Arms smuggling. Drug running. Kleptocracy writ large.
Tax havens, from places like the U.S. Virgin Islands and Barbados to Switzerland and Jordan, aid and abet all three, offering crooks and criminals ways of escaping paying their fair share. But there’s another side effect of tax havens that has received far less attention: environmental destruction.
In a landmark new study published earlier this week in Nature Ecology & Evolution, a half-dozen researchers, led by Victor Galaz, deputy director of the Stockholm Resilience Center at Stockholm University, studied the effects tax havens have had on illegal fishing and deforestation in the Amazon. The findings were stark.
When it comes to depleting the world’s oceans, almost three-fourths of the fishing vessels implicated in illegal, unreported, and unregulated fishing either are or were registered in tax havens — Belize and Panama in particular. Tax havens also often act as “Flags of Convenience” (FOC) states, which, as the researchers wrote, are “countries to which vessel owners flag vessels and from which they can expect limited or no sanctioning mechanisms if they are identified as operating in violation to international law.”
And in Brazil, nearly 70 percent, or over $18 billion, of the foreign capital that made it to major soy and beef cultivation companies — which are among the leading causes of deforestation in the Amazon — from 2000 to 2011 came via tax havens. That figure included nearly 100 percent of foreign capital for some of the companies investigated.
The issues with relying too heavily on tax havens are numerous: corporate secrecy, avoiding paying taxes in impoverished communities, masking overall operations. But in the new study, researchers found that these facets of tax havens have the additional effect of damaging the “global environmental commons.”
The research builds on other one-off studies — tax evasion in the British Virgin Islands tied to Indonesian deforestation, shell companies involved in West African diamond mines — but it offers the most comprehensive look thus far at the environmental costs associated with tax havens, corporate secrecy, and offshore networks. (One of the largest offshore finance hubs? The United States.)
ThinkProgress spoke with Galaz about his findings, the implications, and where researchers — and the rest of us — go from here.
The findings in the study were staggering: almost $20 billion of capital transferred via tax havens to those companies pushing beef and soy cultivation in the Amazon, the majority of vessels involved in illegal fishing tied directly to tax havens. What stood out most to you? What was the most surprising?
I think it was the percentage, the very high percentage, in terms of capital flows. When you see $20 billion, or $10 billion or $18 billion, it’s like, of what? How much of the market is that? How much of their profits is that? It’s very hard to say whether these numbers are big or small, since this is a very big sector, and there’s a lack of other financial data that would give the fuller picture. But the percentage is interesting. And if you look at the illegal fishing, the number of vessels fishing illegally that are caught is very low — just over 200. Of course, there’s a data gap, because other vessels fishing illegally are probably good at getting away. But again I think what’s interesting is the percentage: 70 percent of those caught fishing illegally are tied to tax havens. So something clearly happening there.
The answer might be straightforward, but it’s simple enough — why? Why do these companies do this?
In terms of illegal fisheries, as we discuss in the article, there are many benefits to be made by flagging in both a tax haven and so-called “Flag of Convenience” state. What that allows you to do is, first of all, fish illegally without risking becoming sanctioned. And if you’re registered in a tax haven at the same time, that allows you to get involved in aggressive tax planning and gain those benefits.
In terms of the soy and beef sector, and this is the tricky thing, it’s very difficult to know exactly why this happens. It’s a very important observation, that so much capital is coming through a subsidiary company in a tax haven. We don’t prove it, but the pattern is very similar to tax planning. And the thing is — this is not illegal. And I want to be very clear about it. And maybe that’s something the Brazilian government just wanted to encourage — maybe it was a policy they encouraged just to boost that sector.
But the thing everyone should be aware of is how embedded the tax haven economy is in the global economy. A lot of foreign direct investment into Brazil is already via tax haven, so in a sense that’s normal. But that percentage in our study is significantly higher than other sectors.
Why hasn’t there been more research between tax havens or offshore networks and environmental degradation before?
I think it’s a combination of two things: a data gap, first of all, and then a mental gap. I don’t think we have been asking the right questions about tax havens before. We’re just starting to realize, and get insights about, how embedded the tax haven economy is in the global economy. When we think about tax haven jurisdictions, we just think it’s where rich individuals hide their money. But that’s not what’s happening.
What’s been the reaction to your findings thus far?
It’s been overwhelming. There’s been a lot of interest, and many requests for more information. It’s very interesting to see the environmental dimensions of tax havens so explicit. Like you said, there have been a few reports here and there by journalists, but this is showing the global dimensions of this.
When it comes to the Amazon, as you write, no tax haven can compete with the Cayman Islands. Why do these companies rely so clearly on the Cayman Islands?
To be honest, I don’t know. I haven’t looked into it in great detail. There’s probably legacy effect there, since the Cayman Islands plays a role in a lot of investment in the region anyway.
You have a series of questions at the close of your study: on how tax havens have allowed these companies to expand operations or circumvent environmental regulations, or how the loss of tax revenue may hamper environmental enforcement efforts. What are the biggest questions for you? What are the most pressing areas of concern?
I think for me the most pressing question is, in what other sectors will we be able to see this pattern? And when I say sectors, I mean sectors related to the global environment: mining, deforestation elsewhere, these big sectors that we know are modifying our planet at such a critical point of time. So just to understand the scope of that. And then of course acting on that info is what we want to happen, to have the best policies in place in the global economy. The ambition is to reach sustainable development goals — climate stability, food and health for all. What’s the role of these hidden subsidies, of these tax havens, in the global economy?
This interview has been edited and condensed for clarity.