Price of Offshore

1
!ames S. Penry, 1!n 2012

1nL kICL CI CIISnCkL kLVISI1LD*

nLW LS1lMA1LS lC8 MlSSlnC CLC8AL 8lvA1L
WLAL1P, lnCCML, lnLCuALl1?, Anu LCS1 1AxLS

AL dlnner Lhey dld dlscourse very flnely Lo us of Lhe probablllLy
LhaL Lhere ls a !"#$ &'"( )* +),'- ./& ln Lhe land.

-- Samuel epys, ulary (1663)

0-' +),1 2', +),

-- PalLlan proverb

3.'4'# #)+'$./,2 )5$ $.'4' 6 6 6 ",& /$# 789:;<7=

-- 8lpley

Iames S. nenry

Senlor Advlsor/ Clobal 8oard Member

1ax !usLlce neLwork

!uly 2012

* 1hanks Lo !ames 8oyce, !ohn ChrlsLensen, Alex Cobham, 8lchard Murphy, 8onan
alan, Sol lccloLLo, and nlcholas Shaxson for Lhelr consLrucLlve feedback. 1hanks are
also due Lo Lhe World 8ank, Lhe lMl, Lhe 8lS, and Lhe un for much of Lhe baslc daLa
analyzed ln Lhls reporL.

2

1A8LL CI CCN1LN1S

1he r|ce of Cffshore kev|s|ted

1. IN1kCDUC1ICN] SUMMAk AND kL IINDINGS

2. WnLkL IS CIISnCkL, ANWA?

3. 1nL GLC8AL nAVLN INDUS1k

4. CLD LS1IMA1LS

S. NLW LS1IMA1LS

6. 1kADL MISkICING AN ASIDL

7 . IMLICA1ICNS

ALNDIk I: 1nL kL-nIS1Ck CI CIISnCkL LS1IMA1LS

ALNDIk II: LkLAINING CAI1AL ILIGn1

ALNDIk III: kL CnAk1S

3

1. IN1kCDUC1ICN] SUMMAk

1he deflnlLlon of vlcLory for Lhls paper ls Lo revlew and lmprove upon exlsLlng esLlmaLes
of Lhe slze, growLh and dlsLrlbuLlon of unLaxed prlvaLe wealLh proLecLed and servlced by
Lhe global offshore lndusLry.

1hls ls necessarlly an exerclse ln nlghL vlslon. 1he subLerranean sysLem LhaL we are
Lrylng Lo measure ls Lhe economlc equlvalenL of an asLrophyslcal black hole.

Llke Lhose black holes, Lhls one ls vlrLually lnvlslble and can be somewhaL perllous Lo
observers who venLure Loo close. So, llke asLronomers, researchers on Lhls Loplc have
necessarlly used lndlrecL meLhods Lo do Lhelr esLlmaLes, conducLlng Lhelr measuremenLs
from a respecLful dlsLance. 1hls lndlrecL approach ls palnsLaklng, and has many lnherenL
llmlLaLlons, as well see.

unllke ln Lhe fleld of asLrophyslcs, however, Lhe lnvlslblllLy here ls fundamenLally man-
made. rlvaLe secLor secrecy and Lhe offlclal governmenL pollcles LhaL proLecL lL have
placed mosL of Lhe daLa LhaL we need dlrecLly off llmlLs even Lhough lL ls, ln prlnclple,
readlly avallable.

ln many ways, Lhe cruclal pollcy quesLlon ls whaL are Lhe cosLs and beneflLs of all Lhls
secrecy?

AnoLher key Lheme LhaL emerges from Lhls paper ls LhaL Lhere ls an urgenL need for Lax
[usLlce advocaLes and Lhelr allles ln governmenLs and ln Lhe publlc, especlally ln source
counLrles where Lhe wealLh ls comlng from, Lo press Lhe relevanL auLhorlLles for Lhls
lnformaLlon.

1he very exlsLence of Lhe global offshore lndusLry, and Lhe Lax-free sLaLus of Lhe
enormous sums lnvesLed by Lhelr wealLhy cllenLs, ls predlcaLed on secrecy: LhaL ls whaL
Lhls lndusLry really supplles as lL compeLes for, conceals, and manages prlvaLe caplLal
from all over Lhe planeL, from any and all sources, no quesLlons asked.

We are up agalnsL one of socleLys mosL well-enLrenched lnLeresL groups. AfLer all,
Lheres no lnLeresL group more rlch and powerful Lhan Lhe rlch and powerful, who are
Lhe ulLlmaLe sub[ecLs of our research.

1he flrsL sLep, however, are Lhe esLlmaLes. 1he way ls hard, Lhe work ls Ledlous, Lhe daLa
mlnlng ls as mlnd-numblng as any day below surface aL Lhe coal face, and Lhe esLlmaLes
are sub[ecL Lo maddenlng, lrreduclble uncerLalnLles.

neverLheless, as usual, some Lhlngs may be sald.

4
New Lst|mates. As dlscussed below, prevlous esLlmaLes of Lhe slze and growLh of Lhe
offshore lndusLry Lo daLe have relled on rough [udgmenLs and rules of Lhumb or, aL besL,
on one or Lwo very slmple esLlmaLlon meLhods.

We LrlangulaLed on our esLlmaLes from Lhe vanLage polnL of several dlfferenL meLhods.
1he alm ls noL pseudo-preclslon, much less really blg numbers, buL Lo ldenLlfy a
plauslble base case for Lhls oLherwlse-well hldden secLor of Lhe global economy.

A More Cpen rocess. AnoLher ob[ecLlve ls Lo keep a sharp eye ouL for Lhe puzzles
surfaced by Lhls daLa analysls, of whlch Lhere are many. A key problem wlLh prevlous
esLlmaLes ls sensaLlonallsm. 1haL ls Lo be expecLed, glven Lhe sub[ecL maLLer, and Lhe
facL LhaL esLlmaLlon ls sLlll domlnaLed by relaLlvely closed communlLles of consulLlng
flrms, governmenL agencles, or nCCs.

An lmporLanL alm of Lhls pro[ecL ls Lo esLabllsh a more open, LransparenL, collaboraLlve
model for dolng such research so LhaL Lhe daLa sources, esLlmaLlon meLhods, and core
assumpLlons are all exposed Lo Lhe sunllghL of peer revlew, and ulLlmaLely Lo publlc
scruLlny.

Lst|mat|on Methods. As dlscussed below ln more deLall, Lhls paper employs four key
esLlmaLlon approaches: (1) a sources-and-uses model for counLry-by-counLry
unrecorded caplLal flows, (2) an accumu|ated offshore wea|th model, (3) an offshore
|nvestor portfo||o model, and (4) dlrecL esLlmaLes of offshore asseLs aL Lhe worlds Lop
30 g|oba| pr|vate banks.

1o complle lLs esLlmaLes, Lhe paper uses laLesL avallable daLa from Lhe World 8ank and
lMl, Lhe un, cenLral banks, and naLlonal accounLs Lo expllclLly model caplLal flows for
each member of a subgroup of 139 key source counLrles LhaL publlsh such daLa.

1he paper goes furLher, supplemenLlng Lhese models wlLh oLher evldence, lncludlng (1)
daLa on so-called Lransfer mlsprlclng, (2) daLa on Lhe cross-border demand for llquld
maLLress money llke reserve currency and gold, parL of whlch may move Lhrough
offshore markeLs, and (3) a revlew of markeL research by leadlng consulLlng flrms on Lhe
slze of Lhe offshore prlvaLe banklng markeL. (See SecLlon 3, below, for more deLalls.)

We belleve LhaL Lhe resulLlng esLlmaLes of unrecorded caplLal flows and accumulaLed
offshore wealLh are Lhe mosL rlgorous and comprehenslve ever produced.
1
ln Lhe splrlL
of open research, we hereby lssue an open challenge Lo Lhe lMl and Lhe World 8ank
Lo all comers, ln facL Lo see lf Lhey can come up wlLh beLLer esLlmaLes.

1
We wlll house Lhls and accompanylng reporLs permanenLly here.
hLLp://www.Lax[usLlce.neL/cms/fronL_conLenL.php?ldcaL=148

3

kL IINDINGS

Cvera|| S|ze

A slgnlflcanL fracLlon of global prlvaLe flnanclal wealLh -- by our esLlmaLes, aL leasL 521 to
532 tr||||on as of 2010 -- has been lnvesLed vlrLually Lax-free $.4)52. Lhe worlds sLlll-
expandlng black hole of more Lhan 80 offshore secrecy [urlsdlcLlons. We belleve Lhls
range Lo be conservaLlve, for reasons dlscussed below.

8emember: Lhls ls [usL flnanclal wealLh. A blg share of Lhe real esLaLe, yachLs,
racehorses, gold brlcks -- and many oLher Lhlngs LhaL counL as non-flnanclal wealLh --
are also owned vla offshore sLrucLures where lL ls lmposslble Lo ldenLlfy Lhe owners.
1hese are ouLslde Lhe scope of Lhls reporL.

Cn Lhls scale, Lhls offshore economy ls large enough Lo have a ma[or lmpacL on
esLlmaLes of lnequallLy of wealLh and lncome, on esLlmaLes of naLlonal lncome and debL
raLlos, and mosL lmporLanLly Lo have very slgnlflcanL negaLlve lmpacLs on Lhe
domesLlc Lax bases of key source counLrles (LhaL ls, counLrles LhaL have seen neL
unrecorded prlvaLe caplLal ouLflows over Llme
2
.)

2. Cur 139-country focus group: who are the rea| debtors?

We have focused on a subgroup of 139 malnly low-mlddle lncome source counLrles
3

for whlch Lhe World 8ank and lMl have sufflclenL exLernal debL daLa.

Cur esLlmaLes for Lhls group underscore how mlsleadlng lL ls Lo regard counLrles as
debLors only by looklng aL one slde of Lhelr balance sheeLs.

Slnce Lhe 1970s, wlLh eager (and ofLen aggresslve and lllegal) asslsLance from Lhe
lnLernaLlonal prlvaLe banklng lndusLry, lL appears LhaL prlvaLe ellLes ln Lhls sub-group of
139 counLrles had accumulaLed 57.3 to 59.3 tr||||on of unrecorded offshore wea|th ln
2010, conservaLlvely esLlmaLed, even whlle many of Lhelr publlc secLors were borrowlng

2
More preclsely, source counLrles" are Lhose whose LoLal real accumulaLed neL unrecorded prlvaLe
caplLal ouLflows are poslLlve for Lhe perlod 1970-2010 (or whaLever perlod ls avallable for Lhe parLlcular
counLry.) LqulvalenLly, lL ls Lhose counLrles whose prlvaLe clLlzens have accumulaLed poslLlve neL
unreporLed / unLaxed flnanclal wealLh abroad.
3
1hls ls a raLher homogenous group, Lhe large ma[orlLy of whlch are low-mlddle lncome counLrles, buL
lnclude some rlch non-CLCu counLrles llke Saudl Arabla and kuwalL, as well as a few developed
counLrles llke Pungary and korea. Cur crlLerlon was LhaL a) exLernal debL daLa was avallable, and b) Lhey
are source counLrles: LhaL ls, Lhose counLrles whose prlvaLe clLlzens have accumulaLed poslLlve neL
unreporLed/ unLaxed flnanclal wealLh abroad.

6
Lhemselves lnLo bankrupLcy, endurlng agonlzlng sLrucLural ad[usLmenL and low
growLh, and holdlng flre sales of publlc asseLs.

1hese same source counLrles had aggregaLe gross exLernal debL of 54.08 tr||||on ln 2010.
Powever, once we subLracL Lhese counLrles forelgn reserves, mosL of whlch are
lnvesLed ln llrsL World securlLles, Lhelr aggregaLe neL exLernal debLs were m|nus 52.8
tr||||on ln 2010. (1hls dramaLlc plcLure has been lncreaslng sLeadlly slnce 1998, Lhe year
when Lhe exLernal debLs mlnus forelgn reserves was aL lLs peak for Lhese 139 counLrles,
aL +$1.43 Lrllllon.
4
)

So ln LoLal, by way of Lhe offshore sysLem, Lhese supposedly lndebLed source
counLrles lncludlng all key developlng counLrles are not debtors at a||: they are net
|enders, to the tune of 510.1 to 513.1 tr||||on aL end-2010.

1he problem here ls LhaL Lhe asseLs of Lhese counLrles are held by a small number of
wealLhy lndlvlduals whlle Lhe debLs are shouldered by Lhe ordlnary people of Lhese
counLrles Lhrough Lhelr governmenLs.

As a u.S. lederal 8eserve offlclal observed back ln Lhe 1980s: 1he real problem ls noL
LhaL Lhese counLrles don'L have any asseLs. 1he problem ls, Lhey're all ln Mlaml (and, he
mlghL have added, new ?ork, London, Ceneva, Zurlch, Luxembourg, Slngapore, and
Pong kong)

1hese prlvaLe unrecorded offshore asseLs and Lhe publlc debLs are lnLlmaLely llnked,
hlsLorlcally speaklng: Lhe dramaLlc lncrease ln unrecorded caplLal ouLflows (and Lhe
prlvaLe demand for llrsL World currency and oLher asseLs) ln Lhe 1970s and 1980s was
poslLlvely correlaLed wlLh a surge ln llrsL World loans Lo developlng counLrles: much of
Lhls borrowlng lefL Lhese counLrles under Lhe Lable wlLhln monLhs, and even weeks, of
belng dlsbursed.
3

1oday, local ellLes conLlnue Lo voLe wlLh Lhelr flnanclal feeL whlle Lhelr publlc secLors
borrow heavlly abroad buL lL ls llrsL World counLrles LhaL are dolng mosL of Lhe
borrowlng. lL ls Lhese frequenLly heavlly lndebLed source counLrles and Lhelr ellLes LhaL
have become Lhelr flnanclers.

ln Lerms of Lackllng poverLy, lL ls hard Lo lmaglne a more presslng global lssue Lo
address.

4
World 8ank/lMl daLa (2012), my analysls.
3
See !ames Penry, 3.' >())& >",?'4#1 $"('# *4)+ $.' 2()@"( 5,&'424)5,& 'A),)+-1 CcLober 2003, for an
lnvesLlgaLlve lnslde look aL Lhe lnLesLlnes of Lhe global prlvaLe banklng model ln developlng counLrles.

7
3. now th|s wea|th |s concentrated. Much of Lhls wealLh appears Lo be concenLraLed ln
Lhe hands of prlvaLe ellLes LhaL reslde ln a handful of source counLrles many of whlch
are sLlll regarded offlclally as debLors.

8y our esLlmaLes, of Lhe $7.3 - $9.3 Lrllllon of offshore wealLh belonglng Lo resldenLs of
Lhese 139 counLrles, the top 10 countr|es account for 61 percent and Lhe top 20 for 81
percent. (See Appendlx 3, p33 for more deLalls.)

4. Untaxed Cffshore Larn|ngs start to swamp outf|ows. Cur esLlmaLes also correcL Lhe
sangulne vlew LhaL slnce new ouLflows of caplLal appear Lo have recenLly decllned from
counLrles llke Mexlco and 8razll, caplLal fllghL ls no longer a problem for Lhese counLrles.

Cnce we Lake lnLo accounL Lhe growLh of large unLaxed earnlngs on accumulaLed
offshore wealLh, lL Lurns ouL LhaL from 1970 Lo 2010 Lhe real value (ln $2000) of Lhese
earnlngs alone may be has much as $3.7 Lrllllon equlvalenL Lo abouL 60 percenL of Lhe
global LoLal unrecorded caplLal ouLflows durlng Lhls perlod.
6
lor LaLln Amerlca, Sub-
Saharan Afrlca and Lhe Mlddle LasL LhaL have long hlsLorles of accumulaLlng offshore
wealLh and unreporLed earnlngs abroad, Lhe raLlo ls close Lo 100 percenL or more.

8y shlfLlng aLLenLlon from flows Lo accumulaLed sLocks of forelgn wealLh, Lhls paper
calls aLLenLlon Lo Lhe facL LhaL reLenLlon of lnvesLmenL earnlngs abroad can easlly
become so slgnlflcanL LhaL lnlLlal ouLflows are evenLually replaced by hldden fllghL,
wlLh Lhe hldden sLock of unrecorded prlvaLe wealLh generaLlng enough unreporLed
lncome Lo keep lL growlng long afLer Lhe lnlLlal ouLflows have drled up.

S. Cffshore earn|ngs swamp fore|gn |nvestment. AnoLher key flndlng ls LhaL once we
fully accounL for caplLal ouLflows and Lhe losL sLream of fuLure earnlngs on Lhe
assoclaLed offshore lnvesLmenLs, forelgn dlrecL and equlLy lnvesLmenL flows are almosL
enLlrely offseL even for some of Lhe worlds largesL reclplenLs of forelgn lnvesLmenL.

6. W|de open and eff|c|ent cap|ta| markets: how trad|t|ona| theor|es fa||ed. SLandard
developmenL economlcs assumes LhaL flnanclal caplLal wlll flow predomlnanLly from
caplLal-rlch hlgh-savlng rlch counLrles Lo caplLal-scarce counLrles where reLurns on
lnvesLmenL are hlgher.

8uL for many counLrles Lhe global flnanclal sysLem seems Lo have enabled prlvaLe
lnvesLor moLlves undersLandable ones llke asseL dlverslflcaLlon along wlLh less
admlrable ones llke Lax evaslon -- Lo swamp Lhe convenLlonal Lheory. 8educlng frlcLlons
ln global flnance, whlch was supposed Lo help caplLal flow ln Lo caplLal-sLarved
developlng counLrles more easlly and efflclenLly, seems Lo have encouraged caplLal Lo
flow ouL. 1hls ralses new quesLlons abouL how efflclenL frlcLlonless global caplLal
markeLs are.

6
See Appendlx lll, p34

8

7. 1he act|ve ro|e of pr|vate banks. Cur analysls refocuses aLLenLlon on Lhe crlLlcal,
ofLen unsavory role LhaL global prlvaLe banks play. A deLalled analysls of Lhe Lop 30
lnLernaLlonal prlvaLe banks reveals LhaL aL Lhe end of 2010 Lhese 30 collecLlvely
managed more Lhan 512.1 tr||||on ln cross-border lnvesLed asseLs from prlvaLe cllenLs,
lncludlng vla LrusLs and foundaLlons. Conslder Lhe role of smaller banks, lnvesLmenL
houses, lnsurance companles, and non-bank lnLermedlarles llke hedge funds and
lndependenL money managers ln Lhe offshore cross-border markeL, plus self-managed
funds, and Lhls flgure seems conslsLenL wlLh our overall offshore asseL esLlmaLes of
uS$21-$32 Lrllllon.

A dlsproporLlonaLe share of Lhese asseLs were managed by ma[or global banks LhaL are
well known for Lhelr role ln Lhe 2008 flnanclal crlsls, Lhelr generous governmenL ballouLs
and bounLlful execuLlve compensaLlon packages. We can now add Lhls Lo Lhelr llsL of
dlsLlncLlons: Lhey are key players ln many havens around Lhe globe, and key enablers of
Lhe global Lax ln[usLlce sysLem.

lL ls lnLeresLlng Lo noLe LhaL desplLe choppy markeLs Lhe rank order aL Lhe Lop of Lhe
prlvaLe banklng world has been remarkably sLable key recenL Lrends have been for an
lncreased role for lndependenL bouLlque money managers and hedge funds, and a shlfL
Loward banks wlLh a sLrong Aslan presence.

8. Cffshore Investor ortfo||os. 8ased on a slmple model of offshore lnvesLor porLfollo
behavlor, daLa from Lhe 8ank for lnLernaLlonal SeLLlemenLs (8lS), and lnLervlews wlLh
prlvaLe bankers and wealLh lndusLry analysLs, Lhls ylelds a scale-up facLor LhaL ls also
conslsLenL wlLh Lhe aggregaLe range for 2010 noLed earller.

A slmple model, based on a comblnaLlon of 8lS daLa on cross-border deposlLs and oLher
asseL holdlngs by non-bank lnvesLors, an analysls of porLfollo mlx assumpLlons made
by wealLh lndusLry analysLs, and lnLervlews wlLh acLual prlvaLe banks, suggesLs an
overall mulLlpller of 3.0 Lo scale up our cross-border deposlLs flgure Lo LoLal flnanclal
asseLs. 1hls ls very conservaLlve.

9. New kevenue Sources for G|oba| Needs. llnally, lf we could flgure ouL how Lo Lax all
Lhls offshore wealLh wlLhouL kllllng Lhe proverblal Colden Coose, or aL leasL enLlce lLs
owners Lo relnvesL lL back home, Lhls secLor of Lhe global underground ls also easlly
large enough Lo make a slgnlflcanL conLrlbuLlon Lo Lax [usLlce, lnvesLmenL, and paylng
Lhe cosLs of global problems llke cllmaLe change.

10. Cther est|mates. ln complllng Lhe evldence for Lhls paper, weve had a chance Lo
examlne oLher recenL work by analysLs. We flnd a number of shorLcomlngs, parLlcularly
ln meLhods LhaL rely heavlly on sLudles of lnLra-company Lransfer prlclng. SecLlon 4,
below, explores Lhls ln more deLall.

9
2. WnLkL IS CIISnCkL, ANWA?

Slnce Lhe laLe 1970s, lnvesLlgaLlve [ournallsLs, Lax auLhorlLles, drug enforcemenL offlclals,
LerrorlsL Lrackers, and naLlonal securlLy experLs -- and a few economlsLs -- have
gradually become aware LhaL Lhere ls lndeed a vasL deal of money -- a large and
growlng chunk of Lhe worlds prlvaLe wealLh and lncome -- hldden ouL Lhere, noL so
much ln Lhe land, buL offshore, proLecLed by a hlghly-pald, lndusLrlous bevy of
professlonal enablers ln Lhe prlvaLe banklng, legal, accounLlng, and lnvesLmenL
lndusLrles, Laklng advanLage of Lhe lncreaslngly borderless, frlcLlonless global economy.

Crade-school geography condlLlons us Lo Lhlnk of offshore as a physlcal locaLlon.
lndeed, some resldenLlal havens llke Slngapore and SwlLzerland do speclallze ln
provldlng secure low-Lax physlcal resldences Lo Lhe worlds wealLhlesL people, along
wlLh expenslve prlvaLe schools, hosplLals, and resorLs Lo enhance Lhe famlly dynasLles
human caplLal, and hlghly secure sLorage faclllLles for prlvaLe collecLlons of arL, gold,
[ewels, classlc cars, yachLs, planes, weapons and oLher LrlnkeLs.

Powever, prlvaLe banklng has long slnce become vlrLual. So Lhe Lerm offshore refers
noL so much Lo Lhe acLual physlcal locaLlon of prlvaLe asseLs or llablllLles, buL Lo nomlnal,
hyper-porLable, mulLl-[urlsdlcLlonal, ofLen qulLe Lemporary locaLlons of ,'$B)4?# )* ('2"(
",& C5"#/D('2"( ',$/$/'# ",& "44",2'+',$# LhaL manage and conLrol prlvaLe wealLh --
always ln Lhe lnLeresLs of Lhose who manage lL, supposedly ln Lhe lnLeresLs of lLs
beneflclal owners, and ofLen ln lndlfference or ouLrlghL deflance of Lhe lnLeresLs and
laws of mulLlple naLlon sLaLes. A palnLlng or a bank accounL may be locaLed lnslde
SwlLzerlands borders, buL Lhe all-lmporLanL legal sLrucLure LhaL owns lL Lyplcally LhaL
asseL would be owned by an anonymous offshore company ln one [urlsdlcLlon, whlch ls
ln Lurn owned by a LrusL ln anoLher [urlsdlcLlon, whose LrusLees are ln yeL anoLher
[urlsdlcLlon (and LhaL ls one of Lhe slmplesL offshore sLrucLures) ls llkely Lo be
fragmenLed ln many pleces around Lhe globe.

ulLlmaLely, Lhen, Lhe Lerm offshore refers Lo a seL of capablllLles. 1he key cllenLs for
Lhe offshore sysLem lnclude Lhe worlds wealLhlesL lndlvlduals and companles, as well
as lLs worsL vlllalns. numberlng [usL a few mllllon of Lhe worlds 6.3 bllllon people, Lhey
are an lncredlbly dlverse group, from 30-year old Chlnese real esLaLe speculaLors and
Slllcon-valley sofLware Lycoons Lo uubal oll shelks, 8usslan resldenLs, mlneral-rlch
Afrlcan dlcLaLors and Mexlcan drug lords.

10

lrom a sllghL dlsLance, all Lhese players share Lhe same baslc needs: (1) anonymlLy for
Lhem, Lhelr famllles, and Lhelr buslness and pollLlcal deallngs, (2) Lhe ablllLy Lo mlnlmlze
Lhe neL presenL value of fuLure Laxes, neL of Lax avoldance cosLs, (3) lnvesLmenL
managemenL, for Lhose who sLlll belleve ln lL, (4) ablllLy Lo easlly access and manage
Lhelr wealLh from anywhere on Lhe planeL, (3) secure places Lo hang ouL, hlde ouL and
en[oy llfe, and (6) lron-clad flnanclal securlLy for Lhelr huge sLocks of anonymously-
owned, largely-unLaxed prlvaLe asseLs1 agalnsL Lhe conLlnulng LhreaLs posed noL only by
Lax men and prosecuLors, buL also by kldnappers, exLorLlonlsLs, sples, hlL men, con men,
hackers, paparazzl, pollLlcal opponenLs, dlsgrunLled famlly members, ex-wlves, ex-
lovers, and each oLher.

lL ls Lhese core capablllLles secrecy, Lax mlnlmlzaLlon, access, asseL managemenL, and
securlLy LhaL our modern offshore sysLem offers. ln Lhe lasL 30 years a sophlsLlcaLed
LransnaLlonal prlvaLe lnfrasLrucLure of servlce provlders has grown up Lo dellver Lhese
servlces on an unprecedenLed scale. 1hls plraLe banklng sysLem now launders,
shelLers, manages and lf necessary re-domlclles Lhe rlches of many of Lhe worlds worsL
vlllalns, as well as Lhe Langlble and lnLanglble asseLs and llablllLles of many of our
wealLhlesL lndlvlduals, alongslde our mosL successful malnsLream banks, corporaLlons,
shlpplng companles, lnsurance companles, accounLlng flrms and law flrms.

11
All Lhese players have become, as lL were, clLlzens of a brave new vlrLual counLry -- one
LhaL lack physlcal boundarles buL can sLlll offer escape rouLes from many of Lhe Laxes,
flnanclal regulaLlons, human rlghLs sLandards, and moral resLralnLs LhaL Lhe resL of us
Lake for granLed: Lhe responslblllLles of socleLy. Cne seL of rules for a Llny mlnorlLy of
rlch and powerful people, anoLher seL for everyone else.

1he dlsLurblng reallLy ls LhaL llLLle of Lhls analysls ls new: crlLlcs llke me have been
dlscusslng Lhls sLrucLural defecL ln Lhe world economy and developmenL flnance slnce aL
leasL Lhe 1980s.
7
1he 1ax !usLlce neLwork has been Lalklng abouL lL for a decade. Slnce
Lhe recenL flnanclal crlsls began ln laLe 2007 world leaders have pald more aLLenLlon --
aL leasL rheLorlcally. AL a summlL ln London Lhe C20 declared on Aprll 2, 2009 LhaL Lhe
era of bank secrecy ls over, endorsed a new Loolbox of measures Lo be used agalnsL
[urlsdlcLlons LhaL fall Lo comply wlLh lnLernaLlonal sLandards, and promlsed Lo develop
proposals Lo help developlng counLrles secure Lhe beneflLs of a new cooperaLlve Lax
envlronmenL by Lhe end of 2009.

lL should have been a warnlng Lo us all LhaL Lhe blackllsL of Lax havens produced by Lhe
CLCu, whlch was supposed Lo be ln Lhe fronLllne of Lhe global flghL agalnsL Lax haven
secrecy, was empLy on Aprll 7, 2009 [usL */!' &"-# afLer LhaL dramaLlc C20 sLaLemenL.
lL remalns empLy. 1he Lax havens are now supposedly clean. Meanwhlle, Lhe prlvaLe
banklng operaLlons of global banks remaln among Lhelr mosL proflLable dlvlslons.

SubsequenL C20s seem Lo have obsessed wlLh debL burdens creaLed by Lhe crlsls and
seem Lo have losL lnLeresL ln cracklng down on havens: and leaders ln Lhe uk, Canada,
and Lhe uS have used Lhe crlsls Lo make Lhe case for cuLLlng Laxes sLlll farLher. When lL
brlefly appeared ln 2010 LhaL Lhe crlsls was ebblng, conservaLlve leaders also argued
LhaL Lhe Llme for anLl-haven hysLerla was over.

Cverall, Lherefore, Lhe lesson for haven reform ls LhaL we should noL lean Loo heavlly on
cycllcal moods. 1he haven sysLem played a slgnlflcanL role ln aggravaLlng our laLesL,
malnly llrsL World crlsls, by faclllLaLlng badly under-regulaLed cross-border lendlng,
hedge funds, and lnsurance. 8uL Lhe serlous harms LhaL Lhe offshore sysLem creaLes
been around for decades, chronlcally affecLlng many of Lhe worlds pooresL counLrles,
and over Llme undermlnlng Lax [usLlce ln rlch and poor counLrles allke.

7
See, for example, by Lhls auLhor: noncompllance wlLh uS 1ax Law, 13-111, ln lncome 1ax Compllance.
A 8eporL of Lhe A8A SecLlon of 1axaLlon.(8esLon, vlrglnla: A8A, 1983), 1he uebL Poax, 1he new
8epubllc, Aprll 1986, Amerlca Lhe 1ax Paven, 1he WashlngLon osL, !anuary 29, 1989, 8anqueros y
Lavadolares. (423 pp, 8ogoLa: 1ercer Mundo LdlLores, 1996), !ames S. Penry, 1he 8lood 8ankers. (2003:
8aslc 8ooks, 2003), 1he MyLh of uebL 8ellef, ln SLeve PlaLL, ed., A Came as Cld as Lmplre. (Sl: 8arreLL
koehler, 2007), lraLe 8ankers (2012, forLhcomlng). See also !ohn ChrlsLensen, ulrLy Money: lnslde Lhe
SecreL World of Cffshore 8ank, 41-67, ln SLeve PlaLL, ed., A Came as Cld as Lmplre. (Sl: 8arreLL koehler,
2007), nlcholas Shaxson, 1reasure lslands. (uk: algrave MacMllllan, 2011), and !ames 8oyce and Leonce
ndlkumana (2012).

12
3. 1nL GLC8AL nAVLN INDUS1k

Clven Lhls vlrLual geography perspecLlve, lL ls lmporLanL Lo emphaslze several
sLrucLural facLs abouL Lhe offshore lndusLry, as we work on our esLlmaLes.

I|rst, lL ls lmporLanL Lo dlsLlngulsh beLween Lhe lnLermedlary havens whlch acL as
condulLs for wealLh and desLlnaLlon havens where prlvaLe wealLh ulLlmaLely ends up.

We Lyplcally assoclaLe offshore legal enLlLles llke shell companles, asseL proLecLlon
LrusLs, capLlve lnsurance companles, and haven banks wlLh Lhe convenLlonal llsL of
offshore havens (or 1reasure lslands) found on, say, early 2000s CLCu blackllsLs:
sulLry, dodgy Lroplcal lslands llke 8ermuda, Lhe Cayman lslands, nauru, SL. klLLs, AnLlgua,
and 1orLola, or Lhe Luropean bolL holes such as SwlLzerland, Lhe Channel lslands,
Monaco, Cyprus, ClbralLar, and LlechLensLeln. 1hese 80-odd fronL-llne havens, mosL of
whlch are offshore by anyones deflnlLlon, collecLlvely provlde a home Lo over 60
mllllon people, and over 3.3 mllllon paper companles, Lhousands of shell banks and
lnsurance companles, more Lhan half of Lhe worlds reglsLered commerclal shlps above
100 Lons, and Lens of Lhousands of shell subsldlarles for Lhe worlds largesL banks,
accounLlng flrms, and energy, sofLware, drug, and defense companles.

ln Lhe 1970s-90s, as mulLlnaLlonal corporaLlons (MnCs), banks, lnvesLors, and a varleLy
of llrsL and 1hlrd World scalawags demanded haven servlces, Lhe ellLes ln Lhese Llny
ersaLz sLaLes dlscovered Lhey could make a darn good llvlng slmply by Lurnlng a bllnd
eye. 1helr numbers roughly Lrlpled durlng Lhese years.

Powever, as Lhe 1ax !usLlce neLwork has recenLly emphaslzed ln lLs work on lLs llnanclal
Secrecy lndex slnce 2009, Lhls convenLlonal llsL of havens ls mlsleadlng, lf were
lnLeresLed ln flndlng Lhe money. lor whlle Lhere are mllllons of companles and
Lhousands of Lhlnly caplLallzed banks ln Lhese flscal paradlses, few wealLhy people wanL
Lo depend on Lhem Lo manage and secure Lhelr wealLh. 1hese sLealLhy lnvesLors
ulLlmaLely need access Lo all Lhe prlmary beneflLs of hlgh-cosL llrsL World caplLal
markeLs -- relaLlvely efflclenL, regulaLed securlLles markeLs, banks backsLopped by large
populaLlons of Laxpayers, and lnsurance companles, well-developed legal codes,
compeLenL aLLorneys, lndependenL [udlclarles, and Lhe rule of law. generally, Lhese can
only be found ln a handful of so-called llrsL World counLrles llke Lhe uS, Lhe uk,
SwlLzerland, Lhe neLherlands, 8elglum/Luxembourg, and Cermany. So we have Lo look
Lo Lhese desLlnaLlon havens ln order Lo geL a handle on Lhe slze and growLh of
unrecorded cross-border prlvaLe wealLh.

Second, Lhe prlvaLe enablers play a crlLlcal role ln Lhls markeL, one LhaL cuLs across
lndlvldual havens. lnvesLlng and securlng large amounLs of prlvaLe wealLh across borders
ls complex, requlrlng speclallzed skllls ln Lax, flnanclal plannlng, banklng, enLlLy
sLrucLurlng, and esLaLe plannlng. 1hls ls noL someLhlng LhaL mosL wealLhy people
underLake on Lhelr own. As noLed, Lherefore, a global servlces lndusLry of law flrms,

13
accounLanLs, lnsurance companles, and especlally prlvaLe banks has grown up Lo caLer
Lo Lhls cross-border markeL.

Whlle lL has Lhousands of players, Lhe room aL Lhe Lop ls surprlslngly llmlLed global
accounLlng ls sLlll domlnaLed by Lhe 8lg lour, whlle a small number of caplLal clLy
and haven-based law flrms domlnanL Lhe lawyerlng, and global prlvaLe banklng ls
domlnaLed by less Lhan 30 mulLlnaLlonal banks. lor our esLlmaLes Lhls ls qulLe helpful,
because lL ylelds anoLher meLrlc LhaL can be used Lo LrlangulaLe on Lhe slze of Lhe
offshore markeL.

1h|rd, anoLher key developmenL slnce Lhe laLe 1990s ls Lhe growLh of Lhe onshore-
offshore markeL for secrecy and Lax avoldance, especlally ln Lhe unlLed SLaLes. lrom
uelaware Lo Alaska, nevada, and SouLh uakoLa, a growlng number of sLaLes are offerlng
lnexpenslve legal enLlLles llke llmlLed llablllLy corporaLlons and asseL proLecLlon
LrusLs whose levels of secrecy, proLecLlon agalnsL credlLors, and Lax advanLages rlval
Lhose of Lhe worlds LradlLlonal secreLlve offshore havens. 1he wldespread use of Lhe
llkes of Lhe nevada LLC or Lhe uelaware asseL proLecLlon LrusL, ln Lhe supposedly
onshore unlLed SLaLes, furLher undermlnes Lhe LradlLlonal assoclaLlon of offshore
wlLh parLlcular physlcal locaLlons, and underscores Lhe facL LhaL Lhe A4)##D@)4&'4 *()B#
examlned ln Lhls paper may be [usL Lhe Llp of Lhe lceberg.

14
4. CLD LS1IMA1LS

1he n|story and o||t|cs of Lst|mat|on

As Lord kelvln, Lhe dlscoverer of absoluLe zero on Lhe LemperaLure scale, once noLed,
lf you cannoL express lL ln numbers, your knowledge ls of a meager and unsaLlsfacLory
klnd.

Slnce Lhe laLe 1970s, a growlng number of economlsLs have acknowledged Lhe exlsLence
of Lhe subLerranean economy and have begun Lo use a varleLy of meLhods Lo esLlmaLe
lLs slze, growLh raLe, and composlLlon more preclsely.

1he flrsL phase of Lhls esLlmaLlon work, ln whlch Lhe auLhor was deeply lnvolved, ls
provlded ln Appendlx 1: 3.' E4'DF/#$)4- )* 9**#.)4' G#$/+"$'#6 1hls aLLempLed Lo
ldenLlfy Lhe slze and growLh of Lhe &)+'#$/A underground economles ln leadlng llrsL
World counLrles by analyzlng ",)+"(/'# ln Lhe demand for currency and oLher moneLary
aggregaLes for example, currency sLocks ouLsLandlng LhaL were wlldly
dlsproporLlonaLe Lo LransacLlon demand, or welrd lnLer-reglonal currency flows ln Lhe
uS lederal 8eserve SysLem.
8

1hls lnlLlal phase of economlc research on Lhe underground economy was very
successful ln ldenLlfylng Lhe facL LhaL Lhls secLor was generally large, vlbranL and
growlng, relaLlve Lo above-ground economlc acLlvlLy ln many counLrles. lL led Lo a brlef
perlod ln whlch offlclal lnsLlLuLlons llke Lhe uS Congress, Lhe 1reasury, and Lhe lederal
8eserve collaboraLed acLlvely wlLh Lhe auLhor and oLher researchers, provldlng access Lo
lnLernal daLa, venues for LesLlmony, and even supporL for new regulaLlons llke Lhe u.S.
1reasurys new reporLlng requlremenLs for uS currency Lurned lnLo banks, adopLed
qulckly ln 1977-79 afLer Lhe auLhor and oLher analysLs dlscovered LhaL banks ln llorlda
and 1exas near Lhe u.S. souLhern border wlLh Mexlco were recelvlng an lnordlnaLe
amounL of $100 bllls.

1hls early research led us Lo noLlce LhaL conLrary Lo Lhe baslc assumpLlons of
developmenL economlcs Lhere were very large gross and neL flows from Lhe
developlng world Lo CLCu counLrles: noL only ln Lhe form of demand for reserve asseLs
llke currency and gold, buL also for ordlnary flnanclal asseLs.

unforLunaLely, however, once we opened Lhe doors on Lhese prevlously-hldden hldden
cross-border flows of bank deposlLs and oLher asseLs ln Lhe early 1980s Lhe uS 1reasury,
Lhe lederal 8eserve, Lhe uS Congress, oLher WesLern governmenLs and Lhe CLCu, as

8
See Appendlx l Lo Lhls paper: 1he re-PlsLory of Cffshore LsLlmaLes.

13
well as Lhe global blg bank lobby, suddenly became much less cooperaLlve. 1haL remalns
Lhe slLuaLlon Loday.
9

WhaL we had uncovered was Lhe exlsLence of a hlghly lucraLlve banklng buslness LhaL
had prevlously noL been dlsclosed ln any banks annual reporLs, leL alone ln 1reasury or
lederal 8eserve daLa bases or Congresslonal lnqulrles even Lhough Lhls had acLually
become Lhe blg banks +)#$ (5A4"$/!' (hlghesL rlsk-ad[usLed 8CL) buslness @- *"46

1hls was Lhe offshore buslness of lnLernaLlonal prlvaLe banklng, whose core mlsslon
baslcally conslsLed of havlng rellable, secure, Lop-Ller, Loo blg Lo fall llrsL World banks
enLlce Lhe ellLes of rlch and poor counLrles allke Lo shelLer Lhelr wealLh Lax-free
offshore, usually ln conLravenLlon of Lhese home counLrles laws, ln many cases whlle
lendlng heavlly Lo Lhe governmenLs and banks of Lhose very same source counLrles.

lL soon became clear Lo Lhls auLhor LhaL ln sLrlklng conLrasL Lo Lhe slLuaLlon wlLh
respecL Lo currency demand or even Lhe quesLlon of where loans Lo developlng
counLrles wenL -- securlng any dlrecL evldence on whlch counLrles generaLed Lhe
largesL caplLal ouLflows, where prlvaLe fllghL caplLal ended up, and how much lL was
worLh, would be almosL lmposslble wlLhouL a comblnaLlon of deLalled case-by-case
lnvesLlgaLlons and laborlous lndlrecL daLa LrlangulaLlon.

1haL was 26 years ago. Slnce Lhen Lhe global offshore lndusLry has more Lhan
quadrupled ln slze.

1he M|ss|ng Data.

Llke Lhe labyrlnLh of Lhe mlnoLaur, Lhe secreLs of Lhe offshore lndusLry have many levels
of proLecLlon. llrsL, of course, prlvaLe bankers, haven lawyers and accounLanLs geL pald
handsomely Lo hlde Lhelr cllenLs asseLs, ldenLlLles, and even behavloral paLLerns.
CollecLlvely, Lhey also malnLaln lnfluenLlal lobbles.

Second, bank regulaLors and cenLral banks of mosL lndlvldual counLrles Lyplcally vlew
prlvaLe banks as key cllenLs. So Lhey have long permlLLed Lhe worlds Lop havens and
banks Lo conceal Lhe ulLlmaLe orlglns and ownershlp of asseLs under Lhelr supervlslon,
especlally Lhose held ln off-balance sheeL LrusLs and flduclary accounLs.

1hlrd, even Lhough mulLllaLeral lnsLlLuLlons llke Lhe 8ank for lnLernaLlonal SeLLlemenLs
(8lS), Lhe lMl, Lhe World 8ank, and Lhe CLCu LhaL are supposed Lo be somewhaL
lnsulaLed from Lhe pollLlcal fray, Lhey have been hlghly senslLlve Lo Lhe collecLlve
lnLeresLs of Wall SLreeL & Co. 1hey have never been wllllng Lo requlre flnanclal

9
1o aLLracL forelgn caplLal, mosL llrsL World counLrles malnLaln elaboraLe lncome and esLaLe Lax
preferences for so-called non-resldenL allens, and also for non-domlclled forelgners ln Lhe case of Lhe
uk and SwlLzerland, who are allowed Lo reslde whlle paylng very low lncome and wealLh Laxes.

16
lnsLlLuLlons Lo fully reporL Lhelr cross-border cusLomer llablllLles, deposlLs, cusLomer
asseLs under managemenL or under cusLody, by secLor and counLry of orlgln, even aL an
aggregaLe counLry level.
10

lnLeresLlngly, however, Lhe 8lS &)'# gaLher such palr-wlse deLall for quarLerly cross-
border bank asseLs and loans, because lL conslders Lhls useful for monlLorlng Lhe
sLablllLy of global banklng sysLem. lL would Lechnlcally be qulLe easy Lo collecL Lhe same
daLa on Lhe llablllLy slde, and Lo exLend lL Lo off-balance sheeL cusLomer asseLs and
llablllLles under managemenL, admlnlsLraLlon, and cusLody.

8uL apparenLly Lhe 8lS conslders Lhe sLablllLy of developlng-counLry flnances a lower
prlorlLy.

A deLalled summary of Lhe holes ln exlsLlng offlclal daLa wlLh respecL Lo slzlng Lhe
offshore lndusLry ls provlded ln Appendlx lll.
11

C|d Lst|mates Cap|ta| I||ght

Slnce aL leasL 1984, macroeconomlsLs have Lolled Lo reflne Lhe meLhods used Lo
esLlmaLe caplLal fllghL and Lo exLend lL Lo a growlng number of developlng counLrles.
12

Cddly, Lwo of Lhe earllesL sLudles of caplLal fllghL were by Lwo lMl economlsLs
13
and by
economlsLs aL Morgan CuaranLy 1rusL, Lhe precursor Lo Lodays !MorganChase a
long-Llme key player ln global prlvaLe banklng.
14
unforLunaLely, however, none of Lhese
sLudles focused on slzlng or locaLlng Lhe sLock of offshore wealLh resulLlng from all Lhls
caplLal fllghL, or on esLlmaLlng Lhe slze of Lhe offshore lndusLry. SLlll, Lhe consensus of
more Lhan a dozen such sLudles ls LhaL hundreds of bllllons of dollars fled Lhe developlng

10
1he 8ank for lnLernaLlonal SeLLlemenLs quarLerly and annual reporLs do conLaln deLall on @",? ()",#
",& )$.'4 @",? "##'$# by counLry of desLlnaLlon, buL noL bank llablllLles or cllenL asseLs under
managemenL. See 8lS, lnLernaLlonal 8anklng SLaLlsLlcs, CuarLerly reporLs, aL
hLLp://www.bls.org/sLaLlsLlcs/rppb0910.hLm.
11
lor example, see Appendlx lll, p9, for Lhe holes ln Lhe 8lS daLa.
12
See, for example, Cerald LpsLeln (2003) LdlLor, CaplLal lllghL and CaplLal ConLrols ln ueveloplng
CounLrles. (AmhersL: Ldward Llgar, 2003), Lhe mosL comprehenslve esLlmaLes unLll Lhls book. See also
!ames 8oyce and Leonce ndlkumana (2001) ls Afrlca a neL uebLor. new LsLlmaLes of CaplLal lllghL lrom
Several Severely-lndebLed Sub-Saharan Afrlcan CounLrles, 1970-98, !ournal of uevelopmenL SLudles, vol.
38, no. 2, pp. 27-36, llorlan kaufmann (2004) A CrlLlcal ulscusslon of Pow Lo Measure CaplLal lllghL: 1he
Case of ArgenLlna, new School/uMass CraduaLe Workshop, november 2004, kevln Chang, SLl[n
Claessens, and 8oberL Cumby (1997) ConcepLual and MeLhodologlcal lssues ln Lhe MeasuremenL of
CaplLal lllghL, lnLernaLlonal !ournal of llnanclal Lconomlcs, vol. 2(1997), 101-11, 8enu Schnelder
(2003a), Measurlng CaplLal lllghL: LsLlmaLes and lnLerpreLaLlons, Cul Worklng aper 194, Cverseas
uevelopmenL lnsLlLuLe, Ldsel 8e[a !r. (2004), CaplLal lllghL from Lhe ASLAn lour: A Case SLudy on
lndonesla, Malaysla, Lhe hlllpplnes, and 1halland, u Mass AmhersL.
13
See Mohsln S. khan and nadeem ul Paque, lorelgn 8orrowlng and CaplLal lllghL: A lormal Analysls,
lMl SLaff apers, v. 32 (4), uecember 1983, 606-628.
14
See Morgan CuaranLy 1rusL, World llnanclal MarkeLs, LuC CaplLal fllghL, March 1986.

17
world durlng Lhls perlod Lhough a slgnlflcanL porLlon of Lhe ouLflow were found Lo have
been round-Lrlpped back lnLo Lhose counLrles, parLlcularly hlgh-growLh developlng
counLrles llke Chlna.

C|d (Ad noc) Lst|mates Consu|t|ng I|rms

AbsenL dlrecL evldence on Lhe slze and growLh of offshore, ln Lhe lnLerlm, parL of Lhe
esLlmaLlon gap has been fllled by a serles of lmpreclse guessLlmaLes by varlous
managemenL consulLlng flrms, all wlLh large-scale banklng pracLlces.

1he flrsL of Lhese, by Merrlll Lynch/Cap Cemlnl ln 1997, relled on rough [udgmenL and a
wlde varleLy of unspeclfled sources. lL esLlmaLed Lhe slze of offshore wealLh owned by
hlgh-neL worLh lndlvlduals (PnWls) aL $3.3 Lrllllon ln 1996, supposedly up from [usL
$2.3 Lrllllon ln 1989.
13
A year laLer Lhey esLlmaLed Lhe flgure for 1997 was $3.8 Lrllllon.
AfLer LhaL, Lhey sLopped maklng speclflc offshore esLlmaLes, whlle conLlnulng Lo
publlsh an annual World WealLh 8eporL LhaL provldes esLlmaLes of LoLal flnanclal
wealLh presumably offshore and domesLlc for hlgh-neL worLh lndlvlduals.

AlLhough Merrlll Lynch, acqulred by 8ankAmerlca durlng Lhe flnanclal crlsls, has recenLly
dropped ouL of wealLh esLlmaLlon, CapCemlnl conLlnues Lo publlsh lLs ad hoc esLlmaLes.
lL has also been [olned by 8osLon ConsulLlng Croup (8CC), Mcklnsey, and varlous smaller
servlce provlders Lo Lhe prlvaLe banklng markeL. lor example, ln 2008 Lhe Cllver Wyman
Croup, a flnanclal consulLanL, esLlmaLed Lhe global offshore prlvaLe wealLh owned by
hlgh-neL worLh lndlvlduals aL $8 Lrllllon as of 2007.
16
ln !une 2009 8CC esLlmaLed Lhe
volume of llquld offshore asseLs under managemenL ln 2008 aL $6.7 Lrllllon, down
from a peak of $7.2 Lrllllon ln 2007.
17
Scorplo arLners has also enLered Lhe fray wlLh a
long serles of ad hoc esLlmaLes of lLs own.

A close look aL Lhese consulLlng sLudles flnds many glarlng omlsslons. lor example,
8CCs 2009 esLlmaLes noL only lefL ouL all of Afrlca, buL all non-flnanclal offshore asseLs
held by LrusLs and foundaLlons, whlch are Lyplcally a very large share of PnWl
porLfollos.
18
lndeed, as well see, Lhe acLual slze of offshore flnanclal wealLh ls far hlgher
Lhan any of Lhese consulLanLs clalm.

13
See Merrlll Lynch/ Cemlnl ConsulLlng, World WealLh 8eporL (1997), avallable aL
hLLp://dss2.prlnceLon.edu/daLa/3161/.
16
Cllver Wyman LLd (2008), 1he luLure of rlvaLe 8anklng. A WealLh CpporLunlLy? aL
www.mmc.com/knowledgecenLer/CllverWymanluLurerlvaLe8anklng.pdf6
17
8osLon ConsulLlng Croup (SepL. 13,2009), Clobal WealLh 8eporL: uellverlng on Lhe CllenL romlse,
summary aL hLLp://www.bcg.com/Medla/ress8eleaseueLalls.aspx?ld=Lcm:12-28981
18
See 1!n, Cn sLrong assumpLlons and oLher nonsense, !une 24, 2009, aL
hLLp://Lax[usLlce.blogspoL.com/2009/06/on-maklng-sLrong-assumpLlons-and-oLher.hLml

18
C|d Lst|mates Governments and NGCs

Clven Lhe lmporLance of Lhe economlc developmenL and Lax pollcy lssues aL sLake here,
one mlghL have LhoughL LhaL Lhe lMl and Lhe World 8ank would have devoLed aL leasL a
few of Lhelr Lhousands of economlsL-person years Lo sLudylng Lhls lssue.

1o daLe, however, we can only flnd one expllclL lMl esLlmaLe of Lhe sLock of offshore
prlvaLe asseLs -- a modesL $1.7 Lrllllon flgure for 2000, wlLh no clear meLhodology.
19
ln
2001 a former lMl ulrecLor of llscal Affalrs dld clLe a $3-$7 Lrllllon flgure for Lhe
volume of offshore prlvaLe asseLs, buL decllned Lo offer any more deLalls.
20

ln 2000 Lhe uS SLaLe ueparLmenLs 8ureau for lnLernaLlonal narcoLlcs esLlmaLed Lhe
asseLs of 30 offshore [urlsdlcLlons aL $4.8 Lrllllon.
21
1hen Lhe CLCu, whlch has
supposedly been worklng on harmful Lax compeLlLlon by offshore havens slnce 1998,
22

also ln 2007 endorsed a $3-$7 Lrllllon range.
23
Around Lhe Llme of Lhe Aprll 2009 C20
conference ln London, when global anLl-haven senLlmenLs were raglng, Lhe CLCu
Lemporarlly boosLed lLs esLlmaLe Lo $11 Lrllllon, wlLhouL offerlng a clear meLhodology.
24

8uL by SepLember 2009 Lhe CLCu had reLreaLed Lo summarlzlng a wlde range of
esLlmaLes produced by oLhers.
23

As for nCCs, slnce Lhe early 2000s Lhere has been a rlslng crescendo of esLlmaLes
relaLed Lo Lhe slze of offshore.

! ln 2000 Cxfam publlshed a rough $6 Lo $7 Lrllllon esLlmaLe for all prlvaLe
offshore wealLh, wlLhouL any furLher deLalls.
26

! ln 2003, a qulck-and-dlrLy analysls by Lhe 1ax !usLlce neLwork (1!n,) enLlLled 1he
rlce of Cffshore, esLlmaLed Lhe value offshore prlvaLe wealLh aL $11.3 Lrllllon as of !une

19
lMl ubllshlng Clobal orLfollo lnvesLmenL Survey (2000), aL
hLLp://www.lmf.org/exLernal/np/sec/nb/2000/nb0008.hLm.
20
vlLo 1anzl, AusLrallan naLlonal 8adlo, March 21 2001, aL
hLLp://www.abc.neL.au/rn/Lalks/bblng/sLorles/s263977.hLm.
21
lnLernaLlonal narcoLlcs ConLrol SLraLegy 8eporL, u.S. ueparLmenL of SLaLe 8ureau for lnLernaLlonal
narcoLlcs and Law LnforcemenL Affalrs (March 2000), aL 363-66.
22
CLCu (1998), Parmful 1ax CompeLlLlon: An Lmerglng Clobal lssue,
hLLp://www.oecd.org/daLaoecd/33/1/1904184.pdf.
23
!effrey . Cwens, ulrecLor, CLCu CenLer for 1ax ollcy and AdmlnlsLraLlon, Cffshore 1ax Lvaslon, !uly
20, 2007, Clobal ollcy lorum, aL
hLLp://www.globalpollcy.org/componenL/conLenL/arLlcle/172/30123.hLml.
24
CLCu esLlmaLes $11 Lrllllon parked ln Lax havens, 1lmes of lndla, Aprll 4 2009, aL
hLLp://www.buslness-sLandard.com/lndla/news/oecd-esLlmaLes-11-Lrllllon-parked-ln-Lax-
havens/333933/
23
See CLCu (2009), CLCus CurrenL 1ax Agenda, aL
hLLp://www.oecd.org/daLaoecd/38/17/1909369.pdf1 H6 IJ6
26
Cxfam (2000), 8eleaslng Lhe Pldden 8llllons for overLy LradlcaLlon, aL
hLLp://www.oxfam.org.uk/whaL_we_do/lssues/debL.../Lax_havens.hLm6

19
2004, of whlch $9.3 Lrllllon supposedly conslsLed of offshore flnanclal asseLs and $2
Lrllllon was non-resldenLlal offshore real esLaLe. 1!n used an lnLeresLlng meLhodology
LhaL we wlll reLurn Lo and expand on below.
27
unLll now, Lhls ls sLlll Lhe largesL publlshed
esLlmaLe for LoLal offshore wealLh.
28

! ln 2009, the author developed esLlmaLes of Lhe volume of caplLal fllghL and Lhe
value of offshore flnanclal asseLs derlved from leadlng developlng counLrles for Cxfam
C8, a documenL LhaL was dlsLrlbuLed aL Lhe Aprll 2009 C20 summlL ln London, albelL
raLher quleLly.
29

1haL sLudy employed a verslon of Lhe convenLlonal sources and uses meLhods used by
Lhe auLhor for global caplLal fllghL esLlmaLes publlshed ln hls 1996 sLudy of bankers and
money launderers. 1o LhaL baslc meLhod, Lhe auLhor added Lhe noLlon of esLlmaLlng
Lhe neL value of offshore wealLh accumulaLed by developlng counLrles, flrsL ouLllned
aL a 1!n / AA8A Conference ln Lssex ln Lhe uk, ln 2006-2008.

1he sLudy esLlmaLed LhaL durlng Lhe perlod 1970 Lo 2007 aL leasL $130- $200 bllllon of
unrecorded prlvaLe caplLal fllghL flowed ouL of Lhe developlng world each year. uslng
conservaLlve assumpLlons abouL relnvesLmenL raLes and lnvesLmenL ylelds, Lhese flows
suggesLed LhaL accumulaLed offshore wealLh sLock owned by developlng counLry
resldenLs was worLh aL leasL $6.2 Lrllllon by 2007. 1hls lncluded only wealLh from
developlng counLrles, whlch ls aL mosL 23 Lo 30 percenL of all offshore prlvaLe wealLh
30
.

1hls large flgure for developlng counLry wealLh alone lmplled LhaL $)$"( offshore prlvaLe
wealLh was much hlgher Lhan oLher esLlmaLes, and lL lmplled LhaL developlng counLrles
mlghL be loslng as much as $120-$160 bllllon per year ln losL Lax revenue on Lhe lnLeresL
and oLher lncome generaLed by all Lhls unreporLed anonymous wealLh more Lhan Lhe
enLlre global LoLal of forelgn ald from CLCu counLrles. MosL of Lhls unreporLed lncome
was elLher reLalned abroad and relnvesLed or spenL on shopplng Lrlps ln arls, London or
Mlaml.

lL was also lnLeresLlng Lo compare Lhls lnlLlal $6.2 Lrllllon esLlmaLe for developlng
counLry fllghL wealLh wlLh Lhe $3.4 Lrllllon gross forelgn debL owed by all developlng
(low- and mlddle-lncome) counLrles as of 2007. AfLer Laklng fllghL wealLh lnLo accounL,

"#
$%& '()*+(,)-.(,/ 0"11234 $5* 6+-7* .8 988:5.+*4 ,)
hLLp://www.Lax[usLlce.neL/cms/upload/pdf/rlce_of_Cffshore.pdf6
28
As dlscussed below, 1!n (2003) based lLs esLlmaLe on scallng up 8lS daLa on offshore deposlLs by
nonbanks by an average raLlo of cash and bank deposlLs Lo all flnanclal asseLs LhaL was based on
Merrlll Lynch/ CapCemlnls annual esLlmaLes of asseL allocaLlons for hlgh-neL worLh porLfollos.
29
1ax haven crackdown could dellver $120bn a year Lo flghL poverLy Cxfam, March 13, 2009, aL
hLLp://www.oxfam.org.uk/appllcaLlons/blogs/pressofflce/?p=3912.
30
See Lhe reglonal breakdowns of Lhe offshore wealLh esLlmaLes by Lhe consulLlng flrms. 1helr esLlmaLes
are conslsLenL wlLh Lhls markeL share for Lhe source counLrles ln our sample.

20
Lherefore, |t became even c|earer that deve|op|ng countr|es as a who|e d|dnt rea||y
face a debt prob|em, but a huge offshore tax evas|on prob|em.

Cn a neL of forelgn reserves debL basls, Lhe slLuaLlon was even more sLrlklng. AfLer
allowlng for forelgn reserves owned by developlng counLrles, as of 2007, Lhe mosL
recenL year for whlch Lhe daLa was Lhen avallable, low-and mlddle-lncome developlng
counLrles as a group had +/,5# $413.1 bllllon of neL forelgn debL -- even before Laklng
Lhls offshore fllghL wealLh lnLo accounL. 1he negaLlve number ls malnly because hlgher-
growLh counLrles llke Chlna and lndla have managed Lo accumulaLe over $2.3 Lrllllon of
reserves. Lven omlLLlng Chlna and lndla, by 2007 all oLher developlng counLrles owed
[usL $979 bllllon of neL-of-reserves forelgn debL, compared Lo $3.3 Lrllllon of non-
Chlnese offshore fllghL wealLh.
31

! 1ransfer M|spr|c|ng. AnoLher offshore acLlvlLy LhaL has recenLly been Lhe sub[ecL
of lncreased esLlmaLlon efforLs by economlsLs ls corporaLe Lransfer mlsprlclng. 1hls work
focuses on Lhe facL LhaL ln addlLlon Lo caplLal fllghL and offshore haven abuse by
lndlvldual Laxpayers, Lhere has also been a Lrend for MnCs Lo slash Lhelr corporaLe Laxes
by shlfLlng proflLs and royalLy paymenLs Lo low-Lax havens and losses and lnLeresL
expense Lo hlgh-Lax [urlsdlcLlons. lor example, accordlng Lo Lhe l8S, reporL, from 1994
Lo 2004 uS companles more Lhan Lrlpled Lhelr forelgn proflLs, parklng nearly 60 percenL
of lL ln Lax havens.
32

Some of Lhese Lransfer prlclng abuses have Lo do wlLh over-lnvolclng of goods lmporLs
and under-lnvolclng goods exporLs, so as Lo mlnlmlze lncome ln hlgher-Lax counLrles and
shlfL unreporLed proflLs abroad. CLher Lransfer prlclng abuses lnvolve Lhe (below-
markeL) Lransfer of lnLellecLual properLy rlghLs (know-how, brand value, fllms, paLenLs,
and sofLware) Lo low-Lax [urlsdlcLlons.

Accordlngly Clobal llnanclal lnLegrlLy (Cll) slnce 2006 have publlshed a serles of
esLlmaLes of gross flnanclal ouLflows from developlng counLrles LhaL rely heavlly on
esLlmaLes of goods Lransfer mlsprlclng. ln 2008 ChrlsLlan Ald esLlmaLed Lhe annual cosL
of such corporaLe Lransfer mlsprlclng Lo developlng counLrles, ln Lerms of losL Lax
revenues, aL $160 bllllon per year.
33
1hese losses are supposedly ln addlLlon Lo Lhe losL
Lax revenue on unreporLed lndlvldual lncome, offshore lnLeresL and dlvldends due Lo
unrecorded fllghL.

lor our purposes, Lhese esLlmaLes of Lransfer mlsprlclng *()B# do noL lead dlrecLly Lo
esLlmaLes of Lhe slze and growLh of offshore prlvaLe wealLh #$)A?# )4 unreporLed lncome
generaLed by Lhese sLocks. 1hey are sub[ecL Lo many Lechnlcal problems for example,

31
World 8ank (2009) daLa on gross exLernal debL and forelgn reserves by counLry, our analysls.
32
See uS l8S, 8emarks by Commlssloner uouglas Shulman before Lhe 21sL Annual Ceorge WashlngLon
unlverslLy lnLernaLlonal 1ax Conference, uecember 8, 2008.
33
ChrlsLlan Ald (2008), ueaLh and 1axes: 1he 1rue 1oll of 1ax uodglng, aL hLLp://
www.chrlsLlanald.org.uk/caw08/8eporL_08_LxecuLlve20Summary.pdf

21
Clls esLlmaLes perLaln only Lo flows, noL sLocks or lnvesLmenL earnlngs, Lhey leave ouL
all negaLlve numbers from Lhe calculaLlons, and ln mosL cases Lhey only daLe back Lo Lhe
year 2000.
34
Powever, Lhey have cerLalnly helped dramaLlze Lhls aspecL of Lhe offshore
problem.

Summary: key L|m|tat|ons, Lx|st|ng Lst|mates

All Lold, Lhese early esLlmaLes of offshore acLlvlLy reflecL a growlng consensus LhaL
offshore wealLh and Lhe lncome LhaL lL generaLes are slgnlflcanL and growlng, and LhaL
Lhey are largely mlsslng from offlclal sLaLlsLlcs, convenLlonal esLlmaLes of lncome and
wealLh lnequallLy, and mosL lmporLanL, Lhe global Lax base.

Powever, Lhe flurry of esLlmaLes produced Lo daLe have many llmlLaLlons.

Iuzzy Methods. ln many cases Lhe esLlmaLlon meLhodology has been ad hoc and
someLlmes [udgmenL-based, maklng lL dlfflculL for lndependenL observers Lo repllcaLe
and verlfy lL.

1echn|ca| Lrrors and Cm|ss|ons. ln some cases, whole caLegorles of offshore
wealLh have been omlLLed for example, ln Lhe case of Lhe consulLlng sLudles noLed
above, asseLs held ln LrusLs and foundaLlons for prlvaLe beneflclarles are omlLLed
enLlrely. ln oLher cases, such as Clls Lransfer prlclng analysls, we have seen ouLrlghL
lf frulLful Lechnlcal errors.

Under-Used Data. A varleLy of oLher poLenLlally relevanL, publlcally accesslble
daLa Lypes have noL yeL been broughL Lo bear Lhe Lask of esLlmaLlng Lhe slze, growLh,
and dlsLrlbuLlon of offshore acLlvlLy for example, cerLaln daLa on cross-border
lnvesLmenLs ln 8lS reporLs, daLa on local holdlngs of currency, gold, and oLher llquld
wealLh, Lhe composlLlon of prlvaLe banklng cllenL porLfollos, enabler acLlvlLles,
sLafflng, and producLlvlLy by haven locaLlon, and prlvaLe banklng asseLs under
managemenL, consldered below.

ropr|etary Mode||ng. arLly because of compeLlLlve behavlor among offlclal
lnsLlLuLlons, academlcs and members of Lhe nCC communlLles, Lhere has been a
Lendency Lo redo slmllar daLa analyses over and over agaln, wlLhouL Lhe klnd of open,
collaboraLlve peer revlew LhaL mlghL be more conduclve Lo generaLlng cumulaLlve
progress on models and meLhods. 1here has also been a Lendency Lo be somewhaL
vague abouL key esLlmaLlon meLhods, daLa sources, and assumpLlons. llnally, Lhere has
no doubL been a greaL deal of redundanL analysls of Lhe very same daLa seLs. 1hls
conLrasLs sharply wlLh Lhe more open approach Lo models, esLlmaLes and daLa ln, say,
envlronmenLal sclences.

34
See Lhe dlscusslon below LsLlmaLlon MeLhods.

22

Cff|c|a| Secrecy. 1he key problem ls mlsslng daLa. Much of Lhe daLa requlred for
Lhls klnd of analysls appears Lo be elLher already on hand or readlly avallable, should
cenLral banks, Lreasurles, and mulLllaLeral lnsLlLuLlons llke Lhe 8lS and Lhe lMl declde Lo
make lL avallable or aL leasL analyze lL lnLernally and aggregaLe lL a form LhaL ls lnLo
accepLable for publlcaLlon. A key acLlon lLem ls for nCCs noL Lo menLlon developlng
counLrles Lo press such lnsLlLuLlons for more Lransparency.

rocess Improvements Lst|mat|on kesearch

A key ob[ecLlve of Lhls pro[ecL, beyond generaLlng new esLlmaLes, ls Lo esLabllsh a more
expllclL framework for maklng such esLlmaLes and a more open process for researchers
Lo collaboraLe.

We have esLabllshed a web slLe on LsLlmaLlng Lhe rlce of Cffshore where all Lhe daLa
seLs and models employed ln Lhls paper wlll be made publlcly avallable. 1hls wlll permlL
researchers Lo develop varlaLlons of Lhelr own, avold redundancy, and even more
lmporLanL, Lrade suggesLlons for lmprovemenLs, and share new daLa sources. 1he web
page ls here.
hLLp://www.Lax[usLlce.neL/cms/fronL_conLenL.php?ldcaL=148

We also plan Lo esLabllsh faclllLles for researchers ln Lhls area Lo collaboraLe.

23
S. NLW LS1IMA1LS

Some background

endlng changes ln research collaboraLlon, we have Lrled Lo address all Lhe oLher key
flaws ln exlsLlng esLlmaLes -- Lechnlcal errors and omlsslons, Lhe lack of expllclL
meLhodologles, varlaLlons ln daLa sources, meLhods, and Llme perlods LhaL makes lL
dlfflculL Lo compare alLernaLlve esLlmaLes, and excesslve rellance on a llmlLed range of
daLa Lypes and esLlmaLlon meLhods.

Scope of the Lst|mates

AL Lhe ouLseL lL ls worLh resLaLlng our core focus, whlch ls on measurlng (),2D$'4+
5,4'A)4&'& A4)##D@)4&'4 H4/!"$' */,",A/"( A"H/$"( *()B# ",& #$)A?# LhaL have conLrlbuLed
slgnlflcanLly Lo Lhe eroslon of Lhe domesLlc Lax base, especlally ln developlng counLrles.

1here are several very dlfferenL sources for Lhese flows and sLocks LhaL ls one reason
why l prefer Lo call Lhem unrecorded caplLal flows and sLocks raLher Lhan caplLal
fllghL.

Cne key source ls underreporLed caplLal flows LhaL have been secreLed offshore and
lnvesLed abroad beyond Lhe reach of domesLlc Lax auLhorlLles.

1hls broad deflnlLlon focuses on unrecorded caplLal flows wlLhouL pre-[udglng Lhe
moLlves for lL.
33
Among Lhe posslble moLlves are (1) shorL-Lerm speculaLlon (hoL
money), (2) longer-Lerm porLfollo dlverslflcaLlon, (3) asseL proLecLlon (lncludlng
proLecLlon agalnsL pollLlcal rlsks and lllegallLy), and (4) more dublous moLlves, llke
money launderlng, lncome Lax evaslon, round-Lrlpplng (Laklng money offshore,
dresslng up ln secrecy sLrucLures Lhen preLendlng Lo be forelgn lnvesLors ln order Lo
Lake advanLage of Lax breaks and exchange raLes only avallable Lo forelgners), back-
Lo-back lendlng games, exporL subsldy fraud, avoldance of lmporL duLles, corrupLlon and
more.

All Lhese moLlves have been aL work Lhrough Lhe perlod we are conslderlng, so Lhe besL
explanaLlon ls all of Lhe above.

Powever, slnce neL ouLflows from developlng counLrles have conLlnued over susLalned
perlods of Llme, and slnce llLLle offshore wealLh or Lhe earnlngs LhaL lL produces have
been repaLrlaLed, Lhe mosL lmporLanL facLors drlvlng lL are noL Lhose LhaL drlve hoL
money, buL long-Lerm de-caplLallzaLlon.

33
1hls ls ln conLrasL Lo oLher auLhors llke CuddlngLon (1986), who have llmlLed Lhelr aLLenLlon Lo flows
LhaL are moLlvaLed by some speclflc facLor, llke shorL-Lerm speculaLlon. Slnce Lhere are so many oLher
posslble moLlves for unrecorded caplLal, and slnce Lhe daLa needs so much work, lL seems more
approprlaLe Lo be a llLLle more open-ended abouL Lhe measuremenL.

24

lor Lhe lnLeresLed reader, Appendlx ll provldes my crlLlcal revlew of exlsLlng
explanaLlons for caplLal fllghL ln Lhe economlcs llLeraLure.
36

As dlscussed below, our besL esLlmaLe ls LhaL leasL 23-30 percenL of Lhese funds,
averaglng several hundred bllllon per year slnce Lhe1970s, have come from developlng
counLrles.

Another key source ls under-Laxed corporaLe proflLs and royalLles LhaL have been
parked offshore ln low-Lax havens by way of rlgged Lransfer prlclng schemes. Whlle
esLlmaLes for Lhe value of such Lransfer prlclng abuses are more problemaLlc, Lhey are
llkely Lo be slgnlflcanL.
37

A th|rd source ls a myrlad of llllclL acLlvlLles ln Lhe global underground economy
corrupLlon, fraud, lnslder Lradlng, drug Lrafflcklng, blood dlamonds, and lnnumerable
oLher for-proflL crlmes. Lven for source counLrles wlLh zero or very low lncome Laxes,
llke 8ussla, Saudl Arabla, and mosL oLher Mlddle LasLern oll producers, havens provlde a
convenlenL way Lo launder all Lhls llllclL looL. Whlle banks and oLher flnanclal
lnLermedlarles are supposed Lo follow know your cusLomer rules LhaL prevenL Lhls
klnd of chlcanery, ln pracLlce Lhe regulaLlons are full of loopholes -- raLher llke,
approprlaLely enough, Swlss cheese.
38

Narrow scope, conservat|ve est|mates.

uesplLe lncludlng all Lhese sources, our focus so far ls sLlll much narrower Lhan Lhe full
scope of Lhe prlce of offshore. 1here ls a long laundry llsL of economlc bads enabled by
haven [urlsdlcLlons: noL only Lax evaslon buL also fraud, brlbery, lllegal gambllng, money
launderlng, and Lrafflc ln conLraband: drugs, sweaLshops, human and sex Lrafflcklng,
arms, Loxlc wasLe, confllcL dlamonds, endangered specles, booLlegged sofLwareLhe llsL
ls vlrLually endless.

ln prlnclple, all Lhese bads deserve Lo be lncluded on Lhe soclal balance sheeL ln any
overall assessmenL of Lhe offshore lndusLry. ln pracLlce, however, we wlll focus here on
whaL we can geL a handlly on. And glven Lhe sheer scale of Lax evaslon faclllLaLed by
offshore havens, however, lL ls clearly one of Lhe maln anchors for Lhe sysLem, whlch
underplns all Lhese oLher dublous acLlvlLles.

36
See Appendlx ll: Lxplalnlng CaplLal lllghL.
37
See, for example, Lhe slgnlflcanL orlglnal research on corporaLe Lransfer prlclng abuses by ur. Slmon
ak:
hLLp://www.russla[ournal.com/node/18073, hLLp://porLal.acm.org/clLaLlon.cfm?ld=780978 ,
38
Cf. Lhe LorLured hlsLory of Lhe quallfled lnLermedlary regulaLlons for ma[or banks ln Lhe uS:
hLLp://www.hg.org/arLlcle.asp?ld=3934.

23

We also omlL several lmporLanL Lypes of non-flnanclal wealLh LhaL are collecLlvely qulLe
slzeable, as well as lmporLanL for Lax [usLlce and developmenL pollcy -- noLably human
caplLal, neL clalms on real properLy (lncludlng land and naLural resources), and
lnLanglbles llke clalms Lo paLenLs, Lrademarks, brands, Lechnlcal know-how, and oLher
lnLellecLual properLy. ln all Lhese cases Lhe role of cross-border flows and offshore
havens appears Lo have been lncreaslng: for example, recenL exposes concernlng
redomlclllaLlons of lnLellecLual properLy Lo low-Lax [urlsdlcLlons by leadlng uS
pharmaceuLlcal and compuLer companles, or conLlnulng concerns abouL 1hlrd World
braln draln.

Do tax havens prov|de pub||c goods, as we|| as bads?

uefenders of Lhe sLaLus quo wlll argue LhaL Lhls paper only addresses Lhe prlce of
offshore, noL Lhe value Lhey say lL provldes. 1hey would argue LhaL havens, for
example, help people dodge noxlous governmenL rules and regulaLlons, provlde escape
haLches for Lhe vlcLlms of oppresslve reglmes, help wealLhy ellLes evade conflscaLory
LaxaLlon, dlverslfy Lhelr domesLlc porLfollos, en[oy Lhe frulLs of Lhelr hard labor
undlsLurbed by Lhe lrrlLanLs of LaxaLlon and regulaLlon, and aL Lhe same Llme compelllng
naLlon-sLaLes Lo engage ln Lax compeLlLlon, whlch (Lhey argue) force Lhem Lo become
more efflclenL ln dellverlng governmenL servlces.

Such Lradeoffs are noL unknown. lor example, lL ls very hard Lo defend Lax
enforcemenL aL any prlce when Lhe Lax collecLor ls Lhe 8urmese [unLa, Caddafls Llbya,
or perhaps even Lhe ClLy of Chlcago.

Cur sense, however, ls LhaL mosL counLrles operaLe very, very far from Lhls hypoLheLlcal
Lax compllance vs. freedom-and-prosperlLy margln, along whlch lncreased Lax
compeLlLlon and reduced compllance auLomaLlcally leads Lo lncreased llberLy,
enLrepreneurshlp, and growLh. We aL Lhe 1ax !usLlce neLwork feel we have, ln a varleLy
of dlfferenL fora, effecLlvely demollshed preLLy much every one of Lhelr argumenLs for
Lhese supposed beneflLs
39
.

1he argumenLs of Lhe defenders of Lax havens are especlally problemaLlc once we
conslder Lhe facLs LhaL Lhe proceeds of non-compllance Lend Lo flow noL Lo Lhe besL and
brlghLesL, buL Lo Lhe mosL unsavory, LhaL non-compllance ls conLaglous, so aggresslve
non-compllance by ellLes promoLes non-compllance by everyone else excepL Lhe poor,
who end up fooLlng Lhe blll, LhaL mosL of Lhe proceeds of caplLal fllghL and Lax evaslon
are never repaLrlaLed Lo source counLrles buL slL ldle ln relaLlvely-low-yleld offshore
lnvesLmenLs, and LhaL when Lhe publlc secLor has been sLarved for caplLal (perhaps

39
lor lnsLance, on Lhe common clalm LhaL Lax haven secrecy can help clLlzens escape un[usL despoLs and
Lhelr llke, see our arLlcle 1he non-perlls of lnformaLlon exchange, !uly 2009.
hLLp://Lax[usLlce.blogspoL.ch/2009/07/non-perlls-of-lnformaLlon-exchange.hLml

26
havlng had Lo rely on hlgh-cosL loans or lnflaLlonary flnance raLher Lhan Lax revenue),
Lhe raLe of reLurn on publlc lnvesLmenLs ls ofLen hlgher Lhan on prlvaLe lnvesLmenL. 1ax,
by produclng beLLer roads and educaLed populaLlons and so on, can crowd ln prlvaLe
lnvesLmenL, raLher Lhan crowd lL ouL as many people belleve.

Lst|mat|on Methods and Some kesu|ts

As noLed, Lo overcome Lhe llmlLaLlons of prevlous esLlmaLes, our sLraLegy has been Lo
LrlangulaLe on esLlmaLes from several dlfferenL angles. As menLloned, our four key
models are as follows:
A sLandard verslon of Lhe sources-and-uses model for counLry-by-counLry
unrecorded caplLal flows,
An accumulaLed offshore wealLh model,
An offshore lnvesLor porLfollo model, based on cross-border asseLs daLa, and
ulrecL esLlmaLes of offshore asseLs under managemenL for Lhe worlds Lop 30
global prlvaLe banks.

1he paper supplemenLs Lhese wlLh oLher evldence, lncludlng

1. uaLa on so-called Lransfer mlsprlclng,
2. uaLa on Lhe cross-border demand for llquld maLLress money llke reserve
currency and gold, parL of whlch may move Lhrough offshore markeLs
3. A revlew of markeL research by leadlng consulLlng flrms on Lhe slze of Lhe
offshore prlvaLe banklng markeL

AnoLher reference polnL ls CredlL Sulsses global wealLh esLlmaLe for mld-year 2011,
whlch ls probably Lhe mosL comprehenslve and mosL recenL esLlmaLe of global wealLh. lL
puLs LoLal global wealLh aL $231 Lrllllon, lncludlng flnanclal asseLs and non-flnanclal
asseLs (prlnclpally houslng and land) aL markeL value
40
. CredlL Sulsse does noL offer a
flgure for offshore holdlngs buL Lhe raLlo of Lhls $231 Lrllllon flgure Lo 1!ns $21-32
Lrllllon flgure headllned above ls roughly 1:10, supporLlng our vlew LhaL our new
esLlmaLes are reasonable and conservaLlve.

1hls secLlon of Lhe paper wlll revlew Lhe esLlmaLlon meLhods ln some deLall. 1he
followlng secLlon on lllghL aLLerns summarlzes Lhe resulLs of Lhe caplLal flows and
wealLh models.

40
1he CredlL Sulsse esLlmaLe uses Pousehold 8alance SheeL daLa for selecLed counLrles, comblned wlLh
household lncome and expendlLure daLa, and supplemenLed by an esLlmaLlon of wealLh holdlng paLLerns
wlLhln naLlons, lL also Look lnformaLlon gleaned from varlous rlch llsLs Lo flll lnformaLlon gaps on wealLh
holdlngs aL Lhe Lop of Lhe dlsLrlbuLlon. lrom 7()@"( :'"($. 8'H)4$1 IKLL, CredlL Sulsse 8esearch lnsLlLuLe:
hLLps://lnfocus.credlL-
sulsse.com/daLa/_producL_documenLs/_shop/323323/2011_global_wealLh_reporL.pdf

27

1he methods |n deta||.

(1) Unrecorded Cap|ta| I|ows: sources-and-uses.

1hls paper employs laLesL daLa from Lhe World 8ank/lMl, Lhe un, cenLral banks and
naLlonal accounLs Lo expllclLly model caplLal flows for each counLry, for 139 key caplLal
source counLrles, mosLly low-mlddle lncome counLrles, for whlch such Llme serles daLa
ls publlshed.

As of 2010, Lhese counLrles ln our sample accounLed for 83 percenL of Lhe
worlds 6.89 bllllon populaLlon, 31 percenL of lLs $76.7 Lrllllon -ad[usLed gross
naLlonal lncome, $4.1 Lrllllon of forelgn debL, and $6.8 Lrllllon of forelgn reserves, or 73
percenL of Lhe worlds LoLal.

Data Sources. 1he speclflc varlables lncluded ln Lhe counLry models of unrecorded
caplLal flows changes ln forelgn reserves, Lhe currenL accounL balance, gross exLernal
debL sLocks (of more Lhan 1 year duraLlon), neL forelgn lnvesLmenL (8C basls), porLfollo
lnvesLmenL (neL of coverlng LransacLlons), nomlnal gross naLlonal lncome, prlce
deflaLors are all annual daLa, lnlLlally ln uS dollars. (See Lhe speclflc counLry
spreadsheeLs).

ln mosL cases Lhese daLa are from Lhe World 8anks World uevelopmenL lndlcaLors
daLabase. lor a few counLrles, as noLed on Lhe spreadsheeLs, daLa for recenL years had
Lo be derlved from oLher sources, lncludlng cenLral banks and Lreasurles. LsLlmaLes of
Lhe currency composlLlon of forelgn debL, debL reschedullngs, and changes ln arrears
are also generally from World 8ank/ lMl sources, alLhough ln a few cases (e.g.,
Slngapore) cenLral bank daLa was used Lo supplemenL Lhese esLlmaLes.

1|me er|ods. As shown ln each counLry spreadsheeL, ln mosL cases lndlvldual counLry
daLa are analyzed for Lhe enLlre perlod 1970-2010 lncluslve, alLhough Lhe avallable Llme
serles are shorLer for a subseL of counLrles, noLably Lhe lSu sLaLes, Chlna, and some sub-
Saharan counLrles.

Country I|ows Mode| Deta||s. 1he baslc counLry flows model provldes esLlmaLes of
nomlnal and real offshore caplLal flows for Lhe perlod from 1970 Lo 2010 lncluslve,
correcLlng Lhem for facLors.

Several alLernaLlve measures of unrecorded caplLal flows fllghL are avallable ln Lhe
academlc llLeraLure on Lhls sub[ecL. 1hese are volumlnous, compared wlLh Lhe number
of emplrlcal sLudles.
41

41
lor an acerblc summary of Lhe dlfference beLween armchalr and lnvesLlgaLlve economlcs, see
Appendlx lll, p10. lor a revlew of alLernaLlve measures of caplLal fllghL, see llorlan kaufmann, op. clL.,
fooLnoLe 2. MosL of Lhe alLernaLlve measures of caplLal fllghL appear Lo be hlghly correlaLed. lor
example, ln Lhe case of Mexlco, Lhe slmple correlaLlon of lederal 8eserve's neL currency payouLs from Lhe
San AnLonlo and Ll aso branches (ln real $1980) wlLh a sources and uses measure of Mexlco's fllghL

28

Cur own preferred measure ls an ad[usLed verslon of Lhe so-called sources and uses
meLhod.
42
8aslcally Lhls adds up a counLrys measured sources of forelgn caplLal
forelgn loans, neL dlrecL lnvesLmenL, and neL porLfollo lnvesLmenLs and compares
Lhem wlLh recorded uses, lncludlng flnanclng currenL accounL deflclLs and lncreaslng
offlclal reserves. A slmple 8usslan example ls provlded ln Appendlx lll.
43

ln prlnclple, Lhe dlfference beLween Lhese recorded sources of forelgn caplLal and
uses of forelgn caplLal may be aLLrlbuLed Lo unrecorded neL caplLal ouLflows. Cf
course each and every lngredlenL ln Lhls yardsLlck ls sub[ecL Lo measuremenL error.
Powever, over Llme and across dozens of counLrles, Lhe errors should more or less
cancel ouL.

We have preferred Lo develop our own esLlmaLes of caplLal fllghL Lo have conslsLenL
esLlmaLes and a sLandard perlod for comparlson
..
Cn Lhe sources slde, our measure
sLarLs wlLh World 8ank daLa for dollar value of gross exLernal debL sLocks by year, as
well as neL forelgn dlrecL lnvesLmenL (on a balance-of-paymenLs basls) and neL forelgn
porLfollo lnvesLmenL, excludlng coverlng LransacLlons by forelgn CenLral 8anks. 1he
World 8anks annual debL sLock esLlmaLes already lnclude an esLlmaLe of forelgn
porLfollo debL lnvesLmenLs and Lrade debL.

Lxcept|ona| I|nanc|ng. Cne necessary ad[usLmenL Lo Lhe World 8ank debL sLock
numbers ls for excepLlonal flnanclng, an accounLlng enLry made when counLrles have
Lrouble servlclng Lhelr debLs -- Lhe sum of neL lnLeresL raLe arrears, debL forglveness,
and caplLallzed lnLeresL. As noLed by kaufmann (2004), Lhls enLry ls flcLlonal flnance,
ln Lhe sense LhaL lL amounLs Lo an arblLrary book-keeplng enLry, noL acLual cash flow.
1he World 8anks debL serles lncludes excepLlonal flnanclng ln lLs debL serles, buL noL ln
reserves, whlle Lhe lMl lncludes lL ln lLs measure of reserves and relaLed lLems. lor
Lroubled debLors llke 8razll, ArgenLlna, nlgerla, and 8ussla, Lhe numbers are large
enough Lo lead Lo nonsenslcal resulLs lf excepLlonal flnanclng ls lncluded. We deducLed
lL from Lhe World 8ank debL sLock serles.

Debt I|ows Vs. Changes |n Debt Stocks. 1he World 8ank also provldes a serles of debL
flows by year for some counLrles, for 1989 on, buL Lhere are large unexplalned
dlscrepancles ln Lhls daLa, compared wlLh flrsL-dlfferenclng our ad[usLed debL sLock
numbers, and lL glves lmplauslble resulLs ln Lhe case of several counLrles, so we declded
Lo rely on Lhe ad[usLed debL sLock numbers.

from l970 Lo l987 was .69. lor changes ln u.S. bank llablllLles reporLed as owned by non-bank Mexlcans,
Lhe correlaLlon was .67. lor an errors and omlsslons measure of fllghL -- Lhe sum of shorL-Lerm prlvaLe
caplLal ouLflows plus errors and omlsslons from Lhe balance of paymenLs accounL -- Lhe correlaLlon was
.67. SLaLlsLlcal regresslon LhaL conLrols for oLher varlables ylelds even sLronger resulLs.
42
1he key assumpLlons for Lhls caplLal ouLflow model are summarlzed ln Appendlx lll, pp10, 11
43

29
Lxchange kate Ad[ustments. WhaL ls forelgn debL, anyway? 1he World 8ank deflnes lL
wlLh respecL Lo Lhe resldency of Lhe borrower, noL Lhe currency ln whlch lL ls
denomlnaLed, so lL ls lmporLanL Lo keep an eye on currency varlaLlons ln dlsLlngulshlng
real from nomlnal caplLal flows.

Some researchers on caplLal flows (8oyce and ndlkumana op.clL.) adopLed Lhe pracLlce
of ad[usL Lhe World 8anks long-Lerm debL sLock numbers for changes ln exchange raLes,
ln cases where Lhere ls a subsLanLlal amounL of non-dollar-denomlnaLed long-Lerm debL.
lf. say, Lhe dollar appreclaLes relaLlve Lo Lhe yen, Lhe acLual dollar value of yen-
denomlnaLed long-Lerm debL and Lhe flows of new prlnclpal assoclaLed wlLh lL would
lncrease, whlle Lhe 8anks dollar-denomlnaLed serles would be unchanged.

l have grudglngly followed Lhls pracLlce here Lhough lL ls laborlous, glven Lhe number of
counLrles and currencles lnvolved, and Lhough lL Lurns ouL noL Lo make all LhaL much
dlfference Lo Lhe esLlmaLes. lndeed, Lhls resulL ls conslsLenL wlLh Lhe evldence from
8oyce and LpsLeln (op. clL.) own sLudy, whlch shows LhaL Lhe effecLs of exchange raLe
ad[usLmenL Lo debL on caplLal flow esLlmaLes are small for mosL counLrles, malnly
because movemenLs ln mulLlple currencles ofLen cancel each oLher ouL, especlally over
long perlods of Llme. ln addlLlon, mosL large debLors now hedge agalnsL currency
flucLuaLlons. neverLheless, for Lhe sake of academlc purlLy, weve done Lhe LheoreLlcally
correcL Lhlng.

Debt keschedu||ngs and Changes |n Arrears. uependlng on Lhe counLry, Lhese can be
very lmporLanL, alLhough mosL esLlmaLes Lo daLe have largely lgnored Lhem. lrom a
balance of paymenLs accounLlng sLandpolnL, for example, decllnlng arrears are llke
lncreased reserves or a rlslng currenL accounL deflclL a use of forelgn funds. We have
lncorporaLed Lhem ln esLlmaLes for all 139 counLrles.

(2) 1he Accumu|ated Cffshore Wea|th Mode|.

8ulldlng on Lhe counLry models developed Lo esLlmaLe caplLal flows, our second key
model uses a slmple framework Lo esLlmaLe how much Lhese accumulaLed flows mlghL
be worLh over Llme.

1hls addresses Lhe obvlous problem wlLh flow-based esLlmaLes Lhey donL help us
accounL for Lhe rlse of Lhe global offshore lndusLry and lLs asseLs under managemenL
over Llme. nor do Lhey acknowledge Lhe reallLy LhaL Lhanks Lo Lhe prlvaLe banklng
lndusLrys susLalned lobbylng -- offshore lnvesLors Lyplcally are permlLLed Lo en[oy Lhe
Lax-free perks of non-domlcllaLlon or non-resldency ln counLrles llke Lhe uS and Lhe
uk, aL leasL wlLh respecL Lo lnLeresL on debL and bank deposlLs.

1he base case verslon of Lhls model assumes LhaL a slgnlflcanL porLlon 30 Lo 73
percenL, on average -- of Lhese Lax-free earnlngs are noL repaLrlaLed Lo source counLrles,

30
buL are relnvesLed abroad ln relaLlvely safe, low-yleldlng lnvesLmenLs, denomlnaLed ln
LradlLlonal reserve currencles llke uS dollars. 1hls ls conslsLenL wlLh Lhe facL LhaL mosL
haven lnvesLmenLs are made for longer-Lerm moLlves llke asseL proLecLlon, money
launderlng, and dlverslflcaLlon, noL [usL shorL-Lerm speculaLlon, wlLh low Lurnover and
hlgh relnvesLmenL raLes.

We furLher assume LhaL 100 percenL of Lhe lnlLlal ouLflows are neL of source-counLry
lncome Laxes oLherwlse Lhey presumably would noL be unrecorded. SubsequenL
offshore earnlngs are noL repaLrlaLed and are noL sub[ecL elLher Lo domesLlc Lax or
forelgn Laxes.

8eflecLlng Lhelr appeLlLe for secure low-rlsk lnvesLmenLs, we assume offshore cllenLs
earn a modesL 6-monLh Cu raLe on Lhelr accumulaLed forelgn caplLal, whlch Lhelr prlvaLe
bankers have already grossed down Lo reflecL Lhe cosLs of offshore managemenL.

1hls baslcally assumes, conservaLlvely, LhaL over Lhe long haul, a large share of fllghL
flows has been lnvesLed ln relaLlvely-secure porLfollos of uS and Luro-denomlnaLed
asseLs, malnly bank Cus. unLll Lhe laLe 2000s, Lhe convenLlonal wlsdom among fllghL
caplLallsLs was, WhaL could be safer Lhan Loo-blg-Lo-fall uS, Swlss and uk banks? Cf
course Lhere was also lnvesLlng ln ark Avenue, Mayfalr, Ceneva, and SouLh 8each real
esLaLe, hlgh-flylng hedge funds, lnLerneL sLarLups, anama ocean fronL, fllm producLlons,
rap muslclans and drug deals. 8uL our assumpLlon permlLs us Lo esLabllsh a conservaLlve
basellne for porLfollo reLurns. As one ClLlbanker ln Mexlco ClLy sald, 1he money my
cllenLs puL offshore ls for safe-keeplng...When Lhey wanL 200 percenL reLurns, Lhey
keep Lhe money here.
44

Cbvlously Lhere ls much more work Lo wlLh exacL modellng for speclflc groups of
lnvesLors, Llme perlods, and raLes of reLurn. lor example, appeLlLes for rlsk and llquldlLy
may vary conslderably by reglon, whlle Lhe low lf sLable -- nomlnal raLes of reLurns on
offshore lnvesLmenLs assumed here may have been wlldly hlgh or low ln dlfferenL
perlods.

Cn Lhe oLher hand, based on our lnLervlews wlLh prlvaLe bankers and oLher offshore
lndusLry experLs, for Lhe medlan offshore prlvaLe banklng cusLomer, Lhese assumpLlons
are noL a bad sLarL. 8ased on our lnLervlews wlLh prlvaLe bankers and oLher offshore
lndusLry waLchers Lo daLe, Lhls klnd of ldeal Swlss cusLomer ls much less lnLeresLed ln
maxlmlzlng shorL-Lerm reLurns Lhan ln securlng an offshore nesL egg Lyplcally he or she
ls ofLen Laklng qulLe enough rlsk, Lhank you, back home.

8uL of course Lhese assumpLlons are easlly modlfled, assumlng we have evldenLlary
reasons Lo do so.

44
1he ClLlbanker quoLe ls from my lnLervlew wlLh Mexlcan ClLlbanker, !uly 1988.

31
Ch|nas Story. 1here ls one counLer-example, or aL leasL a poLenLlal quallflcaLlon Lo Lhls
offshore wealLh accumulaLlon model, however. 1hls ls Lhe case of Chlna. As noLed
below ln our revlew of Lhe resulLs, Chlna, lncludlng Lhe malnland and Lhe Pong kong
SA8, have recenLly been aL Lhe Lop of Lhe llsL ln Lerms of boLh unrecorded caplLal
ouLflows and esLlmaLed fllghL wealLh. As of 2010, for example, Chlna had accumulaLed
real ouLflows (ln $2000) of $743 bllllon, Lhe hlghesL ln LasL Asla, whlle Lhe Pong kong
SA8 recorded ouLflows of $123.9 bllllon. lf we slmply comblne Lhese flows and apply Lhe
wealLh accumulaLlon model Lo Lhem, Lhe resulL ls LhaL Chlnese lnvesLors supposedly
now accounL for nearly $1.2 Lrllllon of offshore prlvaLe wealLh an lmplauslble 13
percenL of Lhe global LoLal.
43

1he real problem here ls LhaL, [usL as ln Lhe case of Chlnas spurlous Lrade mlslnvolclng
noLed above, much of lLs unrecorded caplLal LransacLlons wlLh Pong kong are probably
double-counLed. A slgnlflcanL amounL of Chlnas apparenL caplLal fllghL ls acLually [usL
round-Lrlpplng by way of lnLermedlary companles based ln Pong kong and a few oLher
key havens, noLably Lhe 8rlLlsh vlrgln lslands.)

1hls sLlll counLs as parL of Lhe offshore lndusLry, buL for purposes of our wealLh model,
lL begs Lhe quesLlon of how large a facLor such round-Lrlpplng ls noL only for Chlna, buL
for oLher source counLrles, especlally for Lhose on our Lop 20 offshore wealLh llsL.

Powever, wed argue LhaL Chlnas slLuaLlon wlLh Pong kong may be unlque. Whlle, for
example, key LaLln Amerlcan counLrles llke venezuela and Mexlco have long en[oyed
close Lles wlLh Lhelr closesL haven, Lhe uS, and we are aware of some round-Lrlpplng
by lnvesLors ln 8razll, we also know for a facL LhaL wealLhy lnvesLors from Lhese source
counLrles accounL for a slgnlflcanL share of uS bank deposlLs owned by non-resldenLs.

llnally, we can use our esLlmaLes of Pong kongs unrecorded caplLal Lo place an upper
bound on Lhe maxlmum amounL of round-Lrlpplng wlLh respecL Lo Lhe malnland aL
mosL, lL ls abouL 17 percenL of malnland Chlnas gross unrecorded caplLal ouLflows. 1hls
permlLs us Lo ad[usL Chlnas accumulaLed wealLh esLlmaLes accordlngly. lL also provldes
a reasonable maxlmum esLlmaLe for Lhe llkely share of round-Lrlpplng by oLher source
counLrles.

(3) Ana|ys|s of r|vate 8ank|ng Assets

As weve seen, Lhe accumulaLed offshore wealLh model opened Lhe door Lo many oLher
posslblllLles, lncludlng an analysls of relnvesLmenL earnlngs on offshore wealLh.

lor decades, llrsL World prlvaLe bankers employed by Lhe Lop 30 or so lnsLlLuLlons have
orchesLraLed Lhe sysLemaLlc eroslon of lncome and wealLh Lax bases ln hlgh- and low-
lncome counLrles allke. 1hey have asslduously recrulLed Lhe worlds wealLhlesL people as

43

32
Lhelr cllenLs, lncludlng Lens of Lhousands of developlng counLrles. 1hey have served as
senlor plloLs ln CaplLal lllghL Alr, helplng Lhese cllenLs move a slgnlflcanL share more
Lhan half, ln Lhe case of LaLln Amerlca and some Aslan counLrles of Lhelr llquld caplLal
Lo offshore accounLs under Lhe cover of shell companles and LrusLs, beyond Lhe reach of
domesLlc Lax auLhorlLles. 1hey have enabled cllenLs Lo move lL, hlde lL, lnvesL lL, manage
lL, spend lL, and make use of lL remoLely on Lhe fly.

All Lold, Lhe sophlsLlcaLed Lax ln[usLlce neLwork LhaL Lhese lnsLlLuLlons have
consLrucLed now employs fewer Lhan a mllllon people all over Lhe planeL.
46
8uL Lhls ls
an lnfluenLlal mllllon Lhey are Lhe sysLems archlLecLs, operaLors, and managers of Lhe
p|utonom|c system LhaL ClLlgroup analysLs descrlbed qulLe ln an lnfamous, now
suppressed, 2003 memo.
47

Whlle Lhere are now over 300 prlvaLe banks, hedge funds, law flrms, accounLlng flrms,
and lnsurance companles LhaL speclallze ln offshore, Lhe lndusLry ls acLually very
concenLraLed. MosL of lLs employees work dlrecLly or lndlrecLly for Lhe worlds Lop 30
prlvaLe banks, especlally Lhe Lop 21 LhaL now each have prlvaLe cross-border asseLs
under managemenL of aL leasL $100 bllllon each.
48

ln shorL, Lhls comparaLlve handful of ma[or prlvaLe banklng lnsLlLuLlons now accounLs
for 62 Lo 74 percenL of all offshore prlvaLe wealLh. Many readers wlll recognlze Lhe
names of Lhe domlnanL players, as Lhey have done for decades: u8S, CredlL Sulsse,
ClLlgroup/SS8/Morgan SLanley, ueuLsche 8ank, 8ankAmerlca/Merrlll Lynch,
!MorganChase, 8n arlbas, PS8C, lcLeL & Cle, Coldman Sachs, A8n Amro, 8arclays,
CredlL Agrlcole, !ullus 8aer, SocleLe Ceneral, and Lombard Cdler.

1o address Lhls baslc facL abouL Lhe offshore markeL, we have underLaken a sysLemaLlc
analysls of cross-border prlvaLe banklng asseLs under managemenL aL Lhe Lop 30
lnLernaLlonal prlvaLe banks for Lhe perlod 2003-2010. Cur daLa sources lnclude company
annual reporLs and 10ks, lnvesLmenL analysLs, lnLervlews wlLh prlvaLe banklng lndusLry
experLs, lndusLry waLchers llke WealLh 8rleflng news and Money Launderlng AlerL, and a
survey of recenL markeL research sLudles for Lhe prlvaLe banklng lndusLry.

46
SwlLzerland probably has Lhe largesL number of dlrecL employees ln prlvaLe banklng abouL 200,000,
accordlng Lo Lhe Swlss 8ankers AssoclaLlon. 1he global lndusLry esLlmaLe ls based on our deLalled analysls
of lndlvldual havens and prlvaLe banklng lnsLlLuLlons. 1he lndusLry also creaLes lndlrecL demand for oLher
buslness servlces, lncludlng law flrms, accounLlng flrms, offlce servlces, and Lravel. We have allowed for
Lhls ln our esLlmaLe.
47
See www.scrlbd.com/.../ClLlgroup-CcL-16-2003-luLonomy-8eporL-arL-1.
48
As of !uly 2008, before Lhe crash, Luromoney esLlmaLed LoLal asseLs under managemenL for Lhe global
prlvaLe banklng lndusLry as a whole aL $11.8 Lrllllon. See:
hLLp://www.euromoney.com/ArLlcle/2093990/rlvaLe-banklng-MeLhodology.hLml. 8y SepLember 2009
Lhls flgure had fallen Lo $11.1 Lrllllon. Cur sample of Lhe Lop 30 banks accounLed for abouL $8 Lrllllon of
Lhls. As noLed ln Lhe LexL, ln addlLlon Lo AuMs, of course, Lhere are also asseLs under cusLody, deposlLs,
and cllenL brokerage asseLs under admlnlsLraLlon, whlch are on Lhe order of 30 Lo 80 percenL greaLer
Lhan AuMs. So Lhese flgures are all conslsLenL wlLh our esLlmaLed $20 Lrllllon for 2009.

33

1he resulLs are readlly summarlzed.

I|rst, as of uecember 2010, by our esLlmaLes, Lhe worlds Lop 30 global prlvaLe banks
alone had $12.06 Lrllllon of prlvaLe cross-border flnanclal wealLh under managemenL.
1hls compared wlLh 2003, when our esLlmaLe ls LhaL Lhe Lop 30 managed $3.4 Lrllllon
an average annual growLh raLe for Lhe lndusLry of nearly 16 percenL, desplLe Lhe world
economys ups and downs.

nor are Lhese all Lhe cllenL asseLs LhaL Lhese lnsLlLuLlons handle. 1here are also bank
deposlLs, whlch are usually lncluded under managed asseLs, as well as asseLs under
cusLody and admlnlsLraLlon, lncludlng brokerage asseLs. uependlng on Lhe year, Lhese
addlLlonal asseLs Lyplcally add aL leasL 23 percenL Lo Lhe LoLal. Allowlng for Lhls, as well
as for underreporLlng and oLher daLa problems, Lhese flgures are conslsLenL wlLh our
overall $21 Lrllllon Lo $32 esLlmaLe for global offshore flnanclal asseLs as of 2010.

Second, Lhe Lop Len banks ln Lhls group are remarkably sLable Lhe Swlss banks u8S and
CredlL Sulsse occupled Lhe lead poslLlons ln boLh years, and 7 of Lhe Lop 10 remalned ln
Lhe Lop Ller. noLable new addlLlons Lo Lhe leaders were 8arclays, Lhe ulLra-prlvaLe
Ceneva bank lcLeL, and 8ankAmerlca, by way of lLs Merrlll acqulslLlon, noLable
decllners were ClLlgroup and A8n Amro.

1h|rd, Lhe Lop Len banks grew even fasLer Lhan Lhe lndusLry as a whole, an AAC8 of over
20 percenL per year durlng Lhls perlod, sharply lncreaslng Lhelr share of Lhe groups
asseLs under managemenL from 42 percenL ln 2003 Lo more Lhan 31 percenL ln 2010.

1he lrony here ls LhaL every one of Lhese leadlng global banks, excepL lcLeL, were
deemed Loo blg Lo fall by Lhelr governmenLs ln 2008-2010, and collecLlvely recelved
hundreds of bllllons ln Laxpayer-flnanced caplLal ln[ecLlons, sLandby credlLs, loan
guaranLees, Loxlc asseL guaranLees, low-cosL loans, and Lhe uS 1reasurys lebruary 2009
swap deal wlLh SwlLzerland.
49
1hey beneflLLed greaLly from Lhe $80 bllllon AlC ballouL
and Lhe vlrLually-zero real lnLeresL raLe envlronmenL esLabllshed by Lhe worlds cenLral
banks. WlLhouL Lhese Loo blg Lo fall governmenL subsldles, several would have
dlsappeared.
30

49
lrom AugusL 2008 Lhrough AugusL 2009, Lhe governmenL ald recelved by Lhe Lop 21 prlvaLe banklng
lnsLlLuLlons as a group LoLaled aL leasL $393 bllllon of sLandby credlLs, $939 bllllon of Loxlc asseL
guaranLees, and $392 bllllon of governmenL caplLal ln[ecLlons. CovernmenL ald Lo banks, Lurope and Lhe
uS, uS lederal 8eserve, uS 1reasury, PM 1reasury, and oLher cenLral bank offlclal sources, our analysls.

30
lL ls lnLeresLlng Lo noLe LhaL Lhe precursors of ClLlgroup, !MorganChase, 8ankAmerlca, and Coldman
Sachs were all deeply lnvolved ln lendlng Lo flnance sLock markeL speculaLlon ln 1928-29. ClLlbanks
chalrman aL Lhe Llme, Sunshlne Charlle MlLchell, was descrlbed by a uS SenaLor as more Lhan any 30
men, responslble for Lhe sLock markeL crash.

34
uld Lhe 1reasury ueparLmenLs around Lhe world noL undersLand LhaL Lhese very same
banks are leadlng Lhe world ln enabllng Lax dodglng lndeed, Lo some exLenL, preclsely
because offshore lnvesLors know LhaL Lhey have been under-wrlLLen by Lhelr 1reasury
ueparLmenLs?

(4) 1he Cffshore Investor ortfo||o Mode|.

Cur lasL model ls anoLher relaLlvely slmple, daLa-focused model of offshore lnvesLor
porLfollo behavlor. lL ls based on a comblnaLlon of 8lS daLa on cross-border deposlLs and
oLher asseL holdlngs by non-bank lnvesLors, an analysls of porLfollo mlx assumpLlons
made by wealLh lndusLry analysLs, and lnLervlews wlLh acLual prlvaLe banks.

All Lhls ylelds a range of porLfollo scale-up facLors LhaL can be comblned wlLh reporLed
8lS asseLs daLa Lo yleld anoLher esLlmaLe for Lhe slze of offshore wealLh.

koots of the mode|: 1INs Iru|tfu| Lrrors. Cur model ls rooLed ln 1!ns orlglnal 2003
esLlmaLe for offshore prlvaLe wealLh of $11.3 Lrllllon, whlch lncluded $2 Lrllllon of non-
resldenLlal offshore real esLaLe and $9.3 Lrllllon of offshore flnanclal wealLh. unLll now,
Lhls ls sLlll noL only Lhe largesL esLlmaLe Lo daLe, buL also Lhe only one LhaL was made
wlLh even a rudlmenLary porLfollo model.

1!n based lLs rough esLlmaLe on Lhe slmple procedure of scallng up 8lS daLa on offshore
deposlLs by nonbanks by an average raLlo of cash and bank deposlLs Lo all flnanclal
asseLs LhaL was based on ML/CapCemlnls annual esLlmaLes of asseL allocaLlons for hlgh-
neL worLh porLfollos.

unforLunaLely, 1!n made several slmple errors. 1hese conLrlbuLed, lf anyLhlng, Lo a
subsLanLlal 5,&'4'#$/+"$/), of Lhe slze of offshore. Powever, Lhe baslc meLhodology
can be reflned and exLended Lo dellver yeL anoLher LrlangulaLlon.

1!ns 2003 esLlmaLe conLalned several errors, all of whlch blased lL downwards. llrsL, lL
relled on Lhe wrong llne lLem for offshore deposlLs, uslng a LoLal of uS$ 2.7 Lrllllon.
31

1he correcL comparable flgure for offshore deposlL llablllLles by nonbanks for !une 2003
was $4.68 Lrllllon. 8y !une 2007 Lhls had grown Lo $7.43 Lrllllon, dropplng back Lo $7.01
Lrllllon as of !une 2010, under Lhe lmpacL of Lhe economlc crlsls.
32

Second, Lo esLlmaLe LoLal offshore flnanclal asseLs, 1!n used a 3.3 llquldlLy raLlo Lo
scale up Lhls cross-border deposlLs flgure Lo LoLal flnanclal asseLs. 1hls was based on a
2004 sLudy of global flnanclal asseL demand by Mcklnsey & Co., whlch found LhaL LhaL

31
See 1!n (2003), op. clL., 1he rlce of Cffshore, p. 1, whlch lncorrecLly use $2.7 Lrllllon for Lhe value
of offshore deposlLs ln !une 2004. 1he acLual flgure for offshore deposlLs by nonbanks was $4.03
Lrllllon. (See 8lS CuarLerly Survey, uecember 2004, 1able 1.)
32
1hls 8lS daLa on cross-border deposlL llablllLles ls llmlLed Lo reporLs obLalned from [usL 30 offshore
flnanclal cenLers, and may Lherefore be regarded as conservaLlve.

33
Lhe raLlo of cash (bank deposlLs) Lo LoLal flnanclal neL worLh ln hlgh-neL worLh lnvesLor
porLfollos had averaged 3.3 Lo 3.83 over Lhe precedlng 4 years.

1!n Lherefore assumed a 3.3 raLlo Lo scale up lLs deposlLs esLlmaLe Lo flnanclal neL
worLh. 1hls was desplLe Lhe facL LhaL lL was hard Lo reconclle Mcklnseys esLlmaLes for
deposlLs wlLh Lhose of 8lS, slnce Lhe Mcklnsey numbers lnapproprlaLely lncluded a huge
amounL of lnLer-bank deposlLs, whose raLlos Lo flnanclal asseLs had noLhlng Lo do wlLh
Lhe behavlor of nonbanks.

ln facL, ML/ CapCemlnl (ML/CC) has esLlmaLed acLual llquldlLy raLlos for hlgh-neL worLh
lndlvlduals wlLh more Lhan $1 mllllon ln neL flnanclal asseLs dlrecLly for !une 1998,
uecember 1998, !une 2002, and each successlve year Lhrough 2010. 1he medlan value
for 1998-2010 was 4.6, and for 2004-2003 lL Lopped 4.9. (See ML/CC, World WealLh
8eporLs, op. clL.) Cnly ln years of decllnlng sLock markeLs llke 2002 and 2008-9 dld Lhe
llquldlLy raLlo dlp below 4. lor purposes of our esLlmaLes here, 2010 was baslcally a year
when all Lhe key sLock markeLs ln Lhe uS, Asla, and Lurope were recoverlng nlcely,
slgnallng (premaLurely) a recovery.

1here +/2.$ @' a case LhaL ML/CCs esLlmaLes of Lhese average llquldlLy raLlos for
PnWls should be Laken as an 5HH'4 @)5,& for offshore flnanclal lnvesLmenLs, on Lhe
argumenL LhaL offshore funds are securlLy blankeLs for more rlsk-averse lnvesLors.
Weve doubled-checked Lhls by examlnlng Lhe slze of prlvaLe banklng cllenLs lnvesLed
asseLs under managemenL relaLlve Lo Lhelr cross-border deposlLs for several prlvaLe
banks LhaL are leaders ln Lhe offshore markeL, and publlsh Lhls daLa, lncludlng u8S and
CredlL Sulsse. lor Lhese lnsLlLuLlons, llquldlLy raLlos equaled or exceeded Lhe same-
year llquldlLy raLlos lmplled by ML/CCs average PnWl porLfollo allocaLlons.

ln our esLlmaLes, we have LreaLed Lhe ML/CC-based llquldlLy raLlos as upper bounds,
and have seL a conservaLlve lower bound aL 3.0 raLlo, much lower Lhan Lhe 3.3 orlglnally
used by 1!n. 1hls 3.0 raLlo ls below Lhe ML/CC porLfollo allocaLlon esLlmaLes for all buL
one year ln Lhe 1998-2010 perlod 2002, when lL equaled 3.0. lL Lherefore esLabllshes a
super-conservaLlve floor under our non-banks deposlLs mulLlpller.

Cf less lnLeresL Lo our focus here -- whlch ls on flnanclal wealLh -- whlle 1!n also allowed
LhaL non-resldenLlal real esLaLe holdlngs mlghL be anoLher lmporLanL componenL of
offshore wealLh, Lhelr $2 Lrllllon esLlmaLe for 2003 seems low relaLlve Lo Lhe correcLed
porLfollo slze.

llnally, 1!n also lgnored Lhe role of so-called alLernaLlve lnvesLmenLs and
collecLlbles ln PnWl porLfollos, lncludlng hedge funds, arL, and prlvaLe equlLy. Whlle
we lack speclflc lnformaLlon on Lhe share of )**#.)4' porLfollos H'4 #' accounLed for by
such llllquld lnvesLmenLs, for real esLaLe and non-collecLlble alLernaLlves, Lhe respecLlve
medlan porLfollo shares reporLed by ML/CC for Lhe perlod 1998-2008 were 17 percenL
and 10 percenL respecLlvely, wlLh ranges of 13-24 and 7-20.

36

ln sum, whlle furLher research on offshore PnWl porLfollo allocaLlons ls warranLed, Lhe
baslc 1!n meLhodology ls worLh developlng. lor purposes of Lhls paper we have checked
Lhe range of llquldlLy raLlos used above wlLh prlvaLe bankers and lndusLry sources, and
Lhey have conflrmed LhaL Lhey are plauslble.

kev|sed ortfo||o Mode| Lst|mates. As for 1!ns orlglnal esLlmaLes, when Lhe errors are
correcLed, Lhe mosL llkely quanLlLy of prlvaLe offshore flnanclal asseLs ln !une 2004 was
noL $9.3 Lrllllon, buL $12.1 Lo $20 Lrllllon, dependlng on wheLher we use Lhe very
conservaLlve 3.0 llquldlLy mulLlpller or someLhlng more reallsLlc.

Slnce Lhen, offshore deposlLs by nonbanks nearly doubled from 2004 Lo uecember
2007, when Lhe global economy Look a Lumble. uurlng LhaL perlod, offshore flnanclal
asseLs may have grown Lo be worLh as much as $22 Lo 33 Lrllllon. Slnce Lhen Lhe model
lndlcaLes LhaL Lhey have slumped sllghLly Lo Lhe $21 Lrllllon Lo $32 Lrllllon range, wlLh a
plauslble mldpolnL of abouL $26 Lrllllon. 8uL Lhls sLlll represenLs enough growLh slnce
2004 Lo be conslsLenL wlLh Lhe growLh ln global prlvaLe banklng AuMs noLed above.
33

Assumlng a developlng counLry wealLh share of 23 Lo 30 percenL, Lhls range ls also
conslsLenL wlLh Lhe resulLs of our accumulaLed wealLh model.

1he kev|sed G|oba| D|str|but|on of Wea|th

lL may be helpful Lo place Lhese esLlmaLes ln Lhe conLexL of Lhe overall dlsLrlbuLlon of
global flnanclal wealLh. lL Lurns ouL LhaL Lhls dlsLrlbuLlon ls lncredlbly concenLraLed. 8y
our esLlmaLes, aL leasL a Lhlrd of all prlvaLe flnanclal wealLh, and nearly half of all
offshore wealLh, ls now owned by worlds rlchesL 91,000 people [usL 0.001 of Lhe
worlds populaLlon.

1he nexL 31 percenL of all wealLh ls owned by Lhe nexL 8.4 mllllon,
anoLher Lrlvlal 0.14 of Lhe worlds populaLlon.
34
As noLed, a Lhlrd of Lhls has been
accumulaLed from Lhe 139 source counLrles ln our focus sample. AlmosL all of lL has
managed Lo avold all lncome and esLaLe Laxes, elLher by Lhe counLrles where lL has been
lnvesLed and or where lL comes from.

33
1hese esLlmaLes for 2010 exclude oLher non-flnanclal very lmporLanL forms of offshore wealLh llke
non-resldenLlal real esLaLe, alLernaLlve lnvesLmenLs, and collecLlbles. As noLed, for 2004, 1!n added
anoLher $2 Lrllllon Lo lLs $9.3 Lrllllon flgure for flnanclal asseLs Lo accounL for real esLaLe, buL noLhlng Lo
allow for offshore alLernaLlve lnvesLmenLs and collecLlbles. Accordlng Lo ML/CapCemlnl, non-resldenLlal
real esLaLe and alLernaLlve lnvesLmenLs may add anoLher 23 Lo 38 Lo PnWls wealLh porLfollos,
alLhough Lhe offshore porLfollo shares are lower.

34

37
6. 1kADL MISINVCICING -- AN IMCk1AN1 ASIDL

Cn Lhe uses slde, as noLed, we have employed Lhe World 8anks serles for counLry
currenL accounL deflclLs and changes ln reserves. Some auLhors, llke Cll, LpsLeln (2003),
and 8oyce and ndlkumana have also Lrled Lo ad[usL Lhe observed currenL accounL deflclL
for alleged Lrade mlslnvolclng of forelgn Lrade.

l have experlmenLed exLenslvely wlLh such ad[usLmenLs. l slmply donL flnd Lhe rough
rules of Lhumb LhaL are used Lo make Lhese ad[usLmenLs rellable.
33

lf one ls a greaL bellever ln Lhe lmporLance of aggregaLe as opposed Lo case-speclflc
goods Lrade mlsprlclng, leavlng ouL Lhls ad[usLmenL generally Lends Lo make our
unrecorded caplLal flow esLlmaLes even more conservaLlve.

33
LpsLeln (2003) ls hereLofore Lhe mosL comprehenslve caplLal fllghL esLlmaLes Lo daLe, buL hls esLlmaLes
are sub[ecL Lo many ob[ecLlons. llrsL, LpsLeln (2003) omlLs key counLrles LhaL are leadlng source of fllghL
caplLal noLably, 8ussla, Mexlco, venezuela, and ArgenLlna. Llke Cll, he also employs Lhe so-called
8oyce-ndlkumana ad[usLmenL for mls-lnvolclng, whlch l flnd very problemaLlc. lor several counLrles,
llke Chlna and Malaysla, Lhls ad[usLmenL alone accounLed for several hundred bllllon ln addlLlonal
lmpuLed fllghL. 1he ad[usLmenL, whlch ls based on Lhe lMls ulrecLlon of 1rade sLaLlsLlcs, assumes a
consLanL normal 10 percenL clf/fob raLlo for all developlng counLry Lrade wlLh Lhe llrsL World. lL Lhen
Lakes all Lhe llrsL World exporLs Lo a speclflc developlng counLry LhaL are reporLed ln Lhe lMls ulrecLor of
1rade SLaLlsLlcs, and scales Lhem up by Lhls raLlo, compares Lhe resulLlng ad[usLed exporLs flgure wlLh
Lhe reporLed llrsL World lmporLs by a speclflc counLry, and aLLrlbuLes any resulLlng gap Lo lmporL over-
lnvolclng. lL Lhen exLrapolaLes from Lhls llrsL World-developlng counLry gap Lo Lhe counLrys enLlre Lrade
balance, on Lhe assumpLlon LhaL llrsL World Lrade daLa are accuraLe.

My lnspecLlon of Lhe uns CommodlLy 1rade SLaLlsLlcs daLa base (hLLp://unsLaLs.un.org/unsd/comLrade)
whlch has deLalled lnformaLlon on acLual fob/clf raLlos by counLry and commodlLy, reveals LhaL Lhe 1.1
raLlo assumpLlon ls ofLen wlldly lnaccuraLe, and LhaL lL flucLuaLes over Llme, even for a glven commodlLy
famlly. 1here may also be Llmlng and quallLy dlfferences LhaL affecL Lhe daLa for example, exporLs Lend
Lo be recorded earller Lhan lmporLs, and wlLh less accuracy, because of Lhe lncenLlves Lo collecL lmporL
duLles and enforce quoLas. 1hls blases our esLlmaLes of lmporL over-lnvolclng upwards. ln Lhe case of
Chlna, as dlscussed ln Lhe LexL, Lhere are also serlous problems lnvolved ln separaLlng ouL Lrade wlLh Pong
kong, a key LransshlpmenL polnL. See also lrank 8. CunLer (2003), CaplLal lllghL from Chlna 1984-2001,
!une 2003, Lelgh unlverslLy. Much more research aL Lhe lndlvldual counLry level and commodlLy level ls
needed Lo resolve Lhls lssue, so for Lhe momenL, we belleve LhaL Lhe safer course ls Lo omlL Lhe
ad[usLmenL enLlrely.

LpsLeln (2003)s esLlmaLes for Chlna also appear Lo be vasLly oversLaLed, even wlLhouL Lhe mls-lnvolclng
ad[usLmenL, because of Lhe way Pong kong ls LreaLed ln Chlnas balance of paymenLs sLaLlsLlcs. LpsLeln
(2003) also aLLempL Lo correcL for Lhe facL LhaL some counLrles debLs are parLly denomlnaLed ln non-
dollar currencles.

llnally, for mosL counLrles, LpsLelns esLlmaLes sLarL ln 1980 and leave off ln 2001, whlle ours exLend from
1970 Lo 2010.

38
1hls ls as good a polnL as any Lo make a more general polnL abouL Lhe esLlmaLlon of
Lransfer mlsprlclng, slnce lL has recenLly recelved more aLLenLlon Lhan ever ln Lhe
offshore debaLe.

ln Lhe course of preparlng Lhls paper and anoLher presenLaLlon for 1!ns recenL Pelslnkl
Lransfer prlclng conference,
36
l have closely examlned several recenL esLlmaLes of
alleged Lransfer mlsprlclng ln goods -- by Cll ln parLlcular.

1hls analysls leads me Lo conclude LhaL we A",,)$ rely on Lhe sLandard approaches Lo
esLlmaLlng Lransfer mlsprlclng abuse ln order Lo correcL errors ln Lhe currenL accounL,
much less ln order Lo esLlmaLe aggregate flows of unrecorded caplLal flows due Lo
Lransfer mlsprlclng. 1here are slmply Loo many problems wlLh Lhe daLa.

ln parLlcular, we have Clls well known clalms LhaL aL leasL $1 Lrllllon per year ls belng
losL '"A. -'"4 by developlng counLrles because of goods mlsprlclng.

l flnd Lhls sensaLlonal clalm dublous aL besL. A close look aL Clls analysls of Lrade
mlsprlclng reveals LhaL lL ls serlously flawed, for several reasons.
37

(1) Clls analysls leaves ouL all counLry cases where Lhelr measures of Lrade mlsprlclng
are negaLlve desplLe Lhe facL LhaL such cases are qulLe common, especlally ln Afrlca,
due Lo facLors llke unreporLed conLraband and Lhe parklng of proflLs ln offshore havens.
1hls facLor Lends Lo lnflaLe Lhe aggregaLe esLlmaLes enormously.

(2) More Lhan 70 percenL of Clls aggregaLe esLlmaLes for Lrade mlslnvolclng derlve
from [usL Lwo counLrles Chlna and Mexlco. 8oLh of Lhese gaps also largely perLaln Lo
Lhese counLrles Lrade wlLh Lhe uS. WhaLs golng on here?

8ecenL work on Lhese Lwo slzable lmbalances by professlonal Lrade experLs suggesLs
LhaL Lhey were largely due Lo bureaucraLlc facLors llke Llmlng delays ln Lrade reporLs,
exchange raLe varlaLlons, Lhe handllng of LransshlpmenLs Lhrough Pong kong, Chlnas
key offshore Lrade lnLermedlary, and Lhe facL LhaL Mexlco does noL Lrack or ad[usL lLs
daLa for re-exporLs. WlLhouL a more careful look aL speclflc bllaLeral Lrade relaLlonshlps
aL Lhe level of Lradlng parLners and lndusLrles, we should LreaL Lhese esLlmaLes wlLh
greaL cauLlon.
38

1he Need for Case Stud|es. Cn Lhe oLher hand, my recenL work on goods mlslnvolclng
shows LhaL lL can be a serlous problem ln speclflc lndusLrles llke mlnlng, foresLry,
Lobacco, beer, and agrlbuslness, -- especlally where lL provldes a condulL for caplLal
ouLflows, parklng proflLs ln low-Lax havens, and Lax avoldance.

36
1!n lnLernaLlonal Conference on 1ransfer rlclng, Pelslnkl, llnland, !une 13-14, 2012.
2#
$5*:* 8,7).+: ;*+),-(-(< ). )5* =>' ,(,/?:-: .8 )+,@* A-:-(B.-7-(< ,+* :CAA,+-D*@ -( E;;*(@-F '''4
*:;*7-,//? ;#1
2G
H** E;;*(@-F '''4 :C;+,I

39

uslng prevlously-unanalyzed Lradlng parLner daLa from Lhe un ComLrade daLa base, we
have done counLry-by-counLry Lrade mlsprlclng analyses for key source counLrles,
lncludlng Chlna, Mexlco, lndla, and Zambla, a Llny rlch poor counLry ln sub-Saharan
Afrlca LhaL heavlly on copper exporLs.
39

We have also looked closely aL Lransfer mlsprlclng by SwlLzerland, a key re-exporLlng
haven ln Lhe global Lrade sysLem LhaL has hereLofore earned a nlce llvlng by parklng
proflLs havens. 1hese careful case sLudles of parLlcular bllaLeral Lradlng relaLlonshlps
acLually underscore Lhe unsavory role LhaL havens play ln our global Lradlng sysLem.

Cur analysls leads Lo several key concluslons:

(1) We slmply A",,)$ rely on Lransfer mlsprlclng comparlsons Lo correcL errors ln Lhe
currenL accounL, for purposes of esLlmaLlng aggregate unrecorded caplLal flows. 1he
garganLuan esLlmaLes of Lrade mlsprlclng LhaL we ofLen read abouL ln Lhe headllnes
should be Laken wlLh a salL Lhumb and a shoL glass of Lequlla.

(2) Speclflc lndusLry case sLudles are Lhe way Lo go. Cur deLalled sLudles of mlsprlclng
wlLh respecL Lo Mexlco, Zambla, lndla, and SwlLzerland show LhaL analyzlng bllaLeral
Lrade closely underscores Lhe unsavory role LhaL havens play ln our global Lradlng
sysLem.
Clven Lhe serlous daLa problems for example, Lhe absence of up-Lo-daLe publlshed
Cll-lC8 raLlos for speclflc Lradlng parLners and commodlLles -- Lhere ls no way rlghL
now Lo esLlmaLe how large lL ls on a global scale, wlLhouL a greaL deal of furLher
research.

lurLhermore, Lhe focus on goods Lransfer mlsprlclng obscures Lhe slgnlflcanL role played
by corporaLe abuses of Lhe haven sysLem wlLh respecL Lo lnLanglbles llke brands,
paLenLs, and knowhow, mlsprlclng of whlch has been growlng dramaLlcally. llnally, nolsy
esLlmaLes of aggregaLe corporaLe goods mlsprlclng Lend Lo dlsLracL aLLenLlon noL only
from Lhe klnd of haven abuse of mls-lnvolclng [usL noLed, buL also from Lhe serlous
abuses by Lhe offshore lnvesLmenL and prlvaLe banklng lndusLrles LhaL are Lhe focus of
Lhls paper.

2J
H** E;;*(@-F '''4 B,+-.C: 75,+):

40

7. IMLICA1ICNS

1hls reporL has many lmpllcaLlons for publlc pollcy and research. 1hls flnal secLlon
summarlzes some of Lhe mosL lmporLanL ones.

I. M|ss|ng Wea|th, Understated Inequa||ty.

As noLed earller, Lhls reporL focuses our aLLenLlon on a huge black hole ln Lhe world
economy LhaL has never before been measured prlvaLe offshore wealLh, and Lhe vasL
amounLs of unLaxed lncome LhaL lL produces. Comlng aL a Llme when governmenLs
around Lhe world are sLarved for resources, and we are more consclous Lhan ever of Lhe
cosLs of lnequallLy, lL could noL be more Llmely.

uslng several lndependenL esLlmaLlon meLhods, and Lhe mosL comprehenslve daLa seL
ever assembled, we have been able Lo LrlangulaLe on Lhe slze and growLh of Lhls black
hole. Lven Lhough we Laken palns Lo err on Lhe conservaLlve slde, one key lmpllcaLlon ls
LhaL Lhls hldden offshore secLor ls large enough Lo make a slgnlflcanL dlfference Lo mosL
of our convenLlonal measures of lnequallLy.

1he reporL underscores Lhe facL LhaL all of our convenLlonal measures of lnequallLy
sharply undersLaLe Lhe levels of lncome and wealLh lnequallLy aL boLh Lhe counLry and
global level. (1he 1ax !usLlce neLwork reporL ;,'C5"(/$-M N)5 0),$ O,)B $.' F"(* )* ;$1
whlch accompanled Lhe 2012 release of Lhls one, explores Lhe lssue ln more depLh.) lor
mosL counLrles, Lhe lnequallLy of flnanclal wealLh wlLhln counLrles ls noL only much
greaLer Lhan we suspecLed aL any one polnL ln Llme, buL lL has been growlng much
fasLer.

lndeed, slnce Lhe overwhelmlng share of unrecorded offshore prlvaLe asseLs LhaL we
have ldenLlfled belong Lo a Llny ellLe, Lhe lmpacL on lnequallLy ls asLonlshlng We have
esLlmaLed, for example, LhaL less Lhan 100,000 people, .001 of Lhe worlds populaLlon,
now conLrol over 30 percenL of Lhe worlds flnanclal wealLh.
60

lurLhermore, slnce Lhe offshore lndusLry experlenced a Lake-off ln Lhe laLe 1960s, and
has been growlng relaLlve Lo Lhe resL of Lhe world economy Lhrough 2010, lL appears
LhaL ln-counLry wealLh lnequallLy may have lncreased rapldly durlng Lhls perlod.

60
Appendix III, p102

41
Cf course global lnequallLy ls also Lhe resulL of dlsparlLles among "!'4"2' levels of
wealLh among naLlons. 1he acceleraLlon of naLlonal growLh by leadlng developlng
counLrles llke Chlna, lndla, and 8razll slnce Lhe laLe 1980s lmplles LhaL Lhe narrowlng of
average dlfferenLlals ln naLlonal lncome and wealLh levels among counLrles may have
offseL Lhese wlder ln-counLry lnequallLles Lo some exLenL.

Cn Lhe oLher hand, Lhe acceleraLed growLh raLes of Lhese forLunaLe few developlng
counLrles has also wldened Lhe gap beLween Lhem and many oLher developlng
counLrles.

lurLhermore, local, ln-counLry lnequallLy ls arguably by far Lhe mosL lmporLanL Lype of
lnequallLy ln Lerms of soclal, pollLlcal, and economlc lmpacLs, as well as percepLlons of
relaLlve well belng, and LhaL ls Lhe Lype LhaL has lncreased aL Lhe hands of Lhe global
haven lndusLry.

llnally, from Lhe plraLe bankers markeL perspecLlve, whaL ls perhaps mosL lnLeresLlng
abouL Lhe new landscape of global lnequallLy LhaL we have uncovered ls Lhe recenL
emergence of a Lrue LransnaLlonal prlvaLe ellLe a relaLlvely Llny fracLlon of Lhe worlds
populaLlon LhaL shares surprlslngly slmllar needs and lnLeresLs from Lhe sLandpolnL of
flnanclal secrecy, banklng servlces, Laxes, and regulaLlon.

lncreaslngly, lndeed, Lhe lndlvldual members of Lhls prlvaLe ellLe may be assumlng many
of Lhe same aLLrlbuLes as mulLlnaLlonal companles, even as MnCs have been becomlng
more llke prlvaLe lndlvlduals, so far as pollLlcal rlghLs are concerned. 1hls means LhaL
super-rlch lndlvlduals are lncreaslngly acLlng as clLlzens of mulLlple [urlsdlcLlons aL once,
even Lhough Lhey may be resldenL nowhere for Lax purposes, LhaL Lhey are able Lo
relocaLe qulckly across borders, and LhaL Lhey are able Lo acqulre represenLaLlon
wlLhouL LaxaLlon, Lhe ablllLy Lo exerL local pollLlcal lnfluence ln mulLlple [urlsdlcLlons,
lndependenL of whaLever Laxes Lhey pay ln any parLlcular [urlsdlcLlon.

lL also means LhaL as a group Lhls LransnaLlonal ellLe has, ln prlnclple, a sLrong vesLed
lnLeresL ln pushlng for weaker lncome and wealLh LaxaLlon weaker governmenL
regulaLlon, more open markeLs, and weaker resLrlcLlons on pollLlcal lnfluence and
campalgn spendlng across borders wlLh a huge LransnaLlonal haven army of plraLe
bankers, law flrms, accounLlng flrms, lobbylsLs, and 8 flrms ready Lo do Lhelr blddlng.

1hus Lhe )@P'A$/!' lncrease ln global wealLh lnequallLy aL Lhe lndlvldual level LhaL we
have begun Lo measure here seLs Lhe sLage for asklng a wlde varleLy of quesLlons abouL
Lhe resulLlng pollLlcal and soclal lmpacLs on Lhe LradlLlonal naLlon-sLaLe.

II. 1ax 8ase Lros|on. AnoLher key lmpllcaLlon of Lhls sLudy ls LhaL Lhe lmpacL on losL Lax
revenue lmplled by our esLlmaLes may be huge -- large enough Lo make a slgnlflcanL
dlfference Lo Lhe flnances of naLlons, especlally Lo developlng counLrles LhaL are now
sLruggllng Lo replace losL ald dollars and pay for cllmaLe change.

42

Assumlng, conservaLlvely, LhaL global offshore flnanclal wealLh of $21 Lrllllon earns a
LoLal reLurn of [usL 3 percenL a year, and would have faced an average marglnal Lax raLe
of 30 percenL ln Lhe home counLry, Lhls unrecorded wealLh mlghL have generaLed Lax
revenues of $189 bllllon per year more Lhan Lwlce Lhe $86 bllllon LhaL CLCu
counLrles as a whole are now spendlng on all overseas developmenL asslsLance.

Cf course calculaLlons are sub[ecL Lo all klnds of caveaLs Lhe mosL lmporLanL belng LhaL
Lhey lmaglne a world ln whlch developlng and developed counLrles allke are noL only Lo
locaLe Lhls offshore wealLh and Lax lL, buL are also able Lo agree on reasonable rules for
dlvvylng up Lhe proceeds. ln pracLlce, of course, many key source counLrles donL even
have domesLlc lncome Lax reglmes ln place, leL alone Lhe power Lo enforce such Laxes
across borders.

8uL from Lhls angle, Lhls sLudy acLually conLalns some good news. llrsL, ln effecL, we
have acLually [usL locaLed a huge plle aL leasL $21 Lrllllon -- of unLapped flnanclal
wealLh LhaL mlghL now be called upon Lo conLrlbuLe Lo Lhe soluLlon of our mosL
presslng global problems.

Second, we also now know LhaL a subsLanLlal fracLlon of Lhls wealLh ls belng managed
by Lhe Lop 30 players ln Lhe global prlvaLe banklng lndusLry.

1ogeLher, Lhese flndlngs may provlde an opporLunlLy Lo Lhlnk creaLlvely abouL (1) how
Lo prevenL Lhe abuses LhaL have lead Lo off-Lhe-books wealLh accumulaLlon ln Lhe
fuLure for example, Lhrough auLomaLlc lnformaLlon exchange, counLry-by-counLry
reporLlng, and beneflclal ownershlp reglsLraLlon, and (2) how besL Lo make use of Lhe
huge sLock of accumulaLed, unLaxed wealLh LhaL ls already Lhere, as well as Lhe sLeady
sLream of unLaxed earnlngs LhaL lL generaLes for example, by levylng a modesL CLCu-
wlde wlLhholdlng Lax on anonymous asseLs under managemenL ln Lhe Lop 30 banks,
wlLh Lhe proceeds devoLed Lo ald and cllmaLe change.

Agaln, such pollcy measures are especlally lmporLanL for Lhe ma[orlLy of developlng
counLrles LhaL are noL ln a poslLlon Lo be able Lo Lax lncome or wealLh on Lhelr own.
lndeed, once we Lake lnLo accounL Lhe growLh of hldden offshore asseLs and Lhe
earnlngs Lhey produce lnLo accounL, many ersLwhlle debLor counLrles are ln facL
revealed Lo be neL credlLors of Lhe wealLhy CLCu counLrles where much of Lhls prlvaLe
flnanclal wealLh has been parked, off Lhe books.

lndeed, as noLed, Lhls reporL has shown LhaL developlng world as a whole has been a
slgnlflcanL C8Lul1C8 of Lhe developed world for more Lhan a decade.

lor developlng counLrles, Lhen, Lhe Lrue so-called developmenL flnance problem ls
preclsely LhaL all Lhls unrecorded wealLh ls now offshore, ln Lhe hands of prlvaLe bankers
and Lhelr own rapaclous ellLes. 1haL means Lhelr debL problem has really become a

43
tax [ust|ce problem one LhaL Lhe developed counLrles have a responslblllLy as well as
Lhe capaclLy Lo help Lhem solve.

III. |rate 8ank|ng on the kampage. As dlscussed above, lL Lurns ouL LhaL Lhe secreLlve
offshore secLor whlch essenLlally speclallzes ln Lax dodglng and Lhe launderlng of
proceeds from a myrlad of oLher dublous acLlvlLles ls noL [usL an archlpelago of exoLlc
unrelaLed havens, buL a very lucraLlve global lndusLry Lhe global plraLe banklng
lndusLry. 1hls lndusLry has baslcally been deslgned and operaLed for decades, noL by
shady no-name banks locaLed ln lsland paradlses, buL by Lhe B)4(&# ("42'#$ H4/!"$'
@",?#, as well as leadlng law flrms and accounLlng flrms. All of Lhese lnsLlLuLlons are
based, noL ln lsland paradlses, buL ln ma[or llrsL World caplLals llke new ?ork, London,
Ceneva, lrankfurL, and Slngapore.

As weve seen, Lhls reporL suggesLs LhaL Lhe worlds largesL banks have, lf anyLhlng, been
expandlng Lhelr haven-relaLed plraLe banklng operaLlons slgnlflcanLly. even whlle
offlclal lnsLlLuLlons llke Lhe C20, Lhe 8lS, Lhe lMl, and Lhe World 8ank have baslcally
Lurned a bllnd eye Lo lL.

lndeed, Lhe reporL remlnds us LhaL LhaL many of Lhe very same banks LhaL were mosL
deeply lnvolved ln parklng Lrllllons offshore have recenLly recelved huge publlc ballouLs.

1hus, of Lhe Lop 10 players ln global prlvaLe banklng- a|| ten recelved subsLanLlal
ln[ecLlons of governmenL loans and caplLal durlng Lhe 2008-2012 perlod. ln effecL,
ordlnary Laxpayers have been subsldlzlng Lhe worlds largesL banks Lo keep Lhem afloaL,
even as Lhey help Lhelr wealLhlesL cllenLs slash Laxes.

Many of Lhese markeL leaders ln global plraLe banklng Lhe pracLlce of hldlng and
managlng offshore asseLs for Lhe worlds ellLe have also been ldenLlfled laLely as Lhe
markeL leaders ln many oLher forms of dublous acLlvlLy, from Lhe lrresponslble
morLgage lendlng and hlgh-rlsk securlLlzaLlon LhaL produced Lhe 2008 flnanclal crlsls, Lo
Lhe very laLesL ouLrageous scandals lnvolvlng Llbor raLe rlgglng and money launderlng
for Lhe Mexlcan carLel.

All Lhls begs Lhe quesLlon of why lL ls LhaL flnanclal regulaLors conLlnue all Lhls dublous
acLlvlLy Lo be perpeLraLed by Lhls very same comparaLlve handful of glanL lnsLlLuLlons
Lhe llvlng embodlmenL of corporaLe serlal offenders, produclng a seemlngly endless
sLream of flnanclal chlcanery on a global scale, ln counLry afLer counLry afLer counLry. ls
Lhere now such a Lhlng as 1oo 8lg 1o 8e PonesL?

44
IV. Stemm|ng the 1|de. 1hls leads naLurally Lo Lhe nexL lmpllcaLlon -- naLlon-sLaLes need
Lo work LogeLher Lo Lake sLeps now Lo conLrol over all Lhls ouL-of-conLrol global
flnanclal polluLlon.

ln a sense, Lhls presenLs exacLly Lhe same pollLlcal quesLlon as Lhe Lax [usLlce and
global ellLe problems LhaL were noLed earller. 8uL Lhe resulLlng flnanclal mlsbehavlor
ls no longer [usL a Lax [usLlce lssue lL ls a fundamenLal problem of corporaLe
malpracLlce LhaL goes Lo Lhe very hearL of Lhe global markeL economy, and Lhe key
players ln Lhe offshore lndusLry are aL Lhe hearL of lL.

Pow should global bank regulaLors, as well as Lax auLhorlLles, work LogeLher Lo clean up
all Lhls chlcanery? 1he flndlngs of Lhls 1!n reporL calls lnLo quesLlon Lhe clalms made by
C20 leaders way back ln Aprll 2009, ln Lhe lmmedlaLe afLermaLh of Lhe flnanclal crlsls,
when Lhey boldly declared LhaL Lhe era of bank secrecy ls over.

1hls reporLs underscores Lhe facL LhaL Lhe era of bank secrecy and Lhe mlsbehavlor lL
proLecLs ls far from over LhaL Lhere ls an urgenL need for pollcy makers Lo Lake
fundamenLal sLeps Lo sLem Lhe growLh of Lhe global haven lndusLry.

As noLed, among Lhe key pollcy measures LhaL 1!n supporLs are auLomaLlc lnformaLlon
exchange among Lax auLhorlLles, counLy-by-counLry corporaLe reporLlng, and Lhe
deploymenL of publlc reglsLrles for beneflclal ownershlp of companles, LrusLs, and
foundaLlons.

Clven Lhe lead role played by leadlng banks, law flrms, and accounLlng flrms ln
enabllng all Lhls dublous acLlvlLy, global auLhorlLles musL slmply adopL much sLlffer
sancLlons for Lhe repeaL offenders ln Lhls lndusLry. Lven large scale flnes have noL
been effecLlve deLerrenLs we need Lo adopL much sLronger sancLlons for Lhe
lnsLlLuLlons LhaL engage ln plraLe banklng mlsbehavlor and Lhe managers LhaL run
Lhem.

8eyond LhaL, Lhls reporL also suggesLs LhaL Lhe llne beLween offshore and onshore
Lax dodglng has recenLly been blurred by Lhe rlse of llrsL World secrecy [urlsdlcLlons llke
uelaware, nevada, and Slngapore, ln addlLlon Lo LradlLlonal blackllsL nomlnees llke
SwlLzerland, MaurlLlus, LlechLensLeln, and Lhe 8ahamas. ln order Lo curLall Lhe klnd of
global bads deLalled ln Lhls reporL,, lL wlll be vlLal Lo curb Lhls onshorlng of offshore
secrecy.

V. Mu|t||atera| kegu|ators -- M|ss|ng kesearch, Data, and W||| ower. As noLed,
desplLe Lhls well-documenLed exploslon ln Lhe slze and growLh of offshore prlvaLe
wealLh, lL ls slmply a scandal LhaL offlclal lnsLlLuLlons llke Lhe 8ank for lnLernaLlonal
SeLLlemenLs, Lhe lMl, Lhe World 8ank, Lhe CLCu, and Lhe C20, as well as leadlng cenLral

43
banks, have devoLed so llLLle research Lo Lhls flnanclal black hole ln Lhe global
economy.

ln prlnclple, lnsLlLuLlons llke Lhe World 8ank, Lhe lMl, Lhe uS lederal 8eserve, Lhe 8ank
of Lngland, and Lhe 8ank for lnLernaLlonal SeLLlemenLs noL only have ample analyLlc
resources, lncludlng scores of economlsLs. 1hey also have much of Lhe daLa needed Lo
esLlmaLe Lhls secLor more carefully.

lor reasons of Lhelr own, however, Lhey have LoleraLed Lhe growLh of Lhe offshore
secLor far Loo long -- lL has been lefL up Lo nCCS llke 1!n Lo supporL Lhe klnd of deLalled,
palnsLaklng facLual analysls LhaL underlles Lhls reporL

lL ls Llme for Lhese lnsLlLuLlons Lo llve up Lo Lhelr promlses, and work wlLh organlzaLlons
llke 1!n on a research and pollcy agenda LhaL flnally glves Lhls offshore secLor Lhe
aLLenLlon lL deserves.

Colng forward, a key nexL sLep wlll be slmply be Lo demand more Lransparency from
global publlc lnsLlLuLlons on Lhls sub[ecL. 1hey need Lo release more of Lhe daLa Lhey
already have on lLs slze and growLh, and Lhey need Lo devoLe more serlous resources Lo
lLs sLudy.

VI. Summary. lL ls common for researchers Lo conclude each and oLher every sLudy wlLh
a call for more sLudles!

lndeed, we have done LhaL here, parLly [usL because we are exclLed abouL Lhe progress
reporLed here, and parLly [usL because we have uncovered so many more lnLeresLlng
puzzles.

Powever, by calllng for more careful analysls and sLudy, we donL wlsh Lo dlsLracL
aLLenLlon from Lhe many lmporLanL flndlngs LhaL, we belleve, are already secure enough
Lo [usLlfy acLlng upon Lhem.

lor example, we already know LhaL Lhe black hole represenLed by offshore flnanclal
wealLh ls much larger Lhan anyone has prevlously deLermlned.

We already know LhaL lL has grown large enough Lo have a powerful lmpacL on
lnequallLy, Lhe dlsLrlbuLlon of Lhe Lax burden, publlc flnances, and pollLlcal lnfluence
across Lhe globe.

We already know LhaL Lhls secLor has been deslgned, operaLed, and pollLlcally defended
by an lnfluenLlal, well-organlzed global plraLe banklng lndusLry.

46
We already know LhaL Lhls lndusLry now operaLes, for all lnLenLs and purposes, off Lhe
books, and beyond Lhe effecLlve reach of Lodays publlc regulaLors and Lax auLhorlLles.

ln shorL, Lhls huge, secreLlve offshore lndusLry has Lruly become Lhe dark slde of
globallzaLlon.

We all share a collecLlve responslblllLy now Lo redouble our efforLs Lo geL lL under
conLrol.

***

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!ames S. Penry, 1!n 2012

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