Tag: tax havens

Paradise Leaked: An Analysis of Offshore Data Leaks

20220131 Paradise Leaked Image 01

In recent years, there have been several high-profile leaks of documents related to the offshore financial industry, such as the Pandora Papers released last year. Some of the data contained in the leaked documents have now been made public. In this brief, we discuss the advantages and pitfalls of using these data for economic analysis. We show that despite some caveats, there are patterns in these data that can shed light on a secretive industry. For instance, the number of offshore entities linked to a country increases significantly when that country experiences a change in political leadership. By contrast, financial sanctions on a given country result in a reduction in the number of established offshore entities. In the immediate aftermath of the financial crisis, many countries signed bilateral treaties with tax havens in order to promote transparency. Our analysis of the leaked data shows that the overwhelming majority of offshore entities are not governed by these treaties.

“… that I may see and tell of things invisible to mortal sight.”

John Milton, Paradise Lost

Offshore Tax Haven Leaks

Zucman (2013) estimates that household wealth held in offshore tax havens is equivalent to 10% of world GDP. While there are many legitimate reasons for wealthy individuals to use offshore financial services, the secrecy surrounding offshore holdings has also enabled tax evasion and money laundering. The international community has launched several initiatives trying to increase the transparency of offshore wealth holdings. Over the past decade, several large collections of documents from offshore financial service providers have been leaked to the media: Pandora Papers (2021), Paradise Papers (2017/2018), Bahamas Leaks (2016), Panama Papers (2016), and Offshore Leaks (2013). Investigative journalists have used information from the leaks to expose many instances of secretive financial dealings linked to political leaders. Examples from FREE network countries include: the connections between a close ally of Belarussian President Alexander Lukashenko and a gold mining venture in Zimbabwe, the offshore business holdings of past and present Ukrainian presidents and their respective allies, and the wealth of Russian President Vladimir Putin’s close associates and childhood friends (see, for instance, Cosic 2021, Mylovanov and Mylovanova 2016).

The International Consortium of Investigative Journalists (ICIJ) has made public information on more than 800,000 offshore entities that are part of the offshore data leaks (see ICIJ Offshore Leaks database). The data contain information on the names of companies or people who set up offshore entities, their country of origin, the offshore jurisdiction, and the dates of incorporation and deactivation for offshore entities.

What Can We Learn from the Data?

Despite the wealth of information that this database contains, there has been relatively little academic research using the offshore leaks data. Two notable exceptions are Alstadsæter, Johannesen and Zucman (2019), and Londoño-Vélez and Ávila-Mahecha (2021), who link information from the Panama Papers to administrative records from Scandinavia and Columbia, respectively. They find that tax evasion is concentrated among the richest households. Guriev, Melnikov and Zhuravskaya (2021) use the revelation of the Panama Papers to study its effect on perceptions of corruption.

There are several challenges to using the offshore leaks data for systematic data analyses. First, there are both legitimate and illegal uses of offshore financial services, and without further information, it is not possible to distinguish between them. Second, as this information is obtained through leaks at specific offshore services providers, the data are unlikely to be representative of overall offshore financial activity. Third, there is no information on financial transactions, and we do not know the amounts of money involved in the offshore entities. Finally, more sophisticated offshore structures may make it impossible to deduce the ultimate owner of each entity and its country of origin. Especially for the second and third reasons, economists have tended to focus on balance of payments statistics and cross-border bank deposit data when estimating flows to offshore accounts. For example, Andersen, Johannesen, Lassen and Paltseva (2017) show how the oil wealth of countries with weak institutions is diverted into secret offshore accounts. Becker (2019) investigates recent trends in Russian capital flows and shows that a significant share of Russian money flows to Western European banks. See also Nyreröd and Spagnolo (2018, 2021) for discussions of the role of European banks in recent money laundering scandals.

With these caveats in mind, Figure 1 shows the correlation between the number of offshore entities in the data (on the y-axis) and the offshore wealth holdings of each country’s households (on the x-axis) as estimated by Alstadsæter, Johannesen and Zucman (2018). While the chart shows a positive correlation of 0.56 between these two measures, it also illustrates that the number of leaked entities may be a poor proxy for the stock of offshore wealth. Countries with a significant fraction of offshore wealth in European tax havens are underrepresented in the leaks (e.g., France, Germany, and Italy) while the UK, Russia, and Latvia account for a disproportionate share of leaked offshore entities.

Figure 1. Number of offshore entities and estimated offshore wealth

Source: ICIJ Offshore Leaks database, Alstadsæter, Johannesen and Zucman (2018) and authors’ calculations.

Timing of Offshore Entity Creation

While the number of overall leaked entities per country might not be a perfect measure of the amount of offshore wealth, we find that there are systematic patterns in the timing of the creation of offshore entities. In particular, more offshore entities are created when individuals face political uncertainty in their own countries and fewer offshore entities are created by individuals from countries under financial sanctions.

Elections and Change of Leadership

Figure 2 shows the average number of newly incorporated offshore entities linked to a given country (on the y-axis), depending on that country’s political situation. Panel A shows no clear pattern of offshore entities being created by companies or individuals around the time of elections. Elections are often predictable and frequently result in the reelection of the incumbent government. In contrast, Panel B shows a clear increase in the number of offshore entities linked to a country around the time when that country experiences a change in the de facto political leader. Around four months before there is a change in political leadership, the average number of entities created per country per month almost doubles. Offshore entity creation falls back to normal levels typically around half a year following the transition of power. This pattern suggests that wealth leaves countries at times of political uncertainty and is consistent with the findings of Andersen, Johannesen, Lassen and Paltseva (2017) and Earle, Shpak, Shirikov and Gehlbach (2021).

Figure 2. Offshore entity creation and national political situation

Panel a. Elections

Panel b. Change of political power

Source: ICIJ Offshore Leaks database, The Rulers, Elections, and Irregular Governance (REIGN) Dataset and authors’ calculations. A change of power is defined as a change in the de-facto political leader (e.g., due to the incumbent losing an election or the collapse of a coalition government).

International Sanctions

Figure 3 shows the impact of sanctions from the United Nations, European Union, and the United States on the average number of offshore entities linked to a given country (on the y-axis). Panel A shows that when a country is subject to financial sanctions, the number of linked offshore entities created falls to around 10 per year from an average of 25 before the introduction of sanctions. The impact of sanctions can already be seen in the year before the start of the sanctions, which could reflect measurement and reporting errors or anticipation of the sanctions. In contrast, Panel B shows that trade sanctions that are not accompanied by financial sanctions have no significant impact on offshore activities. These charts suggest that financial sanctions may have some impact on how much capital can be moved from countries under sanctions to offshore accounts.

Figure 3. Offshore entity creation and international sanctions

Panel a. Financial sanctions

Panel b. Trade (without financial) sanctions

Source: ICIJ Offshore Leaks database, Global Sanctions Data Base and authors’ calculations.

Promoting Transparency

After the Financial Crisis in 2009, G20 countries compelled offshore tax havens to sign bilateral treaties to allow for the exchange of banking information under the threat of economic sanctions. More than 300 treaties were signed by tax havens that year. The effectiveness of this policy has been debated. For instance, Johannesen and Zucman (2014) show that the treaties lead to a relocation of bank deposits from compliant to less compliant offshore tax havens.

The G20 crackdown required each tax haven to sign at least 12 bilateral treaties. Relative to a comprehensive multilateral agreement, this policy had two limitations. Firstly, it leaves room for the diversion of funds identified by Johannesen and Zucman (2014). Secondly, tax havens were able to choose freely among potential partner countries – regardless of the underlying financial flows. Figure 4 shows that only a small fraction of the entities in the offshore leak database have a country of origin that signed a treaty with the tax haven in which they were incorporated. In addition, the small share of entities that will be subject to treaties suggests that havens did not always sign treaties with the most important counterparts. While the leaked entities may not be representative of offshore finance as a whole, this picture appears inconsistent with the OECD’s claim that “the era of bank secrecy is over” (OECD 2011)

Figure 4. Entity creation by treaty status

Source: ICIJ Offshore Leaks database, treaty events from Johannesen and Zucman (2014) and authors’ calculations.


A series of leaks over the past decade have exposed over 40 million documents related to the secretive offshore financial industry. Information related to over 800,000 offshore financial entities has been made public by the ICIJ. While a few high-profile cases received significant media coverage and gave rise to further investigations, the vast majority of references to networks of individuals, trusts, and shell corporations are difficult to decipher. This brief argues that, collectively, these leaked documents can be informative. They can be used to analyze the reasons for moving money offshore (such as domestic political uncertainty) as well as the constraints individuals face when doing so (such as international sanctions or bilateral treaties on bank secrecy).

In an effort to further increase transparency, 102 jurisdictions committed to a new standard for the automatic exchange of certain financial account information between tax authorities from 2019. Until such reforms are successful, leaks by whistleblowers are likely to remain a valuable source of information on the offshore financial industry.


Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Capital Flows from Russia — The Bigger Picture

A bunch of dollar bills covering table that represents capital flows in Russia

There is an increasing focus on how Russian capital flows are being channelled through Western banks to various destinations, including offshore havens. There are of course legitimate reasons and legal ways of moving capital across borders, but much of the international focus on capital flows in recent decades is linked to the financing of terrorism, tax evasion, and money laundering in connection with criminal activities. This brief provides the macro view of capital flows between Russia and the rest of the world to paint the bigger picture behind the more specific stories we read about in the news that involve individual businessmen, corrupt officials, criminals, and banks.

International capital movements have a clear role in allocating resources efficiently across countries. However, today’s media coverage instead typically focuses on the role of capital flows in financing terrorists and avoiding taxes. Recently, money laundering has been creating headlines around the world in the Panama papers and other similar stories, illuminating complicated schemes in the global financial system in connection with illegal activities such as tax evasion, corruption, drug dealing and human trafficking.

In the international policy making arena, since 1989, the Financial Action Task Force (FATF) has the objective “to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system”. After the terrorist attacks in 2001, the issues of anti-money laundering (AML) and combatting the financing of terrorism (CFT) also became a central area of the IMF’s work and has since become an increasingly important policy question.

In several of the news stories, money flowing from Russia features prominently. This brief provides the bigger picture of Russian capital flows based on publicly available data as a complement and background to the news stories that are based on inside information, or “leaks”, and that focus on particular individuals and banks.

Composition of capital flows

In the official balance of payments statistics, capital flows are divided into a number of different categories, for example, private vs public or banks vs non-banks. There is also a distinction made between foreign direct investments (FDI) on the one hand and portfolio flows, loans and other types of transactions (PLO) on the other. Since the balance of payments also has to balance (despite the fact that not all international transactions have been recorded) there is also a term called errors and omissions (E&O) that take care of various discrepancies. In environments with poor data collection and a large share of activities that take place “off the books”, this term tends to be large. For Russia, this term has become smaller over time as the economy and data collection has matured.

In terms of volatility and magnitude of flows, the distinction between FDI and PLO is often important and so also in Russia. Figure 1 shows the private sector flows to and from Russia over the last two plus decades.

Figure 1. Capital flows to and from Russia

Source: Central Bank of Russia and author’s calculations

After a rather slow start in the early years of transition, capital flows took off as Russia started to generate growth in 2001, and the flows kept growing until the global financial crisis. As expected, FDI flows have been less volatile than PLO flows but perhaps more surprising, in- and outflows in both categories seem to move closely together (see Becker (2019) on why this is the case). We can also note that there has been a marked downturn in flows at the time of the annexation of Crimea and subsequent sanctions and counter sanctions between the West and Russia.

Cumulative capital flows

By computing net flows from the data in Figure 1 and accumulating this over time, we get a clearer idea in Figure 2 of the massive amounts of capital that have left Russia over the last decades. In the early years, the outflows were in the form of errors and omissions (E&O) and PLO, but the PLO trend was reversed in the early 2000’s and turned total accumulated flows back to zero before the global financial crisis hit. The global financial crisis was a clear turning point for capital flows in general and PLO flows in particular.

Figure 2. Net private capital flows

Source: Central Bank of Russia and author’s calculations

In the year following the global financial crisis, almost USD 300 billion left Russia. Outflows then continued, albeit at a slower pace, only to accelerate again at the time of Russia’s annexation of Crimea. By mid-2018, USD 700 billion had left Russia since 2008, mainly in the form of PLO flows. This is equivalent to twice the amount of fixed capital investments in Russia in 2017.

For a country like Russia that is in need of increased investments both from domestic and foreign sources to generate long-term sustainable growth, these outflows are very costly at the macro level even if they are beneficial to individual entities that are behind the flows.

Destinations of capital flows

Where the money from Russia ultimately ends up should matter less to people in Russia than the fact that they are not invested and generating growth at home. However, it can matter a great deal to people, policy makers and businesses in the destination countries. Not only because it involves business opportunities and employment to some, but also because it generates concerns among regulators, law enforcement and tax authorities regarding the origins and purposes of the investments.

We do not have full coverage of where all the money Russian entities invest or park abroad end up, but official statistics are available for at least part of the investments. First of all, there is data on cross-border assets and liabilities of the banks that report to the Bank of International Settlement (BIS), which shows what foreign residents have deposited in the banks. Russian claims on BIS reporting banks are shown in Figure 3, where we can note that total claims by Russians amount to USD 131 billion. Half of this amount was deposited with French, Swiss, UK, and Belgian banks at the end of September 2018.

Figure 3. Russian claims on BIS reporting banks in different countries (USD bn, Sept. 2018)

Source: BIS and author’s calculations

Given the recent scandal in Danske Bank, we can also note that USD 8 billion was deposited by Russian entities in Danish banks, which may not sound much in this context but amounts to around 2 per cent of Danish GDP.

Again, macro level data does not tell us if the flows behind the numbers are illicit or legitimate, but it provides some sense of the order of magnitude and possible significance for the entities involved in the transactions and their regulators and supervisors.

The next piece of information is due to the IMF’s and others’ efforts to collect and harmonize data on the destination of portfolio and FDI assets, and the data for Russia is presented in Figures 4 and 5.

The prime locations for Russian owned portfolio assets are Ireland and Luxembourg, followed far behind by the Netherlands, UK and US. In total, official portfolio assets are rather modest at USD 69 billion, which is far off the cumulative net PLO flows in Figure 2 of over USD 500 billion even if we add the BIS reporting bank deposits in Figure 3.

Figure 4. Russian portfolio assets by the destination country (USD bn, Sept. 2018)

Source: Central Bank of Russia and author’s calculations

This could have many explanations, including that a significant share of Russian PLO assets is not in BIS reporting banks or in countries that provide transparent reporting of other types of PLO assets. The fact that cumulative flows and stocks reported in international statistics are so different, though, clearly asks the question where the remaining assets are invested.

The last component for which we have data is the location of Russian FDI assets. This turns out to be the most significant asset class available in the official statistics with a total of USD 364 billion invested abroad. Given that the magnitudes of FDI flows in Figures 1 and 2 are much smaller than PLO flows, this is somewhat surprising. Less surprising is the fact that more than half of this is invested in Cyprus, which is a well-known destination for Russian money.

However, it also begs the question on how assets are classified and where; Cyprus annual GDP was USD 24 billion in 2018, or 13 per cent of what is classified as Russian FDI assets in Cyprus. The only reasonable interpretation is that Cyprus is an offshore destination to park Russian money and not the ultimate location of direct investments from Russia. It is not unlikely that similar explanations are also valid for a significant share of the assets recorded as investments in the Netherlands, Austria and Switzerland, not to mention the British Virgin Islands (BVI) or the Bahamas. This problem is not unique for Russian data, but the magnitude of the problem regarding this data is still striking.

Figure 5. Russian FDI assets by the destination country (USD bn, Sept. 2018)

Source: Central Bank of Russia and author’s calculations

Policy conclusions

Capital leaving Russia is mainly a problem for investments and growth in Russia, but, as has become far too clear recently, some of the flows also create problems in other countries. In particular, flows that are associated with money laundering and channelled through financial institutions in the West can create massive problems for banks that do not have sufficient control mechanisms in place or are guided by short-term profit maximization that encourages staff to look the other way when illicit flows are coming in.

Given the massive scale of flows coming from Russia, it can obviously be tempting to be part of this business while at the same time very costly to implement procedures and routines that control all of the flows adequately. However, not understanding the bigger picture of Russian flows can be even costlier.


Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.