Many of the roots of the current global economic crisis trace back to offshore financial centers located in tax havens. These include both those located in the smaller, mostly island states like Cayman and Jersey, and the larger tax havens like the City of London, Switzerland, Dublin, Delaware or Luxembourg.
These tax havens did not "cause" the crisis, but they contributed powerfully to it. This happened in a number of interlinked ways:
- They offered what has been called a "get out of regulation free" card to businesses that abuse them.
- The offshore system enabled U.S. financial services companies in particular (but also others) to get around domestic regulations and grow fast, achieving political and regulatory "capture" and contributing to the "too big to fail" banking problem. This happened first in the offshore Euromarkets from the 1960s, and then in the wider global offshore system.
- Unhealthy competition on tax and regulation between tax havens, and between them and other jurisdictions, eviscerated and degraded regulations that may otherwise have staunched the crisis.
- Tax incentives, typically through tax havens, played a major role in accelerating the build-up in debt and leverage across the global financial system.
- "Satellite" tax havens like some Caribbean islands or Britain's Crown Dependencies are conduits for illicit and other financial flows, often from developing countries into financial centers like London, New York, and these contributed to large macroeconomic imbalances. The mainstream economics profession has not measured these vast flows, many of which (such as transfer mispricing) simply do not show up in national statistics.
- A key feature of the crisis is that the financial system became frozen as a result of mutual mistrust and impenetrable complexity making it impossible for actors to understand the financial positions of their partners. The secrecy jurisdictions, by giving companies incentives to festoon their financial affairs across multiple jurisdictions, and by covering these affairs in a veil of secrecy, played a major part.
- Tax havens provided the cover for all manner of fraudulent business models - such as those offered by Bernie Madoff, Allen Stanford and others.
- Offshore centers helped corporations conceal serious losses, which contributed to the build-up.
- Offshore bank booking centers have played a powerful role in creating liquidity, which underlay the crisis.
Tax havens, by giving banks with global reach a "competitive" advantage over their more nationally-based rivals (by permitting evasion and avoidance of tax and regulatory obligations), contributed powerfully to the "too big to fail" problem.
Not only that, but by draining reputable jurisdictions of the tax dollars of their wealthiest citizens and corporations, and by fostering massive capital flight out of developing countries, they have made it so much harder for victims of the crisis to pay to clean up the mess.
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