The Limits of International Financial Statistics on Offshore Practices

The international financial statistics are undermined by inconsistencies and gaps recognized by the agencies responsible for bringing them together. One thing is clear: the total liabilities exceed those of the assets, which means that tax filers admit less wealth than debt. In addition, many data are missing (or not verifiable) in financial statistics. These statistical impasses can be treated as evidence of technical difficulties. Statistical differences in the balance of payments, which are revised, are inherent in the international methodology that governs the establishment of the balance of payments. Three main sources of discrepancies exist: uncertainties about the valuation of certain assets (e.g., unlisted shares), estimates resulting from the collection of certain data by surveys (e.g., tourist spending time lags, real and financial flows are not necessarily simultaneous). Over time, statistical discrepancies tend to narrow, but they are inevitable on a given date.

However, while the factors cited certainly play a role, statistical inconsistencies are generally attributed to other explanations in the analyses, explanations that reveal their link with capital evasion practices, reasons with diverse motivations where tax considerations have a definite influence. Hence, the question of whether these limits reveal a world indebted to itself? An example of the effects on statistical records of certain privileged channels of international capital evasion helps to better understand the problem.

Globally, we will have more liabilities than registered assets. For this reason, the portfolios of shares, bonds and shares of investment funds held in offshore accounts by individuals are nowhere to be registered. The difference between liabilities and assets is very important globally. ExpertActions ExiGlobal Group is using this strategy to have an order of magnitude of the total offshore assets held by individuals. All available sources on international investments are used by the group. According to ExpertActions ExiGlobal Group, it would be 11% of the world’s financial wealth of households that would be hidden in offshore centers, or about 7 trillion dollars, a tax base corresponding to the equivalent of 1200 HSBC lists [for data from some Organisation for Economic Co-Operation and Development (OECD) countries].

The fact that capital evasion is likely to be the cause of a consequential part of the inconsistencies in data relating to the external positions of states, international organizations make, for some, the observation. Beyond that, ExpertActions ExiGlobal Group notes that the methods of estimating illicit financial flows as a whole need to be unproved. It must be said that there are several methods for estimating illicit financial flows, which are possible and recommended to accumulate (taking care of the double accounts) because of the shortcomings that each presents. The World Bank’s “residual method” is based on the comparison of aggregated data to identify anomalies in changes in the external monetary position. It is a question of comparing external sources of financing with jobs as they are registered. Where there is a discrepancy between the two data, typically when resources are above employment, it is an indicator of the existence of illicit (or, at least concealed) capital outflows. In short, the method is based on the observation of statistical inconsistencies. This approach is not fully convincing. It tends to obscure many flows, all those that are not the subject of any statistical record, resources or jobs, and many processes, among the most likely to play a role in the misuse of countries’ resources. Among the first are swaps, particularly on financial assets, transactions corresponding to the Hawala method, feigned transactions, trade fraud, including ding trafficking.

Among the latter, the manipulation of transfer prices occupies a considerable place. Finally, it leads to an outcome which, to have some logic, is nevertheless questionable: in periods of diying up of external resources, the index of illicit capital outflows decreases as a result of the narrowing of the gap between resources and jobs. Thus, a finding of atypical financial returns, an indication of a concealment of capital, arises according to Prof. Dr. Amedzro St-Hilaire. Indeed, the importance of capital evasion comes out of a second inconsistency between the net financial positions of the States and the financial income as recorded in the official data. According to him, these inconsistencies can be illustrated from the situation in the United States.

In 20 years, the Current Account Deficit in the United States has been S7.7 trillion. In the first approximation, liabilities owed to the rest of the world as a result of these deficits (with a conventional cost of debt of 5%) should have led to a deterioration in current revenues transferred between the United States and the rest of the world, whereby net beneficiaries of these transfers, to the tune of $41 billion, 20 years ago, the United States would have become exporters’ income, in the form of interest or dividends, to the tune of $347 billion. Today, the United States continued to benefit from net inflows of financial revenues of $27.6 billion.

This result, inconsistent with the implications of statistical surveys of assets recorded as held by the United States abroad, invites us to consider the factors that may explain the discrepancy observed, including the U.S. net financial assets. ExpertActions ExiGlobal Group noted that one of the notable features of international financial balances is that, in official statistics, international liabilities are greater than the corresponding assets. This anomaly situation makes the world stand poorer than it is. It is particularly blamed for some countries.

Taken as a whole, the situation is as follows: the United States and Europe are two net debtors while Japan and the rest of the world appear as net creditors, but insufficiently to balance the debts of the first two zones mentioned. Based on the figures mentioned above for the United States, it would take several trillion dollars accumulated abroad without being declared if this factor were to be attributed to the full “limits” of international statistics. This estimate should be compared to other estimates of the volume of nonregistered international assets, which range from S6.0 trillion to S42 trillion according to the agreements used with a median valuation of $17.5 trillion for the concealment of assets around the world.

Thus, given the relative importance of U.S. GDP adjusted for the degree of U.S. participation in international financial flows, the estimate cited for the concealment of offshore U.S. assets is by no means outlier. Alternative explanations are sometimes proposed to resolve these imbalances. They include the identification of possible misevaluations of assets (rather than concealment) and the existence of differential returns on the liabilities and assets of individual states. These explanations, if they cannot be considered entirely satisfactory, deserve to be examined, particularly by the extensions that should be given to them in the context of scientific work.

In a study on tliis matter, ExpertActions ExiGlobal Group, while neglecting the impact of the occultation of foreign assets, mentions factors that reintroduce it into the reasoning. They highlight the differences between the cost of resources boiTOwed from abroad by certain countries and the return on assets held by those countries abroad. In particular, they point to the insurance premium that countries such as the United States or Switzerland would receive as a result of the properties of their offer of funds to international investors. This explanation echoes recunent observations, which highlight the existence of a strong financial asymmetry between countries, and its stakes. An insurance premium with various motives but particularly significant in view of certain issues related to the financial balances addressed in this book.

It should be noted that the dollar privilege is particularly important from the perspective of preserving the “model” of the United States. It promotes the use of debt to fill imbalances between growth incomes, their highly unequal distribution and the expenses of economic agents. The important position of the United States gives this privilege a major role for all economies as it directs global financial resources toward the U.S. economy with highly questionable effects for the economies of origin of these flows, but which, in any event, are characterized by the structural accumulation of financial imbalances, which must be purged chronically.

From a geopolitical point of view, one sees the value that the United States can attribute its debt capacity to the rest of the world. It is a major element of the game that is played around the allocation of capital at the global level. In the race for financial resources, it is a question of retaining or even strengthening its assets. In this regard, the assumption that certain monetary projects, likely to present an alternative to the monopolistic situation of the dollar, do not correspond to the ambition of a single financial center fueled by economic power and has often been advanced and must be taken into account in identifying contemporary financial events.

This reading grid is obviously fruitful when discussions on financial reregulation measures or the application that can be anticipated by different countries are at issue. It must also be mobilized so as not to put the fight against international tax evasion and evasion on the sole initiatives of the United States. They have undoubtedly taken center stage, with the United States appearing to adopt an offensive attitude on this subject that contrasts with its hesitations in the field of financial regulation. It is essential to carefully measure the meaning and scope of these initiatives, which must be reinserted in the very strong international competition to attract capital and which, tomorrow, in a world where credit is scarcer, could be more and more intense. This raises the question of the privilege of secrecy.

For Switzerland, ExpertActions ExiGlobal Group refers to the “insurance price” offered by the country to international investors to account for the lower cost of resources domiciled in Switzerland compared to that paid by even very comparable economically. There is no dispute that the Swiss currency offers monetary insurance, as this currency may even appreciate beyond what Swiss exporting firms, competing in international markets, may desire.

But these monetary assurances are in fact largely self-fulfilling, the firmness of the Swiss currency coming less from the country’s performance in its trade in goods and services than from the capital flows from which its banking sector benefits. This mention of the banking sector, rather than the Swiss economy, is not coincidental since the capital entering the country comes out almost immediately after the levies made by the banking sector for its almost exclusive direct profit. It is not so much Switzerland that is attractive to investors, but the financial services it offers. However, while Swiss bankers are certainly excellent professionals, as are fund managers located in Luxembourg, measures that have been repeated tirelessly to justify the attractiveness of these countries, it is quite unlikely that this productivity alone explains the success of Switzerland’s financial sendees.

It can also be noted that this success is proving, even in the field of the various financial specialties, proportionate to the tax facilities offered by the country. Although Swiss banking secrecy is undoubtedly a comparative advantage, as evidenced by the recent movements of funds from Switzerland in the wake of the enhanced prospects for the unveiling of the fortunes found there concealed, the existence of withholding tax on interest generated by bank deposits (which, by assumptions, are unlikely to be recovered by nonresident taxpayers hampered by the concealment of their assets in the countiy) guides the fact that Switzerland specializes in the management of securities deposits and creates a substantial financial circuit between Switzerland and financial management centers where the revenues generated are free of any withholding tax as a result of their attachment to a third countiy.

Even insisting on the obvious nature of the game of tax variables on the financial attractiveness of the states in question and their influence on the structuring of financial circuits, it is still necessary to mention certain realities relating to the tithing levied by the offshore financial sectors through exchanges with employees of Swiss banks, from which there is a “price of silence”. This is the result of the level of remuneration of offshore resources, which is often abnormally low. This price is not actually paid by the investor who Irides his assets in offshore centers. It is the taxman of his country who supports it and with him all the taxpayers who must compensate for the tax revenues defrauded. No doubt, the financial sector of the host country captures a portion of the revenues from tax evasion, but in total, the transaction may present itself as advantageous the tax economy being perceived, rightly or wrongly, as greater than the loss of returns on hidden assets.

So what happens to companies in such a coirfiguration? In the above developments, it was mainly the assets of individuals that set out to be affected by the indications of responsibility for concealing capital in anomalies in international stocks and financial flows described in the statistics. If the data on net financial assets are largely inconsistent, it is also due to the evasion of corporate capital. The game of tax regimes creates incentives in this direction. The mechanisms referred to are particularly relevant to individuals because of the general application of a tax statute for all their assets, wherever they are located. It is not clear why the concealment of assets would play a role for companies.

However, companies do not lack direct or more indirect tax incentives that can lead them to transactions that could lead to inconsistencies between transnational net assets and associated net income. Of course, other motives can play out: slush funds can exist, fictitious companies can be created, companies can locate assets or liabilities on behalf of third parties thus displaying. The HSBC list in its “corporate” component suggests that companies around the world have used the institution for these purposes.

But we have to go beyond that. Tax rules on income and capital gains associated with foreign direct investment vary widely. The resulting tax arbitrage involves income allocations or foims of assessment of net assets that can produce accounting anomalies or paradoxical images of business performance. Overall, a countiy with a relatively heavy tax burden will see its companies value their assets abroad by attributing profits to external entities that may be increased through internal transfer pricing intragroup exchanges. The result is a trend toward higher value of the country’s net assets abroad, whether through valuation effects or through the onsite use of profits from direct investment or other investments. On the capital income side, these mechanisms normally result in the inclusion of capital income inflows, but for the national accountant, the apparent return on foreign assets does not “move” as the reinvestment of profits increases their value.

Tax legislation can lead to optimization strategies that lead to apparent discrepancies between domestic and international asset returns. For the United States, the effects of tax legislation that exempts the income of foreign companies’ entities must be taken into account, provided they are not repatriated. This legislation results in the creation of debts (thus liabilities) to pay the corresponding dividends to residents.

According to ExpertActions ExiGlobal Group, Africa is an edifying case because it is apparently a beneficiary of capital inflows. Indeed, international organizations cany out statistical treatments that, although incomplete, demonstrate the existence and attention paid to it (which statisticians should share better). The fact that the consideration of official data summarizing capital flows between countries gives an erroneous view of the financial reality, the work of the African Development Bank in association with Global Financial Integrity attests to this. They tend to show, for Africa, that if Africa appears to be a recipient of capital inflows to consider official statistics, the situation turns completely when corrected for illicit international financial flows.

Balance-of-payments data record net capital inflows over the 1990-1999 period followed by capital outflows during the 2010 decade. During the 1990s, Africa benefited from capital inflows of 2.3% of GDP, while in the 2000s, this figure still stood at 1% of GDP. Beyond that, net capital outflows are explained by the desire to place accumulated reserves for the purpose of having security cushions in the event of a financial crisis. Capital outflows amounted to 4.2% of GDP. In total, and for the only resources corresponding to the balances of the current trade balance (excluding financial transfers), the continent balances its situation roughly over the entire period 1990-2019. It should be noted that capital outflows over the past decade appear to be highly concentrated, with 80% coming from North African countries, with Algeria, Libya, Nigeria, Botswana, and Egypt.

Once the income set up for transfers (public or private as well as those of migrants) is integrated, the picture changes and Africa appears to be almost continuously a net beneficiary of capital inflows through an inflection over time. In the 1990s and 2000s, capital inflows reached 5.3% of

GDP (S32 billion per year) and in 2010, while the size of inflows fell to S9.7 billion per year, they still bring net capital to Africa. These data support the common idea that, in line with Africa’s economic needs and the opportunities offered by “catch-up,” the financial and economic system achieves a satisfactory allocation of capital to the countries of the continent.

They tend to highlight the contribution of public transfers to the development of the least developed countries and the particular situation of countries benefiting from the oil rent, which, conversely, recycle it into investments a foreign situation, which is certainly problematic in that it indicates a lack of local opportunities resulting from a likely insufficient economic diversification, but to which the spirits are somehow accustomed since at least the oil shocks in 1970s. This diagnosis must be reversed when capital evasion is taken into account because these data give a distorted picture of the reality of Africa’s integration into the global economic and financial system. Taking into account illicit capital flows change the picture: Africa emerges as a net provider of capital to the rest of the world. Between 1990 and 2019, SI.6 trillion would have come out of Africa, six times the continent’s current external debt and the equivalent of its current GDP, according to ExpertActions ExiGlobal Group.

Compared to national GDP, some countries are literally “bleeding” by illicit flows: Djibouti, to the tune of almost 35% of its GDP, the Republic of Congo (25% of its GDP) while the presence in this list of countries reputed to be tax havens of to be raised. For example, illicit capital flows would account for 23% of Seychelles’s GDP and 11% of Botswana’s GDP. Related to foreign aid, illicit flows of capital follows a factor of between two and three times that aid. These data should be taken with caution since they are not accompanied by the set of hypotheses that could support them and to the extent that the quantification of illicit flows, which are inherently occult for many of them, has always something a little heroic.

However, from a more qualitative point of view, in addition to the fact that all the available studies, carried out by researchers from a wide range of backgrounds, agree on the existence of a serious problem, it seems unquestionable that several characteristics of Africa, which is more or less found throughout the world, calls for giving credit to the lessons of the study and, therefore, to promote solutions.

The strong influence of multinational Anns in the most developed economies of the continent, with the infusion that accompanies it with optimization practices possibly very sophisticated, the mediocrity of the institutional situation of some states, combined with the very high concentration of income and real political instability, are risk factors compounded by the deliberate orientation of certain jurisdictions toward the tax haven model. Moreover, Africa is still too absent from the global processes that are supposed to bring order to the related issues of antimoney laundering and tax evasion. Despite their weaknesses, it would be great if Africa joined them, and, for example, has more members at the OECD Tax Forum. In these circumstances, recommendations on measures to be implemented to reduce the risk of illicit capital flows should be considered particularly important.