Offshore Financial Centres - Treasury Contents


Memorandum from Professor E. FitzGerald, University of Oxford

GREY ASSETS AND BLACK TRANSACTIONS: A GLOBAL SECURITY PROBLEM

SUMMARY

  International security in general, and that of the EU in particular, is threatened by the routing of criminal/terrorist "black" funds through offshore financial centres and unregulated cash transfer systems. Research now starting at Oxford University will investigate the extent to which this problem is made intractable by tax avoidance by wealth holders and lack of low cost banking for immigrant remittances, both of which generate large volumes of unregistered "grey" flows and assets that provide cover for black transactions. The findings will have important policy implications.

NEED FOR FURTHER RESEARCH

  The key attraction of in offshore financial centres is secrecy (to avoid paying tax elsewhere), not low tax rates as such—and it is this secrecy which generates the security problem.[367] Tax evaders require havens with strong property rights (often associated with major powers through treaties, dependency or regulatory agreements) combined with secrecy, precisely because they are not in a good position to claim asset ownership in domestic courts.

  This liquidity provides a "grey" cover for "black" criminal (narcotics, theft, arms, bribery etc) and terrorist transactions. In the case of migrant remittances, these are mostly transferred through informal nonbank cash transfer systems in order to avoid high bank costs on small transactions, and bureaucratic formalities in the home country. The enormous volume of these grey flows also provides ideal cover for black transactions related to criminal and terrorist activity.[368]

  Current reporting systems do not work well, and even when the target is known tracking payments is a slow and costly process.[369] There is need of further research from a strictly economic and financial viewpoint in order to understand the logic of these transactions, and thus design better methods detecting and preventing them.

  Apart from the clear benefits in terms of global security, reduction or elimination of tax evasion through offshore financial centres would have clear benefits in terms of increased fiscal revenue, which could either be used to improve welfare services (particularly underfunded pension schemes) or to reduce the burden of taxation on lower income groups. Further, it would provide further fiscal resources to developing countries still burdened by debt problems and pressing infrastructure investment needs.[370]

STATE OF THE ART AND ADVANCES PROPOSED

  Although these are widely recognized problems, most research work on them is from the legal[371] and political disciplines[372] on the one hand, or by intergovernmental agencies on the other.[373] Despite the strong modern tradition of the application of economic logic to crime[374] and more recent interest extensions to fields such as information security, this approach seems to be lacking in this field as exemplified by the contents of such leading journals as Journal of Money Laundering Control. International tax research also has potential for economic analysis of users' motivations, but this too is mainly legal in nature.[375]

  We are concerned with the decisions as to which channels are used to use to move and hold related assets, rather than the nature of the illegal, quasi-legal or unregulated activities themselves. The advance proposed in this project is to apply financial and economic models of investment decision making to available empirical data, in order to evaluate the factors which generate the "grey" transactions, and assess their propensity to provide an effective camouflage for "black" transactions.

EUSECON

  As part of a large research programme funded by the European Community under the Seventh Framework Programme (Theme 10: Security) I am engaged as a key partner in the EUSECON (New Agenda for European Security Economics). The EUSECON is coordinated by the German Institute for Economic Research DIW Germany; and includes in addition to the University of Oxford, the Universities of Hamburg, Prague, Patras, Bilbao, Jerusalem, Thessaly, Linz and The Hague.

  The objectives of our component of this programme are as follows:

    —  Establish empirically the extent to which offshore financial centres and informal money transfer systems provide an effective cover for criminal and/or terrorist funding transactions.

    —  Explain these observations analytically by reference to modern investment models, taking into account factors such as risk, returns and diversification on the one hand, and costs of information, transactions and agency on the other.

    —  Test the extent to which more effective tax information exchange and lower bank transfer costs could reduce grey flows and thus the cover given to black transactions.

  Work started in May 2008 and will continue until September 2010.

  The first stage will be to gather data and documentation from key international agencies, including the US and UK Treasuries, the OECD Centre for Tax Policy and Administration, the Financial Action Task Force, the UN/DESA Tax Cooperation Committee and the Bank of International Settlements. Contact has already been made with these agencies in previous research projects, and access to available information should not be problematic.

  The second stage will be to analysis this data (both qualitatively and qualitatively) in the context a simple yet robust financial model of asset choice where the returns, risk and transactions costs are determined by the institutional characteristics of the channel and/or location chosen.

  The third stage will be to derive the implications for the design of policy instruments. Of particular interest will be (a) the application of withholding taxes with offshore centres along the lines of exiting EU initiatives; and (b) the provision of free banking services for migrant remittances, connected with micro-credit institutions.

June 2008














367   FitzGerald, V. (2002) "International Tax Cooperation and Capital Mobility" Oxford Development Studies 30(3) 251-266. Back

368   FitzGerald, V. (2004) "Global Financial Information, Compliance Incentives and Terrorist Funding" European Journal of Political Economy Vol 20.2 (June, 2004) pp. 387-401. Back

369   Paul Allan Schott Reference Guide to Anti-Money Laundering and Countering the Financing of Terrorism World Bank, 2006. Back

370   FitzGerald (2002) op. citBack

371   Victor V. Ramraj, Michael Hor and Kent Roach (Eds) Targeting Terrorist Finances: The New Challenges of Financial Market Globalization, Global Anti-Terrorism Law and Policy Cambridge University Press 2006. Back

372   Thomas J. Biersteker and Sue E. Eckert (Eds.) Countering the Financing of Global Terrorism (London and New York: Routledge Publishers, 2006. Back

373   Financial Action Task Force (FAFT), Annual Report Paris, 2006 Back

374   Isaac Ehrlich and Zhiqiang Liu (Eds) The Economics Of Crime Edward Elgar, 2006. Back

375   FitzGerald, V. (2002) "International Tax Cooperation and Capital Mobility" Oxford Development Studies 30(3) 251-266 Back


 
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