More On Legal & Compliancefrom The Advisor's Professional Library
- Registration Requirements for Investment Advisor Representatives (IARs) When individuals launch an advisory firm, they must avoid marketing themselves or the firm as investment advisors before they are properly approved and registered. Otherwise, they are subject to severe penalties.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
An organization opposed to tax avoidance has released a report estimating the world’s wealthiest individuals have stashed at least $21 trillion in offshore tax havens: an amount greater than the combined GDP of the United States and Japan.
The London-based Tax Justice Network (TJN), a liberal advocacy, calls its current estimate “conservative,” and says the true figure could potentially be as high as $32 trillion, more than twice the U.S. GDP of $15 trillion. The report updates a 2005 study that put the offshore total at $11.5 trillion.
The report, prepared by by former McKinsey & Co. Chief Economist James Henry and released this week, acknowledges the difficulty in estimating numbers that are intentionally hidden by the “rich and powerful.” Consequently, it supplements data from the IMF, UN and central banks with its own data mining to indirectly establish what it considers a “base case,” or safe estimate.
Tax attorney Jim Duggan of Chicago’s Duggan Bertsch expressed skepticism of TJN’s numbers. “Many of the assets offshore are in jurisdictions with strict confidentiality law," Duggan said in a statement, "so it is difficult to accept the findings of any such report since it likely supposes too much.”
The report’s author says TJN is making its data and methods publicly available and issued a challenge:
“We believe that the resulting estimates of unrecorded capital flows and accumulated offshore wealth are the most rigorous and comprehensive ever produced. In the spirit of open research, we hereby issue an open challenge to the IMF and the World Bank—to all comers, in fact—to see if they can come up with better estimates.”
A key purpose of the report is to draw attention to tax revenue lost to the world’s poor because of the tax evasion of the rich and powerful. TJN estimates that unrecorded wealth might amount to $189 billion in annual revenue, or more than twice the amount that the rich Organization of Economic Cooperation and Development (OECD) countries give in annual foreign aid.
Duggan disputes this finding as well, saying “a strong argument can be made that these structures are indeed assisting in globalization as they are being invested into other countries around the world to promote development and economic growth.”
The report frames the lost revenue problem very differently, arguing that “if we could figure out how to tax all this offshore wealth without killing the proverbial Golden Goose, or at least entice its owners to reinvest it back home, this sector of the global underground is also easily large enough to make a significant contribution to tax justice, investment and paying the costs of global problems like climate change.”
The TJN report focuses on quantifying the offshore money more than tracing motives for offshoring the funds. The report says motives include:
- short-term speculation (“hot money”)
- longer-term portfolio diversification
- sset protection (including protection against political risks and illegality) and
- more dubious motives, like money laundering, income tax evasion, “round-tripping” (taking money offshore, dressing up in secrecy structures then pretending to be ‘foreign’ investors in order to take advantage of tax breaks and exchange rates only available to “foreigners”); back-to-back lending games; export subsidy fraud; avoidance of import duties; corruption; and more.
In an interview Friday with AdvisorOne, Duggan acknowledged the existence of financial criminality but had a different take on offshoring: “There is nothing inherently illegal whatsoever with having money outside of one’s home jurisdiction, period. Illegality comes up when someone chooses not to report that income or is evading taxes.”
“In some cases [keeping money offshore] might be advisable,” he added.
Tax Justice Network is primarily concerned with the welfare of developing nations, saying on its website that it aims to “provide a medium through which tax justice issues can be promoted within multilateral agencies such as the United Nations, the World Bank, the International Monetary Fund [IMF], the Organization for Economic Cooperation & Development and the European Union.”
According to audited income and expense information on its website, TJN is funded mainly through governmental and nongovernmental grants. The development aid arm of Norway’s foreign ministry provided the largest grant for 2011, nearly three times the funding provided by the second-largest donor, the international relief group Oxfam.