While there is now significant literature in law, politics, economics, and other disciplines that examines tax havens, there is little information on what tax haven intermediaries — so-called offshore service providers — actually do to facilitate offshore evasion, international money laundering, and the financing of global terrorism. To provide insight into this secret world of tax havens, this Article relies on the Author’s study of big data derived from the financial data leak obtained by the International Consortium for Investigative Journalists (ICIJ). A hypothetical involving Breaking Bad’s Walter White is used to explain how offshore service providers facilitate global financial crimes. A transaction cost perspective assists in understanding the information and incentive problems revealed by the ICIJ data leak, including how tax haven secrecy enables elites in nondemocratic countries to transfer their monies for ultimate investment in stable democratic countries. The approach also emphasizes how, even in a world of perfect information, political incentives persist that thwart cooperative efforts to inhibit global financial crimes.INTRODUCTION (FOOTNOTES OMITTED):
On April 3, 2013, the International Consortium for Investigative Journalists (ICIJ) announced that it had obtained the world's largest financial data leak. The leak included over 2.5 million documents detailing the tax haven financial dealings of over 70,000 taxpayers and over 120,000 offshore corporations and trusts. This leak had been investigated by over eighty-six journalists in forty-two countries prior to its public revelation, forming what is likely the most comprehensive global journalist collaboration in history. For the first time, the secret world of tax havens was revealed in great detail.
The "big data" derived from the ICIJ financial data leak provided journalists and selected researchers, including this Author, with the opportunity to understand how individuals use tax havens to criminally evade taxes, launder illegal earnings, and finance cross-border terrorism (collectively, "global financial crime"). This Article provides a taxonomy of offshore tax evasion efforts derived from the Author's study and analysis of the data leak, with the ultimate aim of providing insights into the incentive and information problems that make it difficult to inhibit global financial crime.
While there is now a significant literature in law, politics, economics, and other disciplines that examine tax havens and offshore tax evasion, there is little information on what tax haven intermediaries--offshore service providers such as finance and trust companies--actually do to facilitate offshore evasion. The gap in the writings can be largely explained by the secretive nature of tax haven activities that shielded them from outside scrutiny. For example, the ICIJ financial data leak revealed that offshore service providers were often not complying with international "know your customer" standards, which creates information problems that significantly raise transaction costs for law enforcement authorities with respect to enforcing tax and criminal laws governing offshore tax evasion and other global financial crime.
A less explored idea is that the secret world dramatically lowers transaction costs for criminals engaged in these offshore activities--the secrecy effectively reduces certain risks facing tax evaders, international drug launderers, and financiers of global terrorism. A transaction cost perspective can assist with understanding the incentive and information problems revealed by the ICIJ financial data leak. The approach emphasizes the ways that offshore service providers take advantage of information problems to facilitate global financial crime.
The ICIJ financial data leak also provides evidence of capital flight from non- or quasi-democratic countries to wealthier democracies such as the United States and other Organization for Economic Cooperation and Development (OECD) nations; it reveals how a small portion of ruling elites in countries such as China use tax haven intermediaries as conduits to invest their monies in stable democracies. The capital-importing countries hence benefit from trillions of dollars of inward foreign direct and portfolio investment, a significant portion of which would not likely take place in the absence of tax haven secrecy.
This environment provides a moral hazard for the capital-importing countries, as the current regime in many ways benefits their economies at the expense of the capital-exporting countries. Tax havens, non-democratic states, and even wealthy democracies all face political incentives to pursue the status quo of tax haven secrecy. This Article shows that, even in a world of perfect information, until political incentives change it will be difficult to make any real progress to inhibit global financial crime.