Why Offshore Matters

Guest post by Bradley Hope, The National newspaper’s Cairo bureau chief.

Phrases like “nominee shareholders” and “chains of offshore companies” are enough to make most people’s eyes glaze over. But that is on purpose.

Much like the financial wizards who created complicated financial instruments to conceal the risky bets they were making before the financial crisis, the lawyers and accountants behind offshore banking want their world to become low-profile and unimportant when the truth is quite the opposite. 

Half of all global trade passes through offshore tax havens, as this video below explains in what is a good primer for those unfamiliar with the topic:

But why do these tax havens matter?

A telling glimpse into why businessmen and women are so keen on keeping their secrecy came in April with “Offshore Leaks”, a huge investigative journalism project involving dozens of reporters around the world that showed how the high and mighty use offshore banking to conceal assets, evade taxes and pay bribes.

The leaks have shaken the foundations of a financial edifice that is believed to hold as much as $32 trillion.

So far, the elites of the Middle East have been saved of any exposure.

But that may soon change because journalists are still digging through the 2.5 million secret records obtained by the International Consortium of Investigative Journalists from a whistleblower.

The authoritarian regimes of the Middle East have long understood the power of offshore banking. Without the mechanisms provided by offshore banking, the countries of the Arab Spring would have been sitting ducks and vulnerable to exposure, long before they were hit by political change.

That’s why post-Arab Spring countries are struggling to recover assets they believe to have been the product of corruption: bribes, kickbacks and outright thefts.

For example, when Egypt’s Illicit Gains Authority – one of the main groups investigating corruption cases against the Mubarak regime and cronies – checked the bank accounts of Hussein Salem, a major tycoon, they found 45,379 Egyptian pounds, US$4,091, 18,730 Euros, 4,170 Saudi Riyals, 370 Swiss Francs and 30 British pounds.

In all that amounted to about $37,444.36 in cash. They also found properties, jewels and other valuables, but nothing close to his real estimated wealth of more than a billion dollars.

Salem, like many of Egypt’s political and business elite, did not keep his money in Egypt because it wouldn’t be safe from scrutiny.

Instead, he held bank accounts in Switzerland, Paris, Abu Dhabi and Hong Kong. He owns companies in the British Virgin Islands, Guernsey and Panama.

Likewise, Ahmed Ezz, the steel tycoon and former National Democratic Party bigwig, held accounts in Liechtenstein. Authorities there told Egyptian investigators that money funnelled into the country from Cairo promptly disappeared into a web of other companies, many of them believed to be used by Ezz to buy property in London.

Gamal and Alaa Mubarak, sons of the former president, hold more than $300 million in a joint bank account in Switzerland. They also owned a Cypriot company that they used for investments.

But in all of these cases, it is physically impossible for the average person to trace the assets and beyond the capabilities of many countries.

Remember when the protesters in Tahrir were chanting about Mubarak’s $70 billion? Egyptian investigators have only found two assets in Mubarak’s name: a villa in Sharm el Sheikh and another on the North Coast. In total, Egypt has not found more than $1 billion of assets belonging to members of the old regime around the world.

Even if it did find assets, it would have the challenge of proving they originated from corruption. That may be impossible without years of exhaustive inquiries, following each transaction from each offshore company to the next.

The Phillipines is still trying to figure out where the Marcos family stashed all their money (on cases that began in the late 1980s).

This explains why the government of Mohammed Morsi is trying reconciliation negotiations, allowing those accused of corruption to turn over some assets in exchange for cases against them to be dropped. But that is a bad idea for another reason: it only perpetuates a system where those accused of corruption can buy their way out of legal cases.

None of this even begins to touch on an even bigger problem: tax evasion. Offshore banking has helped created a situation where economic growth does not filter down to people in developing countries. Even as countries get richer, the elite use offshore accounts and companies to avoid paying taxes.

[caption id="attachment_1687" align="aligncenter" width="640"]Locations of Offshore Tax Jurisdictions, Grant Thornton Locations of Offshore Tax Jurisdictions, Grant Thornton[/caption]

Egypt estimates it is missing about 66 billion Egyptian pounds from tax revenues – enough to fund gas cylinder subsidies for a year and $1 billion worth of wheat. 

Libya and Tunisia are also grappling with similar problems. And should the government of Bashar Al Assad fall in Syria, the next government, too, will struggle to find the family’s assets.

Here’s hoping that the crack forming in offshore banking rips all the way across. The world needs to fast put an end to an era where bankers and multi-national companies, mafia dons and kleptocrats can build up secret fortunes with no accountability.

One Comment

  • Nathan Anderith
    Posted June 2, 2013 at 12:32 pm | Permalink

    Good article, highlights the difficulties of recovering the felool’s ill-gotten gains.

    I’m not sure if I completely agree that repatriating assets would be a terrible idea, though. Yes, it sends the wrong message, but it’s not like the corrupt businessmen are quivering in terror at the shadow of the Egyptian law at the moment. Corruption’s so endemic that I’d question whether punitive measures (or the lack thereof) has much of an incentivising effect. If that money did come back, though, it would increase general liquidity and could possibly improve investor confidence.

    I suppose either argument rests on an unknown psychological effect on a group of shadowy individuals, so it’s hard to give evidence either way.

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