Magnitudes: dirty money, lost taxes and offshore
July 22, 2012 - We have opened up a major new web page entitled "Estimating the Price of Offshore", which will complement this one.
The size of the offshore economy is hard to measure precisely, as a result of its fragmented nature, difficulties involved in defining it, and a pervasive culture of secrecy. International efforts to measure it often focus only on narrow aspects of it. For example, much effort is expended on measuring and tackling terrorist finances or (to a lesser extent) international bribery, but little attention is paid to problems on much, much larger scales -- such as commercial transfer mispricing abuses.
It is important to note that the different estimates provided below mostly do not take into account the impact on domestic tax laws of tax competition, whose effects are probably impossible to measure, but which are likely to have impacts at least as large as the impacts and losses described below.
It is also worth noting that harmful financial flows and tax losses include both the illegal kinds (notably tax evasion) and the legal kinds (notably tax avoidance) and the large grey area in between the legal and illegal. This page describe a series of partial measurements of both aspects, but because of problems of overlap and gaps we have not put these pieces together into a unified whole. TJN is currently working on a major project called Mapping the Faultlines, in partnership with Washington-based Global Financial Integrity and with funding from the Ford Foundation, which will help provide a more unified picture of the problem. Results should be ready in 2009.
The first part of this page outlines global and regional estimates; the second section identifies some data for individual countries. In a report in July 2009 the Oxford Centre for Business Taxation challenged some of the data below: that report, and TJN's response, can be found here.
GLOBAL AND REGIONAL ESTIMATES
Tax Justice Network: The Price of Offshore
In March 2005, TJN published The Price of Offshore, based on data from Boston Consulting Group; McKinsey’s; Merrill Lynch/Cap Gemini, and the Bank for International Settlements. This document estimated that the world’s High Net Worth Individuals (HNWIs) held around $11.5 trillion of assets offshore, which would generate a return of about $860 billion a year at a 7.5% rate of return, and a consequent tax loss of $255 billion (let's call it $250 billion as it's hard to be precise on this secret data) as a result of it being held offshore, more than three times the OECD countries’ official development assistance to the entire world. This figure was considered extremely conservative: it did not include tax losses arising from tax competition or trade mispricing; the surveys on which the data was based tended to exclude holdings of individuals with liquid assets below $1 million, and corporations, which reportedly pass more money through tax havens than individuals. It did not include other taxes such as inheritance taxes. We must also stress that this is part of a much bigger global picture. Much tax is also lost through transfer mispricing (see below,) loopholes in domestic tax schemes that do not use offshore, and so on. See below for some of the other estimates that make up the global picture. See the briefing paper here.
Update, March 2010. Wealth Bulletin reports new IMF research showing huge discrepancies between portfolio assets and liabilities in selected offshore centres. IMF data shows portfolio assets held by foreigners in Luxembourg to be worth US$1.5 trillion at the end of 2008; while portfolio investment liabilities reported by the government stood at US$2.5 trillion - a US$1 trillion, or 40% difference. The Cayman Islands reports $750 billion in portfolio assets but $2.2 trillion in liabilities. "The fact that many undeclared funds in offshore accounts are held in cash deposits, not in portfolio investments, means the sum is likely to be much higher." The IMF believes the sum of the external assets and liabilities of what it calls small international financial centres – only a part of the offshore picture and excluding offshore centres such as Switzerland and the City of London – is $18 trillion. Click here for more.
Gabriel Zucman: the Missing Wealth of Nations
Estimates that 8% of the global financial wealth of households is held in tax havens, 6% of which goes unrecorded; this stock of unrecorded assets is double the recorded net debt of the rich world
Global Financial Integrity
In January 2009 Global Financial Integrity (GFI) at the Center for International Policy in Washington published a report on illicit flows from developing countries, which estimated that "in 2006, the most recent year of the GFI study, developing countries lost an estimated $858.6 billion – 1.06 trillion in illicit financial outflows." Click here for the Executive Summary; the full economist version , en Français y en Español . A statistical appendix is available here An Excel version of this should be available from GFIP >
In February 2010, Global Financial Integrity published a report estimating that developing countries are losing $98 billion to $106 billion each year due solely to re-invoicing; approximately 4.4 percent of the developing world's total tax revenue. Read the TJN summary of that report here.
In March 2010, GFI published a new study Privately Held, Non-Resident Deposits In Secrecy Jurisdictions, estimating that
- Current total deposits by non-residents in offshore and secrecy jurisdictions are just under US$10 trillion;
- The United States, the United Kingdom, and the Cayman Islands top the list of jurisdictions
- Asia only accounts for approximately 6 percent of worldwide offshore deposits, although Hong Kong is the tenth largest secrecy jurisdiction by deposits in this report;
- The rate of growth of offshore deposit holdings in secrecy jurisdictions has expanded at an average of 9 percent per annum; outpacing the rise of world wealth in the last decade.
Earlier Raymond Baker, who runs GFI, made a different set of estimates of global dirty money in his ground-breaking 2004 book Capitalism’s Achilles Heel. He used both a bottom-up approach (adding up dirty money’s component parts –drugs money, mispricing, etc.) and a top-down approach (approximating it as a share of global GDP.) He estimated cross-border flows of global dirty money in a range between $1.1-1.6 trillion annually, about half from developing and transitional economies, and two thirds of which is commercial dirty money. In April 2007, the World Bank endorsed Baker’s figure, although it has (astonishingly) not yet published its own independently researched data.
Using his lower $500bn estimate for developing and transitional economies, Baker said: “Through most of the 1990s, aid was running at about $50bn a year from all sources. It has edged up slightly in this decade. $50bn of aid in; $500bn of dirty money out. For every $1 that we have been generously handing out across the top of the table, we’ve been taking back some $10 of illicit proceeds under the table. There is no way to make this formula work, for poor or for rich.” The $500bn coming illegally out of developing and transitional economies is equivalent to 8% of their GDP.
In the 1990s U.S. Treasury department officials told Baker that illicit inflows into the U.S. stood at around $250 billion per year, and in a good year they seized $250 million of that. This equates to a failure rate of 99.9%. The volumes have increased since then, but there is no reason to think that the failure rate has improved.
“Laundered proceeds of drug trafficking, racketeering, corruption, and terrorism tag along with other forms of dirty money to which the United States and Europe lend a welcoming hand,” Baker concluded. “These are two rails on the same tracks through the international financial system.” It is not possible to tackle any of these seriously without tackling them all. Baker's opening speech at a conference on June 28, 2007 explains some of the issues in stark detail.
"No one I have ever talked to thinks dirty money is declining or that anti-money laundering efforts are stemming the global tide of illicit proceeds. Indicators point in the opposite direction." Baker broke down his data like this:
| Cross-border flows of global dirty money, US$ billion, annual
| Commercial, of which:
|Abusive transfer pricing||300||500|
| Fake transactions
World Bank: Global Illicit Flows
Some of the world’s biggest financial institutions – notably the World Bank and the IMF – have failed seriously to try and measure many aspects of it, and it is urgently important that they should do so. Even the narrow aspects that they have studied, however, are alarming. In 1998, the IMF’s managing director Michel Camdessus estimated the size of money-laundering transactions globally as being “almost beyond imagination” - at 2 to 5 percent of global GDP, which suggested a figure then of $640 billion to $1.6 trillion. (This was based on a figure of $32 trillion for global GDP at the time; however, latest World Bank data put total Global GDP at $45 trillion at market prices, of which the U.S. economy accounts for about $12.5 trillion. Measured at Purchasing Power Parity, global GDP is estimated at $61bn.) However, IMF officials subsequently declined to specify what he meant by “money-laundering” or whether this included the commercially tax-evading component.
The World Bank estimated in 2004 that over a trillion dollars is paid in bribes each year -- and this does not include embezzlement of public funds or theft of public assets. It is important to note that most of this data cannot be deduced from looking at “errors and omissions” entries or GDP measures in national accounts – it simply goes unrecorded in national statistics. Nevertheless, other sources of information are now beginning to emerge about both the stock and the flows of offshore holdings and dirty money. It is estimated that 60 percent of all global trade is estimated to be routed through tax havens.
We outline a number of different estimates of the problem below. Essentially, there are two types of estimates. One focuses on legality, and tries to measure illegal flows. The other focuses on all kinds of abusive tax practices, whether legal or illegal. The Tax Justice Network tends to focus on the second kind of estimate (which will tend to involve larger numbers than the first kind) because it is concerned not so much about who is following the law or not (although that is important, and there is a very large grey area between legal and illegal tax abuses) but about how abusive tax and regulatory structures undermine democracies, disempower electorates and increase income and wealth inequality.
Below we list a number of different estimates for different kinds of financial assets and flows.
Media reports sometimes quote OECD data estimating the total size of offshore wealth held by HNWIs at a much lower $5-7 trillion. The reason for the lower figures appears to be simply that the reports are quoting OECD data (based on information from the IMF and the Bank for International Settlements) that may be out of date; the OECD has cited these figures since 1998. We also believe the OECD uses a narrow definition of offshore and excludes, for example, large financial centres such as London. We would welcome more clarity from the OECD on the methodology it uses to calculate their figures.
"Developing countries are estimated to lose to tax havens almost three times what they get from developed countries in aid."
Angel Gurría, OECD Secretary-General, November 2008
US corporate cash
A JP Morgan study in May 2012 estimated that U.S. corporations hold $1.7 trillion in cash or near-cash sitting offshore or overseas. However, David Cay Johnston, citing US Federal Reserve and IRS statistics, estimates the figure at $3.4 trillion. See here and here.
A new March 2009 analysis for Oxfam by James Henry, former Chief economist at McKinsey & Co, found that at least $6.2 trillion of developing country wealth is held offshore by individuals, depriving developing countries of annual tax receipts of between $64-124bn. If money moved offshore by private companies was included this figure would be much higher. The scale of the losses could outweigh the $103bn developing countries receive annually in overseas aid. Capital flight is a growing problem too with an additional $200-300 billion being moved offshore each year.
CapGemini's World Wealth Report 2007 estimated HNWI (High Net Worth Individuals - those with more than) global wealth at $37.2 trillion in 2006, 11.2% higher than in 2005, with Singapore, India, Indonesia and Russia showing the highest growth in HNWI populations. It estimated a global total of 9.5m HNWIs. Note that this data only includes financial assets: non-financial assets will be far bigger. Ultra-HNWIs (those with more than $30 million in financial assets) saw their wealth grow even faster: a 16.8% rise from 2005 to 2006, to a total $13.1 trillion. CapGemini forecast HNWI wealth rising to $51.6 trillon by 2011.
Boston Consulting Group
In a 2003 report, Boston Consulting Group estimated total HNWI assets at $38 trillion, broken down as follows:
|Total HNWI assets $trn||% held offshore
|North America||16.2||less than 10|
|Asia-Pacfic and Middle East||10.2||Japan < 10
Other Asia 30
|Latin America||1.3||More than 50|
We would expect that rapid global economic growth since then will mean that the numbers are significantly larger today.
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 mispricing into the EU and the US alone from non-EU countries is estimated conservatively at more than US$1.1tn (£581.4bn, €850.1bn.)
In Death and Taxes: the true toll of tax dodging (May 2008) Christian Aid estimated that from transfer mispricing and false invoicing, that the loss of corporate taxes to the developing world is currently running at
US$160bn a year (£80bn), more than one-and-a-half times the combined aid budgets of the whole rich world – US$103.7bn in 2007. "We predict that illegal, trade-related tax evasion alone will be responsible for some 5.6 million deaths of young children in the developing world between 2000 and 2015. That is almost 1,000 a day."
Research (pdf) by Alex Cobham at the Oxford Council on Good Governance shows that poorer countries forego $385 billion in revenues annually, due to tax avoidance and tax evasion. This is considered a conservative estimate, and is nearly four times bigger than total OECD countries’ foreign development assistance to the whole world.
In The Mirage of Debt Relief, a chapter in the book A Game As Old As Empire, James Henry, a former chief economist at McKinsey & Company, describes how foreign loans and aid into developing countries were accompanied by very large outflows of private capital, “producing the largest tidal wave of capital flight in history while revolutionizing the world’s offshore private banking market.” He estimated the outflows resulting from this “debt-flight” cycle at an average of $160 billion per year (in real 2000 dollars) from 1977 to 2003, and by the early 1990s, the total amount of untaxed Third World private flight wealth exceeded the value of all outstanding Third World foreign debt. Henry estimated the stock of outstanding debt of developing countires in 2006 at $3.24 trillion, with a net present value somewhat higher, at $3.7 trillion (or $3.2 trillion excluding China and India.) Of that, he estimated that $1 trillion – or 25 to 35 percent of the total, either “disappeared into poorly planned, corruption-ridden development projects or was simply stolen outright.” In an earlier calculation, Henry used World bank and Merrill Lynch/Cap Gemini data to estimate that the world’s High Net Worth Individuals (HNWIs – or those worth $1m or more in liquid assets) had a total liquid net worth of $32 trillion, or 77% of the world’s total $42.2 trillion liquid net worth, even though the 8.3 million HNWIs represented just 0.13% of the world’s 6.4 billion population. (In 1998, Merrill Lynch / Cap Gemini estimated that a third of HNWIs’ wealth is held offshore, which, with Henry’s $32 trillion figure, would tally with the estimate in The Price of Offshore, above.
Knight Frank / Citi Private Bank
A new report on the world's wealthiest individuals, published in April 2008, provides some information on a country by country basis (and some residential property price comparisons.) The report says that the rate of growth of high net worth individuals has outpaced growth in both gross domestic product, and GDP per head, which it believes indicates that the rich are getting richer relative to their respective countries. See this FT story about the report, and the background data here. Unfortunately, this data does not contain estimates of wealth held offshore.
INDIVIDUAL COUNTRY DATA
In alphabetical order:
In April 2008 James Boyce and Léonce Ndikumana of the University of Massachusets, Amherst, published new research which estimated that capital flight from 40 sub-Saharan African countries from 1970-2004 stood at $607 billion in 2004 dollars (including interest earnings), compared to a total $227 billion external debt owed by those countries in 2004. In other words, Sub-Saharan Africa is a net creditor to the rest of the world in the snse that external assets, as measured by he stock of capital flight, exceed external liabilities, as measured by the stock of external debt. “The difference is that while the assets are in private hands, the liabilities are the public debts of African governments,” they said, adding that “The real counterpart of many assets on the balance sheets of creditor banks is private deposits in many of the same banks by individuals belonging to Africa’s political and economic elites.” See the April 2008 edition of Tax Justice Focus (p5) for more details.
In 2002, Boyce and Ndikumana investigated the econometrics of capital flight from 30 sub-Saharan African countries, and estimated that external borrowing is positively and significantly related to capital flight, suggesting that to a large extent capital flight is debt-fueled. They estimated that for every dollar of external borrowing in the region, roughly 80 cents flowed back as capital flight in the same year. [TJN notes: this study highlights the fact that tax havens are significantly involved in profiting from international lending to Africa, and capital flight out of Africa that results from this.]
A May 2008 study by Léo-Paul Lauzon of the Université du Québec à Montréal (UQAM) estimated, conservatively, that Canadian banks avoided $16 billion in taxes between 1993 and 2007. The research can be found here. He estimated that the five biggest Canadian banks had at least 89 official subsidiaries in tax havens - though the real number is undoubtedly much higher. Data for wider Canadian tax losses are not yet available.
According a report by France's Syndicat Unifié des Impôts (the Union of Tax Civil Servants,) tax evasion (which is, by definition, illegal), ran at approximately 45 billion Euros in 2006. It estimated average tax evasion in Europe at 2-2.5% of European GDP. Another official document contains some breakdowns of estimates, but much of the data is rather old.
Media reports quote a figure of tax losses to Germany of the order of 30 billion Euros per year, just from (illegal) tax evasion. We do not currently have data for tax avoidance, though since Germany has a larger population (and economy) it seems likely that the figure will be higher than Britain's (see above).
According to officials from the Deutsche Steuer-Gewerkschaft (the tax union), German individuals hold an estimated €300 billion in foreign tax havens, and tax evasion (of all kinds) is approximately €50 billion annually. (Source: TJN-Germany's Germany representative Nicola Liebert's book "Wie sich der Staat selbst das Wasser abgräbt – und was dagegen zu tun wäre. Die deutsche Steuerpolitik auf dem Prüfstand.") Schriftenreihe kritische Wissenschaften, Berlin 2007.) More details (in German) can be found here. A more recent study, cited in Der Spiegel in May 2008, reports higher figures: "close to €500 billion ($775 billion) in untaxed German assets are in foreign tax shelters, with fully one-third of that amount on deposit in accounts in banks in Swiss cities like Geneva, Zürich and Lugano."
A leaked internal memo from the finance ministry estimates how much federal corporate taxes German companies don't pay in Germany: the discrepancy between the amount of federal taxes theoretically due and the taxes actually paid was €17bn in 2005. [The memo is quoted by the tax expert Lorenz in the book Unternehmenssteuerreform 2008: Kosten und Nutzen der Reformvorschläge, Jarrass Jarrass, Lorenz; Obermair, Gustav (2006).] This figure is calculated by taking the difference between the earnings of German-incorporated tax companies, deduct losses brought forward and dividends from foreign equity holdings, and comparing this to the earnings reported to the German tax authorities. However, this is only part of the picture: most companies in Germany are neither limited companies nor joint-stock companies and therefore don't pay corporate taxes, but income taxes - and these are not included in the above figure. These company taxes cannot be separated out from household income taxes. Data about the taxation of companies in Germany therefore should be taken with a pinch of salt, and it's German data is not easily comparable with that of other countries.
Several Indian media articles have reported that Indian nationals hold 1.456 trillion US dollars in Swiss banks. TJN believes this is greatly exaggerated, and according to the Indian government, it originates with a chain letter. (It is possible that this number may result from a 2008 analysis by the Berne Declaration estimating that Switzerland hosts 362-1,467 billion Swiss Francs' worth of tax-evading money sourced from all developing countries.) Global Financial Integrity estimated in 2010 that from 2000 to 2008 India had lost more than US$125 billion in cumulative illicit capital flight. In March 2010 GFI estimated that India had lost a total of US $213 billion in illicit financial flows, with a present value of at least US $462 billion, conservatively estimated. The Indian government issued a White Paper on this in 2012, which is reported here (original here, also in Hindi.)
In Nigeria, the National Economic and Financial Crimes Commission (EFCC) estimated in 2005 that around $400 billion had been stolen or misused by past rulers – a figure that is similar to the entire amount of foreign aid for the entire continent; much of that money has moved offshore. This is probably an exaggeration: the IMF estimated in 2003 that Nigeria's cumulative oil revenues from 1965-2000 (after deducting payments to the oil companies) was "only" $350 billion in 1995 prices.
TaxAnalysts: Jersey, Guernsey, Isle of Man, Switzerland, Caribbean
This high-level tax research organisation is running a project called Offshore Explorations. It is investigating assets ripe for tax evasion (illegal,) so it is not directly comparable with TJN's own figures, which include (legal and questionably legal) tax avoidance money too.
TaxAnalysts published reports in October 2007 showing the impact of three tax havens, linked closely to the City of London: Jersey, Guernsey and the Isle of Man. One report contained this paragraph:
At the end of 2006, there were $491.6 billion of assets in the Jersey financial sector beneficially owned by non-Jersey individuals who were likely to be illegally avoiding tax on those assets in their home jurisdictions. We estimated the comparable figure for Guernsey to be $293.1 billion.
In November 2007 another report, on the Isle of Man, put the comparable figure at $150.5bn. These three jurisdictions therefore held $935.2bn of such assets. Earning 7%, that much money would generate annual income of $65.5bn. Taxing that at a modest 30% rate would yield $19.6bn. That is more than a third of the sum that the World Bank estimated in 2002 would be needed to tackle the Millennium Development Goals to "reverse the grinding poverty, hunger and disease affecting billions of people." These are just three tax havens. The Tax Justice Network has identified at least 80 of them.
In December 2007 TaxAnalysts added Switzerland to their analysis, concluding that at the end of 2006, there were $607.4 billion of assets in Switzerland's financial sector beneficially owned by non-Swiss individuals who could easily be illegally avoiding tax on those assets in their home jurisdictions; to this should be added a further $356.1 billion in fiduciary deposits.
Then, in January 2008, they concluded a separate analysis of Hedge Funds in the Caribbean, which estimated that $262.8 billion has been invested by individuals in hedge funds domiciled in the Cayman Islands, the British Virgin Islands, the Bahamas, and Bermuda, with good reason to believe that much of this involves tax evasion.
In addition to the TaxAnalysts data linked to above, the Berne Declaration has produced its own analysis here. Key paragraphs:
"We estimated foreign private wealth, managed in Switzerland, to amount to between 2500 and 4000 billion Swiss francs. A few weeks after we had published that figures, the Swiss Bankers Association came forward with a figure (without naming sources) of 2150 billion Swiss francs. . . . using a range of estimates that between 30 and 90 percent of this is undeclared, (this) results in a plausible range of 645 to 3600 billion francs for the amount of tax evaded black money placed in Switzerland.
In February 2010 the Geneva-based research group Helvea produced estimates of approximately €500 billion in "black money" from Europe alone. Read more here.
In February 2009 TJN's Richard Murphy produced research for the BBC's Panorama programme estimating conservatively that the UK loses about £18.5 per year to tax havens, including avoidance and evasion. This, if fully tackled, would be enough to take 4.5p off the basic rate of UK income tax.
In February 2008 Britain's Trades Union Congress published a report prepared by TJN's Richard Murphy estimating that £25 billion annually is lost to the UK from tax avoidance. This is made up of £13 billion p.a. from tax avoidance by individuals and £12 billion p.a. from the 700 largest corporations. In March 2008 HMRC (the UK's Revenue and Customs department) published a report estimating of the UK tax gap - the result of both avoidance and evasion - at between £11bn and £41bn, compared with total 2003-04 revenues from direct tax and national insurance of £246bn. For a summary of the findings by Tax Research UK, click here. For the full HMRC report, click here.
< Update: May 2011: new study estimates U.S. tax evasion at US$ 500bn >
The U.S. IRS estimated in 2001 that the total tax gap stands at $345 billion, which Senator Carl Levin said in 2007 represented unpaid taxes each year owed by individuals, corporations and other organisations who "offload their tax burden onto the backs of honest taxpayers." The IRS has not produced estimates of the international tax gap ("all revenue losses resulting from noncompliance with the U.S. tax laws due to international transactions") but Levin cited a figure of around $100 billion." However, a January 2009 report by the US Treasury said that because the IRS did not measure the international tax gap, it was unlikely that the international tax gap is comprehensively included in the IRS' $345bn figure. Other specific estimates exist:
- July 2009. US Congressional Research Service provides new estimates here
- Estimates from Professor Reuven Avi-Yonah and tax expert Joe Guttentag that offshore tax haven abuses by individuals alone cost the U.S. Treasury $40-$70 billion a year in unpaid taxes.
- Professors Simon J. Pak and John Zdanowicz found that transfer pricing abuses by corporations cost the U.S. Treasury about $53 billion per year in lost tax revenue. See the executive summary of their original short research report, studying 2001 data, here.
- The combined totals of these two has been quoted by the US Treasury in 2009 as providing a range of $40-123 billion annually, though the $40bn figure assumes zero transfer pricing loss.
- A 2004 study by the journal Tax Notes which found that American companies shifted $149 billion of profits to 18 tax haven countries in 2002, up 68 percent from 1999.
- An estimate by Professor Kimberly Clausing of Wellesley College in 2009 that the U.S. Treasury lost over $60 billion in tax revenues in 2004 from profit-shifting by corporations to low-tax countries; a preliminary update in 2011 suggested that estimate would be raised to $90 billion.
The Bank of Italy estimates that Italians hold some €500bn in undeclared funds outside the country.
July 2009. US Congressional Research Service provides new estimates here >
July 2009. Oxford report challenges TJN data: TJN replies here >
March 2009. Christian Aid's False Profits: robbing the poor to keep the rich tax-free estimates conservatively more than US$1.1tn (£581.4bn, €850.1bn) in capital flow from bilateral trade mispricing into the EU and the US alone from non-EU countries from 2005 to 2007 >
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. >