From Panama to Paradise

“The ‘Paradise Papers’ have once again highlighted the failure of governments around the world to deal with the scourge of tax dodging and financial crime facilitated by offshore financial centres, and we commend the ICIJ on their fearless investigative journalism” – Tax Justice Network

The Paradise Papers, released by the International Consortium of Investigative Journalists (ICIJ) on November 5, 2017, is the largest leak of data to date from the world of financial secrecy. It has once again confirmed that this is a serious global issue.  It establishes beyond doubt that many multinational corporations and wealthy elites are dodging taxes and their obligations to society with impunity, supported by the biggest banks, accountants and lawyers.

According to the Tax Justice Network (TJN), an independent international network launched in 2003, “these truly anti-social actions undermine public health and education systems, and drive inequality and corruption – leaving the poorest families and the poorest countries of the world to suffer”. This is indeed the most candid comment one can offer. Research by many reputed independent networks, especially by the TJN and Global Financial Integrity, confirms that lower-income countries bear a disproportionate share of the burden from global tax abuse – this has direct costs in terms of everything from foregone economic growth to excess child mortality.

According to the ICIJ, Paradise Papers, reveal “offshore interests and activities of more than 120 politicians and world leaders, including Queen Elizabeth II whose private estate indirectly invested in a rent-to-own loan company accused of predatory tactics. At least 13 allies, major donors and Cabinet members of US President Donald J Trump appear, including Commerce Secretary Wilbur Ross’s interests in a shipping company that makes millions from an energy firm whose owners include Russian President Vladimir Putin’s son-in-law and a sanctioned Russian tycoon. It reveals offshore interests and activities of more than 120 politicians and world leaders, including Queen Elizabeth II, and 13 advisers, major donors and members of US President Donald J Trump”.

Some key findings of the Paradise Papers are tax engineering of more than 100 multinational corporations, including Apple, Nike and Botox-maker Allergan, tax-haven shopping sprees by multinational companies in Africa and Asia using shell companies in Mauritius and Singapore to reduce taxes, secretive deals and hidden companies connected to Glencore, the world’s largest commodity trader, and accounts of negotiations in the Democratic Republic of the Congo for valuable mineral resources. It gives details of the rich, including royalty and sports stars, owning jets and yachts, using Isle of Man’s tax-avoidance structures.

The Paradise Papers like the Panama Papers have proved beyond doubt that the corrupted international infrastructure is allowing élites to escape tax and regulations. Pakistanis who    are part of this new undesirable club have been unveiled by journalist Umar Cheema, representing the ICIJ in Pakistan, in his story: ‘After Panama Papers: Paradise Papers shake and shock world’ (The News, November 6, 2017). This report shows that tackling the dual menaces of unlawful outflows, money laundering and tax evasion is not our peculiar problem. Many governments of the world are facing challenges of checking flight of untaxed money.

The wealthy of the world have around $40 trillion in tax havens; the share of Pakistanis is around $150-200 billion. According to the World Bank’s Stolen Asset Recovery initiative estimates, the cross-border flow of proceeds from criminal activities, corruption and tax evasion is $2 trillion per year, about half of which comes from developing and transitional economies. Assets held offshore, beyond the reach of effective taxation, are equal to about a third of total global assets. Offshore finance is not only based in islands and small states, it has become an insidious growth within the entire global system of finance, offering not only low or zero taxes, but facilities for individuals or entities to get around the rules, laws and regulations using secrecy as their prime tool.

Tax havens help rich people hide money that should be spent on schools, hospitals, roads and other public services. These force poor people to pay taxes that are due from the rich. Such jurisdictions help criminals hide their loot. Tax havens help dictators and their cronies plunder resources of developing countries. They allow banks to dodge financial rules and regulations. They corrupt markets (concealing insider dealing and supporting aggressive tax dodging by multinational companies), create a private world of secrecy, impunity and power for the  elite, widen the gap between the rich and the poor, make laws that affect us all and above all shake our faith in democracy.

Tax havens are not only heightening inequality and poverty, corroding democracy, distorting markets, undermining financial and other regulation and curbing economic growth, accelerating capital flight from poor countries, and promoting corruption and crime around the world, but are also being widely by criminals and terrorists. Undoubtedly, the fight against tax havens is one of the greater challenges of today’s world.

Tax havens challenge the basic tenets of traditional economic theory and open new fields of analysis on a diverse array of important issues such as foreign aid, capital flight, corruption, climate change, corporate responsibility, political governance, hedging funds, inequality, morality – and much more.

As corrupt elites strip their countries’ financial assets and relocate them to these financial centres, developing countries’ economies are deprived of local investment capital and their governments are denied desperately needed tax revenues. This helps capital flow not from capital-rich countries to poor ones, as traditional economic theories might predict, but in the opposite direction. It is time the international community addressed seriously what may be the biggest risk of all: tax abuse, and tax havens and everything they stand for.

The TJN in its reaction to Paradise Papers has rightly called on world leaders to commit finally to ending tax abuse and financial secrecy. It is time the UN convened a summit of world leaders with the goal of agreeing to a UN convention to end tax abuse and financial secrecy. World leaders need to agree to binding targets to reduce all forms of illicit financial flows, with accountability mechanisms to ensure progress.

The writer is an advocate of the Supreme Court and adjunct faculty at LUMS.

Email: ikram@huzaimaikram.com

Twitter: @drikramulhaq