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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-Ã -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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