Capital Flight: Gingerbread Havens, Cannibalised Economies

It could be said that the Brothers Grimm wrote both fairy tales and nightmares at one and the same time. In such tales, Hansel and Gretel — innocent children abandoned in the woods at the behest of their stepmother — stumble on a delicious, edible cottage inhabited by a cannibalistic witch. Though they eventually outwit the witch, finding their way home, the moral of the story, as it relates to “toddler” or developing economies is clear: gingerbread cottages and idyllic countries-cum-tax havens such as Switzerland, serve as bases where the young are cannibalized, deposited by “fathers” of the nation and “parent” corporations.

According to Global Financial Integrity, $900-billion is “secreted” each year from underdeveloped economies, with an estimated $11,5-trillion currently stashed in havens. More than one quarter of these hubs belong to the UK, while Switzerland “washes” one-third of global capital flight. “The idea that Switzerland has a clean economy is a joke; it is a dirt-driven economy,” stated Richard Murphy, director of Tax Research LLP. The Swiss Bankers Association claims that four-fifths of the nation supports banking secrecy, revealing a society deeply embedded in a culture of impunity and exploitation, where the licit acts as a shield protecting the illicit in a terribly respectable manner.

Transparency International’s corruption perception index limits corruption to the “abuse of entrusted power” by Third World governments, rating Switzerland and the UK as the least corrupt nations in the world. It is a theme UK Prime Minister Gordon Brown has promised to address at next month’s G20 summit and one that Barack Obama has already begun to tackle. (Alas, Obama’s proposed framework is full of holes: the Geithner-Summers plan, for example, will bail out the corporates by overpricing toxic assets, secretly financed by raiding taxpayers via the Federal Reserve, while Brown appears to be overly comfortable playing the Swiss card, and conveniently blurring the lines between offshore financial centres such as London, New York, Sandton, and tradition 'postcard' tax havens.)

The timing could not be better: the US Government Accountability Office recently reported that 83 of the top 100 corporations maintained subsidiary units in tax havens. Many corporations, including Citibank and Morgan Stanley qualified for the billions in bail-out funds subsidised by taxpayers, a pattern reflecting the IMF-imposed shift from corporate (fictive citizen) to consumer (flesh and blood citizen) taxation.

This policy is especially lethal for developing countries where the poor are now caught in tax brackets, courtesy of the IMF and World Bank’s structural adjustment programmes (SAP), instituting policies ranging from “tax holidays” to the privatisation of state services, carving out huge slices of natural capital at corporate auctions. SAPs were justified on the basis of outstanding debt, unilaterally contracted by corrupt and despotic regimes; a considerable portion siphoned in virtual suitcases almost on arrival. Africa has collectively lost more than $600-billion in capital flight, excluding other mechanisms of flight including ecological debt (globally estimated at a potential $1,8-trillion per annum), the cost of liberalised trade (just under $300-billion) … and the list goes on …

Even the World Bank knows it. Professor Patrick Bond, author of Talk Left, Walk Right quotes the bank’s data on resource depletion saying: “In the case of Gabon, income goes from $3 370/person GNI down to negative $2 241 once you correct for the implications of stripping out natural assets. Consider the non-renewable resources extracted from South Africa, which is Africa’s most industrialised country, and as you see, we go down from $2 837 per person to minus $2 per person, in a given year, 2000. It is actually much worse now with the higher prices. I tell my compatriots that we should have just stayed in bed that year, not gotten up go to work — because by working on extracting SA natural resources, we actually lost money at the end of the year.”

(This is a rather relevant issue in light of the estimated 360 million tonnes of titanium deposits, one of the largest in the world, sitting under a 22km stretch of Wild Coast soil.)

Despite this, the development model — justified on the basis of outstanding debt — continues to impose structural injustice via the “debt cancellation” trap of the Heavily Indebted Poor Countries initiative, where cancellation is more or less postponed until the satisfaction of completion points, instituting secrets memorandums of agreement, subsidies to foreign corporations and massive tax concessions (such as income tax, usage fees, property tax) — the primary source of revenue for “export-oriented” developing countries.

“Corporations prefer weak governments that are anxious to secure investments, and despotic governments,” said John Christensen, founder of the Tax Justice Network and former economic advisor to Jersey, one of the UK’s leading “crown dependency” havens. “Although multinationals influence the shape of global trade and investment by structuring trade in corrupt and secretive ways, these issues are generally marginalised during trade negotiations.”

“Hydrocarbon contracts in particular are very secretive, especially with regards to taxation, and it is difficult to get evidence of payment, with many political parties and politicians receiving payment on the side,” he said. When it comes to tax receipts and tax deals, the powers that be are only too happy to become Sicilian and go the path of Omerta. It’s simply not in their interest to repudiate odious debt, the midnight piggy bank of the Big Shiny Men (with fat wallets, fatter armies and the fattest of heads).

In 2006, developing regions owed $3,7-trillion in “odious” debt, servicing more than $570-billion per annum. An analysis by economist James Henry revealed that more than $1-trillion worth of loans “disappeared into corruption-ridden projects or was simply stolen outright”.

Tax havens, of course, are all in favour of it. According to Swiss banker Jacques de Saussure, “tax competition is the only agent of productivity for governments — it is the only competition they have”.

Yet it is impossible to ascertain the origin and destination of capital flight as the international financial community successfully lobbied to have automatic exchange of tax information scrapped from the IMF’s Article of Agreements, immunizing corporate and Third World corruption. Though Africa has been labelled as the world’s most corrupt region, generally 3% to 5% of total outflow emanates from the political elite, with 30% composed of criminal flight. Multinational internal mispricing makes up 60% of capital outflow, with corporations declaring profits in tax havens, as opposed to the country of performance.

Corporations and the capital exporting governments of the Organisation for Economic Co-operation and Development — also known as the “rich man’s club” — have trumpeted self-serving “solutions” by backing frameworks such as the Extractive Industries Transparency Initiative (EITI), but EITI is a gimmick easily circumvented by reducing taxable revenues to cash payments. Gabon, mentioned above, passed EITI with semi-flying colours, even as the country was mired in the Elf affair. Nicholas Shaxson, author of Poisoned Wells, wrote of the subject: “Magistrates discovered the money from Elf’s African operations financed French political parties and officials, and supplied bribes to support French commercial, military and diplomatic goals around the world. In exchange, French troops protected compliant African dictators.”

The solution/s to this conundrum is distinctly American (and Murphian — the night Murphy’s son finally fell asleep, the extra energy and time gave way to the eureka moment when he identified it). According to Murphy, the profits of the whole corporation must be taken into account, and taxed on the basis of “the formula of apportionment”.

“It already works in the US where states all have different corporate taxes,” he said.

The definition of corruption must also broaden to include tax havens as well as make mandatory the automatic exchange of tax information. It’s a move that will certainly ruffle a few feathers, but in doing so, the lifeline sustaining tyrannical regimes from Burma to Angola will be cut, effectively weeding out the real roots of terror.