Tax Research UK

The Wealth Bulletin has reported:

Research has found huge discrepancies in the amounts declared by offshore centres

The amount of undeclared money languishing in offshore financial centres has always been difficult to quantify: the very nature of it being undeclared makes it hard to trace. But work by economists at the International Monetary Fund has shed new light on the cash involved, confirming it runs into trillions of dollars.

Gian Maria Milesi-Ferretti, an economist for the IMF in Washington, said statistical information on Luxembourg, one of the largest offshore financial centres in Europe, illustrated the extent of the problem. He said: “Luxembourg is one of the few offshore centres that disclose detailed statistics on assets and liabilities held in the financial sector, which makes it invaluable to understand cross-border money flows.”

The latest available IMF figures show portfolio assets held by foreigners in Luxembourg to be worth $1.5 trillion at the end of 2008. But looking at statistics provided by the Luxembourg Government on portfolio investment liabilities for the country – the mirror image of the asset information held by the IMF – there is a big discrepancy. The investment liabilities in Luxembourg were $2.5 trillion – $1 trillion (€726bn) more than the assets reported.

Milesi-Ferretti said: “This is a huge difference, almost 40%, and is unlikely to be entirely accounted for by the fact that some countries do not report their portfolio investments or their destination to the fund.” China, Taiwan and many of the oil-exporting countries do not participate in the IMF’s survey.

The IMF found a similar discrepancy in the Cayman Islands data, whereby the $2.2 trillion in equity liabilities reported by the country, a British overseas territory, at the end of 2007 – the latest figures available – bears little resemblance to the $750bn of portfolio assets reported to the international organisation.

Taken together, the data for the two offshore centres alone shows at least $2 trillion remains unaccountable for. And the fact that many undeclared funds in offshore accounts are held in cash deposits, not in portfolio investments, means the sum is likely to be much higher.

Switzerland – the biggest offshore financial centre – has only a small discrepancy between what it reports as portfolio liabilities and what it reported to the fund as assets, but the Government admits to having at least $600bn in undeclared accounts.

I admit I can’t resist the temptation to say that some of us have been saying this for a long time. The Tax Justice Network published my research on this in 2005, suggesting there were £11.5 trillion of assets offshore. Time and again this has been attacked by organisations that should have known better and by academics with a right wing axe to grind. But now, like so much else I and others have argued, it is being validated. And the issue itself, once dismissed as inconsequential is now being considered seriously:

Although the IMF is concerned about the undeclared assets held in offshore centres from a tax perspective, it is particularly concerned about how this money affects cross-border financial interaction and contributes to shocks in the global economy such as the recent credit crisis.

Milesi-Ferretti said: “The Cayman Islands were the largest foreign holder of private-label US mortgage-backed securities on the eve of the financial crisis. More information on the ultimate holders of these securities could clearly provide valuable insights on the transmission of the ‘sub-prime shock’ and the financial crisis more generally.”

The IMF believes the sum of the external assets and liabilities of what it calls small international financial centres – which includes all the offshore centres except Switzerland – is $18 trillion.

Well, in that case apologies are in order – as ever, we were too cautious in our estimates.

The figure is higher than those of big investing countries such as France, Germany or Japan and is a multiple of those of other large economies such as China.

Milesi-Ferretti said: “What is even more striking is that this number is likely to be an underestimation given the data problems with offshore financial centres.”

That is an especially timely admission: I am in Washington to discuss this data issue with the IMF later this week. I’,m now looking forward to constructive dialogue, debate and a programme for action.

Richard Murphy Economics, IMF, Secrecy jurisdictions, Tax Havens, Tax Justice Network

IMF presses for tax on banks’ risky behaviour | Business | guardian.co.uk .

The International Monetary Fund today threw its weight behind a new tax on the global financial sector designed to limit risky speculative behaviour and help the world’s poorest countries.

Dominique Strauss-Kahn, the IMF’s managing director, said banks and other big financial institutions were responsible for systemic risk and it was only right that they provided resources to mitigate those threats to the world economy.

While ruling out a so-called Tobin tax – a levy on foreign currency transactions proposed by the American economist James Tobin in the early 1970s – Strauss-Kahn said a high-level IMF team would work on proposals in the coming months.

Two comments:

1) Glad they’ve caught up with what some of us have been saying for some time

2) As ever, they call it wrong.

I’m not holding my breath.

Richard Murphy Development, Economics, IMF

The Guardian  has reported:

The International Monetary Fund is facing intense pressure from a coalition led by Bob Geldof to set aside more of the proceeds of a planned sale of its gold reserves to help Africa.

Speaking at a press confidence inside the IMF’s headquarters in Washington, Geldof said Africa had been left out of the G20 agre ement at the London summit this month, and urged the IMF to find ways of devoting more resources to protecting the poor from the credit crunch.

He said:

All those arguments the activists and the politicians had for many years about aid, or debt cancellation, we can lay them to rest, because we’re all begging for aid. We just call it fiscal stimulus – and we’re all begging for debt relief; we just call it disposing of toxic assets.

Geldof has his faults (but don’t we all - as some like to point out here, often, about me) but this is good work.

Remember, a lot of that gold came from Africa in the first place - and they never got the right price for it then (or now, come to that).

Richard Murphy Development, IMF

The FT has reported that:

The distinction between “offshore” and “onshore” financial centres has been dropped by the International Monetary Fund, in a victory for more than 40 small countries that complained they had been unfairly stigmatised in the fight against financial crime.

The IMF said the distinction between on- and offshore centres “had been blurred by globalisation”, which had increased the range of cross-border transactions in many countries, as well as the launch of new financial centres catering to non-residents in countries such as Botswana, Brunei, Dubai and Uruguay.

The IMF said it still had concerns “in certain key areas” on combating money laundering and terrorist financing in OFCs, although it judged that compliance was “generally comparable” to that of non-OFC jurisdictions. It also reported progress on banking supervision, cross-border co-operation and data exchange.

Curious: you’ll note that in the third paragraph the IMF can’t get used to the fact that OFCs no longer exist, because it still refers to them. So do others noted in the report. In which case they clearly still do exist.

In fact, what this change represents is recognition of the fact that the 40 or so tax havens involved never were OFCs. The IMF has, I suggest, realised that all along they were tax havens, and no other word will do to describe them. This reflects the definition of tax havens and OFCs that I offer in TJN’s submission to the Treasury Select Committee where I say:

Tax havens are places that create legislation designed to assist persons - real or legal - to avoid the regulatory obligations imposed upon them in the place where they undertake the substance of their economic transactions

and

Offshore financial centres are not the same as tax havens. OFCs are the commercial communities hosted by tax havens which exploit the structures that can be created using the tax haven’s legislation for the benefit of those resident elsewhere.

If it is still using the term OFC, and it looks like it is, then this is the context I suggest, and the move is welcome because it allows the shift in emphasis in regulation that we are calling for to happen. It’s true, the tax havens are now regulated, by and large. But the need now is for that regulation to be imposed on the OFCs. The IMF knows that is not happening. The IMF has cleared the decks for a change in terminology. That change will allow the attack on the abuse led by the accountants, lawyers and bankers of the world to begin in earnest.

It’s not a moment too soon.

Richard Murphy IMF, Tax Havens

The FT has reported that:

The intensifying credit crunch is so severe that lower interest rates alone will not be enough “to get out of the turmoil we are in”, Dominique Strauss-Kahn, the managing director of the International Monetary Fund, warned at the weekend.

In a dramatic volte face for an international body that as recently as the autumn called for “continued fiscal consolidation” in the US, Dominique Strauss-Kahn, the new IMF head, gave a green light for the proposed US fiscal stimulus package and called for other countries to follow suit. “I don’t think we would get rid of the crisis with just monetary tools,” he said, adding “a new fiscal policy is probably today an accurate way to answer the crisis”.

Roll out a crisis: bring back Keynes. Some of us, of course, never went away.

Now it’s time for a New Deal. Some of us would say it’s time for a Green New Deal.

Richard Murphy Economics, IMF

The IMF is undertaking reviews of many offshore territories in 2008 with regard to their money laundering compliance.

Jersey is rolling out new legislation every few days as a result - which is sure evidence for me that external pressure works. And they have prosecuted one unqualified accountant for money laundering, which follows the normal pattern amongst the professions of picking on a sacrificial lamb.

Now the Isle of Man is doing the same, bringing forward money laundering charges against a person called Trevor Baines, who is #462 on the Sunday Times rich list, apparently, and his wife.

As the local report says:

MULTI-millionaire Trevor Baines has appeared in court charged with money laundering offences. Mr Baines, 67, who was ranked 432 in the Sunday Times Rich List this year with a fortune of £162 million, was bailed in the sum of £750,000 - with his mansion home in Douglas, Africa House, put up as security.

He is charged with - between June 1, 2001, and October 3, 2001, in the Isle of Man or elsewhere - knowingly or suspecting that Roys Spyros Poyiadjis was and had been engaged in criminal conduct, being concerned with others in an arrangement whereby the retention and control on or behalf of Mr Spyros of the proceeds of criminal conduct of Mr Spyros was facilitated by the deposit of about $20,000,000 in accounts at the Isle of Man Bank, of about $175,000,000, in accounts at Flemings Isle of Man Ltd, transfers from such accounts at Standard Bank Isle of Man Ltd and by order withdrawn from such accounts.

Now his wife has also been charged as well, the report saying:

THE wife of tycoon Trevor Baines has appeared in court charged with false accounting.

Wendy Nicolau De Almeida Baines, 49, a company director of Africa House, Woodbourne Road, Douglas, is alleged to have, on or about May 31, 2001, in the Isle of Man or elsewhere, falsified a document, namely an invoice from Mainstreet Ltd to Quantum Group Management Ltd in the sum of $920,000,000.

Three things are amazing. The first that this is happening now, when the IMF are due. Second that it’s taken more than six years to bring the case. Third, that someone hadn’t noticed the deposit of $175 million dollars before now.

Don’t get me wrong: I welcome these prosecutions if the evidence exists. But I do very seriously doubt that they are but a scratch on the surface of what is really going on, and are as such token gestures meant to prove that the willing exists to use the legislation that these places have passed but deeply resent. I hope and suspect that the IMF will not be taken in and will ask, as I do, why the Courts aren’t packed day in day out with such cases in these places, because between them there’s $1 trillion of funds deposited on which the income is tax evaded. $175 million is 0.0175% of that.

Richard Murphy Corruption, Guernsey, IMF, Isle of Man, Jersey

Nick Shaxson has written a first rate price on the TJN blog. He refers to IMF thinking on aid, just published, that says:

We find little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth. We also find no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others. Our findings suggest that for aid to be effective in the future, the aid apparatus will have to be rethought.

Actually, we agree. It’s why we talk about tax as the essential fourth leg in the development agenda. Read Nick’s piece to learn more.

Richard Murphy Development, IMF, Tax Justice Network, Tax management

Alistair Darling has given his first major interview to an accountancy paper, and has used it to tell Accountancy Age that:

claims that the UK was a tax shelter were seriously flawed’. ….[T]he IMF does not categorise the UK as a tax haven. This was suggested by some organisations on the back of some seriously flawed experimental methodology for identifying tax havens. The government is committed to ensuring that everyone pays their fair share of tax.

Since I was the person who first drew the attention of the press to the report from the IMF that labelled the UK a tax haven I feel some right to respond to this (and thank Accountancy Age for having already let me do so in their pages).

1) It’s true that the report referred to says it does not represent official IMF opinion. But it was written by an IMF staff member in IMF time using IMF resources and was published on IMF paper on the IMF website. So OK, that does not make it official, but you can bet your bottom dollar that someone approved this work, someone monitored it as it went along, plenty of IMF people input into and reviewed it and it was not put out without some thought as to its consequence. With all respect to Alistair Darling the IMF is not ’some organisation’. Our current prime minister chaired it for some years. The UK is a leading member. And it’s not noted for being radical. If anything it is biased towards the status quo, and its research tends to be cautious.

2) The methodology used in the IMF report sought to overcome subjective tests for what might be a tax haven by using an objective measure. That measure was that the financial services sector in the country tested was larger than that needed to service its domestic economy. This was indicated by it having a financial services sector proportionately larger than one standard deviation away from the norm for all economies tested. There were faults in the test, of course. For example, some of the obvious small island targets could not be tested due to lack of data. This meant they were not listed in the results which therefore under-reported the likely number of havens. Some data had in some cases to be imputed using what were, however, statistically acceptable methods. This is obviously a little problematic, although this did not affect the UK analysis. But as an objective measure most scholars in this area (and I know a lot of them) think this paper was solid, reliable and broke new ground. No one I yet know suggests that the result was flawed. If it is then the Chancellor has duty to say why, and not just throw cheap jibes.

3) The test threw up all the usual suspects as tax havens, bar two. They were the UK and Latvia, who were added to the list. On reflection neither is surprising. Latvia has sought to attract financial services business. So has the UK. Indeed, that’s what we seem to survive on now (and heaven help us in the long run). It’s undoubtedly true that the UK has a financial services sector that is much bigger than we as a country need. And it’s obviously true that we export those services: our invisible earnings have shown this for years. It’s also true (and I’ll be blogging this over the coming days) that we create structures that allow this to happen. The test gives the right result.

So what is Alistair Darling denying? That selling financial services makes us a tax haven? Maybe that might be right. But even if it is it makes us an offshore financial services centre without doubt (and we’re even an island, although I’d stress, that’s not a necessary condition as Luxembourg proves). And such places are broadly synonymous with tax havens and are associated with low tax rates for some but not all people. This means that these laces are good at ensuring that those who are resident pay all their tax tax and those who are not, or are marginally so can be “ring fenced” from that tax bill by offering advantages not available elsewhere or tho those truly resident. In addition, they tend to offer light regulatory regimes with regard to the services needed to avoid tax obligations. This, as I’ll show, is exactly what the UK does.

It may be true that the government is “”committed to making sure everyone pays their fair share of tax” in the UK. But that’s not the point here. The point is that this has to apply to those using the UK whether they are based here or not. That’s the test of a tax haven and those of us who understand this are getting fed up with the UK being used as a centre for abuse. And the press now understands that this is what is happening. Old bluster and cheap jibes won’t work any more. It’s time the Treasury raised its game and its rhetoric and acknowledged its policy on this issue, or changed it.

Richard Murphy Domicile, Economics, Ethics, IMF, Tax Havens, Tax management

The IMF have issued a working paper in the last few days with the headline grabbing title ‘Concept of Offshore Financial Centers: In Search of an Operational Definition’. As is usual in these cases the paper says the working paper only represents the views of its author, Ahmed Zoromé and should not be reported as representing the views of the IMF. It’s hard to believe that though when the paper says:

The issue of an objective definition [of OFCs] is of crucial importance to the work of the IMF.

And that’s exactly what the paper seeks to offer.

I’m not going to critique the whole paper here. I would stress, I think there are weaknesses in it. For example its literature review appears incomplete, out of date and is not well argued. But that’s for an academic discussion. The important issue is that the paper seeks to define Offshore Finance Centres (OFCs) (which it must be stressed in this context are not the same as tax havens) on the basis of the ratio of the relevant proportion of their sales of financial services to their GDP, and suggests that the definition of an OFC is:

a country or jurisdiction that provides financial services to nonresidents on a scale that is incommensurate with the size and the financing of its domestic economy

Statistical analysis is used to determine those countries where this characteristic is found. The analysis is split between high and low income countries (income being per head, in broad terms, not absolute). Some data is estimated and for 23 of the 46 OFCs the IMF has been recognising to data is simply not available (most being the smaller island states). That still left over 100 territories subject to review (the Channel Islands etc not being countries, of course).

The findings are significant. Simply by considering this ratio at a level of statistical significance (and in most cases the stats are extremely clear) a new list of OFCs is produced. The following which were considered OFCs by the IMF are confirmed as such:

• Bahamas
• Bahrain
• Barbados
• Bermuda
• Cayman Islands
• Hong Kong
• Cyprus
• Guernsey
• Ireland
• Isle of Man
• Jersey
• Luxembourg
• Malta
• Mauritius
• Netherlands Antilles
• Panama
• Singapore
• Switzerland
• Vanuatu

The following which the IMF thought to be tax havens fall off this list:

• Costa Rica
• Lebanon
• Macao
• Malaysia (Labaum)

But most tellingly three new OFCs are identified. they are:

• Latvia
• Uruguay
• United Kingdom.

This data is objective. I’ll admit, the UK is clearly not as dependent on financial services as, for example, the Channel Islands, Cayman or Luxembourg are, but equally, compared to places like the US we’re massive players. It’s time to recognise reality. With its cohort of supporting states in the above list the UK is at the centre of the threat to world stability caused by the financial services sector and tax abuse.

I and the Tax Justice Network have been saying this for some time. Now there is objective evidence that it’s time for a change of tack before the UK sinks under the massive internal and external economic problems this policy is creating: problems like having cities where the police, firefighters, nurses and teachers can’t live, which is the sure evidence that this finding is indication of a massive problem for the UK, and not an indicator of the City’s success.

Richard Murphy Economics, IMF, Tax Havens