‘Black Hole’ Hides Trillions in Ill-Gotten Gains

By F. Brinley Bruton

Thanks to lax international tax rules the world’s super rich have siphoned at least $21 trillion — more than 50 percent larger than the entire U.S. economy — into secretive tax-free havens, according to a study by UK campaign group Tax Justice Network.

The report by James Henry, a former chief economist at international consultancy ,McKinsey & Co. shows how with the help of private banks the money has flowed into countries such as Switzerland and the Cayman Islands.

“We’re basically talking about a black hole in the world economy,” Henry told NBCNews.com.

The figure of $21 trillion in off-shore funds is conservative and the true sum could be as high as $32 trillion, Henry said.

According to the study, the world’s top 50 private banks managed more than $12.3 trillion in 2010 in off-shore financial assets, up from $7.5 trillion five years earlier.

In 2010, the world’s top 10 financial institutions — which today include the U.S.’s Goldman Sachs and JPMorganChase, as well as Switzerland’s UBS and Credit Suisse — controlled about half of this amount. At least seven of these top 10 institutions received huge bailouts in the wake of the financial crisis, Henry said.

“This isn’t a bunch of shady third-world banks — these are some of the premier institutions in the world,” Henry said. “JP Morgan, Citibank, Barclays, UBS — the top 10 to 20 banks these are some of the ones who received most of the financial bailout, who were involved in the mortgage fiasco, the Libor rates scandal.”

“Now we find out that they have been spending a lot of time helping very wealthy people avoid taxes,” he added.

Troubling Time for Banking

Indeed, the report comes at a troubling time for a banking industry reeling from a multi-country probe into the manipulation of global benchmark rates. Last month, British bank Barclays agreed to pay a $453 million fine to settle a U.S.-British probe into the rigging of the interest rate known as the London interbank offered rate, or Libor, that affects debt from student loans to mortgages.

That follows years of international turbulence and huge bailouts sparked by the subprime lending crisis in the United States.

While many of the tax-avoiding rich hail from developed countries in Europe and North America, the newly wealthy in developing countries, such as China and India, have siphoned off enough in the last 40 years to pay off their countries’ respective debts, Henry said.

Growing Anger at Tax Evasion

The report — based on information from the Bank of International Settlements, International Monetary Fund, World Bank, and national governments — comes amid growing international concern and anger about tax evasion. It is especially poignant as many countries are struggling under harsh austerity programs to reduce their debt burdens.

The issue jumped into the headlines earlier in July when a United States Senate report said that a “pervasively polluted” culture at global bank HSBC — also named in the study — helped clients move shadowy funds from the world’s most dangerous and secretive corners, including Mexico, Iran, Saudi Arabia and Syria.

The failings and lax controls inside HSBC included an inability to properly monitor $15 billion in bulk cash transactions between mid-2006 and mid-2009, inadequate staffing and high turnover in the bank’s compliance units, the Senate report said.

British tax expert John Whiting said he was skeptical that the amount being squirreled away by the very rich was quite large as the study claimed.

“As much as anything — I have no alternative evidence — the figures just seem so large,” said Whiting, who is tax policy director at the Chartered Institution of Taxation.

But whatever the exact figures, he said the issues raised in the report are real and deserve to be addressed.

“I’m not denying that this is a problem, it’s just the size of it,” he added. “What is happening with all this money?”

So while experts may disagree on the exact numbers, the study sheds light not only on how the murky world of off-shore tax havens, and the growing disparity between the super-rich and everybody else.

This sort of disparity can create popular resentment and eventually unrest, according to Paul De Grauwe, a prominent economist and professor at the London School of Economics.

“Fairness is essential to provide the glue to any system,” he told NBC News.com. “It is important to take out these excesses … people will always try to evade taxes (but) when this has taken on proportions that we’ve seen today you can get violent reactions.”

In other words, while evasion and other similar schemes have likely been employed since governments first began levying taxes, the practices exposed in Henry’s report are likely to spark popular resentment given the austerity and crisis that many countries around the world are enduring.

“On one hand people are asked to cut their wages and live in poverty because banks have to be saved,” De Grauwe said. “And these same banks use all sorts of tech to help superrich to evade taxes.”   Φ

F. Brinley Bruton’s a London-based editor, producer and senior writer at msnbc.com, a NBC News-Microsoft joint-venture and one of the top two news sites in the United States.  In addition to reporting, writing and editing, she’s on a team that manages msnbc.com, and work with NBC News correspondents and producers to create original pieces.

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