Andrea Binder is a Freigeist fellow and research group leader at the Otto Suhr Institute for Political Science at Freie Universität Berlin and author of “Offshore Finance and State Power”. Ricardo Soares de Oliveira is Professor of International African Politics at the University of Oxford and is currently writing a monograph entitled Africa Offshore.
Of all the global governance challenges discussed at the recent BRICS summit in Johannesburg, the role of offshore financial centers should have featured prominently. Instead, the issue found barely a non-binding half-paragraph on page eight of the 26-page summit statement.
An example of stunning hypocrisy is the fact that the BRICS countries rail against the global financial architecture but offer no collective action on offshore banking, and they themselves continue to be among the main users of the global financial architecture.
Data leaks such as the Pandora Papers and Panama Papers have shown how large amounts of cash end up in jurisdictions that cater to wealthy non-residents through secrecy, asset protection and tax exemptions. And according to economist Gabriel Zucman, $7.8 trillion — or about 8 percent of global wealth (and 40 percent of corporate profits) — is currently tucked away in such tax havens.
It is interesting that a significant part of this comes from BRICS countries and other developing countries. The UN Conference on Trade and Development, for example, estimates that $88.6 billion leaves Africa every year in the form of illicit capital flight, much of it ending up abroad.
The fact that this offshore world is fueled by the interests of the rich world and also significantly exacerbates global inequality should give the BRICS countries a boost.
And certainly they are quite vocal in denouncing the role of offshore finance: in the 2020 Moscow Summit Declaration, for example, the BRICS member countries reaffirmed their “commitment to combating illicit financial flows, money laundering and terrorist financing and to close cooperation within the BRICS countries”. . Financial Action Task Force (FATF) and the FATF-like regional bodies […]and other multilateral, regional and bilateral fora.” They have also rightly criticized the West for putting these mechanisms in place decades ago.
In practice, however, all global multilateral action currently being taken takes place at the level of the G7 and the Organization for Economic Co-operation and Development – even if these ambivalent reforms often protect the West’s offshore interests. According to a 2014 report by Global Financial Integrity, the BRICS are doing next to nothing despite being the world’s largest source of capital flight.
And this lack of multilateral action fits perfectly with the way individual BRICS countries have dealt with the offshore world so far.
Brazil is currently the second largest borrower in the offshore financial markets in the world. India has long accepted a double taxation treaty with Mauritius that allowed the wealthy significant foreign direct investment and tax avoidance until 2016. The country also established an offshore financial center in Gujarat. Meanwhile, Russia’s hydrocarbons are traded through opaque offshore jurisdictions, and its elites are notoriously successful in such systems. Then there’s perhaps the most significant – and counterintuitive – stakeholder in the offshore world: China. Its state-owned companies are major users of jurisdictions like the British Virgin Islands, where they register clandestine subsidiaries.
In short, the BRICS countries are just as involved in the offshore world as the Western economies they denounce. The reality is that their governments and political elites both benefit from and need offshore finance – and there are four reasons for this:
First, these countries engage in institutional arbitrage by accessing more efficient institutions abroad—and sometimes institutions that do not exist at home, such as credible treaties or an apolitical judiciary.
They are also seeking access to cheaper and less constrained funding opportunities in the offshore money markets, where they can gain access to US dollars and international investors not available onshore.
The offshore world is – as in the case of Russia since 2022 – severely affected by sanctions and also represents a lifeline for the BRICS countries, which allows punitive measures to be circumvented.
Finally, the BRICS elites often use such facilities for their own personal ends, including hiding illicit funds and assets.
Therefore, the closure of these discretionary offshore avenues may well have implications for their personal survival – or the survival of their regimes.
For this reason, the multilateral approach of the BRICS members remains rhetorical at best. And unilaterally, they either do nothing or selectively implement anti-offshore measures as political tools to consolidate regimes and punish rivals. While they continue to criticize the West, they also have few concerns about the thriving offshore roles of Hong Kong, the United Arab Emirates or Singapore.
The recent summit declaration’s vague language of “international cooperation” and “mutual legal assistance” merely clarified this and even dispensed with the previous declaration’s references to the FATF or anything that smacks of coordination with the West.
And while there has been renewed talk of de-dollarization, the BRICS countries remain interested in access to offshore dollars. In addition, several of the newly admitted states have extremely problematic records when it comes to money laundering and illicit financial flows. This is particularly true of the UAE — an aggressively growing offshore financial center with tight secrecy that the FATF has placed on its “grey list” for “strategic flaws” in its anti-money laundering efforts.
In view of all this, what are the chances of a reform initiated by the BRICS countries in this area? Realistically, the only reason they would take action is because they care about the stability of their own regime. While offshore mechanisms may appear as useful short-term leverages, their long-term effects are likely to have worrying implications for their economies. Over time, offshore finance exacerbates inequality and creates financial instability that can lead to the overthrow of regimes. Brazil experienced this firsthand in the 1982 financial crisis, which had a significant offshore component.
Of course, Russia’s reliance on offshore financial facilities to circumvent sanctions can be written off as a reformer. But one would hope that some of the others would belatedly see an enlightened self-interest in going beyond their rhetoric.
At present, however, even this seems highly unlikely, as the availability of offshore services will continue to prove beneficial in the near future while their negative impact on domestic inequality remains largely hidden from the public.
Also, tackling domestic inequality is not a major concern for many of these governments anyway.
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