Global Overview and Comparison of Offshore Financial Centers and Their Uses
Far from how it is often characterized, the offshore industry grew as a natural and viable response to the changing global economic landscape. Accompanying imagery brings up tropical Caribbean destinations in which greased whiten linen suit wearing mafioso types hand over briefcases full of unmarked currency to a local attorney who launders the money through an intricate series of offshore transfers. This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research.
In many, foreign banks account for the lion’s share of the banking system’s cross-border positions (Graph 4, right-hand panel). Foreign-owned institutions bring skills, technology, networks and reputation that locally owned institutions in small economies have difficulty matching. They also bring access to funding and liquidity, which help cross-border financial centres to operate at scale. The common FSF–IMF–Academic definition of an OFC focused on the outcome of non-resident activity in a location (e.g. financial flows that are disproportionate to the Starting Up An Independent Broker-dealer local economy), and not on the reason that non-residents decide to conduct financial activity in a location. However, since the early academic papers into OFCs in the late 1970s, and the FSF-IMF investigations, it has been consistently noted that tax planning is only one of many drivers of OFC activity. Others include deal structuring and asset holding in a neutral jurisdiction with laws based on English common law, favourable/tailored regulation (e.g. investment funds), or regulatory arbitrage, such as in OFCs like Liberia, that focus on shipping.
- By contrast, it accounted for about 40% of cross-border centres’ aggregate liabilities in 2020.
- If you receive income or payments in a foreign currency, it can be convenient to use a bank that operates with that currency.
- Using big data to find OFCs
Early attempts at OFC identification have resulted in for instance the Tax Justice Network’s “Financial Secrecy Index” and Oxfam’s list of the worst corporate tax havens.
They are neither an ultimate source nor final destination for investments and are usually embedded in small economies, as in the case of Bermuda and the Cayman Islands (Lane and Milesi-Ferretti (2011)). We refer to these as cross-border financial centres and explain in the Box how they differ from offshore centres. There is no universal definition, but tax havens, or offshore financial centers, are generally countries or places with low or no corporate taxes that allow outsiders to easily set up businesses there. Tax havens also typically limit public disclosure about companies and their owners.
OFCs, however, have expanded into a related area to shadow banking, which is asset securitisation. Unlike traditional shadow banking, where the OFC bank needs to access a pool of offshore capital to operate, securitisation involves no provision of capital. OFC securitisation involves the provision of legal structures, registered in the OFC, into which foreign capital is placed to finance foreign assets (e.g. aircraft, ships, mortgages assets etc.), used by foreign operators and foreign investors. The OFC thus behaves more like a legal conduit rather than providing actual banking services. This has seen a rise in large specialist legal and accounting firms, who provide the legal structures for securitisations, in OFC locations. In normal securitisations, the foreign capital, assets and operators can all come from major onshore locations.
With the help of lawyers, accountants, white-shoe professionals and complicit Western governments, the wealthy and well-connected have avoided paying trillions of dollars in taxes. The rest of us cover the difference — or, more commonly, can’t, leaving treasuries bereft of monies needed to build roads, schools and tackle existential threats like climate change and global pandemics. Joe has a Bachelor of Science in Economics from Baruch College, a Masters degree in Education from Columbia University, and has completed four years of Doctoral work and most of his Dissertation for a Ph.D. in Social Psychology. His dissertation research focused on Behavioral Finance concepts including the relationship between emotions and more rational elements in decision-making. Research has shown that emotions often create an over-emphasis on short-term thinking.
For instance, many of the opaque structured financial products that aggravated the global financial crisis since 2008 were created in OFCs6, 7. Third, complex corporate ownership structures help to minimize tax payments–especially for corporations that have many intangible assets, such as intellectual property rights8. For instance, between 2007 and 2009 Google moved the majority of its profits generated outside the United States (US$12.5 billion) to Bermuda through corporate entities in the Netherlands.
Mauritius Leaks examined how companies used Mauritius to avoid taxes, while Paradise Papers revealed the secrets of Bermuda, the island where the law firm Appleby was founded. The conduit-OFC number indicates roughly how much more value is channeled in and out of this country towards a sink, as compared to what should based on its economy’s size. For example, roughly 20 times too much value is routed through the Netherlands. Our goal is to become a trusted financial partner who plays a key role in managing your fund.
Since then, financial centres that cater predominantly to non-residents – henceforth, cross-border financial centres – have loomed large as intermediaries of cross-border financial flows. Small economies that host cross-border financial centres saw their share of global external assets and liabilities rise from around 15% in the late 1980s to 30% in the late 2010s – even as their share of world GDP remained constant at less than 3% (Graph 1, left-hand panel). To remedy this lack of transparency, we developed a novel, data-driven approach that identifies OFCs. We simply ask which countries or jurisdictions play a role in corporate ownership chains that is incommensurate with the size of their domestic economies (see Zoromé 2007). Our results show that offshore finance is not the exclusive business of exotic small islands far away.
The five year project started in September 2015 and is funded by the European Research Council (grant agreement #638946). Financial Planning Concepts of America, Inc. is a Securities and Exchange Commission (SEC) Registered Investment Advisor providing fee-only financial planning and investment management services. Joe began his investment career with Shearson Lehman Brothers at a time when the Wall Street brokerage model was based on products, transactions, and sales commissions. After three years at Shearson, he decided to break away from the Wall Street model and create an advisory firm that was instead based on independent advice, transparent cost, and a fiduciary standard of care. In doing so, Joe helped usher in the movement towards fee-based investment management, and fiduciary-level investment advice.
It was the biggest journalism collaboration in history, at the time, and led to the resignation of world leaders, criminal convictions and more than $1 billion in recouped money. It built on the work of our previous investigations, Offshore Leaks, Swiss Leaks and Lux Leaks. We returned with Paradise Papers, West Africa Leaks, Mauritius Leaks, Luanda Leaks and Pandora Papers. Complex structures confound tax officials, law enforcement and investigative journalists. Here is one example of a complex structure set up for Abbott labs from our Lux Leaks investigation. Some lawyers, including Mossack Fonseca from the Panama Papers, charged $350 to incorporate a company.
(A) Distribution of sectors (NACE Rev. 2) in terms of their dominant position in the chain (Source (SO), Conduit (CO), Sink (SI), Source + Conduit (SC), Source + Sink (SS), Source + Conduit + Sink (SCS)). (B) Percentage of revenue going through each country in chains of size three, by sector. The first column visualizes the distribution of sectors in the source country, the second columns visualizes the distribution of sectors in the conduit (horizontal axis), and the third column shows the distribution of sectors in the sink country. Next, we investigated if there exists geographical specialization in the ownership network.
A prerequisite for becoming an international financial centre is a stable, transparent legal environment that instils confidence in the predictability of contractual terms and the effective resolution of disputes. Dubai’s decision to establish its financial centre as a separate administrative area, with its own courts as well as commercial and civil laws based on English common law, illustrates the importance of the legal framework. Lebanon is another example, in that Beirut’s standing as a financial centre was undercut starting in the 1970s by civil wars and the weakening of domestic institutions. (A) Absolute value of the sink-OFC centrality versus absolute value of the sink-OFC centrality without the GDP normalization. The color of the node indicates the sign of the sink-OFC centrality (green are negative, orange are positive). The size of the node is proportional to the sum of the value entering and leaving the country.
In general, we observe that while the source sector is generally known, this is not the case for the sink sector. Consequently with their classification as sink-OFCs, 40% of LU and 70% of HK companies involved in chains ending in sink-OFCs have missing sector information. We found that the Netherlands (NL), the United Kingdom (GB), Switzerland (CH) and Singapore (SG) are specialized in holding companies (code 642), while Ireland (IE) (together with GB) specializes in activities of head offices (code 701). We considered the network of ownership relations as a directed graph with the firms as nodes and the links as ownership relations, where value flows from corporate entities to their owners. The structure of this network itself has been extensively studied and exhibits common properties of complex networks such as a power-law degree distribution and weight (strength) distribution.
Ireland is the route for Japanese and American companies to Luxembourg (note that since the US is not considered a sink-OFC, companies with the structure \(EU\,country\to IE\to US\) (such as Apple) do not contribute to the conduit-OFC centrality of Ireland). Cyprus is primarily used by Russian companies owned from the British Virgin Islands. Belgium is used as a conduit for the company Euroclear (see Supplementary Information). Transfer pricing occurs when two companies from the same group transact with each other. This happens, for example, when Facebook Ireland sells a service or an asset to Facebook USA.
