Moving Money: International Financial Flows, Taxes, and Money Laundering

Allegations by political leaders and others that offshore financial centers enable multinational enterprise to avoid paying a “fair” amount of tax—and that they enable wealthy individuals to evade paying any tax, much of it on ill gotten gains—are once again garnering headlines and inspiring government action. One of the most prominent commentators on these topics, The Tax Justice Network, has recently claimed that thanks to the services of tax havens $21-$32 trillion of wealth of questionable origin remains hidden and untaxed, and that such abuse must be stopped through greater regulation. In this paper we argue that such claims rest on poor data and analysis, and on mistakes about how financial transactions, international taxation, and anti-money laundering rules actually work. We further argue that demands for more regulation without considering cost and effectiveness rely on a belief that international financial transactions are assumed illegitimate unless tightly controlled, rather than primarily reflecting the normal, legitimate workings of an efficient market. Money “moves” internationally through electrons and physically among financial institutions and non-financial institutions as part of global trade in legitimate goods and services and as part of legitimate transnational capital investment, and, regrettably, as part of criminal enterprise. Some analysts argue that the movement of a large amount of these funds through offshore financial centers (OFCs) suggests a problem with the financial system that puts “global financial capital ... beyond the control of any one national government, able effectively to cast judgment on the fiscal and monetary policies of nation states themselves through the disciplinary fear of capital flight.” Many of these analyses purport to distinguish between “onshore” transactions that are “fully * Professor of Law and Director of Financial Integrity Programs, Center for Business Law and Regulation, Case Western Reserve University. B.A. Yale; J.D. Harvard. The authors gratefully acknowledge research assistance from Brent Douglas and Joshua Brasfield, comments from Jim Bryce, Julie Hill, Matthew Christiansen, and Geoff Cook and research support from their respective deans and Jersey Finance. ** D. Paul Jones, Jr. & Charlene A. Jones Chairholder in Law & Professor of Business, University of Alabama; Research Scholar, Regulatory Studies Center, George Washington University; Senior Fellow, Reason Foundation; Senior Scholar, Mercatus Center at George Mason University. A.B. Princeton; J.D., M.Pub.Aff., The University of Texas at Austin; Ph.D. (Economics), M.I.T. 1 See, e.g., Mark P. Hampton & Jason P. Abbott, The Rise (and Fall?) of Offshore Finance in the Global Economy: Editors’ Introduction, in OFFSHORE FINANCE CENTERS AND TAX HAVENS: THE RISE OF GLOBAL CAPITAL (Mark P. Hampton & Jason P. Abbott, eds. 1999) (noting claim that “as much as half the world’s stock of money either resides in or is flowing through tax havens”). 2 Hampton & Abbott, supra note 1, at 2. See also Kern Alexander, et al., GLOBAL GOVERNANCE OF FINANCIAL SYSTEMS: THE INTERNATIONAL REGULATION OF SYSTEMIC RISK 67 (2006) (asserting that OFCs “pose a major regulatory concern because they often lack adequate regulation and present numerous obstacles to customer identification”).