Multi-trillion dollars of illegal cash have leaked from nations and landed in offshore tax havens. These outflows have been one of the reasons for below-par economic performance. Global authorities have carried out only limited measures to counter the corruption, even though illegal outflows have contributed to the impoverishment of several emerging countries.
The amounts are staggering. Gabriel Zucman, assistant professor of economics at University of California, Berkeley, estimates that 8 per cent of the world’s financial wealth – or $7.6 trillion – was held in tax havens in 2014. Companies registered offshore also owned an estimated $2 trillion in real estate, equities, gold, art, jewellery, yachts and other assets. Today, four years on, money transfers and soaring equity, real estate and other asset prices could easily have raised the total value of those assets to $12 to $15 trillion.
A sizeable proportion of the financial wealth gravitating to the Cayman Islands, Panama, Switzerland, Liechtenstein, Channel Islands and Asia originally came from Russia, China, the Middle East, Africa, Central and South America.
Two newly published books show how the leakage of this money has damaged the productivity of economies and contributed to financial booms and busts.
Oliver Bullough’s Moneyland – Why Thieves & Crooks Now Rule The World & How To Take It Back (Profile Books) concentrates on corrupt eastern European, Middle Eastern and African dictators and Russian oligarchs. These greedy sociopathic individuals have milked their countries’ wealth over the past three decades, leaving the majority of their people poverty-stricken or trapped in wars.
Brendan Brown’s The Case Against 2 Per Cent Inflation – From Negative Interest Rates to a 21st Century Gold Standard (Palgrave Macmillan) describes how the US Federal Reserve, European Central Bank, Bank of Japan and Bank of England have inadvertently contributed to the Wild West financial behaviour. Some three decades ago, central banks decided to abandon the discipline of monetary control. The abrogation of this responsibility ultimately led to the financial crash of 2008. Instead of monetary controls, central banks pursued an inflation target of 2 per cent as they feared deflation and depression. This target accompanied a monetary experiment of negative interest rates and so-called quantitative easing (QE) that flooded financial markets and bolstered zombie banks with cheap money. There were several unintended consequences. The flood of money landed in financial assets causing property, bond equity art and commodity prices to soar as waves of speculation moved from one asset to another.
Central bank policies widened inequality and could cause another crash
Shrewd accountants, lawyers, financial advisors and bankers encouraged the wealthy to avoid tax and use offshore centres to place trillions of dollars in global markets. Fortunately for central bankers, globalisation (notably competition from China and Amazon) kept goods inflation in check. But the 2 per cent targeting and consequent financial asset inflation, have the concurrent risk of a crash in coming years.
The surge in wealth for the minority has widened inequality. Divisions between the rich and poor, the elitists and ordinary workers, worsened. Resentment grew and led eventually to Brexit, the election of Donald Trump, and extreme political factions in Italy, France, Austria, Hungary, the Netherlands and more recently, Germany and Sweden.
Exceedingly difficult to recover trillions of leaked cash
So how do the authorities retrieve money or at least control the expansion of “Moneyland” in the bubble-like world of the super rich and their advisors? With great difficulty, writes Mr Bullough. The UK, for example, passed the Criminal Finances Bill that heralded a draconian antidote to endemic money laundering and tax evasion that had taken place over many years. Much tighter regulations on financial institutions, estate agents, lawyers and accountants as well as publicity of the Bill, helped reduce laundered money. But it has been exceedingly difficult to prosecute alleged wrongdoers. In order to book a foreign crook in Britain, you need to prove their money originated in a crime. This requires evidence from overseas. The UK government says it intends targeting oligarchs following the poisonings in Salisbury. But to prosecute a Kremlin insider, you need evidence from the Kremlin, which so far has not co-operated, he writes. France, Switzerland and the Netherlands have encountered similar problems. Only US prosecutors have managed a result— an out-of-court settlement.
Mr Brown believes that the economic cycle could cure the disease. Massive debt worldwide and inflated asset prices are warning signs of another financial crash. That would be followed by monetary chaos that could cause the authorities to revert to a gold standard, Mr Brown believes. The problem with that scenario, however, is that the contraction in “Moneyland” would be accompanied by financial dislocation and recessions in global economies.
- The writer is Business Times’ London correspondent and author of Jack of Diamonds, which tells the nefarious history of a Russian oligarch.