Index

4:  Corruption

Havens that have become a tax on the  world's poor

Duncan Campbell The Guardian September 21/2004

London: Billions of pounds, enough  to pay for the entire primary  health and education needs of the  world's developing countries, are being  siphoned off through offshore companies and tax havens, according to a  body formed to expose the offenders.

Aid organisations are alarmed that  money which should be used for  building the infrastructure of the  poorest countries is being hidden in  havens by corrupt politicians and  multinationals exploiting tax loopholes.  Offshore companies are being formed  at the rate of about 150,000 a year.  While in the 70s there were just 25 tax  havens, there are at least 63 now,  about half of them British protectorates or former colonies. Tax avoidance  in Britain alone is estimated at between  25bn and 85bn.

This month the Tax Justice Network,  which was formed last year by tax  experts and economists worried about  the trend, launched an international  secretariat in London. It will work  with the UN and other international  bodies to reverse the practice of hiding  money from governments worldwide.

John Christensen, coordinator of the  secretariat, said: "Many developing  countries are now dominated by elites  that are involved in tax havens. Things  have actually got worse in the last few  years." As new havens are formed,  existing ones offer better deals.

Mr Christensen, a former economic  adviser to the Jersey government who  has also worked at the then Department of Overseas Development and  with Oxfam, said many of the havens  were now "locked in a desperate  competition. They like to suggest that  they oil the wheels of global capital  but there is no case for that. What has  happened is that tax havens transfer  the burden of tax away from capital  and towards labour and the consumer."

He also believes that the attraction of  making money by putting it in off- shore havens damaged British industry  because money which could have been  invested in Britain had been removed  from the country.

Kofi Annan, the UN secretary general,  has also expressed concern that money  which should be spent on developing  countries is being moved offshore.

A UN spokesman confirmed yesterday  that Mr Annan saw the issue as a  priority. "The secretary general has  indicated repeatedly that he believes  money should be spent on develop- ment rather than going offshore," he  said.

The secretariat believes the UN has a  vital role to play in tracking the  money. "The remedies have to be  global and the UN is the only body  able to do it," said Mr Christensen.  "The WTO [World Trade Organisation] has failed."######Tax havens have also attracted the  attention of John Kerry, the US  Democratic party's presidential candidate, who has indicated that if elected  he will pursue the companies that hide  their profits abroad.

In April, the US general accounting  office said 61% of US corporations  paid no federal income tax in the late  90s. Tax havens contain only 1.2% of  the world's population and 3% of the  world's GDP, but 26% of assets and  31% of the profits of US multinationals are held there.

Global phenomena

Almost every part of the world now  has access to havens. Europeans can  use the old-established ones such as  Jersey and Liechtenstein or the newer  ones, like Cyprus and Malta; the Asian  Pacific has the Pacific islands and  Singapore; India and southern Africa  have the Seychelles and Mauritius; and  North America has the Caribbean  islands and Central America.

While a number of havens, such as the  Cayman islands and Bermuda, have  improved regulations, the effect of this  has been, in the view of Mr Christensen, to legitimise them. "Merely  chasing out the worst havens and  setting international standards for the  better ones does little to address the  real problems," he said.

The list of political figures who have  availed themselves of the system  includes Haiti's "Baby Doc" Duvalier,  Zaire's President Mobutu, Sani  Abacha, the former president of  Nigeria, and Raul Salinas, the brother  of the former Mexican president. Mr  Abacha, during his period as president,  had a standing order to transfer $15m  (8.4m at current exchange rates) a  day of stolen funds to his Swiss bank  account. Much of this money has been  lost forever to the countries concerned  although some has been traced; the  current president of Nigeria recently  visited Jersey to thank the authorities  there for tracking down the millions  that Mr Abacha had hidden.

In 1999, the Economist estimated that  African leaders had $20bn in Swiss  bank accounts alone, twice the amount  that sub-Saharan Africa spends on  servicing debts.

Among the latest countries offering  such services is Somalia, which Mr  Christensen describes as "an example  of what can happen when the cancer is  not cut out". He believes that the main  function of the financial markets in  Somalia will be money laundering.

Tax avoidance also breeds other  unethical habits: when Enron was  investigated in 2001, it emerged it had  881 offshore subsidiaries, 692 incorporated in the Cayman islands. The  change has been assisted by technological change in communication and the  liberalisation of the marketplace.

Many major charities are also concerned about the situation. "The  implications of tax avoidance on  development are manifold," said Tim  Peat, economic justice campaigner at  War on Want. "While transnational  corporations endeavour to hold on to  cash by shoring it up in tax havens,  millions are lost that could have been  used in the fight against poverty.

"Every time we investigate corruption  in the oil industry, we find that looted  public money has been laundered  through offshore tax havens," said  Gavin Hayman of Global Witness, the  international resource watchdog group.

"Billions of dollars pass from public to  private hands this way with no come- back. The collateral damage to the licit  international system and to international development is truly enormous  and the only people who benefit are  those who have something bad to  hide. Tax havens are the seedy back- street bars of the financial world,  where corporations and multi-million- aires huddle in shadowy corners to  pursue their business out of sight of  respectable citizens."

Instability

The latest Oxfam report on tax  havens, on which Mr Christensen  worked, suggested the amount secreted  in tax havens was equivalent to six  times the estimated annual cost of  universal primary education and almost  three times the cost of universal  primary health.

He said that offshore centres under- mined economies in three ways: the  capacity of countries to raise tax  revenue was limited, thus restricting a  poor country's ability to finance  investments in health and education;  secondly, the offshore system provided  a safe haven for money laundering,  illicit arms dealing and diamond  trafficking; thirdly, the offshore system  contributed to financial instability  which led to the crises in the Indonesian and Thai economies in 90s.

His colleague Sony Kapoor, the  secretariat's economic adviser, agreed: "Tax evasion and tax avoidance on a large scale is inhibiting  development in poor countries and  eroding the existing welfare state in the  rich states."

A variety of international organisations  are now attempting to address the  problem in differing ways. They  include the Organisation for Economic  Cooperation and Development, the  EU, the UN drugs control programme  and the Financial Action Task Force,  which was set up by the

G7 countries. Charities and churches  across Europe, particularly in France,  are also becoming more involved.

Richard Murphy, of Tax Research,  which works closely with the new  organisation, said it was important that  the wealthier countries were seen not  to be dictating terms to poorer  countries.

"You cannot dictate to nation states  their level of taxes," he said, "but you  can require that they only tax what is  theirs to tax."

The notion of tax havens goes back to  just after the Napoleonic wars when  demobbed officers moved to Jersey,  but it was not until the 1960s that the  high rates of British taxation acted as a  motivation for people to move their  money abroad.

Allowing British protectorates or  former colonies to set themselves up  as tax havens was also an attractive  proposition for Britain in that it  allowed those places to become  self-sufficient. Now the whole process  has accelerated to the extent that  billions of pounds are being removed  from the very countries that need  them most.

Duncan Campbell

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