Friday, April 18, 2014


Interview: World's Super-Rich Hide $21 Trillion Offshore

The report looked at the amount of money hidden away.
The report looked at the amount of money hidden away.
Gaps in cross-border tax rules have allowed a very small number of the world’s super-rich elite to hide an estimated $21 trillion in offshore bank accounts. That’s according to a new study, “The Price of Offshore Revisited.”

The astounding amount of hidden money cited in the report is more than the gross domestic products of the American and Japanese economies combined. The research was commissioned by the Tax Justice Network -- an independent organization started by the British Parliament to promote reform. The report’s author, James Henry, is the former chief economist for the global management consultant firm McKinsey & Company. RFE/RL's Bruce Jacobs spoke with him by phone from New York.
RFE/RL: Your report estimates there is $21 trillion hidden in offshore accounts. How confident are you in its accuracy?
James Henry:
Well, it’s like estimating the size of a black hole. There are no statistics directly published on the size of this sector, but I am pretty confident that we have been able to narrow down the range here to a fairly accurate estimate of the range and that is $21 trillion to $32 trillion as of the year-end of 2010. And that is global financial wealth of individuals that is offshore, cross-border investment.
RFE/RL: How much of this would you estimate is legal tax avoidance versus illegal tax evasion?
Well, we think that only about 10 percent of this stuff pays any taxes. You know [former British cabinet minister] Denis Healey once said the difference between evasion and avoidance is the width of a prison wall. If you are a wealthy Mexican and you have your money in a U.S. bank, it is basically up to you whether you tell the Mexican authorities about it. And our estimate is that most of the investors involved here are not running back to their tax authorities and saying, ‘Hey, I got all this income offshore.’ But we have allowed for maybe 10 percent of it being reported.
RFE/RL: Can you speak about the situation in Russia?
Russia has been a major source of capital outflow. You know, you don’t have to rely on our numbers to do that. You just have to turn up in London and see all the "non-doms" [nondomiciled individuals] who are registered there not paying any taxes to the U.K. and we don’t know what they are paying in Russia, but it would be interesting to find out.
There is enormous capital outflow from Russia. Some of it has been reinvested in Russia by way of offshore havens. So it is not completely clear how much of this is staying outside of Russia. It depends on what is going on in Russia with the economy. But we think a substantial fraction of it has been invested abroad and has remained there. The same thing is true of China, by the way. That is our leading country in terms of total outflows in the wealth stock. But we think a lot of that has been reinvested in China, but it is reinvested by way of haven companies.
The good news from Russia’s standpoint is that they do have this offshore wealth stock that they’ve accumulated. They need to decide what to do about it. They could collaborate with other countries in trying to tax it, maybe having a minimal tax like 0.5 percent of these assets that are in banks per year. That would be a tax on anonymous capital.
RFE/RL: What are the practical effects of having so much money hidden in offshore accounts?
First of all, there is a big revenue loss. I think if this wealth were, hypothetically, back home and being taxed, it might raise another $300 billion for the tax authorities of the 139 source countries we are talking about. We would also see a big impact on inequality statistics because this means that we've radically understated wealth inequality measures using the standard statistics for income inequality and other estimates for wealth inequality. These numbers are left out of that and much of this wealth, probably about 90 percent of it, accrues to the top 0.1 percent of the wealth distribution. So we are talking about 10 million people owning about one-third of the world’s financial wealth offshore, and that is a big number.
RFE/RL: How bad is this for the world economy?
Essentially, wealthy investors are being very, very conservative with this [hidden] money, we believe. And from that standpoint, there is an opportunity cost to the countries because it could be yielding a higher social rate of return if it were reinvested in the home country. But you have wealthy people who are scared and they want to have a nest egg, and they have the private banking industry helping them avoid taxes. All this adds up to this kind of irrational, global result which is that you have $21 trillion invested in [certificates of deposit] and stocks that haven’t been performing very well.
RFE/RL: What can governments with leverage like the United States and those in Europe do to remedy this situation?
Well, one of the things we've proposed and I think the [U.S.] Treasury [Department] is now issuing regulations on -- although this is tremendously controversial -- is the so-called [Foreign Account Tax Compliance Act] rules requiring foreign institutions that have U.S. investors to report to the Treasury [Department] what their deposits and their investments are earning if they want to do business in the United States. This could have a ripple effect because I could imagine the Mexican banks demanding the same thing from American authorities -- the Mexican tax authorities demanding the same kind of information from [the United States]. And so it will be interesting to see to what extent we are willing to be consistent here, because traditionally we've gotten very angry about the Swiss bankers who come to New York and try to get wealthy Americans to invest their money in Switzerland. We've been much less excited, as I said before, about helping the Mexican [authorities] tax their wealthy investors when they come to New York.
RFE/RL: Do you think there is the political will in influential countries like the United States to change the situation?
It is a situation that presents certain dilemmas for the United States, but I do think that, on the whole, as Winston Churchill once said: "The Americans will eventually do the right thing after they've exhausted all other possibilities." So in this area, I think the [United States] is the one possible jurisdiction I think will show real leadership in this arena.
RFE/RL: Can you give us an idea of who these wealthy investors are?
We estimate that there may be on the order of 50 to 100 multibillionaires, that is, people with $10 billion or more, in the world. There probably are something on the order of 2,500 to 3,000 billionaires in terms of total financial wealth. There are no more than 10 million folks with investments greater than $1 million on the planet. So all that means that when you add it up, about one-third of the financial assets of the world are owned by this 0.1 percent, and the top 1 percent probably own another one-third. So you are talking about 60 percent of the world's financial assets being owned by about 1 percent of the [world] population.
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Comment Sorting
by: Ilya
July 29, 2012 04:08
Regulation isn't the answer. Cut taxes and pursue responsible economic policies if you want the 'super rich' to keep their money in your country. People don't like getting ripped off by governments (see France under Hollande) or having assets endangered by unsustainable government policies (see Greece).
In Response

by: Eugenio from: Vienna
July 29, 2012 06:41
Cutting taxes is not the answer: nationalize all the the means of production and send all the rich to a concentration camp for 20 years. People do not like getting ripped by capitalists (see a number of EU member states over the last 4 years) or having their economies ruined by the German mafia led by Frau Merkel (see Greece).
Ah, yes, and cheers from the Black Sea shore where I am on vacation right now :-)!
P.S. I have not seen any news for about a week, and now that I looked, it seems like Bashar is taking good care of the friends of Hillary Rice in Aleppo and there are no sign of them left in the capital Damascus. What happened to all this talk about "the last days of the Assad regime" that I read on this web-side the last time I opened it a week ago:-)?
In Response

by: Eugenio from: Vienna
July 30, 2012 00:40
The Black Sea shore, Konstantin? I hope you went to the Georgian side because giving money to Bulgaria or Romania is worse than genocide.

by: Anonymous
July 29, 2012 09:53
a modest but probably not a realistic option:
just limit the amount of capital people should dispose of.

500 million, maybe 1 billion, approximately.
the rest- between 12 and 32 trillion, maybe more - as mentioned in the article could be used to reduce the deficit in many nations, the u.s. and european, african, asian nations included.

still, capital amounting to about 500 million or 1 billion does not imply starvation and poverty!
the interesting aspect here is that the demand of a specific limit in financial resources might sound like radicalism, the important dimension though is that the global economy and many national economies, according to the nobel prize laureate of economics and various scholars in the field, eventually run into a catastrophe if there is no efficient and effective way of dealing with fraud, manipulation, excessive greed and a very dangerous attitude of risk strategies. Verifiably, certain attitudes in economic spheres touch or may be defined as pathological phenomena. therefore, certain frames of reference should not merely be established but have to be adhered to, effectively.
some recent studies have highlighted a truly jeopardous medical/psychiatric dimension in economics. certain people in the business world, according to several neurological studies, have difficulties to distinguish between reality and fiction and are supposed to lack empathy. Some people do not even realize the societal implications of certain decisions.
Yet, as implicitly underscored in the article, if a tiny minority is able to circumvent stipulated legislation by opting for "off-shore accounts" without any harsh legal consequences whatsoever,
then of course, you might raise the question in how far certain economic, legal and political structures are really effective in imposing existent laws.
In Response

by: Anonymous
August 03, 2012 19:18
As far as reality and fiction, I think a core point is that money itself is a fiction. Reality would be things like grain and milk, but money is now a number in a computer.

Those people who are experts with tremendous money would naturally be defined by, and adapted to, the situation of fictional money. Behavior that would be considered defective in other economic situations, then becomes an evolutionary adaptation.

Secondly, another core point is that states are also fiction. Bullets and tanks are reality, but flags and territory are fictional. The laws enforced by those flags are also fictional, and are dependent on a cooperative public.

An appropriate bribe here and there can change unfavorable laws into favorable laws, and donations to media outlets are useful to convince the public that the new law is a great idea.

For the tremendously wealthy, how can law exist? At the highest economic level, I think there is a handshake agreement and nothing more.

Then like any small group, some individuals will behave with destructive narcissism, and others will have consideration for the survival of ordinary people. In the end, the extremely wealthy are still just humans doing human things.

by: Ray F. from: Lawrence, KS
July 29, 2012 17:30
Nice article, and I suppose greater awareness of economic injustice might help to someday change the situation. I remain, however, highly skeptical.

About a decade ago, I spent a year trying to figure out how the global economy works. Can’t say I was successful, as some of the financial shenanigans are opaque and as complex as rocket science. One ‘revelation’ dealt with how some countries (like the US) are using these foreign tax shelters to basically export inflation. Since the dollar is not really based upon anything concrete (i.e. gold), the folks at the Federal Reserve have been printing many more dollars than the total amount of US goods and services. This ought to result in higher inflation, but these excess dollars are squirreled away by the ‘elite’ in foreign accounts. This may be one of the primary reasons why the US is not going to get real serious about these foreign accounts. They won’t kill the chicken who provides/protects their golden egg.

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