Offshore financial centers and global inequality

The existence of tax havens thanks to legal loopholes must be problematized from an ethical perspective that places the alleviation of poverty and global income disparities at its epicenter



The global financial system operates at multiple levels of complexity and with different levels of regulatory oversight. At one level, we are faced with economic activities overseen by nation-states and regional and global institutions via a sophisticated regulatory architecture, including the G-20, International Monetary Fund (IMF), Bank for International Settlements (BIS), major central banks and financial authorities. There is a formal global playing field in which major banks, financial intermediaries, hedge funds and investment firms operate under a double-sided regulatory regime that is strictly intolerant of irregularities in developed markets but turns a blind eye to irregularities in international transactions. A parallel playing field is created by lackluster regulation of international money flows and manifests itself through grey areas in offshore financial centers and tax havens created on tiny islands or in micro-states outside major national jurisdictions. Therefore, while formal financial centers, such as London, New York, Tokyo and Frankfurt, hold the pulse of global financial movements, an informal world of finance keeps expanding through offshore centers that host multinational corporations that intermediate wealth and profit transfers, secretive banks with little or no physical presence, minimum regulatory oversight and virtual absence of taxation.

The largest leak of confidential documents in history - 11.5 million pieces and 2600 GB in total - from Mossack Fonseca, a major law firm in Panama, highlights major deficiencies in global financial regulation and brought the issue of offshore centers to the public agenda. The company represents a truly multinational giant standing at the heart of murky financial dealings with 600 representatives in 42 countries and over 300,000 clients so far. In the post-Westphalian globalized world economy, such multinationals could be more effective than many nation-states combined. Expectedly, the bulk of the media attention focused on money laundering and tax fraud accusations related to the families and close entourages of statesmen, ranging from Russian President Vladimir Putin, Chinese President Xi Jinping and Ukrainian President Petro Poroshenko to Iceland's Prime Minister Sigmundur David Gunnlaugsson, who became the first political victim of the whole episode.

But more importantly, this incident might be utilized to underline systemic defects created by offshore financial centers and tax havens that serve to galvanize global inequality. A recent Oxfam report underlined the critical link between the concentration of personal wealth, rising global inequality and offshore centers by stressing that the 62 richest individuals on the planet - down from 388 in 2010 - collectively possess the same wealth as the "bottom half" of the world's population of 3.6 billion people. The majority of offshore wealth is managed by just 50 multinational banks, among which the 10 largest manage 40 percent of money and assets held offshore. It is estimated that 8 percent of individual financial wealth in the world, which equals $7.6 trillion, is kept in offshore financial centers to avoid taxation and public scrutiny. Assuming that this huge reservoir of wealth is taxed at average rates, it is possible to generate an extra financial resource of $190 billion each year that could be used by public authorities for socio-economic purposes. Tax evasion and capital flight to offshore centers, especially hit developing countries very hard, whereby both the personal wealth of the elite few and the profits of multinational companies are transferred abroad with substantial losses of public revenue. For instance, an estimated 30 percent of all wealth in Africa is thought to be kept offshore, which costs an estimated $14 billion to African states in tax revenue each year.

The existence of tax havens thanks to legal loopholes must be problematized from an ethical perspective that places the alleviation of poverty and global income disparities at its epicenter. These centers create grey areas in international finance to which income and wealth could flow legally in a secret, unregulated and untaxed manner that leaves societies deprived of crucial services and galvanizes global inequalities. Yet a coordinated global effort against the spread of tax havens would require systematic collaboration between major national, regional and international players. In a complicated world where proxy wars are managed through secretive firms, veiled support for paramilitary groups and murky financial transfers, the willingness of major global players might be doubtful.