OFCs and tax havens
The origins of money-laundering as a global phenomenon are closely tied to the international spread of offshore financial centres (OFCs) and the opportunities these provide for the spread of tax avoidance and evasion; the latter being of course a criminal offence. At the early stages of this development OFCs were primarily seen as opportunities for tax avoidance because of their low tax status; their transition towards offering tax evasion came later.
As noted last week, European countries had favoured the development of OFCs as an appropriate strategy for the diversification and development of its small, open low-income territories, dependencies, and ex-colonial possessions. In turn European connections to these jurisdictions provided investors with confidence in their political and social stability. Indeed, shortly after this process started, the Group of Seven leading industrial economies (G7) endorsed this strategy, especially for those OFCs located in small poor open economies. As also noted last week, this was aided by the relatively low start-up costs of these centres.
As events unfolded, however, more and more investors came to see these centres as offering not only opportunities for tax avoidance, but for tax evasion as well. And, the authorities in most if not all OFCs, either facilitated this transition or turned a blind eye to it. Very soon thereafter, the distinguishing feature of OFCs came to be their perception by investors as tax havens, always willing to facilitate tax evasion.
In truth, at one period of time during the 1980s, OFCS and tax havens were treated in the financial literature as one and the same. Following this outcome there was a radical shift in European attitudes towards OFCs, going as far as public condemnation of their tax evasion practices by the G7. The situation rapidly deteriorated and by the end of the 1980s, the G7 was calling for global regulation and oversight of the financial services offered by OFCs. This finally led to the establishment at the end of the decade (during the G7 Summit in 1989) of the Financial Action Task Force (on Money Laundering) – FATF, headquartered in Paris.
FATF
FATF will be considered as the next topic in the series. However, before that let us observe the main features of OFCs. While Guyana is not seen as an OFC by FATF or investors, the majority of other Caricom states have strong reputations as OFC sites. (The perceptions of the regulators and investors have played major roles in determining the status of an OFC.)
Several economic features distinguish OFCs. First, they have relatively large financial sectors but these are primarily oriented towards servicing non-residents businesses, individuals and other investors. Their customers pay local fees (registration); and employ local personnel (attorneys, business out-sources and office services providers) which provide local livelihoods.
Second, the legal, institutional and regulatory structure under which OFCs operate is explicitly designed to support and facilitate this orientation. This is reflected in the public attitudes and statements of the authorities, (including government). Indeed some governments go further and facilitate the sector with subsidized public expenditures (for example, general advertisement to attract clients). In these jurisdictions the practice is for currencies, other than that issued under the jurisdiction of the OFC, to be routinely used for local transactions. Local businesses encourage this currency substitution, which financial institutions servicing the domestic sector (banks, cambios and other money changers) facilitate.
As matters stand, however, several of the services provided by OFCs worldwide can also be provided by major industrial economies. Faced with this potential competition, OFCs stress what these major economies cannot provide: that is secrecy and confidentiality, especially in regard to the surveillance of investors/ investments by rich nations that are in hot pursuit of their tax evaders.
Finally, OFCs are perhaps best seen as ‘entrepôts,’ offering non-resident financial services to businesses, individuals and others. Like all entrepôts, they provide products to non-residents on a far vaster scale then their own small size would make economically feasible.
Three streams
The emphasis placed here on the role of OFCs (tax havens) as a driver of money laundering as an international and regional phenomenon is justified historically. Presently, however, there are two other drivers that are at the very least, of equal global and regional significance. Indeed, one of these has accompanied tax evasion from its inception while the other has emerged as a principal driver only since the early 2000s; the former is organized crime and racketeering, and the latter is the financing of terrorism.
As a driver, organized transnationalized crime and racketeering includes such heinous criminal endeavours as trafficking in narcotics, arms, persons, counterfeit artefacts, as well as illegal services (prostitution, gambling and blackmail information). Specifically, for our purposes it is in this stream that Guyana’s money laundering is firmly located.
All the crimes listed above typically involve cross-border transactions and are therefore founded on the existence of international markets for their wares. The anonymity, confidentiality and secrecy provided by laws and regulations serve to create an environment in which criminal practices do not only thrive, but the illegal proceeds thereby generated can be readily converted or ‘washed’ in a manner such that they emerge as legitimate proceeds.
The third driver, which is the financing of terrorism, emerged to the fore following the terrorist attacks on the United States (September 11, 2001). As we shall observe next week this led to special recommendations put forward by FATF for dealing with terrorist financing.
Next week I shall broadly address the purpose, scope and functions of the FATF and its regional affiliate, The Caribbean Financial Action Task Force, CFATF. The latter oversees the monitoring and regulation of money laundering in Guyana and the wider Caricom area.
