Offshore structures are abused for purposes of money laundering, corruption, tax avoidance and tax evasion. This has adverse effects on developing countries, in particular, which are further destabilised and lose important sources of revenue. The Western world is responsible for this, insofar as it helps sustain the offshore economy.
One reason the life-span of the Panama Papers in public attention seemed surprisingly short is that we – citizens of the Western world – were only moderately affected. If you look, for instance, at the politicians involved you will find: Petro Poroshenko, the President of Ukraine, Al Saud, King of Saudi Arabia, John Addo Kufuor, the son of Ghana’s former president, Daniel Munoz, an aid to the former President of Argentina Néstor Kirchner, just to give a few examples. Despite few examples, such as Iceland’s Prime Minister Gunnlaugsson or the father of David Cameron, you will find few prominent Western politicians.
So: No reason to feel concerned? Not at all! Even though offshore structures had a smaller impact here, it was mainly actors from Western countries who established them: bankers, lawyers, accountants and other intermediaries were invovled. They have helped creating and sustaining an offshore industry that is being abused for illicit purposes such as tax avoidance, money laundering and corruption. This industry has adverse effects in particular on developing countries where illicit financial flows subvert an already weak governance system and deviate funds that would urgently be needed for public investments.
Negative effects of the Offshore Economy on Developing Countries
The impact of abusing the offshore economy on developing countries is multifateous and quite considerable. A study commissioned by the African Union on Illificit Financial Flows reports that Africa alone is estimated to have lost in excess of $1 trillion in illicit financial flows and currently loses more than $50 billion annually. This is: $50,000,000,000.
Just to give you an idea of what this sum means, take an example by Chairmian Gooch in her TED Talk ‚Meet global corruption’s hidden players‘. Gooch is the co-founder of Global Witness, an NGO that campaigns against corruption and the exploitation of natural resources. In one striking case that they investigated, the Republic of Congo sold state-owned mining assets to shell companies in the British Virginia Islands. These assets were quickly flipped on for huge profits to major international mining companies listed in London. It was calculated that Congo may have lost more than 1,3 billion dollars from these deals, which is almost twice the country’s health and education budget combined (!).
In other words, if the Republic Congo hadn’t given away the mining assets, it would have had significantly more resources for public investments that could have gone into hospitals, doctors, teachers, schools, education programmes, etc. Just think of how many lives could have been saved if the budget for health was doubled in a country where the health system is in a relatively poor condition and a little change can already make a huge difference. Or think of how many teachers could have been payed or how many schools renovated.
Illicit financial flows in Africa and other developing countries have many faces. The example above shows how an offshore structure can be abused to make unrightful deals and hide the identity of the involved people. But they can have many other purposes: conceal money flows resulting from corruption, shifting profits in order to avoid taxes, launder money earned from criminal activities such as arms, drugs or child trafficking.
These examples show that it is not only about lost revenues that are urgently needed in developing countries. Offshore structures weaken the governance structures of these countries by helping sustain criminal activities. Investments are not enough in these countries, as long as the latter are not stable and safe. Corruption and money laundering sustain inequality and create an environment of uncertainty. This does not only discourage foreign investors but makes life very difficult to bear for people who live in those countries.
Western Countries Help Sustain the Offshore Business
What has all this to do with us? Some people are inclined to say that the pains and sufferings of developing countries is their business, not ours. We are not responsible for corrupt governments, criminal networks, tax fraudsters, and other woes, when they occur in remote places. But this is wrong. As pointed out by Chairmian Gooch in her TED Talk, American banks and European banks have helped chanelling illicit financial flows. Moreover, the Panama Papers have revealed how banks, lawyers, accountants from Western countries are involved in the international offshore business.
Another very shocking case is that of Berenberg Bank, a close business partner of Mossack Fonseca – the Panamanian law firm that was at the centre of the Panama Papers revelations. The Berenberg Bank systematically offered bank accounts to highly suspicious clients, involved in corruption, fraud and organised crime. Compliance officers of the bank, who were in charge of reporting suspicious transactions, warned their superiors. However, they were ignored and eventually dismissed. The Panama Papers revealed the involvement of Berenberg Bank in illicit activities; but no sanctions have been issued up until today. This example illustrates systematic failure to act in order to overcome the shadow economy. (I strongly recommend reading the written statement of Katrin Keikert, one of the former compliance officers of Berenberg Bank who was invited to a hearing at the European Parliament; see this page: ‚Miscellaneous – Cvs, contributions and replies to written questions from speakers‘).
These examples demonstrate that intermediaries in Western countries are actively involved in creating offshore structures that perpetuate illicit activities in developing countries. However, not enough has been done to prevent these activities. The laws that are already in place are often not being sufficiently enforced. What is worse, sometimes there is even no law to prohibit these activities. For instsance, it is not illegal according to German law to help citizens from other countries to evade taxes through the German banking system.
A Moral Duty to Stop Secrecy Structures
People who deny that we have a moral duty to help people in developing countries often argue that we cannot be made responsible for woes that we haven’t caused. However, as argued by the German philosopher Thomas Pogge, we have a duty not to inflict any harm on other people. This is what he calls a ’negative duty of justice‘. By tolerating the offshore economy that is sustained by institutions in our countries, we do however inflict harm on people in developing countries. Hence, we have a duty to stop these activities. It is up to our politicians to change the laws that make illicit financial flows through offshore structures possible and to make sure these laws possible. And ultimately, it is up to us to make pressure on our politicians to act.
Much more could be said about how Western countries are involved in illicit financial flows in developing countries and what could be done to stop this. If you are interested in knowing more, I strongly recommend, among others, the following sources/readings:
Illicit Financial Flows, Report of the High Level Panel on Illicit Financial Flows from Africa, commissioned by the AU/ECA Conference of Ministers of Finance, Planning and Economic Development, http://www.uneca.org/sites/default/files/PublicationFiles/iff_main_report_26feb_en.pdf
ICRIT, Four Ways to Tackle International Tax Competition, http://www.icrict.org/wp-content/uploads/2015/02/ICRICT_Tax_Competition_Report_ENG.pdf.
Stiglitz, Joseph and Pieth, Mark, Overcoming the Shadow Economy, http://www.fes-europe.eu/fileadmin/public/editorfiles/events/oct4/161110_IPA_ShadowEconomy_ptxt_online_1.pdf
European Parliament, The Role of Lawyers, Accountants and Bankers in Panama Papers (Part II), Hearing of the PANA Committee, 28.02.2017, http://www.europarl.europa.eu/committees/de/pana/events-hearings.html?id=20170118CHE00761.
European Parliament, Report on tax avoidance and tax evasion as challenges for governance, social protection and development in developing countries, Rapporteur: Elly Schlein (S&D), 09.06.2015, http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+REPORT+A8-2015-0184+0+DOC+PDF+V0//EN.