Trillions disappear offshore to tax havens

The Cayman Islands is among tax havens for the super-rich. Photo / Megan Singleton

A global super-rich elite has exploited gaps in cross-border tax rules to hide an extraordinary US$21 trillion ($26 trillion) of wealth offshore - as much as US and Japanese GDPs put together - according to research commissioned by the campaign group Tax Justice Network.

James Henry, former chief economist at consultancy McKinsey and an expert on tax havens, has compiled the most detailed estimates yet of the size of the offshore economy in a new report, the Price of Offshore Revisited.

He shows that at least US$21 trillion - perhaps up to US$32 trillion - has leached out of scores of countries into secretive jurisdictions such as Switzerland and the Cayman Islands with the help of private banks, which vie to attract the assets of so-called high net worth individuals.

Their wealth is, as Henry puts it, "protected by a highly paid, industrious bevy of professional enablers in the private banking, legal, accounting and investment industries taking advantage of the increasingly borderless, frictionless global economy".

According to Henry's research, the top 10 private banks, which include UBS and Credit Suisse in Switzerland, as well as the US investment bank Goldman Sachs, managed more than US$6 trillion in 2010, a sharp rise from US$2.3 trillion five years earlier.

The detailed analysis in the report, compiled using data from a range of sources including the Bank of International Settlements and the International Monetary Fund, suggests that for many developing countries the cumulative value of the capital that has flowed out of their economies since the 1970s would be more than enough to pay off their debts to the rest of the world.

Oil-rich states with an internationally mobile elite have been especially prone to watching their wealth disappear into offshore bank accounts instead of being invested at home, the research suggests.

Once the returns on investing the hidden assets is included, almost US$800 billion has left Russia since the early 1990s when its economy was opened up. Saudi Arabia has seen US$308 billion flood out since the mid-1970s, and Nigeria US$306 billion.

"The problem here is that the assets of these countries are held by a small number of wealthy individuals while the debts are shouldered by the ordinary people of these countries through their governments," the report says.

The sheer size of the cash pile sitting out of reach of tax authorities suggests standard measures of inequality radically underestimate the true gap between rich and poor.

According to Henry's calculations, US$9.8 trillion of assets is owned by only 92,000 people, or 0.001 per cent of the world's population - a tiny class of the mega-rich who have more in common with each other than those at the bottom of the income scale in their own societies. "These estimates reveal a staggering failure: inequality is much, much worse than official statistics show, but politicians are still relying on trickle-down to transfer wealth to poorer people," said John Christensen of the Tax Justice Network. "People on the street have no illusions about how unfair the situation has become."

UK Trade Union Congress general secretary Brendan Barber said: "Countries around the world are under intense pressure to reduce their deficits and governments cannot afford to let so much wealth slip past into tax havens."

Assuming the mountain of assets earned an average 3 per cent a year for its owners, and governments were able to tax that income at 30 per cent, it would generate a bumper US$189 billion in revenues - more than rich countries spend on aid to the developing world each year.

Groups such as UK Uncut have focused attention on the paltry tax bills of some highly wealthy individuals, such as Topshop owner Sir Philip Green, with campaigners at a recent protest chanting: "Where did all the money go? He took it off to Monaco!"

A spokeswoman for UK Uncut said: "People like Philip Green use public services - they need the streets to be cleaned, people need public transport to get to their shops - but they don't want to pay for it."

- Observer