And $2.3 trillion is probably a low estimate. The SNB data are on the whole of good quality: they cover all of the banks operating in Switzerland—including branches of foreign banks—and all of the wealth that is held in them. But they aren’t perfect—no economic statistics are; they are all constructions whose meanings and limitations must be carefully understood. In this instance, the fundamental problem is that statisticians are not looking to identify the true beneficiaries of the wealth. This has two consequences. The first is that some assets attributed to Swiss citizens in reality belong to foreigners. I have attempted to take this problem into account, but there is no completely satisfactory way to correct it, and the correction I propose may be insufficient.10
Figure 2: Swiss accounts (spring 2015). In 2015 banks domiciled in Switzerland managed $2.3 trillion belonging to nonresidents. Within this total, $1.3 trillion belonged to Europeans. Forty percent of the wealth managed in Switzerland is placed in mutual funds, principally in Luxembourg.
Source: Swiss National Bank and calculations by the author (see online annex to chapter 1, www.gabriel-zucman.eu).
More important, 60% of the assets belonging to foreigners are attributed to the British Virgin Islands, Panama, and other territories where shell corporations, trusts, and foundations are domiciled. To know who really owns wealth in Switzerland, we need to make some assumptions about who is behind these shell entities. After examining the available evidence, the assumption I retain is that the wealth held through shell companies belongs to American, British, or German citizens in the same proportion as the directly held wealth does, with a correction to take into account that since 2005 Europeans have had greater incentives to use shell companies and Gulf countries have less incentive to do so.11 This involves a margin of error, but despite this limitation, the amounts in figure 2 are the best we have available; they are the only ones that are based on the use of a transparent methodology applied to official statistics, covering all Swiss banks, and not on the hearsay or the so-called expertise of groups of advisers or lawyers whose interests are not always clear.
From this figure we can learn two things. First, contrary to a tenacious legend, a bit more than 50% of the total, or around $1.3 trillion, still belongs to Europeans, and not to Russian oligarchs or African dictators. This proves something obvious: Europe is the richest region of the world; the total private wealth on the Continent is more than ten times greater than that of Russia or Africa, and it is not at all surprising that this is reflected in the absolute levels of offshore wealth. The three countries that border Switzerland are logically in the lead—Germany with around $260 billion, France with $240 billion, and Italy with $140 billion.
But the second thing we learn is that the predominant weight of European capital in no way means that tax evasion isn’t a problem for Africa or for developing countries in general. Relative to their size, the assets that these countries hold in Switzerland are impressive, and the trend is disturbing. With more than $150 billion in Switzerland—more than the United States has, a country whose GDP is seven times higher—the African continent is the economy most affected by tax evasion. If the current trend is sustained, emerging countries will overtake Europe and North America by the end of the decade. And the consequences of tax fraud are even more serious for developing countries—which lack basic infrastructure and public services such as health care and education—than for rich countries.
What investments do foreigners make from their hidden accounts? In the spring of 2015, out of the total $2.3 trillion held in Switzerland, scarcely $250 billion takes the form of term deposits in Swiss banks. The rest is invested in financial securities: stocks, bonds, and above all mutual funds. Among those funds, Luxembourg holds the lion’s share, with around $750 billion.
So today the majority of Swiss bank customers are Europeans, who for the most part control their assets through trusts and shell corporations domiciled in the British Virgin Islands, which provide them with the same level of anonymity as in the time of numbered accounts. Their favorite investment is in Luxembourg funds, on which they pay absolutely no tax.
TWO
The Missing Wealth of Nations
At the heart of offshore tax evasion is the sinister trio of the Virgin Islands, Luxembourg, and Switzerland. But what is the cost of offshore tax evasion throughout all the tax havens in the world? By failing to tackle tax evasion, how much are governments around the world losing? The available data are too imperfect for an exact, definitive answer, but through a detailed investigation of the available statistics, we can come up with a reliable estimate.
However imperfect, this investigation unveils the extent of tax evasion better than any stolen files or hidden data, which—despite sometimes comprising hundreds of gigabytes—are by nature very incomplete. And since a well-documented estimate is an essential step in calculating how much governments have to gain by imposing penalties on uncooperative tax havens, such an estimate is a concrete advance in the fight against tax evasion.
Eight Percent of the Financial Wealth of Households
To estimate the global cost of offshore tax evasion, we need to know two things: the amount of assets held in tax havens throughout the world, and how much additional taxes would be paid if all this wealth were declared.
Starting with the amount of offshore wealth, my calculations indicate that globally around 8% of households’ financial wealth is held in tax havens. What does this mean in concrete terms? The financial wealth of households is the sum of all the bank deposits, portfolios of stocks and bonds, shares in mutual funds, and insurance contracts held by individuals throughout the world, net of any debt. At the beginning of 2014, according to the national balance sheets published by organizations such as the Federal Reserve in the United States and the Office for National Statistics in the United Kingdom, global household financial wealth amounted to about $95.5 trillion. Out of this total, I estimate that 8%, or $7.6 trillion, is held in accounts located in tax havens. This is a large sum. As a point of comparison, the total public debt of Greece—which plays a central role in the current European crisis—is about $350 billion.
As we have seen, the assets held in Switzerland are as high as $2.3 trillion—or close to a third of the total amount of offshore wealth. The rest is located in other tax havens that provide private banking services for high net-worth individuals, the main players being Singapore, Hong Kong, the Bahamas, the Cayman Islands, Luxembourg, and Jersey (see fig. 3). Remember, though, that the distinction between Switzerland and other tax havens doesn’t really make much sense: a large part of the assets registered in Singapore or Hong Kong are in reality managed by Swiss banks, sometimes directly from Zurich and Geneva.
Figure 3: Financial wealth in tax havens (2014). In 2014 on a global scale, households on average owned 8% of their financial wealth through bank accounts in tax havens. One-third of the world’s offshore wealth was in Switzerland.
Source: Country balance sheets, SNB, and calculations by the author (see online appendix to chapter 2, www.gabriel-zucman.eu).
Only Switzerland (and to a lesser extent Luxembourg), however, provides direct information on the stocks of offshore fortunes managed by domestic banks. To have a sense of the global amount of assets held in tax havens, one has to use indirect methods.
Here is how I proceeded.12 I started with the observation—obvious in light of the Swiss case—that wealthy households do not use tax havens to let millions of dollars sleep in savings accounts that earn little or no interest. From their offshore accounts, they essentially make the same investments they do from banks located in London, New York, or Sydney: they buy financial securities—that is, stocks, bonds, and, above all, shares in mutual funds. The money in tax havens doesn’t sleep. It is invested in international financial markets.
Now, it so happens that these investments cause anomalies in the international investment positions of countries—the balance sheets that record the assets and liabilities that nations have vis-
à-vis one another. The following example shows it in a simple way: let’s imagine a British person who holds in her Swiss bank account a portfolio of American securities—for example, stock in Google. What information is recorded in each country’s balance sheet? In the United States, a liability: American statisticians see that foreigners hold US equities. In Switzerland, nothing at all, and for a reason: the Swiss statisticians see some Google stock deposited in a Swiss bank, but they see that the stock belongs to a UK resident—and so they are neither assets nor liabilities for Switzerland. In the United Kingdom, nothing is registered, either, but wrongly this time: the Office for National Statistics should record an asset for the United Kingdom, but it can’t, because it has no way of knowing that the British person has Google stock in her Geneva account.
As we can see, an anomaly arises—more liabilities than assets will tend to be recorded on a global level. And, in fact, for as far back as statistics go, there is a “hole”: if we look at the world balance sheet, more financial securities are recorded as liabilities than as assets, as if planet Earth were in part held by Mars.13 It is this imbalance that serves as the point of departure for my estimate of the amount of wealth held in tax havens globally.
The Luxembourg Chasm
At this juncture, the essential question is as follows: How can we be sure that the gap between assets and liabilities indeed reflects the money held offshore all over the world, and not other important statistical issues that might have nothing to do with it? The answer is—and this is where the investigation becomes interesting—that the money doesn’t evaporate randomly into the ether, but instead follows a precise pattern of tax evasion.
Let’s ask the Luxembourg statisticians how much in shares of mutual funds domiciled in the Grand Duchy are in circulation throughout the world. Their response at the beginning of 2015: $3.5 trillion. Now let’s look at the shares of Luxembourg funds that are recorded as assets in all countries. In principle, this should be exactly $3.5 trillion, but in fact we find barely $2 trillion recorded. In other words, $1.5 trillion have no identifiable owners in global statistics. This is the big problem. And the same problem appears in the two other places where most of the world’s mutual funds are domiciled, Ireland and the Cayman Islands. The funds incorporated in those countries manage trillions. But we don’t know who owns them. The bulk of the world’s asset/liability imbalance comes out of this.
Now, recall that the preferred investment of Swiss bank account holders is precisely buying into mutual funds, notably in Luxembourg and Ireland. Such investments, by nature, are properly recorded as liabilities (in Luxembourg and Ireland) but nowhere as assets. In other words, when we look at them in detail, the global statistical anomalies are nothing other than the mirror image of the investments made by individuals via their offshore accounts. This is why the global asset/liability imbalance, which amounted to $6.1 trillion in 2014, provides a reasonable estimate of the amount of offshore portfolios owned by households all over the world.
By construction, this method captures only a single type of wealth: financial securities. It doesn’t tell us anything, for example, about the amount of regular bank deposits (such as term deposits or commercial deposits) held in places like the Cayman Islands. In the case of Switzerland, such deposits amount to only a tenth of total offshore wealth. Data nonetheless seem to indicate that the amount of bank deposits is relatively larger in other tax havens, notably because most of them are able to provide an interest rate that is a bit higher than in Switzerland. The Bank for International Settlements (BIS) and a number of national central banks provide data suggesting that the amount in individuals’ hidden bank deposits was on the order of $1.5 trillion in 2014.
And so the total amount of private offshore wealth reaches $7.6 trillion, $1.5 trillion in the form of more or less “dormant,” low-yield bank deposits, and $6.1 trillion invested in stocks, bonds, and mutual funds. This equals a total of 8% of the global financial wealth of households.
Let’s be clear: this is not a mathematical truth, but an estimate. There are a number of uncertainties that must be pointed out. First, most of the world’s havens do not publish many useful statistics. It’s a shame—almost all countries conduct censuses of the wealth managed by domestic financial institutions, but almost none publishes any results on the wealth that belongs to foreigners. The United States, for example, does not disclose the assets held in Florida banks by, say, Latin American residents. The only exception, apart from Switzerland, is Luxembourg, which has recently started releasing information similar to that published by the Swiss National Bank.14 According to the latest available data, foreign households have $370 billion in the Grand Duchy. This is less than in Switzerland, but Luxembourg—with half a million inhabitants and with an annual income of about $35 billion—is a very small country. In any case, apart from Switzerland and Luxembourg, offshore wealth cannot be directly measured today. Second, the indirect sources of information that I use to bridge this gap—the international investment positions of countries—have known issues, and therefore my estimate involves a margin of error, as is the case with any attempt to capture the unreported economy. It is not possible to say today whether the world’s offshore wealth is $7.6 trillion or $7 trillion or $8 trillion: all three figures are just as likely. We can, however, rule out a grand total that would be much less or much more, because that would be inconsistent with the direct information published on the amount and nature of wealth held in Switzerland, as well as with what available country balance sheets—and their inconsistencies—suggest.
$7.6 Trillion or $21 Trillion?
Among the set of alternative estimates that have been produced over the years, James Henry’s—which made headlines around the world in the summer of 2012—is perhaps the most widely quoted. I would like to briefly explain why, however, it seems excessive to me. Henry found between $21 and $32 trillion in offshore wealth, or three to four times more than what I find. He gets to the figure of $21 trillion in two stages.15 He starts with the overall amount of cross-border bank deposits—that is, checking and savings accounts held by German corporations in French banks, by English households in Swiss banks, and so on. According to the figures of the BIS, these deposits amount to a total of around $7 trillion. As we have seen, wealthy individuals do not use tax havens to let their money sleep in low-yield bank accounts; for the most part, they make financial investments. In order to account for them, Henry multiplies the amount of bank deposits by three, relying in this on studies according to which the financial wealth of the rich is generally made up of one-third bank deposits and two-thirds stocks, bonds, and shares in mutual funds: $7 trillion times 3 equals $21 trillion.
This method has the merit of being transparent, of being based on statistics accessible to all, and of enabling a reasoned debate. Nonetheless, it remains quite unsatisfying. First, the figure of $7 trillion greatly overestimates the value of the bank deposits held by households in tax havens. It includes many legitimate corporate bank accounts: German companies sometimes need to have an account in Paris, and hedge funds in the Cayman Islands often keep their cash in London or New York. This may represent spectacular amounts of money, but it has nothing to do with the tax fraud of high net-worth individuals.
The BIS doesn’t tell us what percentage of the $7 trillion in international bank deposits belongs to potential defrauders. This is unfortunate, but it is not a reason to ignore the problem or assume that 100% of the money belongs to them. Financial globalization cannot be summed up by tax evasion. The most rational way to proceed consists of consulting the data published by the central banks of each country. It so happens that in most countries, the majority of bank deposits belong to financial companies (like brokers), insurance companies, investment funds, or nonfinancial companies—not to individuals, even camouflaged behind trusts or shell corporations.
As for the portfolios of financial securities held offshore, the problem is as follows: if, as Henry estimates, these assets are as hig
h as $14 trillion, then the asset/liability anomalies should be two times higher than those that we observe in the data, because all the financial securities held by households outside their countries of residence are recorded as liabilities of nations but not as assets. Henry doesn’t explain how his estimate can be reconciled with the existing data on this subject.
And the gap between my estimate and Henry’s cannot be explained by trusts and their equivalent. Shell corporations, foundations, and trusts do not constitute wealth per se; they are structures used to disconnect wealth from its beneficial owners. Their worth derives from the financial securities that are attributed to them. Those securities, from the moment they are held in offshore accounts, are recorded as liabilities but not as assets for countries, exactly like those held in their own name by individuals. They are thus captured by my estimation technique.
An a Minima Estimate
Even if the order of grandeur that I propose—8% of the financial holdings of households, or $7.6 trillion in 2014—seems more credible to me than the dozens of trillions that James Henry and others suggest, my estimate is no doubt a minima. The method that I use, in fact, excludes a certain amount of wealth.
The Hidden Wealth of Nations Page 4