A large British island which was settled by shipwrecked pilgrims in 1609. It has, most unusually, no rivers or lakes. It has a population of 65,000, and is made famous as a major offshore financial centre.
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First came the Panama Papers, then the BahamasLeaks, and now it’s the Paradise Papers. Journalists continue to shed light on and raise a public outcry over the offshore financial centres that corporations use to reduce their tax bill – something that is still being challenged in court.
A recent study has now uncovered all the world’s corporate tax havens and, for the first time, revealed the intermediary countries that companies use to funnel their money into these places.
Published on July 24 in the academic journal Scientific Reports, the paper Uncovering Offshore Financial Centers: Conduits and Sinks in the Global Corporate Ownership Network shows that offshore finance is not the exclusive business of exotic, far-flung places such as the Cayman Islands and Bermuda.
The Netherlands and the United Kingdom also play a crucial – although a heretofore obscure – role in the tax-avoidance game, acting as conduits for corporate profits as they make their way to tax havens
The existence of offshore financial centers (OFCs) affects the work of the Fund in several ways. First, a better understanding of the activities taking place in OFCs can contribute to strengthening financial system surveillance by improving abilities to identify and deal with surrounding risks at an early stage. Second, OFCs are generally used not only by major industrial countries, but also by emerging market economies whose financial systems are perhaps more vulnerable than others to reversals in capital flows, rapid accumulation of short-term debt, unhedged exposure to currency fluctuations, and selective capital account liberalization. Finally, the operation of OFCs has implications for the Fund's work on the promotion of good governance because it can reduce transparency, including through the exploitation of complex ownership structures and relationships among different jurisdictions involved.
Following discussions in various international fora, including the Fund's Interim Committee and the G-7 Ministers of Finance,1 the Financial Stability Forum (FSF) established a working group to look into the workings of OFCs and their impact on financial stability. As a result of the working group's report, the FSF has recommended a system of assessment for a number of OFCs which may have implications for the Fund's work on the assessment of financial stability in general, and for the joint IMF-World Bank Financial Sector Assessment Program (FSAP) in particular.
The purpose of this paper is to provide background information on the business of OFCs and on a number of initiatives taking place in various international fora concerning OFCs. A companion paper addresses the main policy issues stemming from a possible involvement of the Fund in the assessment of OFCs.
This paper is organized as follows.2