British media coverage of the summit, just weeks after the “Panama Papers” scandal erupted, was dominated by the theme of tax havens and their connections to corruption, embarrassing the summit’s host, British Prime Minister David Cameron, who had recently been forced to admit that he had profited personally from a Panama-based offshore trust set up by his father. And while the sums were modest and he did nothing illegal, Cameron faced a meatier problem: The Panamanian law firm at the center of the scandal, Mossack Fonseca, set up the largest number of its shell companies not in Panama but in the British Virgin Islands (BVI), part of a network of British-controlled overseas territories and crown dependencies that also includes the Cayman Islands, Bermuda and Jersey — all major tax havens. These places sport the queen’s visage on their banknotes and stamps, and their laws are approved in (and their final court of appeal is in) London.
Cameron wasn’t the only leader with something to blush about. U.S. Secretary of State John F. Kerry, who also attended the summit in London, faced accusations that the United States is also a major secrecy haven. And it is: The U.S. conceals vast sums of foreign loot behind opaque shell companies in Delaware and Nevada and stands aloof from a new global transparency scheme led by the Organization for Economic Cooperation and Development (OECD) to start sharing banking data beginning in 2017. The OECD’s “Common Reporting Standard” will include most major tax havens — but the United States has not signed on. A widely referenced Financial Secrecy Index (which I helped produce) ranks the U.S. as the third most important tax haven worldwide after Switzerland and Hong Kong, based on a secrecy score weighted for size. Britain only ranks 15th, but it would be at the top if its offshore satellites like BVI and Cayman were included.
Which isn’t surprising. Because powerful countries like the United States and the United Kingdom are themselves major tax shelters, we don’t think of tax havens as major contributors to corruption. But we should.
The world’s most famous corruption ranking, Transparency International’s Corruption Perceptions Index (CPI,) ranks Switzerland, Luxembourg, the United States and several other notorious tax-and-secrecy havens among the world’s “cleanest” countries; while African nations, among the greatest victims of haven-facilitated looting, are ranked “most corrupt.” And the best-known definition of corruption, Transparency International’s “the abuse of entrusted power for private gain” (and a similar but more mealy-mouthed offering from the World Bank) focus attention on individual acts of corruption like bribery. Yet neither picture is complete.
Tax havens corrupt in deep, systemic ways that affect entire communities, not just individuals. With an estimated $7 trillion to $36 trillion stashed offshore, these places are distorting – corrupting – whole societies and the global economy itself. Nigerian writer Chinua Achebe points toward a better, more systemic definition of corruption in his 1983 classic, “The Trouble with Nigeria”: “A normal sensible person will wait for his turn if he is sure that the shares will go round,” he wrote. “If not, he might start a scramble.”
Picture society as a queue. Disrupt a queue with, say, a fire hose, and after the spluttering has ceased, order should re-emerge – just as stable countries recover from earthquakes or economic shocks. Yet when the strongest push in at the front, that is more dangerous: People begin to lose faith in the queue, and in each other. They start to wonder: “Why should I pay my taxes if the rich go offshore and evade theirs?” Or “If I don’t snaffle that stream of oil revenue to feed my family, then that jerk in the next ministry will get it.” As a 2009 Norwegian government study put it, tax havens can weaken political systems by monetarily encouraging “the self-interest that politicians and bureaucrats … have in weakening these institutions.”
To cite a recent example, street protests erupted in Moldova last year after sums equivalent to one eighth of the country’s GDP disappeared from three banks via a secretive shell company run out of a seedy apartment in Britain. This destabilizing effect is precisely why Nigerian civil society groups wrote to Cameron in April urging him to act at the London summit against the U.K.’s haven network. Their own anti-corruption efforts, they said, are undermined “if countries such as your own are welcoming our corrupt to hide their ill-gotten gains.”
Through systematic disruptions like these, tax havens corrupt in three main ways. Most obviously, they facilitate individual corrupt acts like embezzlement: hiding and protecting the proceeds of these crimes. New research by James Henry for the Tax Justice Network estimates that private citizens in just five African countries – Angola, Gabon, Nigeria, South Africa and Sudan – held $640 billion in (mostly secretly held) offshore wealth in 2014, dwarfing those countries’ combined external debts of $225 billion. Much was obtained corruptly: It’s clearly impossible to measure how much. More insidiously, they help powerful players skirt the rules of their societies using offshore escape routes that are not generally available to poorer, weaker citizens, creating one charmed set of rules for the rich and powerful and relegating the rest of us to the back of the line. Third, whole countries – the havens – push in at the front. Panama and the BVI attract big financial flows by turning a blind eye to crimes committed elsewhere. The most unscrupulous havens win in a global race to the bottom on standards and enforcement.
But there is good news here.
For decades, rich countries have piously called on corrupt African countries to clean up. This finger-wagging seems to have had little effect beyond provoking angry defensive responses and justified accusations of hypocrisy — not just by Nigerian presidents. But here at last is a proper opportunity to do something directly. Rich world leaders do have it in their power to crack down effectively on the havens. But to build pressure to act more seriously, we first need to identify all the players (this means rich countries such as the U.S. and U.K., not just poor countries) and we need to adhere to definitions of corruption explicitly covering systemic processes that undermine people’s faith in the rules and institutions that promote the public good. This won’t just help poor countries: It will also benefit our own increasingly unequal societies in the West, where the center ground of politics is being hollowed out by a loss of faith in rules and institutions that promote unity and stability.