At least $21 trillion of unreported private financial wealth was owned by wealthy individuals via tax havens at the end of 2010.  This sum is equivalent to the size of the United States and Japanese economies combined.  The research comes amid growing concerns about the enormous gulf between rich and poor in countries around the globe.

There may be as much as $32 trillion of hidden financial assets held offshore by high net worth individuals (HNWIs), according to the Tax Justice Network USA’s report The Price of Offshore Revisited, which is thought to be the most detailed and rigorous study ever made of financial assets held in offshore financial centres and secrecy structures.

Excerpts from the report says:

A significant fraction of global private financial wealth — by our estimates, at least $21 to $32 trillion as of 2010 — has been invested virtually tax-free through the world’s still expanding black hole of more than 80 “offshore” secrecy jurisdictions. We believe this range to be conservative, for reasons discussed below.

Remember: this is just financial wealth. A big share of the real estate, yachts, racehorses, gold bricks — and many other things that count as non-financial wealth -are also owned via offshore structures where it is impossible to identify the owners.

These are outside the scope of this report.

On this scale, this “offshore economy” is large enough to have a major impact on estimates of inequality of wealth and income; on estimates of national income and debt ratios; and – most importantly – to have very significant negative impacts on the domestic tax bases of key “source” countries (that is, countries that have seen net unrecorded private capital outflows over time1.)

2. Our 139-country focus group: who are the real debtors?

We have focused on a subgroup of 139 mainly low-middle income “source” countries2 for which the World Bank and IMF have sufficient external debt data.

Our estimates for this group underscore how misleading it is to regard countries as “debtors” only by looking at one side of their balance sheets.

Since the 1970s, with eager (and often aggressive and illegal) assistance from the international private banking industry, it appears that private elites in this sub-group of 139 countries had accumulated $7.3 to $9.3 trillion of unrecorded offshore wealth in 2010, conservatively estimated, even while many of their public sectors were borrowing themselves into bankruptcy, enduring agonizing “structural adjustment” and low growth, and holding fire sales of public assets.

These same source countries had aggregate gross external debt of $4.08 trillion in 2010. However, once we subtract these countries’ foreign reserves, most of which are invested in First World securities, their aggregate net external debts were minus $2.8 trillion in 2010. (This dramatic picture has been increasing steadily since 1998, the year when the external debts minus foreign reserves was at its peak for these 139 countries, at +$1.43 trillion.3)

So in total, by way of the offshore system, these supposedly indebted “source countries” – including all key developing countries – are not debtors at all: they are net lenders, to the tune of $10.1 to $13.1 trillion at end-2010.

The problem here is that the assets of these countries are held by a small number of wealthy individuals while the debts are shouldered by the ordinary people of these countries through their governments.

As a U.S. Federal Reserve official observed back in the 1980s: “The real problem is not that these countries don’t have any assets. The problem is, they’re all in Miami (and, he might have added, New York, London, Geneva, Zurich, Luxembourg, Singapore, and Hong Kong)”

These private unrecorded offshore assets and the public debts are intimately linked, historically speaking: the dramatic increase in unrecorded capital outflows (and the private demand for First World currency and other assets) in the 1970s and 1980s was positively correlated with a surge in First World loans to developing countries: much of this borrowing left these countries under the table within months, and even weeks, of being disbursed.

3. How this wealth is concentrated. Much of this wealth appears to be concentrated in the hands of private elites that reside in a handful of source countries – many of which are still regarded officially as “debtors.”

4. Untaxed Offshore Earnings start to swamp outflows. Our estimates also correct the sanguine view that since new outflows of capital appear to have recently declined from countries like Mexico and Brazil, capital flight is no longer a problem for these countries.

Once we take into account the growth of large untaxed earnings on accumulated offshore wealth, it turns out that over the long haul from 1970 to 2010 the real value (in $2000) of these offshore earnings alone may be has much as $3.7 trillion – equivalent to about 60 percent of the global total for all unrecorded capital outflows during this period. For regions like Latin America, Sub-Saharan Africa and the Middle East that have long histories of accumulating offshore wealth and unreported earnings abroad, the ratio is close to 100 percent or more.

By shifting attention from flows to accumulated stocks of foreign wealth, this paper calls attention to the fact that retention of investment earnings abroad can easily become so significant that initial outflows are eventually replaced by “hidden flight,” with the hidden stock of unrecorded private wealth generating enough unreported income to keep it growing long after the initial outflows have dried up.

3. THE GLOBAL HAVEN INDUSTRY

Given this “virtual geography” perspective, it is important to emphasize several structural facts about the “offshore” industry, as we work on our estimates.

First, it is important to distinguish between the “intermediary havens” which act as conduits for wealth and “destination havens” where private wealth ultimately ends up.

We typically associate offshore legal entities like shell companies, asset protection trusts, captive insurance companies, and haven banks with the conventional list of

“offshore havens” (or “Treasure Islands”) found on, say, early 2000s OECD blacklists: sultry, dodgy tropical islands like Bermuda, the Cayman Islands, Nauru, St. Kitts, Antigua, and Tortola; or the European bolt holes such as Switzerland, the Channel Islands, Monaco, Cyprus, Gibraltar, and Liechtenstein. These 80-odd front-line havens, most of which are “offshore” by anyone’s definition, collectively provide a home to over 60 million people, and over 3.5 million paper companies, thousands of shell banks and insurance companies, more than half of the world’s registered commercial ships above 100 tons, and tens of thousands of shell subsidiaries for the world’s largest banks, accounting firms, and energy, software, drug, and defense companies.

In the 1970s-90s, as multinational corporations (MNCs), banks, investors, and a variety of First and Third World scalawags demanded haven services, the elites in these tiny ersatz states discovered they could make a darn good living simply by turning a blind eye. Their numbers roughly tripled during these years.

However, as the Tax Justice Network has recently emphasized in its work on its Financial Secrecy Index since 2009, this conventional list of havens is misleading, if we’re interested in “finding the money.” For while there are millions of companies and thousands of thinly capitalized banks in these fiscal paradises, few wealthy people want to depend on them to manage and secure their wealth. These stealthy investors ultimately need access to all the primary benefits of “high-cost” First World capital markets — relatively efficient, regulated securities markets, banks backstopped by large populations of taxpayers, and insurance companies; well-developed legal codes, competent attorneys, independent judiciaries, and the rule of law. Generally, these can only be found in a handful of so-called First World countries like the US, the UK, Switzerland, the Netherlands, Belgium/Luxembourg, and Germany. So we have to look to these “destination havens” in order to get a handle on the size and growth of unrecorded cross-border private wealth.

While it has thousands of players, the room at the top is surprisingly limited – global accounting is still dominated by the “Big Four,” while a small number of “capital city” and haven-based law firms dominant the lawyering, and global private banking is dominated by less than 50 multinational banks.

For much more on this story and a link to download the whole report go to:

http://tjn-usa.org/4