November 23, 2017
Monday, April 14, 2014

Offshore wealth clocks in at US$300B

Former JP Morgan Vice-President Hernán Arbizu, who has provided information on Argentine tax evasion, attends court in Buenos Aires City last year.
By Francisco Aldaya
for the Herald

Argentines’ assets abroad have grown 250 percent in the last 20 years, report

The total value of Argentines’ offshore assets as a result of capital flight reached US$298.891 billion in 2012, rising more than 250 percent from 1991, the latest report by the Economics and Finance Centre for Argentine Development (CEFID-AR) revealed.
Declared Argentine offshore wealth — based on a “significantly conservative estimate of the accumulated financial returns of assets” and not factoring in the fluctuation of the dollar’s purchasing power — clocks in at US$373.91 billion, it claimed.
CEFID-AR bases its calculation on the data collected by the country’s INDEC statistics bureau using the International Investment Position (IIP) method, but also uses the Residual Balance of Payments method, employed, among others, by the Tax Justice Network (TJN), for a more accurate reading.
The think tank’s current US$373.91 billion weighs in proportionally below the TJN’s US$399.06 billion for 2011, but well above INDEC’s US$205.73 billion for 2012.

The limitations of INDEC’s official IIP method include that it involves collecting data through surveys from the Bank for International Settlements and other financial entities, which tend to underestimate and underreport.

Eighty-five percent of offshore assets registered by INDEC are categorized as “others,” a category mainly comprised of deposits in foreign bank accounts, cash holdings abroad and investments.

The residual method, on the other hand, indirectly calculates capital flight by adding up net capital income (foreign direct investment, foreign public and private debt), the net balance of current accounts and the variation in international reserves.

CEFID-AR corrects methodological oversight by Henry in the practical effect of the 2005 sovereign debt restructuring on foreign assets, among others.

INDEC’s, CEFID-AR’s and the TJN’s studies all indicate the growth of offshore wealth by more than 250 percent since 1991, which strongly reinforces the argument that capital flight is far from a waning concern for the authorities.

The investigators cite the testimony of Hernán Arbizu, a former JP Morgan vice-president whose evidence allowed for an estimate of US$85 billion, mostly at Citibank, UBS, HSBC, Crédite Suisse and BBVA, though the report emphasizes that Arbizu is the only source of information on the magnitude of Argentines’ global bank accounts who exists.

Although the residual method captures “a portion of illicit capital flight,” the investigators recognize their inability to pin down a proportion, or hazard an estimate, of how much escapes their analysis.

Illicit culture

In the face of such limitations, which the think-tank continues to investigate, CEFID-AR nonetheless gives rough estimates on issues such as tax non-compliance in Argentina, which currently costs state coffers an annual average of 16 percent of GDP.

Further attention is drawn to the increasing impact on capital flight of illicit manoeuvres by the private sector.

Three main problems are outlined: “the great weight of commodities exports (grain and increasingly minerals); the accentuated ... economic concentration that gives a reduced number of corporations with foreign property increased relevance; intensely diluted borders that complicate fiscal controls; a relatively weak, outdated national administration of taxation and an inefficient and profoundly corrupt customs office; and the installation of a ‘culture of non-compliance’ under the stimuli of political ruptures, errors and macroeconomic failures.”

Whitewash measures, including the recently extended tax amnesty first implemented in June last year have not helped, according to the investigation, only serving to reinforce a vicious circle whereby companies actually grow dependent on their application for operations in the country to remain viable.

Out of these “the most important seems to be ... exporting contraband,” that is, the recently well-known case of exporting commodities via Paraguay or Uruguay to avoid duties. Methods include “fraud in affidavits, underbilling, triangulation via tax havens, as well as overpricing imports and the management of ‘price transfers.’”

Such manoeuvres cost an estimated seven to nine percent of Argentina’s trade balance per year, or approximately US$8.194 billion in 2010 and US$ 13.218 billion in 2012.

Offshore wealth vs GDP

The offfshore wealth to GDP ratio is “more adequate in calibrating the gravity of this phenomenon,” with Argentina taking third place in the region with 109 percent, four times that of Brazil and twice as much as Mexico. Among developing countries, Argentina fares better only than Kuwait, Panama and Trinidad and Tobago.

TJN’s James Henry told the Herald: “This is an industry specialized in sheltering the income of wealthy corporations and individuals” with an estimated aggregate of “between 21 and 32 trillion dollars” in private financial wealth.

Rudolf Elmer, a whistleblower who worked for Swiss bank Julius Baer, also commented on the transparency deficit to calculate flight: “Systemic corruption is very real: multi-national conglomerates, financial institutions and ultra-high net worth individuals have tremendous influence in the media in order to protect offshore wealth.”

The opacity in the actual amount laundered and evaded in Argentina means capital flight is significantly understated.


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