The dark side of tax havens in money laundering, capital flight and corruption in developing countries: some evidence from Nigeria
| DOI | https://doi.org/10.1108/JFC-02-2021-0044 |
| Published date | 21 June 2021 |
| Date | 21 June 2021 |
| Pages | 62-100 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial crime |
| Author | Olatunde Julius Otusanya,Gbadegesin Babatunde Adeyeye |
The dark side of tax havens in
money laundering, capital flight
and corruption in developing
countries: some evidence
from Nigeria
Olatunde Julius Otusanya and Gbadegesin Babatunde Adeyeye
Department of Accounting, Faculty of Management Sciences, University of Lagos,
Lagos, Nigeria
Abstract
Purpose –This paper aims to assess the role of secrecy jurisdictions in providin g supply-side stimulants for illicit
financial flows from developing countries and how the tax havens structures shape the role of actors. Specifically
focussing on decades of trade liberalisation and markets, and of increasingly rapid movement of people, capital and
information across regions and around the globe, the paper draws on the political economy theory of globalisation
to illuminate the connections between capital flight, money laundering and global offshore financial centres (OFCs).
Design/methodology/approach –The paper uses publicly available evidenceto shed light on the role
played by taxhavens in facilitating money laundering,capital flight and corruption. The issues are illustrated
with the aid of case studies.
Findings –The evidence shows that, in pursuit of organisational and personal interest, the tax havens
create enabling structures that support illicit activities of the politicaland economic elites from developing
countries. The paper further argues that the supply-side of corruption severely limits the possibilities of
preventingcorruption in developing countries.
Research limitations/implications –The paper uses publiclyavailable evidence to illuminate the role
played by OFCsin facilitating elite corruption andmoney laundering practices.
Practical implications –It is impossible to quantify the volume of money laundered, but it has been
estimatedthat money laundering may account for as muchas 5% of the world economy.
Social implications –The paper, therefore, suggeststhat unless this supply-side of corruption is tackled
there is little prospect for an end to aid dependency and the creation of economicallystable and democratic
states in developingcountries.
Originality/value –The paper examines predatorypractices of the international financial industry in tax
havens and OFCs in facilitatingmoney laundering, corruption and capitalflight and the challenges posed for
the economicdevelopment of developing countries.
Keywords Money laundering, Tax havens, Globalisation, Capital flight, Corruption,
Developing countries, Nigeria
Paper type Research paper
1. Introduction
The fundamental nature of corruption and money laundering has changed over the years
and has varied with the social and historicalcontext with which it has been associated. Two
The authors wish to thank the anonymous reviewers, the editor of JFC (Professo r Barry Rider) for their
invaluable and illuminating comments on this paper and Angela Futter for her intellectual support.
JFC
29,1
62
Journalof Financial Crime
Vol.29 No. 1, 2022
pp. 62-100
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-02-2021-0044
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
decades of liberalisation of politics and markets, and of increasingly rapid movement of
people, capital and information across regions and around the globe, have shaped societies
in all parts of the world. In the era of electronic transfers of money and easy mobility of
capital, money laundering is considered to be a major challenge as it has the capacity to
finance corruption, narcotics, smuggling, theft, crime, private armies, pervert democracy
and fuel inequalities (Sikka, 2008;Otusanya and Lauwo, 2012;Hendriyetty and Grewal,
2017). Money laundering is facilitatedby banks, financial services companies, multinational
corporations, shell companies and networks of business advisers and professionals
(AAPPG, 2006;Sikka,2008;Otusanya et al.,2012;Moore et al.,2018).
A number of commentators have argued thatthese developments have been accompanied
by renewed worries about money laundering, corruption and capital flight. New
opportunitiesto pursue wealth and power abound,but so do new ways to use and exchange
them illicitly, and to move the proceeds across borders almost instantaneously (Johnston,
2005;Young, 2013). These practicesbenefit the few at the expense of the many,it delays and
distortseconomic development, pre-emptsbasic rights and due processand diverts resources
from basicservices, internationalaid and whole economies (Otusanyaand Lauwo, 2012).
Money laundering affects a country’s economy by increasing shadow economy and
criminal activities, illicit flows and impeding tax collection (Hendriyetty and Grewal, 2017).
The biggest issue is not the use of sophisticated tax avoidance schemes or tax evasion, but
the rather capital flight from developing to developed countries (Palan et al.,2010;Moore
et al.,2018). Since 1980, an estimated $1.3tn in illicit funds has been lost from sub-Saharan
Africa, withNigeria as one of the top four emitters of illegal flowsin Africa, along with South
Africa, the Democratic Republic of Congo (DRC) and Ethiopia (Business Day, 2020). Some
authoritieseven consider it the “single greatestobstacle to economic and socialdevelopment”
citing billions in government resources lost in the account of it-resources that would
otherwise be spent on education, health and other social programmes (United Nations and
World Bank,2007;Neu et al.,2013;African UnionCommission, 2019). Hence,the mobilisation
of adequate resources is essential for Africa to emerge from its weak economic conditions,
and increasethe level of development of its populations (African UnionCommission, 2019).
There are many obstacles to overcome in building an effective anti-corruption regime,
and tax havens must count as amongst the mostsignificant hurdles (Otusanya and Lauwo,
2012;Young, 2013;Mugarura, 2017). Financial criminals use banks to transfer funds
through legitimate accounts, dormant accounts, telegraphic transfers and money service
businesses (D’Souza, 2012;Young, 2013). It has been argued that tax havenshave played a
significant role in shaping the economies of developed countries. They may play an even
greater role in shapingthe lives of those who live in developing countries (Palan et al., 2010).
A number of literature have described how money laundering, capital flight and
corruption have become a burden on developing countries (Johnston, 2005;AAPPG, 2006;
Sikka, 2008;Palan et al.,2010;D’Souza, 2012;Otusanya and Lauwo, 2012;Otusanya et al.,
2012;Young, 2013;Mooreet al.,2018;Otusanya and Lauwo,2019). No credible estimates are
available as to the volume of money laundering or its distribution across countries and
activities (Reuter and Truman, 2004;Neu et al.,2013;Hendriyetty and Grewal, 2017). While
it is difficult to estimate the amount of money movedthrough the banking system, evidence
suggests that there is the need to strengthen regulatory and procedural guidelines to deal
with the problem.
Available evidence has revealed that nearly all the money looted or stolen from the
developing countries by African leaders found its way into secret banks in some offshore
financial centres (OFCs) [1] in developed countries (Oxfam, 2000;Sikka, 2003;US Senate
Sub-Committee on Investigations,2005, 2010;Tax Justice Network, 2005;AAPPG, 2006;
Dark side of
tax havens
63
Palan et al., 2010;Otusanya, 2011;Moore et al.,2018;Otusanya and Lauwo, 2019;
Transparency International, 2020). The OFCs offer a window for studying contemporary
forms of elite illicit activityand capital accumulation. It has, therefore, been argued that their
policies have consequences for the distribution of wealth, jobs and development of social
infrastructure in other jurisdictions (Sikka, 2003;Weeks-Brown, 2018). The involvement of
OFCs in facilitating money laundering practices by the elite in developing countries,
particularly Nigeria,is considered in this chapter.
A comprehensive analysisof money laundering practicesin developing countries cannot
be achieved in one study. Instead, this chapter takes a cursory look at the connections
between illicit capital flight, money laundering and tax havens and global OFCs and how
they facilitate corruption in developing countries. This chapter specifically explores the
various stages involvedin these practices to encourage debates about the darkestside of the
role of tax havens and their involvement in the money laundering activity of elites in
Nigeria. In particular, it seeks to put their role in scrutiny and encouragereflections on some
questionable practicesby elites, which increase their fortune, but harm citizens.
The paper contains six sections and the first section being the introduction. Section 2
reviews the extant literaturerelating to corruption, money laundering, capital flight and tax
havens. Section 3 considers the role played by developed countries in money laundering
with the continuous expansionof offshore tax havens through the lens of globalisation. This
section examines the role of offshore tax havens in harbouring and encouraging the
movement of illicit fundsfrom developing countries. Section 4 discusses thevarious cases in
which western countries have been implicated in facilitating money launderingpractices in
developing countries. It also examines the role of political elites in money laundering
practices and the research methods explored in the study. Section 5 provides case examples
of tax haven’s involvement in money laundering and the implication of Nigerian elite in
numerous episodes of illegal flightof capital and money laundering.Section 6 concludes the
paper with a summary and discussion. It also suggests areas of research to enrich our
understanding aboutthe role of offshore tax havens and developing nations.
2. Overview of the related literature
The emergence and scaleof money laundering is, arguably, most plausibly understoodas an
institutional phenomenon.However, money laundering thrives on secrecy and the service of
the knowledgeable elite (Palan et al.,2010;Otusanya, 2011). As noted earlier, money
laundering is the product of “deviant”individuals who are greedy, lacking self-control. It
has been argued that financial institutions engaged in legitimate transactions and
international financial transactions can also be used as a vehicle for illicit activities
(Otusanya and Lauwo, 2012;Hendriyettyand Grewal, 2017;Mugarura, 2017).
2.1 Conceptualising corruption
The term “corruption”is intertwined with ideological, moral, cultural and political
perspectives and there are competingviews about corruption to the point of losing sight of
its detrimental and parasitic symbiosis with many polities and their citizens all over the
world (Akindele, 2005). Corruption is a global problem and it does affect all sectors. The
term corruption covers a vast range of activities, from petty bribery to grand corruption,
private sector insider trading to public sector embezzlement (Chaikin and Sharman, 2009;
Otusanya, 2011;Hendriyettyand Grewal, 2017).
A body of literature has attempted to define corruption (McMullan, 1961;Leff, 1970;
Otite, 1986;Scott, 1972;Nye, 1970;Gibbons and Rowat, 1976;Rose-Ackerman, 1978;
Gillespie and Okruhlik, 1991;Zakiuddin and Haque, 2002;Olurode, 2005;AAPPG, 2006).
JFC
29,1
64
To continue reading
Request your trial