I expect to be on Newsnight tonight to discuss the British Virgin Islands and why it appears to be used by so many Chinese people who appear to own companies located there. The issue is already in the Guardian. It's worth looking at the evidence.
According to one BVI company formation agent:
Such is the dominance of the British Virgin Islands as an offshore corporate domicile, that in many regions of the Far East International Business Companies are called simply as "BVI's".
I suspect that is true. According to the BVI there are 480,000 BVI companies at present. Actually, I will tell you they simply really do not know. At one time they said it was more than 800,000. Then we discovered that was the cumulative total formed and it as impossible they were all still operating so they halved the number, arbitrarily. The fact is that no one knows how many BVI companies there are, including the BVI.
What is fairly certain is that with a population of just under 32,000 BVI is the most densely populated country by companies per head of population at more than fifteen a person.
My research in 2010 also showed it to be the place with the most Big 4 offices per head of population. KPMG, PWC and Deloitte are all there - giving one office for less than 11,000 people. You can be sure it's not the local market they're serving.
So why form a company in the BVI? Because there are not taxes, at all. There is no documentation filed on public record for the company, at all. there is no need to have accounting records in the BVI, which for all practical purposes then means there is no need to do so, anywhere. There is almost absolute secrecy.
And so good, or bad as the view may be, at the BVI at securing any data on the companies that are recorded as existing there that it failed the (in my opinion) fairly lax tests that the PECD applies to tax havens - being one of the few places to do so in its latest assessment. The failures were for not being able to tell who owned companies, not being able to secure accounts, not having the right to access information and not taking part in effective information exchange when requested to do so. In other words, even when international organisations demand that it be cooperative it is not and appears to have no intention of being so.
So if you want to organise illicit financial flows - that is, moving money out of a state to avoid regulations without that fact being detected - then the BVI is the place to use.
And the Chinese seem to want to move money out of China in phenomenal amounts. Global Financial Integrity, an organisation with whom I have worked, estimate that more than $100 billion has left China each year for more than a decade now - making it the biggest source of illicit financial flows in the world. In that same period about $60 billion also returned illicitly annually to China via Hong Kong according to GFI. In other words, this money 'round trips' out of and back into China where it is then used for speculative purposes - in no small part to fuel the Chinese house price boom. The rest, of course, ends up invested in 'off plan' housing investment in London.
So the BVI is the epicentre of the world's illicit financial flows - although very little of the cash will, of course, ever see the place at all. What it provides is a front behind which illegal actions can be hidden. And at the end of the day this is a British territory. The Queen has her head on their stamps. There is a British Governor. We are responsible for good government and upholding the rule of law. And we could intervene if we wished. And we don't.
The biggest question is then, why don't we do that? That's the biggest question of all about the BVI. And George Osborne has to answer it.
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Richard,
As an average Joe, I have always wondered why none of the various Chancellors has ever moved against any of the British territories engaged in financial illusions. Even the present band of Muppets in the opposition have swallowed a Schtum pill on this and any other question of tax avoidance. I think they want to be all things to all men. I wish you well in your crusade on our behalf and would suggest that slowly you are winning.
Kind regards,
John
How would “winning this crusade” play out? Would not a meaningful crackdown on the BVI have people scrambling for new places to hide their wealth?
It’s interesting that bitcoin has made itself available at just such a time. What effect would 0.5% of the off-shore tax haven funds flowing into bitcoin have on its price and worldwide adoption?
As the rappers say: hate the game not the playa
So do we stop tackling crime because we can never end it all?
And since BVI us about the worst culprit and there aren’t that many a gain would be real in this case
But you still do not want it.
Why?
Should we stop tackling crime because we can never end it all? Of course not. And, NO, I am no opposed to addressing tax evasion in the BVI either. But I am also interesting in analyzing the system dynamics that would likely transpire if we do so…
Many in my generation (Gen-Y) feel the system is broken for us and is beyond repair. YOU are trying to fix it, while we are interested in “opting-out.” You want to go after the BVI, while we ask ourselves, how will this play out and how should we position ourselves? Bitcoin is away for us to opt-out and try to create a new better system, and I think this is why it has so much appeal to the younger generation. As you try to fix your system, it seems you strengthen decentralized systems like bitcoin. This is a good thing.
Your opt out is anarchy
No thanks
Our opt-out is a chance to build a better financial system.
Your opt-in is a circus.
Ayn Rand did not define better
http://www.zerohedge.com/news/2014-01-21/chinas-epic-offshore-wealth-revealed-how-chinese-oligarchs-quietly-parked-4-trillion
Before putting pen further to paper, and your expending ink, the explanation is actually very simple. China is running a huge balance of payments surplus. If you read Pettis on the Great Rebalanncing, that accounting identity is learly explained as a fundamental. Running such a surplus means that the money can do nothing else but leave, for investment elsewhere. Whether you consider this illicit is therefore a political, not an economic position. The Chinese have no option but to follow that flow, and attempt to invest their money as safely as possible, not in hysterical real estate investment in Ireland or Spain, for example, as a last ditch “resort”. As you will have noticed, the offshore financial centres merely invest the money in the best returns they can find. I am afraid Richard, that there, your one year at Cornell appears not to have been sufficient to analyse the effects on a country running a deficit: too close to home. It has nothing to do with illicit, or perhaps you would wish to provoke a further crash, and finally remove the working capital from the world’s financial circuitry.
At least 60% of the illicit outflows return to China
This is ’round tripping’
Your analysis is simply wrong
Such analysis as John’s is indeed wrong. Non-illicit flows don’t require secrecy structures to hide their source & beneficial owner, nor do they seek to circumvent law, regulation and taxation. Very simply wrong analysis indeed.
John, you are talking rubbish. I suggest you read the extract from ZeroHedge posted by JohnM, which shows this outflow of money is closely linked to the huge levels of corruption in the Chinese state and economy.
You are making an excuse for corruption and greed on an epic scale. In particular, I find the assertion that preventing these cash flows means removing the working capital from the world’s financial circuitry utterly laughable.
If this money is invested in the London property market it just produces another unsustainable property boom as well as making lfe for ordinary British people even more difficult.
The tone of your comment strongly suggests you have a vested interest in offshore finance.
‘The tone of your comment strongly suggests you have a vested interest in offshore finance.’ – Definitely!
I have no interest in the finance industry, merely in international economics. Frankly, the money has to leave the economy as it cannot stay, by definition, there is a surplus. Whether you choose to say that inevitability is by definition illicit is your problem all it shows is that you are capable of further education. Is there not a glimmer of a suspicion in your mind that the Irish and Spanish Hubble bubble was caused by Germany’s balance of payments surplus within a closed circuit known as the Euro, or would that be too much to ask? The fact that the capital outflows go through hedge funds and other vehicles is an inevitability, not some conspiracy of the world’s elite. The level of pretentious ignorance on the blog defies description.
It does not have to leave this way
That is my point
You are ignoring my point
Why?
The answer is even simpler: most of the money is as a result of crime/corruption and laundering of same.
It doesn’t alter the fact, which you are deliberately avoiding that the money has to leave China in the case when China is deliberately stunning a balance of payments surplus. That the Chinese choose to reinvest it in China once it has left does not prove Pettis’ analysis wrong , it simply shows that not everybody has as limited an education as yourself. Ignorance of how international money and capital markets function is not bliss! Pettis is a higher authority than you. Live with it.
You are ignoring the fact that I am saying much of this money goes straight back in to China
Your thesis on this issue is wrong
The external investment is in US bonds
What a wriggle, I hope the Newsnight team are watching this. Your last comment shows how much of the point you have missed. You merely confirm that the capital leaves China which is what I was saying. You are accusing an economic inevitability with a criminal or illicit intention! This is not my analysis, it is that of a senior professor in a Chinese economics faculty in Beijing. The work I have the humility to cite is the Great Rebalancin! by Michael Pettis available on Amazon. Read it before rendering yourself open to further correction.
I do not dispute money has to leave
I dispute this is it….
All I am saying is that the money cannot do anything else but leave, why are you attempting to say that I am implying that the US deficit is not funded by Chinese capital. That is what a transfer from a surplus country to one running a deficit is all about, the fact that some comes back into China does not render it illicit, it is merely going back from whence it came in a form which the inevitable accounting identities described by Pettis can tolerate. It is not fate, iit is not a question of licit or illicit, it is inevitability. It is liquid capital, not tax avoidance or evasion. That is how the international finance system works, that is why the Germans were forced to bring in the savings directive when they changed from a deficit balance to that of a surplus because the money leaving the German economy had no choice but to go. It was capital, not income outflow. Read Pettis, it is enlightening.
I understand macroeconomics
Do you understand illicit flows?
If your understanding encompassed Pettis, then your comments on these flows would agree that they are not a matter of choice. The only manner in which the money could have stayed in China was if the Chinese state increased its own state consumption, which its economic policy presently does not allow. Your understanding of international finance flows cannot be macro-economic by definition. Unfortunately for the trillionesque estimates you provide elsewhere as to capital allegedly stashed offshore, if you count the amounts of the various cash counterparts required to finance the purchaser, the seller and the intervening banking risk in an international contract of sale, you are already at 5 times the contract value of each international contract of sale of goods, before other intermediaries risks are covered. You cannot transact between currencies, even within the Eurozone, withou each party financing their risk on the contract. That is the only way that the international finance industry has achieved financing international trade out of the 1980s pre-existing barter system into which you are attempting to drag it back. Your grasp of that area is very limited indeed. You may have been in the UK and the US recreating the quasi imperial system following the loss of the colonies at the time. It is certainly not State export finance insurance that can find that exposure at the moment. You want continuing employment, and an economy which provides that, you had better review your textbooks before attempting to convince the OECD that you understand it.
So far you have proven yourself good at abusing me
Now why not answer my question – which is how you account for the fact that this money mainly goes back into China?
You haven’t and that undermines all you say
If the BVI didn’t have successful financial system, how would they employ the people on the islands??
Do you think piracy is gainful employment?
Slavery may not have been for the slaves, or those working in the sugar plantations. Curious that an Irish / Brit should admit to have moved on from Drake, Morgan etc. Perhaps you should ask the Somali fishermen why they turned to piracy when there was no Navy to keep the North Korean industrial fishing vessels from scouring the floor. That is a reaction to your abuse.
I am sure there must be logic in your comments
Perhaps I have no time for riddles
Of course, there could be another reason:
http://theeconomiccollapseblog.com/archives/the-23-trillion-credit-bubble-in-china-is-starting-to-collapse-global-financial-crisis-next
Pettis includes that in his analysis, so read it.
If he does he agrees with one of us but not both
I am confident I agree with him on flows
And that he will net the illicit in macro terms – and appropriately so, but which you are not
He´s in my economics bookmarks.
I guess I´ll have to dedicate a few nights of study, if I can find any spare. I´ll start with: ¨Monetary policy under financial repression¨.
It´ll go well with my current interest, in the repression of individual EU states autonomy under various EU treaties designed to enrich the minimum number of people.
In fact, the current repression of people under all governments, even those supposedly democratic, is of interest.
And I´m not a supporter of anyone, sometimes interests coincide, many times they do not.
John M, I found his analysis quite clear, once I was prepared to accept that at that level, the whole process of international flows is counter-intuitive.
What I did take from it , but that is only my conclusion, that there is no room at the moment for any arbitrary, or even ethical supra-national model as to international liquid capital requirements. There is no international regulated currency pool. There may be in the future, which is why the current gaps being filled by the offshore model should be left to close themselves. My view is that the current process from barter through self financing of international commerce will lead to a form of settlement process, but that attempting to regulate it is simply going to put principle before reality, with potentially perverse effects. The current equilibrium between the US balance of payments deficit and the Chinese balance of payments surplus is a form of stability, a little like two sumo wrestlers in deadlock, but it is not an institutionalised one, and will change over time, as ofter economies have to adjust to it. I think I have said enough, and I hope that you have fun reading it. I had to go through it three times, but it was worthwhile
And you claim that ethics should have no role in this is, I suggest, sufficient explanation for all else you say
Only 400,000 companies? Bah! humbug! Delaware has a million.
Richard, I am not abusing you, you just don’t have the background knowledge to support your political assertions, and the institutions on which you are seeking to exercise influence need only wait for the truth as they see it. I have done no more than point out the accounting identity that does your argument no favours. For the benefit of your supporter, the credit bubble is inevitable as Pettis pointed out. He does know what he is talking about, he lectures in Beijing. I know from bitter experience that the Chinese have different views on the ethics and identification of what is ethical and licit than you grasp. There is as yet no general principle of ethics in fiscal behaviour and there will be none so long as individual tax jurisdictions deploy different tax régimes with different economic policies. Were, for example, the Germans to be able to produce a set of products for export and import other goods and services that other EU States could produce more efficiently, fiscal nirvana, balance of payments equilibrium, and no export of capital surpluses destined for the write- offs which your current vision of money, and an attempt at state nationalisation imposes. Let the offshore financial system arbitrate the liquid capital flows until that process is more mature. An attempt such as yours to regulate it will simply revert the world to a barter system from which it has struggled to free itself. Is that abuse?
Yes, I think arguing that offshore should determine legitimacy is deeply abusive to the people who will suffer as a result
John Steed
as soon as you play the man not the ball, the rest of your arguments lose currency. That is a pity. Most of us who read this blog do so to inform and educate ourselves, and true discourse with reasoned arguments enlighten all whatever our political leanings. Personal abuse and patronising does us all a disservice, and yourself more than the rest of us – as it leads to the impression that you are a shill.
I am surprised that Richard has been so tolerant in his responses to your replies. But that in itself destroys your patronising accusations as to his bias.
Next time you want to exchange and ‘inform’, please bear this in mind, and then we can all benefit.
Please read Pettis, this is not my argument. You appear to believe that Richard Murphy’s language is not aggressive. He pushed the Pirates of the Caribean button, and was reminded, sharply, that his concept of predatorial is his own. If you wish to contain the debate within his pit ch, then there will be no progress, as only part of the issues will be addressed.
No progress is dependent on one person alone
But one person can assist the process
“Let the offshore financial system arbitrate the liquid capital flows until that process is more mature.”
In a nutshell let the “85 richest” control the world from a “financial Elysium” free of any obligations,er no thank you.
There is nothing good about the offshore financial centres. They’re the equivalent of the 19th century “Wild West”. I believe that in one way or another there is a connection between 99% of what is wrong in the world and those that use and manage the offshore centres.
You could put this biblically in simple terms. They owe their foundations to those that wish to perpetrate one or more of the cardinal sins and they aid those that wish to release one or more of those four riders otherwise known as Conquest, War, Famine and Death on the rest of us.
There’s nothing there too difficult to understand!
Where will your hypothesis find the liquid capital to function? The “talents”are not buried. Note what I said about international commerce presently being self, ie business funded, not State funded. Richard Murphy may have other proposals, but that is how it currently works. The capital to which you refer has to be integrated into the pool of capital available to banks to finance the various counter parties involved. Licit or illicit, it cannot be taken out of account without the capital provision drying up. You might note that the Lagarde list handed to Greece whilst she was French Finance Minister, has not been followed up, by similar exchanges, now she is in charge of the IMF.
Do you understand where credit comes from?
It does not come from bank deposits?
Bank deposits come from credit made out of thin air?
Read Ann Pettifor’s latest book – Just Money
Yes, I do understand, I used to work in manufacturing industrial product for sale in countries which thehn had no foreign exchange. By definition, I know where the finance for the current self-funded counterparties in international trade, including the insurance, banking risk etc comes from. Each party has Ito fund itself, by liquid capital availability until the transactions unwind. The money is created out of the reliance upon the deposits which support the hope that the transaction will succeed. Hence the motto on the US dollar, in God we trust. It is the basis of fiat money, based upon the backing of the deposits which your are still calling illicit. At that level, it is not just Money. I will read Just Money, at your invitation, provided you rad Pettis. Deal?
If I have time
Right now I make no promise
That’s honest
The invitation remains open!