The International Consortium of Investigative Journalism ( ICIJ), working with over 100 publications across the world, published over 11.5 million documents on 3 April, exposing the names of several wealthy individuals who have hidden their incomes and evaded taxes in their home countries, while holding their wealth secretively abroad.
Every expose of this kind is sensational and a lot of public attention is focused on the names on the list. For those of us who are honest taxpayers, it is painful to see how the rich, who should be paying taxes to fund our roads, hospitals and schools, nonchalantly evade taxes and get away with it. The globalisation of capital markets has enabled so many to game the system.
What are the contours of offshore private wealth? First, global private wealth that is hidden in tax havens is huge. In 2012, the Tax Justice Network (TJN) published the highly acclaimed and most authoritative report, by far, called "The price of offshore revisited" by James Henry, an expert on the subject of tax havens. The report estimated offshore wealth held in the form of financial instruments at $21 to $31 trillion. It provided various approaches to validate this number, establishing that this might be the lowest and most conservative estimate. This number excludes physical assets. It is higher than the GDP of the US and China put together.
Second, the assets are tough to track and retrieve. The assets are not kept in a location like Panama or any of the 80 plus tax havens. Those that call for 'bringing back the money' do not understand that tracing the money, despite all the leaks, is very complex, and will take years of work. A cleverly woven web of structures, that stretches across multiple legal, regulatory and tax regimes, guard the assets. The objectives of the investors who own this wealth are anonymity, minimal or zero tax liability, investment management, easy access and high security. Several entities have made a business of these needs over a very long period of time. It is tough to even begin to domicile the assets that firmly belong to the intended beneficiaries, but to no single country or regime. Third, the best minds work with the assets and vested interests are strong and powerful. To the top accounting and legal firms and multinational banks, the business of enabling wealthy individuals to hide their wealth is big and extremely lucrative. Together, these firms that employ the best minds at very attractive salaries and bonuses, also represent a mighty global power lobby.
Legal and accounting firms are revered for their cross-country expertise in their profession. Multinational banks are too big to fail, and banking regulators still do not seek detailed disclosures of fee-based, off-balance sheet items such as assets under advice, cross-border liabilities of customers, or assets under custody. The growing competition among these sharp minds for client assets manifests itself in various scandals, scams and crises in global markets, the global financial crisis of 2008 being the most damaging of them all. That governments spent billions of dollars of taxpayers' money to bail the investment banks out of the crisis is a telling indicator of their power.
Fourth, private capital flows have modified global capital markets significantly. Corrupt politicians, unethical businessmen, exploitative autocrats and other such 'investors' who move assets out of their countries to offshore regimes, invest them in global assets. This brings about several distortions. Long-term assets that are held secretively get deployed primarily in low-risk and safe short-term bank CDs and treasury bills. Asset prices and valuations are distorted by large amounts of capital that have no domicile, but are deployed across global currency, bond, stock and derivative markets. Some of the assets get 'round-tripped' to be invested in the performing home markets such as China and India, after being routed through structures in neighbourhood havens such as Hong Kong and Mauritius. In the process, regulatory structures are weakened. Read more at: