In 2012 a poll by Eurobarometer showed that 74 per cent of Europeans thought corruption was a major problem in their country. Source: Itar-Tass
They are helping the global economy make a soft landing during the recession, but there is another key area in which the BRICS are ahead of some of the leading democracies – financial secrecy.
According to the UK-based Tax Justice Network’s Financial Secrecy Index (FSI) – which ranks jurisdictions according to their secrecy and the scale of their activities – Switzerland is the most secretive territory in the world with an FSI value of 1765. The United States, Singapore, Germany, Japan, UK and Canada figure in the top 21 countries.
On the other hand Russia at 25, Brazil, 29, and India at No.32 have much lower FSI values – that is, they have fewer secrecy laws to facilitate illicit financial flows. The outlier is China, which wasn’t covered by the survey, but the Chinese territory of Hong Kong is up there at the No.3 spot.
What these arcane numbers add up to is that the current global banking system is facilitating and encouraging corruption around the world while at the same time sucking wealth from poor countries and transferring it to the rich West.
According to the authors of the FSI, an estimated $21 trillion to $32 trillion of private financial wealth is located, untaxed or lightly taxed, in secrecy jurisdictions around the world. Nearly all of these tax havens are under Western jurisdiction. As well as the example of notorious Switzerland, these include Luxembourg, Cayman Islands (UK jurisdiction), Jersey (UK jurisdiction), Panama, Bermuda (UK jurisdiction), Guernsey (UK jurisdiction), UAE, Mauritius (which facilitates black money re-routing to India) and British Virgin Island (UK jurisdiction).
“Illicit cross-border financial flows add up to an estimated $1 trillion-1.6 trillion each year,” says the Tax Justice Network. “Since the 1970s African countries alone are estimated to have lost over $1 trillion in capital flight, dwarfing their current external debts of 'just' $190 billion and making Africa a major net creditor to the world. But those assets are in the hands of a few wealthy people, protected by offshore secrecy, while the debts are shouldered by broad African populations.”
It’s not just a matter of tax evasion. Secrecy havens strike at the heart of the global financial and industrial ecosystem. “In providing secrecy, the offshore world corrupts and distorts markets and investments, shaping them in ways that have nothing to do with efficiency,” says the Network. “The secrecy world creates a criminogenic hothouse for multiple evils including fraud, tax evasion and aggressive tax avoidance, escape from financial regulations, embezzlement, insider dealing, bribery, money laundering, and plenty more.”
Basically, secrecy laws encourage people to extract wealth from their countries and deposit it abroad where the money works for someone else. When wealth flows out, instead of depending on tax, many countries are forced to depend on foreign aid. This cycle has continued for decades.
Faces of the really crooked
In identifying the providers of international financial secrecy, the FSI reveals the traditional stereotype of tax havens is misconceived. The world’s most important providers of financial secrecy are not small, palm-fringed islands as many suppose, but some of the world’s biggest and wealthiest countries. “The illicit financial flows that keep developing nations poor are predominantly enabled by rich OECD member countries and their satellites, which are the main recipients of or conduits for these illicit flows.”
For instance, take the clutch of British overseas territories and crown dependencies. “If Britain's network were assessed together, it would be at the top,” say the authors of the study. (In fact, Hong Kong’s high secrecy rating is a legacy of its British colonial past. Apparently, China will not intervene until mainland Chinese citizens start squirrelling away money in Hong Kong)
And the constant lecturing about the burden of aid the West is saddled with is just a diversion. “The trillion-dollar figure for annual illicit financial flows out of developing countries compares with just $130 billion or so in global foreign aid,” says the report. “So for every dollar of aid provided by OECD countries to developing nations, ten dollars or so flow back, under the table, towards OECD nations and their offshore satellites.”
Competing for the corruption crown
Last month Transparency International published its annual index of corruption. The Berlin-based agency, which has the last word on sleaze, says Switzerland, Luxembourg and the UK are in the least corrupt category. In fact, all the Western countries are shown as remarkably corruption-free.
The list is predictably topped by third world countries, mostly from Africa. From the BRICS, Russia and India are listed among the most corrupt nations and Brazil, China and South Africa are in the moderately corrupt group.
The World Bank also adds its two bits, saying “$20 billion to $40 billion are stolen from developing countries each year".
You think that’s a lot of money? Not according to Jason Hickel, who lectures at the London School of Economics. He writes in Al-Jazeera: “It’s an extremely small proportion – only about 3 per cent – of the total illicit flows that leak out of public coffers. On the other hand, multinational companies steal more than $900 billion from developing countries each year through tax evasion and other illicit practices.”
The well-publicised court cases involving Vodafone and ITC, which are accused of avoiding billions of dollars in taxes in India, vindicate Hickel’s assertion. Also, BP getting the boot from Russia is a result of the British company’s unbridled greed for resources.
The situation is so dire that the more than 30 per cent of global foreign direct investment is booked through tax havens. “This is a massive – indeed, fundamental – cause of poverty in the developing world, yet it does not register in the mainstream definition of corruption, absent from the UN Convention, and rarely, if ever, appears on the agenda of international development organisations,” says Hickel.
So is Transparency International’s index gamed? Why not? Is there any reason to believe it is bias-free when it does not factor in the massive corruption that is part of the City of London or the bribing of Iraqi officials by the United States?
The LIBOR scandal of 2012 revealed the magnitude and extent of gaming by British banks that fix interest rates. When the scandal broke, more than $800 trillion in financial products were riding on LIBOR. That’s 10 times the size of the world’s GDP. It meant hundreds of millions of homeowners, investors and businesses were paying the wrong interest rate. If the rates were gamed by just 0.01 percent the total losses would have been in the region of $800 billion, or two and a half times the GDP of Greece.
But according to Hickel, “This kind of corruption is not entirely out of place in a country where a feudalistic royal family owns 120,000 hectares of the nation's land and sucks up around $65.7 million of public funds each year. Then there's the parliament, where the House of Lords is filled not by election but by appointment, with 92 seats inherited by aristocratic families, 26 set aside for the leaders of the country's largest religious sect, and dozens of others divvied up for sale to multi-millionaires.”
Things are no better in other parts of Europe. In 2012 a poll by Eurobarometer showed that 74 per cent of Europeans thought corruption was a major problem in their country. The results showed around 20 million bribes were paid to officials in the 18 European Union nations covered by the report. The European Commission estimates the cost of corruption is equivalent to 1 per cent of EU GDP, some $156 billion.
Clearly, the representatives from Western democracies and think tanks who offer country ratings and character certificates, besides publishing tomes on how corrupt the third world is, need to be given a long walk on a short plank.
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