. According to the official definition maintained by the IMF, OFCs include jurisdictions that 1) have relatively large numbers of financial institutions in business with nonresidents; 2) have financial systems with external assets and liabilities out of proportion to domestic economies 3) have low or zero taxation, moderate or light financial regulation, and banking secrecy and anonymity.

Secrecy Jurisdiction: This report uses the term "secrecy jurisdiction," as defined by the Tax Justice Network (TJN): Places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. To facilitate its use, secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.

Private, Non-Resident Deposits: Deposits belonging to either private individuals who reside, or corporations which are organized, outside the jurisdiction.

4. Recommendations:

It is the recommendation of this report that greater transparency be introduced into the offshore financial market to curtail tax evasion and illicit financial flows.

As the Bank for International Settlements already collects detailed data on offshore deposits from member countries we recommend that the BIS provide breakdowns of private nonresident deposits by country of origin. Secondly, we recommend that the BIS provide a disaggregation of these deposits into privately and publicly held funds.

Introduction

Over the last two years, offshore banking has come under increased scrutiny worldwide by the media, lawmakers, and the public. During this period, the Swiss banking giant, UBS, was involved in highly visible criminal and civil cases with the United States for enabling U.S. citizens to evade taxes on about US$20 billion in offshore accounts. In May 2008, the U.S. Government Accountability Office (GAO) found that of the 100 largest U.S. corporations, 83 had subsidiaries in tax havens. The report also estimated that in 2004, U.S. multinationals paid an effective tax rate of only 2.3 percent on US$700 billion in active earnings. Less than a year later, in April 2009, the Group of 20 (G20), in conjunction with the Organization for Economic Cooperation and Development (OECD), announced a "naming and shaming" campaign, which placed countries in categories based on each countryâ€TMs compliance with international tax laws and then publicized a blacklist of tax havens (OECD). Despite intense public pressure for more financial transparency, combined with vocal criticisms from global leaders, and unrelenting focus from international media, few country-specific estimates of private, foreign deposits in offshore financial centers exist. This is surprising given that an estimate of these deposits would include the bulk of illicit offshore funds—including those deposits that are tax evading.1

Given the lack of comprehensive data on offshore holdings, this report attempts to quantify deposits held offshore by private entities on a country-by-country basis. The report then examines the changes in these deposits in their historic and economic context. As there are no sources which provide comprehensive data on private, non-resident deposits, our analysis uses a variety of proxy measures to estimate these figures by jurisdiction. These results are analyzed on the global, regional, and individual levels.

The analysis is divided into three sections. First, we estimate country-specific private, non-resident deposits by year using a comprehensive measure of deposits that is based on one primary source and three supplementary sources. Second, we estimate private, non-resident deposits by quarter with a dataset limited to one source. We also track the growth of the offshore market with a 23-year time series, examine the largest receivers of foreign private deposits, and analyze the regional distribution of these deposits. Finally, we present two case studies, Iceland and Switzerland, in the context of the expansion of the offshore market, the 2008 financial crisis, and several significant economic events unique to these countries.

This paper finds that private, non-resident deposits in secrecy jurisdictions have been growing markedly since meaningful data collection efforts began in the 1990s, with totals currently standing just under US$10 trillion. Over that period, these deposits rose at a compound annual rate of 11.4 percent in nominal terms and 9 percent in real terms (adjusted for inflation using the U.S. Consumer Price Index). Even at the adjusted rate, this expansion has significantly outstripped world growth of wealth, which over this period grew at a compound annual rate of 5.3 percent in real terms. This finding may be further evidence of growing illicit financial flows among developing countries and tax evasion among developed countries. It may also imply that the offshore market is becoming an increasingly popular destination of the assets of wealthy individuals worldwide. The three jurisdictions holding the largest amount of non-resident deposits are: the United States, the United Kingdom, and the Cayman Islands, each of which holds over US$1.5 trillion in private, foreign deposits. The United States is the largest holder, with over US$2 trillion.

The complete list of secrecy jurisdictions, as referred to in this paper, is presented in Table 1. We derived this list from the 2007 Tax Justice Network paper titled Identifying Tax Havens and Offshore Finance Centers.


Table 1

Andorra
Anguilla
Antigua and Barbuda
Aruba
Australia
The Bahamas
Bahrain
Barbados
Belgium
Belize
Bermuda
British Virgin Islands
Cayman Islands
Cook Islands
Costa Rica
Cyprus
Dominica
Germany
Gibraltar
Grenada
Guernsey
Hong Kong
Hungary
Iceland
Ireland
Isle of Man
Israel
Italy
Japan

Jersey
Lebanon
Liberia
Liechtenstein
Luxembourg
Macao
Malaysia
Maldives
Malta
Marshall Islands
Mauritius
Monaco
Montserrat
Nauru
Netherlands
Netherlands Antilles
Niue
Northern Mariana Islands
Palau
Panama
Portugal
Russia
Samoa
San Marino
Sao Tome e Principe
Seychelles
Saint Lucia
Saint Kitts and Nevis
Saint Vincent and the Grenadines
Singapore
Somalia
South Africa
Spain
Switzerland
Taiwan
Tonga
Turks and Caicos Islands
United Arab Emirates
United Kingdom
United States
United States Virgin Islands
Uruguay
Vanuatu

*Australia and Japan are not Secrecy Jurisdictions according to TJN, however since they are both used in the forthcoming GFI Report: The Absorption of Illicit Financial Outflows from Developing Countries, we include estimates of their non-resident deposits in this study.

Source: Tax Justice Network, 2007, Identifying Tax Havens and Offshore Finance Centers


For the purposes of this report, we use the entire list of secrecy jurisdictions as defined by TJN. This list is not exhaustive. Other centers, such as Mainland China and Japan, have opaque banking industries and fail to report data on their offshore businesses, but are not included in the list above. As a result, we include an additional center, Japan, because this country is defined as an international financial center by the IMF and a forthcoming Global Financial Integrity (GFI) report identifies Japan as a point of absorption of illicit funds.

Private, Non-Resident Deposits

In this report, we estimate deposits in secrecy jurisdictions belonging to private individuals who reside or corporations which are organized outside that jurisdiction. We label these deposits private, non-resident deposits. "Private" indicates that these figures include only deposits of individuals and corporations and do not include those deposits of banks or governments. Ideally, this information would also include deposits of mutual funds and trusts, but, as explained in the section on data sources, it is not possible to include these depositors. "Non-resident" means the country of origin of the individual or entity holding the deposit is not a resident of the jurisdiction in which the deposit is held.

Data Sources: Banking Statistics

The primary source for this report is the BIS, an organization which fosters "international monetary and financial cooperation and serves as a bank for central banks" (BIS). The BIS provides banking statistics, including the deposit figures of member countries into most countries worldwide, which enables a breakdown of deposits into both offshore financial centers and developed countries. These data are found in its "locational banking statistics."

The BIS states that the purpose of the locational statistics is to "provide an insight into the aggregate international claims and liabilities of all banks resident in […] reporting countries broken down by instrument, currency, sector, country of residence of counterparty, and nationality of reporting bank" (BIS). Forty-two countries report locational banking statistics to the BIS, which are listed in Table 2. Although worldwide statistics would be ideal, the BIS notes that its sample of countries accounts for over 90 percent of the worldâ€TMs total deposits.

Results: Private Non-Resident Deposits in Secrecy Jurisdictions

...

The United States is the largest holder in private, non-resident deposits, followed closely by the United Kingdom and the Cayman Islands. This is not a surprising result. The United States has the largest economy in the world, where both U.S. citizens and foreigners alike have the assurance of the Federal Deposit Insurance Corporation (FDIC) on deposits. ...

Major Holders of Non-Resident Deposits

Table 5 ranks the top ten secrecy jurisdictions by their holdings of private, non-resident deposits in June 2009, the most recent period for which data are available. As with the yearly data, the three largest holders in this table are the United States, the United Kingdom and the Cayman Islands. These jurisdictions dominate the offshore market; each holds over US$1.5 trillion in private foreign deposits—and the United States holds more than US$2 trillion. The next largest jurisdiction by holdings is Luxembourg with US$435 billion.

It is interesting to note that though Switzerland suffered intense media attention and public pressure over its offshore banking sector in the last year, it ranks ninth in terms of largest private, non-resident deposit holdings, after Ireland and the Netherlands.

Table 5. Private, Non-Resident Deposits in Top Ten Secrecy Jurisdictions, in millions U.S. dollars

Rank Secrecy Jurisdiction Jun. 2009

1       United States                   2,182,790.93
2       Cayman Islands         		1,549,753.87
3       United Kingdom         		1,533,574.20
4       Luxembourg                        435,425.86
5       Germany                           425,643.57
6       Jersey                            393,221.52
7       Netherlands                       315,947.91
8       Ireland                           276,409.529
9       Switzerland                       273,973.3
10      Hong Kong                         267,993.97

Conclusion

This paper shows that private, non-resident deposits, which are highly correlated with tax evading offshore deposits, grew at a compound annual rate of 9 percent (in real terms) between June 1996 and June 2009. This staggering growth rate has outstripped the compound annual growth in wealth, either when measured in GDP (3.86 percent) or when measured in real terms (adjusted for inflation) of wealth of the worldâ€TMs High Net-Worth Individuals (5.3 percent). This may be further evidence of a growing discrepancy between recorded and unrecorded wealth worldwide, as data show illicit financial flows from developing countries have been increasing markedly between 2002 and 2006. We also find that the top three offshore deposit holders are the United States, the United Kingdom, and the Cayman Islands. Furthermore, in both the United States and the United Kingdom, offshore deposits have a positive relationship with interest rates, which likely indicates they are pro-cyclical.

A lack of data limited the accuracy of this paper and prevented us from analyzing offshore deposits by country of origin. GFI recommends that the international community improve data collection by implementing the following changes. First, the BIS should publish the locational banking statistics vis-à-vis the non-bank, non-government sector (that is, private sector deposits) in the same manner it publishes the consolidated banking statistics. Were this data available, this paper would not have needed to create a proxy system to estimate the private share of total deposits and our analysis would have been more accurate.

Second, we recommend that the BIS further break down private non-resident deposits by country of origin. Specifically, a researcher should be able find the amount of holdings, for example, of Nigerian residents in Switzerland. These changes would drastically improve data on the offshore industry, helping researchers to better understand the market and would inform policy makers in decision making as they pursue tax evaders and improve collection. Without this data, researchers cannot estimate or understand the offshore industry with a high degree of accuracy and policy makers cannot make informed decisions on improved tax collection efforts.

The staggering growth of these deposits—a rate that is significantly higher than the growth rate of global wealth— is of concern, as it represents a trend toward opacity within the international banking system. This development, coupled with substantial data gaps and a lack of transparency in banking statistics among secrecy jurisdictions, is particularly worrying for researchers and policymakers. The combination of rapid growth and increased opacity is a dangerous combination, hampering tax collection efforts and, by extension, worsening budget deficits in developed and developing countries alike. Policy makers and researchers alike will require considerably enhanced data collection and reporting in order to effectively regulate offshore banking in the immediate years ahead.


AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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