Those Hidden Trillions

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A new report estimates that some $21 trillion to $32 trillion is socked away in offshore accounts, depriving governments of up to $300 billion in sorely needed tax revenues. / REUTERS
A new report estimates that some $21 trillion to $32 trillion is socked away in offshore accounts, depriving governments of up to $280 billion in sorely-needed tax revenues. / REUTERS

The world’s wealthiest people may be sheltering as much as $32 trillion in in offshore tax havens, depriving their home countries of up to $280 billion in potential tax revenues, according to new report by a British-based tax fairness group.

The amount of money squirreled away by the super-rich exceeds the total economies of the United States and Japan combined, says the report, The Price of Offshore Revisited, by the nonprofit Tax Justice Network.

“Despite taking pains to err on the conservative side,” said James S. Henry, a former chief economist at McKinsey & Co. who authored the report, “the results are astonishing.”

The report’s findings dwarf previous estimates of assets stashed in tax havens, which have ranged from $5 trillion to $9 trillion, though its methodology and tone have come under fire.

Relying on data from the International Monetary Fund, the World Bank, the Bank for International Settlements and other sources, the report estimates that private accounts in secrecy havens total $21 trillion to $32 trillion.

In an interview, Henry called his analysis as “the most comprehensive” report ever of the secret accounts of the super rich. He also described three different “consistency checks” he conducted to determine whether his estimates were correct.

Critics said the study lacks the backup data to demonstrate how it arrived at its precise calculations for a figure so far beyond the range of earlier estimates.

“The methodology that’s being used to come up with these numbers is not at all clear from the report,” said Dev Kar, lead economist at Global Financial Integrity, a nonprofit group whose own methods of estimating illicit transfers came under attack in the new study.

Pascal Saint-Amans, who heads a tax evasion unit at the Organization for Economic Development, also dismissed the new estimate.  “I was wondering where the equivalent of 450 Bill Gates are hiding from everyone,” he told Reuters. “It looks like the equivalent 20,000 unknown billionaires in the world or 200,000 people with net worth of 100 million,” he said.

There was little disagreement, however, on the study’s larger point: that that the use of secrecy havens to sidestep tax authorities was a growing problem, despite efforts on the part of the U.S. government and others to crack down on such secret accounts.

Through an amnesty program in recent years, the U.S. has collected some $5 billion in previously undeclared taxes, interest and penalties, said Rebecca Wilkins, senior counsel for federal tax policy at the nonprofit Citizens for Tax Justice.  The report suggests that is but a very small fraction of the amount likely owed.

A companion report, also issued by the Tax Justice Network, said the new estimates of hidden wealth point to an even starker picture of inequality, marked by the growing concentration of wealth in the hands of an elite few.

For example, the report estimates that just 91,000 people, or 0.001 percent of the world’s population, own nearly a third of all the world’s private wealth. The next 8.4 million people own some 51 percent of all wealth.

If correct, that would mean just 9.3 million people, equal to the top 0.14 percent of the world’s population, own 81 percent of the private wealth on the planet.

“Since most of missing financial wealth belongs to a tiny elite, the impact is staggering,” said Henry, the report’s author. “For most countries, global financial inequality is not only much greater than we suspected, but it has been growing much faster.”

The concentration of wealth in the hands of a few is matched, on the banking side, with the concentration of these offshore accounts in the vaults of an elite group of top banks. The top ten backs hold half of all private offshore accounts in the world, a sum the report estimates at $12.1 trillion.

At the top is UBS, the Swiss banking giant currently under investigation for manipulating interest rates to benefit its own books. The banking juggernaut has run afoul of U.S. regulators time and again in recent years, but its management has never faced criminal prosecution. The report estimates that UBS manages some $1.8 trillion in private offshore assets.

Wilkins, of Citizens for Tax Justice, said th U.S. government investigation of UBS had so far turned up some 52,000 offshore accounts held by Americans. Alone. Her group estimates the U.S. Treasury loses some $150 billion a year because of tax havens, of which $40 billion to $70 billion is from citizens avoiding taxes and $90 billion from corporations. The estimates, she said, were in line with the new report’s findings.

Karina Byrne, a spokeswoman for UBS, did not respond to a request for comment.

Following UBS is Credit Suisse with $923 billion under management. It, too, declined to comment. At number five on the list was HSBC, which last week apologized in a hearing before the U.S. Senate for such lax oversight that it allowed the transfer of some $7 billion from Mexico to the United States–a sum that could only have represented the proceeds of drug trafficking and other criminal activities.

In an emailed statement, Juanita Guttierez, a spokeswoman for HSBC North America, wrote that, “HSBC does not condone tax evasion and fully supports efforts to promote appropriate payment of taxes by taxpayers. The institution complies with all law in all jurisdictions in which it operates.”

The problem, of course, is that in these tax havens, the laws permit such sweeping secrecy that they enable tax evasion and money laundering on a grand scale.

The report also contends that nations saddled with large foreign debts appear quite different once hidden wealth is considered.  By adding government foreign reserves and private wealth stashed in overseas accounts, the report concludes that these countries are not debtors at all, but creditors to the industrialized nations.

That accounting, however, drew sharp criticism from economists, who said that lumping together private assets held overseas with a government’s foreign reserves made little sense. Governments do not own private accounts, and so could not use them to pay off foreign debt. At most, they could recover a portion of the money in the form of taxes.

Mr. Kar, formerly at the International Monetary Fund, also criticized the study for a $1 trillion adding error in the report’s figures of net foreign reserves, and for study’s tone, which made no pretense of scholarly detachment.

In an interview, Henry acknowledged the error in calculations, which he blamed on an editing failure in the last-minute rush to release the report.  On the larger question of lumping together government foreign reserves and private assets, he said his calculation was valid as a measure of sorts of a developing country’s net wealth.

“It’s not quite analogous to reserves,” said Henry, adding that the private assets represent an untapped income stream that could be taxed at, say, 30 percent.  “I’m not trying to do government accounting. I’m trying to do social accounting,” he said.

The tone of the report appeared to reflect the motivation behind it: an economic crisis that has private citizens and governments scrambling to maintain solvency. “It’s hard to contemplate the richest people not paying taxes while the rest of us are struggling to find jobs, make ends meet and pay our taxes,” he said.

“This isn’t really a liberal or conservative argument at all,” he said. “This is about who is going to pay their fair share of taxes.”

Diana Jean Schemo

Diana Jean Schemo

Diana Jean Schemo is co-founding executive editor of 100Reporters and an award-winning former foreign, national and cultural correspondent for The New York Times and the Baltimore Sun.

1 COMMENT

  1. Actually, on reviewing our net foreign reserves numbers, it turns out that they were correct. Kar was including just reserves for low and middle income countries, while our figures for year end 2010 included several other key “source” countries, like Kuwait.  The key bottom line conclusion was right under either condition: lower-income countries as a whole a major net lenders to developed countries and banking centers, to the tune of at least $10 trillion as of yearend 2010. 

    As for the notion that the private wealth accumulated abroad by the elites of these countries should not be considered as part of their national wealth, this depends on the purpose for which the analysis is being made. TJN is focused on potential taxable revenue. This has nothing to do with whether governments “own” the wealth of their residents or not, but only with their practical ability to tax the earnings that private wealth generates, wherever it is located. The fact that wealthy folks are able to use the haven network to evade domestic income and wealth taxes, while poorer folks don’t have this ability,  creates a major obstacle to fair taxation. 

    James S. Henry
    TJN Senior Advisor

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