A Staggering $12 Trillion In Assets Has Been Lost To Global Offshore Industry by Tax Justice Network
The definition of victory for this paper is to review and improve upon existing estimates of the size, growth and distribution of untaxed private wealth protected and serviced by the global offshore industry.
This is necessarily an exercise in night vision. The subterranean system that we are trying to measure is the economic equivalent of an astrophysical black hole.
Like those black holes, this one is virtually invisible and can be somewhat perilous to observers who venture too close. So, like astronomers, researchers on this topic have necessarily used indirect methods to do their estimates, conducting their measurements from a respectful distance. This indirect approach is painstaking, and has many inherent limitations, as we’ll see.
Unlike in the field of astrophysics, however, the invisibility here is fundamentally man-made. Private sector secrecy and the official government policies that protect it have placed most of the data that we need directly off limits – even though it is, in principle, readily available.
In many ways, the crucial policy question is – what are the costs and benefits of all this secrecy?
Another key theme that emerges from this paper is that there is an urgent need for tax justice advocates and their allies in governments and in the public, especially in ”source” countries where the wealth is coming from, to press the relevant authorities for this information.
The very existence of the global offshore industry, and the tax-free status of the enormous sums invested by their wealthy clients, is predicated on secrecy: that is what this industry really “supplies” as it competes for, conceals, and manages private capital from all over the planet, from any and all sources, no questions asked.
We are up against one of society’s most well-entrenched interest groups. After all, there’s no interest group more rich and powerful than the rich and powerful, who are the ultimate subjects of our research.
The first step, however, are the estimates. The way is hard, the work is tedious, the data mining is as mind-numbing as any day below surface at the coal face, and the estimates are subject to maddening, irreducible uncertainties.
Nevertheless, as usual, some things may be said.
New Estimates. As discussed below, previous estimates of the size and growth of the offshore industry to date have relied on rough judgments and rules of thumb or, at best, on one or two very simple estimation methods.
We triangulated on our estimates from the vantage point of several different methods. The aim is not pseudo-precision, much less ”really big numbers,” but to identify a plausible “base case” for this otherwise-well hidden sector of the global economy.
A More Open Process. Another objective is to keep a sharp eye out for the puzzles surfaced by this data analysis, of which there are many. A key problem with previous estimates is sensationalism. That is to be expected, given the subject matter, and the fact that estimation is still dominated by relatively closed communities of consulting firms, government agencies, or NGOs.
An important aim of this project is to establish a more open, transparent, collaborative model for doing such research so that the data sources, estimation methods, and core assumptions are all exposed to the sunlight of peer review, and ultimately to public scrutiny.
Estimation Methods. As discussed below in more detail, this paper employs four key estimation approaches: (1) a “sources-and-uses” model for country-by-country unrecorded capital flows; (2) an “accumulated offshore wealth” model; (3) an “offshore investor portfolio” model; and (4) direct estimates of offshore assets at the world’s top 50 global private banks.
To compile its estimates, the paper uses latest available data from the World Bank and IMF, the UN, central banks, and national accounts to explicitly model capital flows for each member of a subgroup of 139 key ”source” countries that publish such data.
The paper goes further, supplementing these models with other evidence, including (1) data on so-called “transfer mispricing.” (2) data on the cross-border demand for liquid mattress money” like reserve currency and gold, part of which may move through offshore markets; and (3) a review of market research by leading consulting firms on the size of the ”offshore” private banking market. (See Section 5, below, for more details.) We believe that the resulting estimates of unrecorded capital flows and accumulated offshore wealth are the most rigorous and comprehensive ever produced.1 In the spirit of open research, we hereby issue an open challenge to the IMF and the World Bank to all comers, in fact – to see if they can come up with better estimates.
See full PDF below.