Citizens' Issues
Estimating illicit funds in global tax havens

The total “development finance” loss – counting both revenues and reinvested earnings – is estimated in the range of $250 to $300 billion. This prevents developing countries from stopping the outflow of money, which thus bleeds them of essential resources
 
The financial crisis of 2008 had an interesting collateral benefit for many emerging economies. Developed countries like Germany, France and US have begun to look at closely the illicit tax avoided funds kept by their citizens in various tax havens. This is because there was a clamour among their citizens about black money kept abroad by the rich when the economy was having major unemployment and recession.
 
As early as February 2008- German authorities have collected information about illegal money kept by citizens of various countries in the Lichtenstein bank. The German Finance Minister offered to provide the names to any Government interested in the list. The United Progressive Alliance (UPA-I) Government unfortunately did not act for many months and after much prodding by opposition, asked for the list in late 2008.
 
Germany’s intelligence agency seems to have paid an unnamed informer more than $6 million for confidential and secret data about clients of LGT group, a bank owned by the Liechtenstein Prince’s family. The revelations have already led to the resignation of the head of Deutsche Post, which is currently the world’s largest logistics company in the world. The Lichtenstein leaders were furious and have focused all their ire at the theft of the data rather than on the facts of the case. The German Government has announced that it would share information on accounts held in the tax haven with any Government that wanted it.
 
They had a list of 1,400 clients of whom only 600 were Germans. The spokesperson for the German Finance ministry Thorstein Albig had indicated (in March 2008) that they would respond to requests without charging any fees for the information. Finland, Sweden, and Norway obtained the data from Germany. This is perhaps the first time a sovereign Government stole data from a bank of a tax haven to expose tax evaders. There are in all more than 70 tax havens and we will elaborate on these later.
 
Similarly, France purchased stolen data from Hong Kong & Shanghai Bank Corp (HSBC)’s Geneva branch. Additionally, US was waging a running battle with Union Bank of Switzerland (UBS) about the illicit funds kept by its citizens in the Swiss bank.
 
These illustrations show how the economic crisis of 2008 was a catalyst for going after tax havens by developed economies.
 

What is the Size of the problem globally?

 

The estimates pertain to total amount hoarded in these tax havens on a global basis and that of individual countries including India. Then there are estimates of India’s illicit money in Switzerland since that country has been a long time favorite of Indians.
 
In reply to a question on how to stop people from parking money outside, Raghuram Rajan, the governor of Reserve Bank of India (RBI) observes that, “No one knows how much black money is stashed outside the country, as there are many speculations doing the rounds.”
 
As another measure to curtail generation of black money, Rajan said, “We need to cut the black money at source and make it difficult for them to hide their ill-gotten wealth”, in a report from Times of India. He should know better but there are different types of estimates, which are inferred and available about the nature of the problem. Of course, by definition, it is black money and so it will be difficult to have an exact estimate regarding the same.
 
Measuring the size of the offshore economy is an exercise in night vision. It is hard to define it; it is fragmented and messy, and it is swathed in secrecy. Official international efforts to measure the various aspects of the phenomenon have been inadequate. We are concerned above with financial flows that are harmful and abusive, whether or not illegality is involved. So we are concerned with tax avoidance, for example, as well as with phenomena such as tax competition.
 
Mostly individual countries’ data is analyzed for “trade mis-pricing” as a major source of generation of illicit funds. This mechanism and implications we will discuss later.
Listed below are some of the Global estimates followed by other regional estimates.
 

Estimate of Global illicit funds

 
1 IMF estimates global black money
– excluding Switzerland, China, Taiwan and Oil exporting economies — at $18 trillion; and that is still an underestimate, says IMF.
 
This estimate of the responsible financial bodies of the world has shocked the world. The extent of black and unsupervised financial economy in the world is now believed to be almost a third of the global GDP. [Cross–Border Investment in small international Financial Centers by Philip R Lane and Gian Maria Milesi-Ferretti –IMF working Paper -2010]
 
The study reports that there may be as much as $18 trillion of foreign dollars parked in small international financial centers, which does not include Switzerland. This does not exhaust the world economies, particularly those economies, which generate lots of export and cash surplus. Leading, cash-rich economies such as China, Taiwan and many of the oil-exporting countries do not participate in the IMF’s survey. This is only for what are called Small International Financial Centers numbering 32.
 
[Andorra, Anguilla, Antigua and Barbuda, Aruba, Bahamas, The Bahrain, Barbados, Belize, Bermuda, Cayman Islands, Gibraltar, Grenada, Guernsey, Isle of Man, Jersey, Lebanon, Liechtenstein, Macao, China, Mauritius, Monaco, Montserrat, Nauru, Netherlands, Antilles, Palau, Panama, Samoa, St. Kitts, St. Lucia, St. Vincent and the Grenadines, Turks and Caicos, Vanuatu, Virgin Islands (British)]
 
Gian Maria Milesi-Ferretti, an economist for the IMF in Washington, said statistical information on Luxembourg, one of the largest offshore financial centers in Europe, illustrated the extent of the problem. The economist said: “Luxembourg is one of the few offshore centers 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.”
 
Richard Murphy, the well-known Economist and accountant and founder of Tax Justice Network, commented: “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 wrote on this in 2005, suggesting there were £11.5 trillion of assets offshore. Time and again this has been attacked by organizations that should have known better and by academics with a right wing axe to grind. But now, like so much else that I and others have argued, it is being validated. And the issue itself, once dismissed as inconsequential is now being considered seriously.
 
The IMF’s $18 trillion number dramatically exceeds previous studies, and even it acknowledges that it probably underestimates the amount of money floating around in tax havens.”
 
2 Christian Aid/ Oxfam estimates
Christian Aid’s False Profits: robbing the poor to keep the rich tax-free estimates that between 2005 and 2007, the total amount of capital flow from bilateral trade mis-pricing into the EU and the US alone from non-EU countries is estimated conservatively at more than US$1.1 trillion (£581.4 billion, €850.1 billion)- Update: March 2009.
 
Oxfam estimates that developing countries miss out on up to $124 billion every year in lost income from offshore assets held in tax havens.–Update: March 2009
 
 
3 Tax Justice Network (TJN) Estimate
According to “Price of offshore revisited” which is thought to be the most detailed and rigorous study ever made of financial assets held in offshore financial centers and secrecy structures  —
 
Global super rich has at least $21 trillion hidden in secret tax havens. Wealthy individuals via tax havens owned at least $21 trillion of unreported private financial wealth at the end of 2010.  This sum is equivalent to the size of the US and Japanese economies combined.
 
There may be as much as $32 trillion of hidden financial assets held offshore by high net worth individuals (HNWIs), according to this Report. We consider these numbers to be conservative.
This is only financial wealth and excludes a welter of real estates, yachts and other non-financial assets owned via offshore structures.
 
4 Other Global estimates
The table below shows estimates of Global Black money compiled from various sources over a period of 5 years…
 
Date Description
December 11, 2013 Illicit Financial Flows from Developing Countries: 2001-2010 – Global Financial Integrity, Dec 2013. Estimating that the developing world lost from 2002 to 2011 developing countries lost US$5.9 trillion to illicit outflows, and $954 billion in 2011 alone.
May 22, 2013 Oxfam: At least $18.5 trillion is hidden by wealthy individuals in tax havens worldwide. Original here.
February 25, 2013 Gabriel Zucman: the Missing Wealth of Nations Estimates that 8% of the global financial wealth of households is in tax havens, 75% of which is unrecorded. (This 'unrecorded' relates to information available to cross-border statistical analysis, rather than to tax authorities.)
July 2012 The Price of Offshore Revisited. TJN's in-depth and unprecedented study into the size of the offshore system. Main report here. Also see:

 

TJN responds to attack on estimates by Jersey Finance, June 2014.

July 2012 Inequality: You don't know the half of it: TJN's assessment of why inequality is much worse than we think, because of offshore secrecy.
November 2011 A Tax Research briefing paper on the $3.1 trillion annual costs of tax evasion worldwide. With country by country breakdown. Original here.
March 2010 New IMF research showing huge discrepancies between portfolio assets and liabilities in selected offshore centres. For instance Luxembourg reports portfolio assets of US$1.5 trillion at end-2008 versus portfolio investment liabilities at US$2.5 trillion. The Cayman Islands reports a $750 billion: $2.2 trillion assets-liability split. Click here for more.
February 2010 Global Financial Integrity estimate that developing countries lose $98 – $106 billion each year due solely to re-invoicing.
May 2008 Death and taxes: the true toll of tax dodging," Christian Aid. Calculating that nearly 1,000 children die every day  just from tax evasion.
   
 

Regional estimates

 
The table below shows estimates of Black money compiled from various sources in specific regions over a period of 5 years…
 
Date Description
May 29, 2013 Illicit Financial Flows from Africa, 1980-2009. Global Financial Integrity. Between 1980 and 2009, the economies of Africa lost between US$597 billion and US$1.4 trillion in net resource transfers away from the continent. Original here.
May 24, 2013 Action aid: Almost half of all investment into developing countries goes through tax havens. Original here.
October 2012 Over $800 billion drained from Sub Saharan Africa. Original here.
October 2012 Over $450 billion drained from North Africa.
March 2009 False Profits: robbing the poor to keep the rich tax-free, Christian Aid. Between 2005 and 2007, total capital flow from bilateral trade mispricing into the EU and the US alone from non-EU countries is more than US$1.1 tn (£581.4 bn, €850.1 bn).
May 2008 Death and Taxes: the true toll of tax dodging, Christian Aid. Estimates corporate tax losses to the developing world at US$160bn a year (£80bn), more than one-and-a-half times the combined aid budgets of the whole rich world.
   
 
World Bank Says: In a Speech by World Bank Managing Director and COO Sri Mulyani Indrawati at Event on Tax Evasion and Development Finance World Bank Managing Director and COO Sri Mulyani Indrawati Washington, D.C., United States 17 April 2015 – says…
 
UNCTAD estimates that more than 60% of global trade occurs within multinational groups. That creates the potential for failing to declare profits and to shift profits from high-tax to low-tax jurisdictions. This is often done through illegal tax evasion.
 
But sometimes it is also done through legal forms of tax avoidance and manipulation – including trade and transfer mispricing; dubious payments between parent companies and their subsidiaries; and profit-shifting mechanisms designed to hide revenues.
A recent UNCTAD study indicates that about $100 billion in annual tax revenue is lost to developing countries in transactions directly linked to offshore hubs. The total “development finance” loss – counting both revenue and reinvested earnings – is estimated in the range of $250 to $300 billion. This prevents developing countries from stopping the outflow of money – which thus bleeds them of essential resources.
This brings us to the larger issue of tax cheating by corporate giants and also annual loss to many jurisdictions. This issue we will be looking at in the next few articles along with the issue of individual countries like India
 
(Views expressed in this article are personal)
 
This article was first published by PerformanceGurus.net
 
(Prof R Vaidyanathan , Professor of Finance and Control, has taught at IIM Bangalore for over three decades and is consistently rated as one of its most popular teachers. Prof Vaidyanathan has coined the term 'India UnInc' for the largest component of the Indian economy comprising small entrepreneurs, households. Prof Vaidyanathan sits on the advisory boards of SEBI and the RBI.)
 

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COMMENTS

B. Yerram Raju

2 years ago

Good consolidation effort. But it is time to calculate how much has come back and how much is likely to get into the treasury in the coming few years under two scenarios;
(1) if the Courts decide the cases in less than 3 months and beyond 3 months after filing suits and (2) if the governments enable setting up legislative actions to bring back the money in such period.

Lawyer vs Lawyers
When lawyers actually do good
 
At a Moneylife seminar, when the audience was asked if they thought lawyers were honest, sadly, not one hand was raised. That prompts us to bring you a heart-warming story of lawyerly Good Samatarianism as well as judicial sympathy.
 
A man was arrested for drug dealing and related offences and converting black money into white. The prosecution threw the book at him. His lawyers, experts in fast-track court proceedings, connived to lose the case in two months. However, to compensate themselves for their ‘effort’, they charged the culprit $250,000 (more than Rs1.5 crore). Not satisfied with their self-serving argument, that the amount is small change for a narco-crook, they also take away his house and his wife’s wedding band and engagement ring.
 
The client got 14 years in prison. But there was a catch. The man had already pleaded guilty in a plea bargain which cannot be done without the consent and knowledge of his lawyers. A plea bargain is when a person’s lawyers go into a huddle with the prosecution and hammer out a deal. It allows a person to accept certain charges in exchange for a lengthy and expensive trial while the prosecution drops a few charges or reduce the sentence and penalty and the matter is closed. However, the judge must agree to the plea bargain.
 
If the person agrees to plead guilty, there are negotiations on the amount of fine or length of the sentence. Sometimes, the period of incarceration is cut if the person agrees to counselling and rehabilitation or learning legitimate crafts; all of it is intended to make a model citizen out of a thug.
 
The operative term is ‘all parties’. That includes the lawyers for the convict. A sort of Lok Adalat.
 
In this case, the lawyers did not cooperate and help their client get a lesser sentence, as they should have. Obviously, the lawyers, having ripped off their client, did not want him out soon. Drug-dealers are no spring chickens and he could be a menace to them. So, instead of a lesser sentence due to the plea bargain, he got 14 years in jail! What did he get out of copping a plea? Nothing. He may even have been acquitted had he stood trial and were to be represented by good lawyers.
 
Enter a white knight. A lawyer, in the Shahid mould, who decides to take up the matter pro-bono. He convinces the judge that the convict was let down by his own advocates. 
 
You be the judge. What would you do?
 
Judges are no fools. While lawyers handle a case or two a day, judges go through dozens of them. Even when they nod, it means they ‘heard the argument’, not that they agree with it. Luckily, the judge saw through the lawyers’ game plan. He not only reduced the sentence, he ordered the lawyers to pay back the entire amount to the convict. He also made the lawyers pay the new advocate, for exposing them and taking on their burden. The amount? $10,000.
 
The story does not end here. Easy come, easy go. The lawyers had spent the client’s money. They had to pay him back. When the man had served his term, he had no place to go. Solution? He took over one of the lawyers’ homes. What business he is in now is not reported, but he is certain of one thing. Justice may be delayed, it may be blind-folded, but it is not blind.
 
Readers may ask why the judge did not take corrective action in the first place. Judges’ hands are tied. They confine their orders within what the lawyer asks, usually called ‘prayers’. If your lawyer prays for Rs10, you may get Rs5. But rarely Rs15. That is why prayers are often couched in vague terms, “…and any other relief that the Hon. Court may deem fit.”
 

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COMMENTS

Bapoo Malcolm

8 months ago

Was going through some old stuff and discovered some interesting letters.

A lawyer has to save his client. So he must advise his client against lying. Rest assured, they will get caught. But that is not the reason for the perjury.

Clients often insist on lying. It makes life difficult. I normally ask to withdraw from the suit. Too many clients justify lying by saying the opposite side does it. And almost all are convinced that one MUST LIE IN COURT. They believe that its the dine thing.

The lawyer REPRESENTS his client. He is briefed by his client. He is bound by that.

And its true what Mr. Mohan said. Has happened to me. I was supposed to have done nothing; the judge did it all. And if we had lost??? "MY LAWYER IS USELESS", they say. Either way, payment is avoided.

B. Yerram Raju

2 years ago

Some lawyers are good and some others make good in the cases they handle. Some are out of court compromises and withdrawal of the cases by the appellant.

sunil

2 years ago

IN INDIAN COURTS,lawyers generally advise their clients not to file criminal plea against any fellow lawyer who may have committed a crime.EVEN PP generally go soft against lawyer of same court and a criminal(lawyer) is set free to commit another crime(s).WHAT SHOULD A PERSON DO IF HE COMES ACROSS SUCH A JUDGEMENT IN WHICH A LAWYER IS SET FREE FROM CRIMINAL CASE JUST BECAUSE HE IS A LAWYER OF SAME COURT?

Sunil Rebello

2 years ago

Lawyer vs Lawyers
now yesterday we heard of Salman Khan's Lawyer who after 10 years of the criminal case - spun a story and tried to insert a Fall guy as the driver to Salman car in the accident.
the judge saw through the Lawyers false tactics. But he did not punish him...WHY?????
The Lawyer should be locked up for 30 days at least, for his lies.. and his license should be suspended for 5 years..

Mr Jitendra

2 years ago

Good article!

MOHAN

2 years ago

Honest lawyers are doing a thankless job.
when a case is won the client would claim that it was because of the law and facts of the case it was won.

If the case is lost it was because of the lawyer the case was lost !!

Railways implement 39 budget announcements
During the first 36 days of the current fiscal, the railways ministry has implemented 39 announcements made by Railways Minister Suresh Prabhu in his budget speech, the government said on Wednesday.
 
In a statement, the ministry said the programmes that have been implemented ranges from passenger amenities system improvements to infrastructure development.
 
Under the implementation strategy, comprehensive action plans were formulated on all budget announcements.
 
To ensure effective and efficient online monitoring, the ministry has also developed a special web-based software E-Samiksha to keep an eye on implementation, it said.

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