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Analysis: Bailed-out banks facilitate $21tn offshore cash hoard

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Hidden treasure: the Cayman Islands where the super-rich hide their cash. (www.shutterstock.com)

Investigative economist James Henry exhaustively trawled through financial information held by the IMF, World Bank, Bank for International Settlements, central banks and national treasuries to come up with the most definitive report ever written on the super-rich and offshore wealth.

Henry’s Price of Offshore Revisted report, commissioned by Tax Justice Network, shows:

- between $21 trillion and $32 trillion of financial assets is owned by High Net Worth Individuals in tax havens. This does not include real estate, art or jewels.

- a conservative 3% return on that $21tn taxed at 30% would generate $189bn – a figure easily eclipsing what OECD industrialised nations spend on overseas development aid.

- the top 50 private banks collectively managed more than $12.1tn in cross-border invested assets for private clients, including their trusts. This is up from $5.4tn in 2005.

- fewer than 10 million members of the global super-rich have amassed a $21tn offshore fortune. Of these, less than 100,000 people worldwide own $9.8tn of wealth held offshore.

Accompanying the Price of Offshore Revisited is a separate paper [co-written by this author]. It reveals that data used by individual countries to assess the gap between rich and poor is inaccurate. And as a result, inequality is far more extreme than policymakers realise.

This is because economists calculating inequality fail to include the vast majority of offshore cash in their findings. So the wealthy are far better off than the studies suggest.

In Inequality: you don’t know the half of it, eight of the world’s leading economists were asked whether offshore wealth was largely excluded from inequality studies. Ranging from the World Bank’s acting chief economist to academics at the Paris School of Economics and the Brookings Institute in the US, they all confirmed this was the case.

This is because the wealthy do not disclose their true incomes. They also rarely participate in surveys. Academics do compensate for non-particpation but they admit, official data vastly underestimates the true picture.

Trickle up
Combined, the two papers published by TJN end any notion that trickle down economics – the Thatcher/Reagan doctrine that suggests tax breaks for the rich benefits all society – works.

We already know that in the US between 1980 and 2010, incomes of the top 1% doubled and the top 0.1% tripled while the bottom 90% saw their incomes fall 5%. But the TJN studies show this wealth disparity would be statistically even worse if offshore cash is included in official studies.

Perhaps most tellingly, the reports bring into sharp focus how global banks – so-called ‘pirate banks’ – have enabled the super-rich to avoid unimaginable sums of tax while at the same time enjoying taxpayers cash through government bank bailouts. A true double whammy of dark proportions.

Some of these banks have been labelled ‘too big to fail’ following the financial crisis. But after the Libor scandal, HSBC’s key role in laundering Mexican drug cash and the subprime bank disaster, there is compelling evidence to suggest they are also ‘too big to be true’.

Which brings us to an issue that is fast troubling global financial regulators: the so-called ‘London disease’. It has not gone unnoticed that many of the financial scandals in recent years have a Square Mile connection. Never mind Libor, it was the London offices of AIG, Lehman Brothers and Bernie Madoff that helped destroy them. The JP Morgan and UBS rogue traders who lost billions were both London based.

The UK is also arguably the centre of the offshore world. It is one of the biggest private bank centres and Britain’s non-domicile tax rules allow the global super-rich to legally avoid taxes on their overseas income while residing here. In addition, many of the UK’s overseas territories and crown dependencies such as Jersey, Isle of Man, the Cayman Islands and the British Virgin Islands are major offshore centres. This perhaps explains why the British government, for all its rhetoric, has failed to clamp down on the shadow financial system.

It has taken the painstaking work of TJN’s Henry to bring to light the true price of offshore. That the IMF, World Bank or OECD has not done this work is troubling especially as their lack of effective oversight contributed to the economic crisis that has caused significant hardship for hundreds of millions of people.

A good way to atone is to start deploying their thousands of economists to implement measures that will introduce transparency to the financial system instead of policies that facilitate secret offshore hoarding by a tiny elite.