GFI, Tax Havens, and Sherlock Holmes

June 11th, 2009

When I say the words “tax evasion,” what springs to your mind?  Perhaps the sandy beaches of the Cayman Islands or the international banking giant and recent scandal headliner UBS.  You might even point the finger right back at the UK and the US whose loose banking laws promote tax dodgers to shelter money in Delaware and London.  While these Goliaths in international banking certainly absorb the bulk of illicit cash flowing across borders, they are not whole picture.

Take the island of Samoa, defined by the OECD in June of 2009 as a cooperative tax haven.  Samoa, in case you are not aware (and I certainly don’t expect you to be!), is an island in Oceania, halfway between New Zealand and Hawaii.  In 2008 Samoa’s GDP was $1.057 billion, which is a per capita income of $4,900/year, comparable to Swaziland, Georgia and Honduras.  Samoa’s modest economy is based mostly on family remittances, agriculture—90% of its exports are coconut products—and fishing .  Oh.  And offshore banking.

As a Research Associate at GFI, I am tasked with hunting down illicit deposit figures for tax havens like Samoa.  I like to think of it as the detective work of illicit financial flows, like an Economist Sherlock Holmes or a monetary Bruce Willis in Die Hard – with numbers and graphs instead of fast cars and helicopters.  Well, maybe it’s not quite that cool.  But almost.

Samoa was one of the more difficult havens to pin down.  In fact, tracing this data felt a bit like the scene in Die Hard 4 when the evil hacker boards a truck and drives around New York City shutting down all the country’s computer controlled systems.  Which makes me Bruce Willis – close in pursuit, barreling through underground tunnels in my own truck and…. I’m clearly not fooling anyone.  I’m just an Econ Dork (with a capital D).

But in all seriousness, the estimates for Samoa do range wildly, with the IMF estimating non-resident deposits at just $60 million in 2007 and the BIS (Bank of International Settlements) putting the figure closer to $4,400 million!  If we are to accept the BIS figure as true, a GDP of $1 billion puts overseas deposits in Samoa at over four times the entire country’s yearly income.

There are dozens of other small island havens just like Samoa.  Some of the data is better and some of the data is worse, but it’s all difficult to track.  And even with the G-20’s pledge for the “end of banking secrecy”—or perhaps completely despite it—gathering data from tax havens hasn’t gotten any easier.  In fact, just after the release of these statements, we asked a data expert who specializes in tax havens, if the G-20s rhetoric would lead to better data collection on their end.  Her response was simple, “it is our view that offshore data will continue to be difficult to get, and where it is available, will continue to be rather ad-hoc.”  Which shows that despite the G-20’s best intentions and strongest language we have not yet seen change on the ground.

Tracking foreign deposits—from the tiniest islands to the largest European banks—would be infinitely more accurate and straightforward with a system of transparency and automatic exchange of information in our international banking system.  In the picture of worldwide illicit financial flows, these islands account for a small, but crucial part of our understanding.  But as Sherlock Holmes would say, “the little things are infinitely the most important.”

Written by Ann Hollingshead

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