Many of the roots of the current global economic crisis trace back to offshore financial centres located in offshore tax havens. To understand this issue, it is essential to understand the geography of offshore. The tax havens involved in the crisis include not only those located in the smaller, mostly island states like Cayman and Bermuda and Jersey, but also the larger offshore centres like the City of London, Switzerland, Dublin, Delaware or Luxembourg.
Though tax havens did not “cause” the crisis, they contributed powerfully to it. This happened in various ways:
- The offshore system offered and offers an offshore “get out of regulation free” card to financial businesses.
- These escape routes helped U.S. and other financial firms grow much faster, achieving political and regulatory “capture” and contributing to the “too big to fail” and ‘too big to jail’ banking problems. This happened first in the offshore Euromarkets that originated in London in the 1950s, and then in the wider global offshore system.
- Unhealthy competition on tax and regulation between offshore financial centres, and between them and other jurisdictions, eviscerated and degraded regulations that may otherwise have staunched the crisis.
- Offshore centres played a demonstrable ‘conduit’ role in transmitting dangerous shocks quickly through the system.
- Tax incentives, typically through tax havens, played a major role in accelerating the build-up in debt and leverage across the global financial system.
- “Satellite” tax havens like some Caribbean islands or Britain’s Crown Dependencies are conduits for illicit and other financial flows, often from developing countries into financial centres like London, New York, and these contributed to large macroeconomic imbalances. The mainstream economics profession has not measured these vast flows, many of which (such as transfer and trade mispricing) do not show up in conventional national statistics.
- In the hottest phase of the crisis in 2008, the financial system gummed up under mutual mistrust and impenetrable complexity where actors could not understand the financial positions of their partners. The secrecy jurisdictions, inviting companies to festoon their financial affairs across multiple jurisdictions, and covering these affairs in a veil of secrecy, exacerbated the problems.
- Tax havens provided the cover for all manner of fraudulent business models – such as those offered by Bernie Madoff, Allen Stanford and others.
- Offshore centres helped corporations conceal serious losses, which contributed to the build-up.
- Offshore centres have played a powerful role in creating excess liquidity, which contributed to the crisis.
- Tax havens, by giving banks with global reach a “competitive” advantage over their more nationally-based rivals (by permitting evasion and avoidance of tax and regulatory obligations), contributed powerfully to the “too big to fail” problem.
Not only that, but by draining reputable jurisdictions of the tax dollars of their wealthiest citizens and corporations, and by fostering massive capital flight out of developing countries, they have made it so much harder for victims of the crisis to pay to clean up the mess.
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Archive before 2014
- Oct 25 – Gensler: “It was financial institutions operating complicated swaps businesses in offshore entities that nearly toppled the U.S. economy” in 2008. Original here.
- July 2, 2013 – Derivatives: letter to Michel Barnier and eight finance ministers
- June 13 – Offshore race to bottom fosters US shadow insurance industry, “may need bailout.” Originals here and here.
- Feb 23, 2012 – Nevada wins race to the bottom on corporate governance. Originals here and here.
- July 2011 – TJN summary of Jim Stewart paper on the Dublin financial centre. Original here.
- Nov 2010 – Greece and the tax havens: an interconnected web of contagion
- June 2010 – The Other Offshore Disaster. NYT on the Bear Stearns collapse, with a prominent role for offshore.
A longer list of stories in this series is available in our pre-2014 archive.