19th July 2020
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World Bank research indicates Switzerland remains a tax haven of choice for the corrupt
Last week’s blog about how corruption in many states has got worse over the past twenty years stirred a surprisingly passionate response from Washington DC to Johannesburg. It was a sharp reminder that blog audiences are now global!
Some people who got in touch wanted to know more about the alleged link between global aid disbursements to the most aid-dependent states, and increased deposits in offshore “tax havens”. This is not my area of expertise – and I won’t pretend that it is – but as somebody interested in exposing and tackling illicit finance, I find this particular link fascinating.
So in response to some helpful messages, I thought I’d provide a quick summary of the World Bank study published in February, which outlined the link between aid disbursements and potentially corrupt deposits in tax havens such as Switzerland, Luxembourg and the Cayman Islands.
My advice, however, is to read the World Bank research in full here, as well as the Global Financial Integrity study on which my original blog was based. Both are nuanced and merit further attention.
The World Bank research was published by Jorgen Juel Andersen from the Norwegian Business School, Niels Johannesen from the University of Copenhagen and Bob Rijkers from the World Bank. It’s an easy-to-read, 48-page document – so don’t be put off by its academic nature.
Primarily, the three authors studied two datasets: quarterly information on aid disbursements to highly aid-dependent states from the World Bank and foreign deposits registered by the Bank for International Settlements (BIS), which assesses total deposits made across what we’d broadly term ‘offshore’ centres or tax havens.
The authors found that aid disbursements to states with the highest levels of aid-dependency appear to trigger money flows into offshore bank accounts – a phenomenon we all fear when assessing aid effectiveness.
Specifically, what the authors found was that for every aid disbursement equivalent to 1% of a state’s GDP, we see an increase of 3.4% in offshore banking deposits made from that state in the same economic quarter. The implied overall rate of aid lost in this way amounts to around 7.5% of all aid disbursed.
The inference, of course, is that this MAY indicate one final destination for a significant chunk of the cash stolen from aid budgets through corruption by local elites. The figures do not, of course, include other vehicles through which aid monies could be hidden by the corrupt – such as property investments.
“While other interpretations are possible, these findings are suggestive of aid diversion to private accounts in havens,” the research states.
Of course, the situation is complicated – something acknowledged by the three authors. But in crude terms, that is the fear: there is an autonomous, traceable (at least in terms of financial values) level of aid which gets syphoned off by corrupt officials somewhere in the chain and placed in secretive offshore tax havens.
This is hardly news. Indeed, it is something aid organisations have long known. But the attempt to measure, in financial terms, the scale of the problem is always interesting. Not only that, but the research helps indicate the preferred offshore tax havens of potentially corrupt officials and those who move money on their behalf.
Interestingly, the World Bank research suggests that Luxembourg and Switzerland are among the most popular choices of tax havens among corrupt regimes and officials targeting aid budgets.
In real dollar terms, tax haven deposits among the twenty-two heavily aid-dependent states studied by the authors were highest across Madagascar, Rwanda, Tanzania, Zambia and Burundi. But higher cash volumes of potential corruption were not exclusive to aid-dependent African states. Afghanistan and Armenia also featured high on the list.
To me, at least, the most interesting aspect of the research is the chosen destination of potentially corrupt cash – and the ramifications for the global financial system. If supposedly ‘legitimate’ finance centres such as Switzerland Luxembourg continue to act as secretive harbours for aid cash stolen by corrupt regimes or officials, then clearly more needs to be done to tackle the problem.
Moves to bring greater transparency to offshore financial centres (OFCs) or tax havens, such as new rules on maintaining a register of beneficial owners for offshore companies, must go further.
This is a subject I’ll be returning to regularly, so I won’t linger on it here. But if you want a crash course in just how disruptive corruption is to aid programmes, then read the World Bank study and contact the excellent authors directly.
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