I was somewhat surprised by a newspaper headline in January 2010, ‘Tax haven risks corruption, OECD warns Ghana’ (Mathiason 2010).1 As a researcher on offshore financial centres (OFCs), also known as tax havens, for a number of years this attribution to Ghana, as a tax haven, appeared at first glance as somewhat exceptional. There are a number of lists identifying either tax havens or OFCs but none include Ghana (see OECD 2000, p. 17, Tax Justice Network 2007, Zoromé 2007, p. 19, Palan et al. 2010, pp. 41–44).2 Consequently, a question took root in my mind: why was the Organisation for Economic Co-operation and Development (OECD), paragon of developed-state virtue, chastising Ghana? Since my initial encounter with this headline I have pursued an answer to this question, only to arrive at the title question to this intervention. In the following discussion I seek to assess the grounds for the OECD statement, and then to counter it with my own question: why not?
Let me begin then by looking at what is behind the OECD statement, and its explicit belief that the presence of an offshore financial centre ‘in the centre of the African continent’ would serve to ‘fuel corruption and crime in west Africa’ (Mathiason 2010). In 2005 Ghana initiated a process to explore the establishment of an offshore banking facility with the advice of Barclays Bank Ghana, which in turn commissioned a study from Grant Thornton Mauritius (the Mauritius office of an international accountancy firm). The feasibility study led to Barclays Bank Ghana receiving the task of outlining the legal framework necessary to establish an international banking facility in Ghana (Amediku 2006, p. 9, Barclays Bank of Ghana 2007). Following on from this assignment to help Ghana craft the necessary legislation, Barclays was granted the first offshore banking licence, as announced in a press release from the bank in 2007, ‘Barclays Bank of Ghana Limited Launches Offshore Banking in Ghana’ (Barclays Bank of Ghana 2007). The ‘Country Overview’ page for Barclays Bank in Ghana declares that:
The Barclays Offshore Banking Unit, the first of its kind in Ghana and indeed Africa South of the Sahara, continues to offer world class banking service to non-resident private clients and corporates.3
On the surface none of this information appears to be substantial grounds for the OECD concern, particularly when Jeffrey Owens, director of the OECD's Centre for Tax Policy and Administration, was quoted in that same newspaper article to the effect that government officials in Ghana were ‘aware of the risks they are running’ (Mathiason 2010). The risks as well as the benefits connected with an offshore financial centre were outlined in a Bank of Ghana study on the ‘Development of offshore financial services centre in Ghana: issues and implications’, produced as guidance for establishing an OFC in Ghana (Amediku 2006). First, this document included the standard disclaimer that it represents the views of its author and not necessarily the views of the organisation for which it was prepared and that statement is accompanied by a statement on the cover page indicating that the Working Paper series of the Bank of Ghana is ‘intended to provide analytical information to support the work of the Monetary Policy Committee’ (Amediku 2006, p. 1). The objective is reasonably satisfied in this particular study, which started from a description of the international financial services centre (IFSC) followed by a description of the institutional structures (infrastructure) necessary to support the IFSC – regulatory, organisational and operational. After setting out the responsibilities for oversight expected from the Bank of Ghana itself the study concludes with several questions ‘for further interdisciplinary research’ (Amediku 2006, p. 34).
Successful OFCs, as such, are for the most part small jurisdictions with limited economic development options. As discussed elsewhere in more detail, the OFC is particularly suited to Caribbean and Pacific islands because it is a low-impact, high-gain strategy for economic development; there is a limited direct impact to local businesses and environment while at the same time the OFC generates rents for the government from licence fees and income taxes from firms operating in the offshore sector (Vlcek 2008, pp. 24–25). These benefits were also noted in the Bank of Ghana report, which then referred to Cyprus and Grenada as examples of some of the beneficial aspects of hosting an OFC (Amediku 2006, pp. 20–21). These two small states are not necessarily the best examples for use in a study to promote the establishment of a new OFC. Cyprus effectively removed the ‘offshore’ distinction from its financial sector in connection with EU accession, while Grenada experienced a number of financial fraud and government corruption scandals in connection with its offshore banking industry, leaving only one (which was under investigation) operating at the end of 2004 (Bureau for International Narcotics and Law Enforcement Affairs 2005, pp. 165–168, 211–213). The final offshore bank operating in Grenada has since closed, leaving the sector dormant though there have been statements indicating the government's intentions for reviving the offshore centre (Caribbean Financial Action Task Force 2009, pp. 7, 20).
If, however, the definitional straitjacket for the OFC that constrains it to the small non-OECD jurisdiction is released (as implied by the section titles and analysis of the Bank of Ghana study) and the jurisdiction is identified simply as an international financial centre, then the range of identifiable locations grows to include London (in the larger UK economy), New York (in the much larger US economy) and Tokyo (in the larger Japan economy). Hence the underlying logic for an OFC in Ghana is not, and should not be, to provide a significant source of government revenue from licence fees or increased employment opportunities for citizens with a university education as was the rationale in small jurisdictions. Rather it should be understood as an avenue to provide a domestic (and regional) financial intermediation capacity, to establish the foundation on which to build a more expansive domestic capital market in support of economic development.
Similar to the public statement of the OECD concerning the economic hazards represented by the presence of an OFC in Ghana, reports from research centres and NGOs also have expressed a concern for the potential negative consequences from its establishment for Ghana, and Africa more generally. Among the specific points made are: that it will facilitate capital flight, corruption and tax evasion; that an OFC in Ghana will increase these risks to the region; that insufficient regulatory enforcement may not prevent Ghanaian residents from using these ‘offshore’ banking facilities; and the risk that the presence of the OFC ‘could contribute to financial instability’ in Ghana (Christensen 2009, p. 18, Prichard and Bentum 2009, p. 44). Yet the potential problems that are attributed to the presence of an OFC in Ghana already exist; they are not a direct result of the establishment of the OFC and consequently the problems of capital flight, corruption and tax evasion may or may not increase due to its proximity. The concern, for example, with the lost potential tax revenue due to capital flight is outlined in some detail by the Tax Justice Network report Closing the floodgates (Christensen et al. 2007). In turn this report may be compared to a similar report produced by the US-based non-governmental organisation (NGO), Global Financial Integrity (Kar and Cartwright-Smith 2007).4 The already existing capital flight identified in these reports utilised the financial services offered by more distant financial centres in Europe and North America without difficulty. In which case, beyond the question of effective enforcement raised by Prichard and Bentum, to what extent would capital flight increase from the presence of the OFC in Ghana as compared to the already existing capital flows labelled in these reports as capital flight?
The alternative view is that the presence of a more local OFC offers an increased potential that this capital, if placed in Ghana's offshore banks rather than using a bank in Europe or North America, could be used for investments in Africa, a point noted by the Bank of Ghana study (Amediku 2006). Prichard and Bentum identified this possibility as an ‘international benefit’ in their report and stated that ‘there is anecdotal evidence from elsewhere in the world that IFSC [international financial services centre] can serve to deepen regional capital markets and expand access to capital’ (Prichard and Bentum 2009, p. 45). In fact, the evidence is slightly more substantial than suggested by the word ‘anecdotal’ as indicated by the published work of several economists (Desai et al. 2004, Desai et al. 2006, Dharmapala and Hines Jr 2009). And it could be argued that the potential for investments and loans in and for Africa is a more likely occurrence from an offshore bank located in Ghana, than it is from an offshore bank located in Geneva, London or New York.
The assumption that the presence of a more convenient OFC will lead to increased capital flight means that the authors also assume that there is capital in Ghana and West Africa that would flee the region, if only the destination bank were closer. This assumption is based on a logic of geography, that physical distance matters, when anyone with the disposable income available to send it abroad presumably also has sufficient disposable income to establish and use an Internet-accessible bank account. J.C. Sharman has already established that it is possible to establish an offshore business company and open an account with a foreign bank in some jurisdictions without the rigorous identity verification procedures expected of anti-money laundering recommendations (Sharman 2010). It is interesting also to note that the more lenient jurisdictions in this regard were the US and UK and not the frequently criticised small islands of the Caribbean.
The fact of the matter is that simply establishing and maintaining the surveillance mechanisms expected in order to comply with the Financial Action Task Force's (FATF) Forty + Nine Recommendations against money laundering and terrorist finance are just as much about constructing an aura of compliance as they are about actually interdicting and preventing financial criminality. As amply demonstrated by the past misdeeds of Sani Abacha (Nigeria), Ferdinand Marcos (Philippines) and Mobutu Sese Seko (Zaire, now the Democratic Republic of the Congo), OECD member states have not been particularly exemplary in demonstrating financial probity when accepting suspicious money. Now the response of the financial industry in the developed economies may be that these example kleptocratic rulers are old cases that pre-date the FATF (established in 1989), and that the regulatory system against financial crimes has been improved since that time. However, as a point of fact the Forty Recommendations were first implemented to deal with illegal drugs-related money laundering in the founding members of the FATF (16 developed states, including the G7), yet the system was in place and failed to identify the illicit assets of either Charles Taylor (Liberia) or Teodoro Obiang Nguema Mbasogo (Equatorial Guinea) when they were placed in banks in Europe and North America. These two examples indicate that yes, in the end, the structures created to interdict such financial misdeeds come into play, but not necessarily as a result of the ongoing surveillance by government regulators over the banking industry or the banks’ regulatory compliance. Rather it was civil society, through the medium of Global Witness and the media in the case of Obiang, and United Nations and Liberian efforts to recover the assets accumulated by Taylor after his arrest and transfer to the Hague (Silverstein 2003, Carvajal 2010).
On reflection, would an OFC in Ghana provide more positives than negatives for the Ghanaian economy? The meta-question here, with respect to the negative consequences attributed to the presence and operations of the OFC in the global political economy, which came first, the supply or the demand? John Christensen, for example, highlights a claim that tax havens provide ‘a supply-side stimulus that encourages and enables grand-scale corruption’ in Africa (Christensen 2009, p. 2). A consideration of Ronen Palan's genealogy of the international financial centre suggests that there was in fact a demand for the London banks to carve out a space to seek profit from the creation of the Euromarkets, which in turn Palan argues brought about the structure of OFCs as they exist today (Palan 2010). But in a deeper historical perspective, the demand is far older and created by citizens seeking a safe place to protect their assets away from the rapacious, whether king, bandit or foraging army. There is, for example, the Swiss banking industry developing in response to French nobility seeking a haven from the King's tax farmers a century before the Revolution (Faith 1982, pp. 19–22). But looking even further back in time there is the example of the Hoxne Hoard. Now resident in the British Museum, it was discovered in Suffolk in 1992 and contained coins, jewellery, silver and gold dated to the early fifth century. It is believed that this cache was buried about the time that the Roman Empire withdrew from Britain, and the owner never returned to retrieve it (British Museum 2000). The point here is that eliminating the supply of offshore banking via some international arrangement should not be seen as simultaneously removing the demand for such financial services or the desire to keep the assets one has acquired for one's self.
It needs to be acknowledged that any author's approach to discussing, analysing or critiquing the structure of international finance variously named the offshore financial centre (OFC), tax haven, secrecy haven or secrecy jurisdiction is privileged by the author's personal viewpoint against or in support of its existence.5 That attitude reflects the author's social and political position in the world, their personal knowledge and life experience and probably their place of birth (and source of political awareness) as shaping a sense of moral awareness of the world. Consequently, whatever claim may be made for rational and impartial judgment is by its very nature coloured and shaped (biased) by the author's worldview. It is that worldview that determines the theoretical approach deployed in any analysis, and the nature of the argument made justifying the conclusion reached and recommendations proposed for further action. There is at the same time operating here socially constructed understandings for the nature of the licit/illicit and legitimate/illegitimate, which, it may be argued by some, are grounded on a distinction based in law. However, the law itself is a social construct created by the state to serve the needs of the state as much as it may serve the needs of society. Hence we have the construction of ‘money laundering’ as a distinct criminal activity independent of the actions that generated the income (Hülsse 2007, Alldridge 2008).
Clearly these points apply to any political economy study; nonetheless they bear repeating in order to emphasise first, that there is no consensus position for this specific topic of inquiry; and second, that the nature of the analysis deployed is very much situated in a developed-state context, critiquing the developed sub-state jurisdictions and developing state (and sub-state) jurisdictions that are utilising existing features of the international system/political economy for their benefit as opposed to benefiting the core developed states. The source for most criticisms of offshore finance rests in these developed states, where the harm that is generated by an OFC is its ‘lost tax revenue’. The incorporation of an argument that the OFC is detrimental to development and to the developing economy serves to mask the persistent and overarching agenda that offshore finance, in the form of these ‘tax havens’, is detrimental to the developed state economy. Or more precisely, their financial services are detrimental to the ability of the developed state to prevent its residents from engaging in capital flight and avoiding taxes. The revival of the OECD campaign against tax competition and OFCs by the G20 at its 2009 London meeting was very much about the tax revenue demands of the developed states (France, Germany). And it was a developing state, China, that hindered the efforts of the G7 on this agenda item (Fidler and Batson 2009).
All that said, the presumption made by the OECD, representing predominantly the core developed states, and the referenced NGOs (resident in these same developed states) is that the presence of an OFC in Ghana is inherently bad, both for Ghana and for West Africa. Nonetheless, as long as offshore financial services exist at some place in the world economy the negative features attributed to them would remain present while any localised economic benefits produced by the OFC would accumulate in that place. The creation of an OFC in Ghana represents an effort to capture the rents of offshore finance in Ghana, rather than leaving them to be collected in other locations. In other words, rather than continuing to enrich the banks in Europe and North America, the OFC in Ghana offers the opportunity to keep the wealth in Africa and potentially it will also attract money avoiding taxes in Europe and North America.
Note on contributor
William Vlcek is Lecturer in International Relations at the University of St Andrews and was previously Lecturer in International Politics at the Institute of Commonwealth Studies, University of London. The author of Offshore finance and small states: sovereignty, size and money (Palgrave 2008), he has published on offshore financial centres and international campaigns against money laundering and terrorist finance in a variety of academic journals.