The Hidden World of Offshore Banking

British Virgin Islands, a well-known tax haven. || Alterra.

The revelation of the Panama, and now Paradise Papers, has sparked an unprecedented amount of interest from the public into how exactly wealthy citizens can continue to legally evade taxes through offshore banking. The shock for many comes not solely from the huge amounts of wealth found to be tax-evaded, but from the fact that many of these perpetrators, even after having their wrongdoing exposed, go unprosecuted. So it becomes necessary to ask: How much wealth is truly being offshored? How easy is it for one to place wealth offshore? And how do these practices remain largely legal?

A recent Forbes study “shows that at least 21 trillion [USD] – and perhaps up to 31 trillion” dollars have been removed from the countries of their owners to countries with secretive offshoring capabilities. Just to place that into perspective, the GDP of the entire U.S. was 18.57 trillion USD for the year of 2016. This proves that massive amounts of money, from around the world, are being funneled into offshore accounts and shell companies for the purpose of tax evasion. Canadians for Tax Fairness report that “Canada’s government loses between 10 billion [CAN] and 15 billion annually due to corporate tax dodging using tax havens” (Huffington Post). That estimation doesn’t even include the tax evasion perpetrated through offshoring by wealthy individuals. Countries around the world are unquestionably losing billions upon billions —if not trillions— in tax revenue, due to the offshoring tax evasion techniques used by corporations and wealthy individuals.

Placing wealth and assets offshore is surprisingly easy. The process begins with someone establishing a shell company, an inactive business which exists only to hold or transfer finances on its behalf. Oftentimes individuals who want to escape suspicion as much as possible will pay extra for what’s called a shelf company. A shelf company is a shell company that was founded years before it was then sold, so even if someone were to begin funneling money into their offshore shelf company in 2017, it could look as though the company has existed with no previous infractions since say 2010. Once a shell company is established, two things can happen from there: countries which promote the establishment of these shell companies usually have little to no business taxes. Firstly, an individual can begin pumping money into this shell company and let it remain untaxed under the protection of that company. But the safest tax havens are another step away. Secondly, under the name of one’s shell company, an individual can open a business-based bank account in that country or any other country around the world. It’s not uncommon for individuals to establish shell companies as mere intermediaries in poor, under-the-radar countries, and then continue pushing their money through to bank accounts in stable countries such as Switzerland. It seems reasonable to assume that because the process is so simple, there must be at least some great financial barriers to pursue establishing an offshore entity. But, once again, it’s actually astoundingly effortless. NPR’s Planet Money podcast hosts decided to see just how accessible and financially burdensome it was to enter the world of offshoring wealth. They googled “offshore company registration” and got 15,000,000 results. In disbelief, I attempted the same thing myself and found identical results. Many of the first results were websites providing phone numbers which anyone could call. After analyzing many of these websites, NPR concluded that it only costs $500 to $3,000 USD to set up a shell company. Other services are also offered, usually only for a few hundred dollars, and these range from having a shelf company to having someone else be the public face of your company. In order to finalize your offshore company, all you need to issue to most providers of this service is a notarized passport and proof of address. Some places, although illegally, even allow you to open a company anonymously. To avoid the illegality of setting up an anonymous company abroad, many people utilize their ability to establish a company anonymously within their home country. Take for example the situation in the United States: Some states, such as Delaware, allow domestic citizens to open a business with total anonymity and no ties to them whatsoever. Then after the establishment of this business entity within the US, you can- without breaking any laws- then open a business on behalf of that business internationally. So, as it turns out, anyone with a few thousand dollars can construct a completely legal and anonymous offshore path to a tax haven.

David Cameron, former UK Prime Minister and inheritor of an offshore account. || CNN.

Now the reasoning for why these practices remain legal are largely political and economic. Countries on both ends of these offshoring deals unquestionably lose tax revenue. Whether your citizens are evading your taxing scheme or you drop your taxing altogether to attract the establishment of shell companies in your country, there is a loss of opportunity to tax more wealth. However, as the public sector loses from offshoring, the private sector arguably does not. Onshore countries- those who promote the establishment of shell companies within their borders- make substantial amounts of money providing these services. Huge amounts of economic growth and activity come from money being pumped into these dormant shell companies, thus very few politicians wish to cut them off. If, say for example, Belize were to tighten restrictions on offshoring it would be killing a multi-million-dollar industry that its citizens profit from. On the other end of the deal, lawyers and financial advisors are making even more money counselling wealthy individuals and corporations on how to go about legally evading taxes. Wall Street would lose millions upon millions of dollars in revenue spread across a diverse field of occupations if offshoring were to be regulated more tightly. In wealthy countries, such as the UK, financial services are becoming proportionally larger and larger in their contribution to GDP. Politicians never want to be associated with the weakening of economic growth, and the gridlocked battle between tightening regulations and the promotion of uninhibited growth will most likely continue on into the unforeseen future. Meaning, it is highly unlikely these practices will be outlawed simply due to the fact that they create a growing source of economic activity, and because these practices profit the people who are the decision makers in the political system. The former UK Prime Minister, David Cameron, is an exemplar of this widespread political predicament. He is a man who rose to power railing against the tax loopholes that allowed for tax evasion, and promised to bring an end to them. Yet once inpower, Cameron never made any significant moves to actually tighten regulations, for two reasons: ne, financial services is one of the largest industries in London, the country’s most populated city. Two, after the release of the Panama Papers, it was revealed that he inherited an offshore account from his father worth millions of dollars.

The vast black hole of offshoring is stunningly easy to peek into, and even jump into if you have an extra 500 bucks or so. But it’s safe to bet that it won’t be closing anytime soon.