Is offshore banking underrated?

by on November 30, 2017 at 3:03 pm in Current Affairs, Economics, Law, Political Science | Permalink

That is the topic of my latest Bloomberg column, here is the closing bit:

Perhaps it’s not always an appetizing thought, but in many contexts wealth aids liberty, and the freedom to keep one’s wealth can limit political degeneration.

There are many possible outcomes here, and it is also possible that offshore finance can make tyranny worse.  But it seems to me opinion has turned against these institutions, without much serious consideration of the political economy issues.  By the way:

The top five countries on this list, [offshore wealth] measured as a percentage of GDP, are United Arab Emirates, Venezuela, Saudi Arabia, Russia and Argentina, based on estimates from 2007.

Worth a ponder.

1 ʕ•ᴥ•ʔ November 30, 2017 at 3:13 pm

I like Tyler, but I think at times he takes “devil’s advocate” a bit too literally.

Because after all, does he want to meet a guy in an alley tonight who has decided “freedom” is “avoiding the cops?”

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2 Anonymous November 30, 2017 at 3:16 pm

Probably not. But there’s no real contradiction there, much as you might wish to treat the two catagories similarly.

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3 ʕ•ᴥ•ʔ November 30, 2017 at 3:19 pm

lol, you need a better game.

Tyler specifically endorses secret transfers, as opposed to free transfers. He clearly states that secret is good because it allows the individual to avoid laws. He is saying, by clear implication, that random individuals choosing legal avoidance is a global win.

But possibly not in a dark alley.

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4 Potato November 30, 2017 at 5:33 pm

Exit, voice, and loyalty. That is the correct framework here.

Does restricting/eliminating the possibility of exit enhance or degrade freedom?

I wouldn’t think this would be a difficult question.

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5 ʕ•ᴥ•ʔ November 30, 2017 at 5:50 pm

Exit, voice, and loyalty is a good reference. We in free countries, without currency controls, don’t need secret accounts for exit.

We should be about voice, to maintain those freedoms.

Whether secret accounts are really a net good for freedom under oppression is discussed by others downpage.

6 ʕ•ᴥ•ʔ November 30, 2017 at 5:53 pm

Speaking of freedoms to protect:

“In 2016, Trump said he would look into tightening rules on wire transfer firms, requiring them to verify whether their clients were US residents. These comments were made in regard to blocking overseas remittances sent by illegals. These curbs may seem limited at first, but they could easily be expanded once launched.”

https://www.forbes.com/sites/oliviergarret/2017/03/06/capital-controls-may-be-coming-to-the-us/#cc0dddd5ce89

7 Anonymous November 30, 2017 at 9:12 pm

The argument by your strawman certainly is unreasonable.

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8 Viking November 30, 2017 at 3:32 pm

Are you also supporting the cancellation of passports for political reasons, like what happened to Bobby Fischer?

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9 ʕ•ᴥ•ʔ November 30, 2017 at 3:36 pm

You are also not seeing the difference between “free transfer” and “secret transfer?”

I can be for the free transfer of people and funds, respecting the laws of respect-worthy countries, without being for secret transfers. This does actually mean that I have a different attitude about money escaping totalitarianism and money escaping democracy. To go even further into the weeds, money escaping totalitarianism might be good or bad, just reward or theft. Things like that are a moral gray area.

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10 derek November 30, 2017 at 6:46 pm

If it is free, then it is not anyone’s business. If disclosure is required, it isn’t free.

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11 ʕ•ᴥ•ʔ November 30, 2017 at 7:04 pm

That would be a libertarian ideal. If you really believe it, you would demand no tracking, no investigation, on domestic banking as well.

We don’t do that because in the real world there is a trade-off with law enforcement.

Back to the guy in the alley.

12 derek November 30, 2017 at 8:07 pm

Only a tyranny would demand disclosure and unfettered access to banking records. And yes, western governments are acting tyrannically when they do that. As evidenced by asset seizure practices. That is why anyone with resources in the countries listed above move their assets offshore because the government steals them.

And if you say that it only happens to criminals you are a blithering idiot.

13 Jeff R November 30, 2017 at 8:22 pm

Maybe the word tyranny is a bit strong, but if your system of taxation requires all this disclosure of what are likely voluminous banking and transaction records, maybe that means it’s inefficient and you should rethink it?

14 The Anti-Gnostic November 30, 2017 at 9:06 pm

Good comment by Jeff R.

15 ʕ•ᴥ•ʔ November 30, 2017 at 9:13 pm

“if your system of taxation requires all this disclosure”

Can you name one system of taxation in the developed world which does not?

16 clockwork_prior December 1, 2017 at 1:54 am

‘Only a tyranny would demand disclosure and unfettered access to banking records.’

I’m guessing you know nothing about FATCA – https://en.wikipedia.org/wiki/Foreign_Account_Tax_Compliance_Act

This is a primary reason for an increasing number of American citizens to give up their American citizenship, as at this point, most banks in the rest of the world simply no longer accept American citizens as customers. Mainly as that is the easiest way to avoid the American government demanding disclosure and unfettered access to banking records.

17 Anonymous November 30, 2017 at 3:42 pm

That depends on why the cops are interested in him, does it not? Murder, drugs, and samizdat lead to different answers.

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18 ʕ•ᴥ•ʔ November 30, 2017 at 7:20 pm
19 Sailordave November 30, 2017 at 3:16 pm

A mechanism to let dictators pay people off in secret, safe from future investigations is a mechanism for encouraging dictatorship

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20 A Truth Seeker November 30, 2017 at 3:35 pm

“The top five countries on this list, [offshore wealth] measured as a percentage of GDP, are United Arab Emirates, Venezuela, Saudi Arabia, Russia and Argentina, based on estimates from 2007.”

Maybe, but malefactors of great wealth from many countries, nit only banana republics and gas stations, use those means to evade legitimate taxation.

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21 JFA November 30, 2017 at 3:38 pm

Is Tyler going for supreme irony when he says “Perhaps it’s not always an appetizing thought, but in many contexts wealth aids liberty, and the freedom to keep one’s wealth can limit political degeneration” right before noting “The top five countries on this list, [offshore wealth] measured as a percentage of GDP, are United Arab Emirates, Venezuela, Saudi Arabia, Russia and Argentina, based on estimates from 2007.”

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22 Albert November 30, 2017 at 3:42 pm

Socratic method, I guess? Lead people to the wrong answer so they can see how obvious the right answer is.

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23 msgkings November 30, 2017 at 4:13 pm

I thought that was called ‘Straussian’ around here?

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24 apoptosis November 30, 2017 at 9:17 pm

I thought maybe this had a glancing association with net neutrality.

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25 derek November 30, 2017 at 6:52 pm

Why is it ironic? It is legal to move money offshore in democracies, and oddly enough the most vigorous and wealthy economies don’t top the list. Why not? Because the political economies in those countries act to make it worthwhile to do business, to own property. If you have wealth in Russia you move it offshore; not for nefarious reasons, but simply that you might have it tomorrow.

Russia etc. would be better off if that money stayed home. It would if there was rule of law and a stable political situation.

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26 Larry Siegel December 1, 2017 at 3:27 am

If you were fleeing Nazi Germany, having a little money stashed in London or New York made all the difference.

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27 Bill November 30, 2017 at 3:43 pm

Hey,

Someone has to

Speak up for

Unjust autocracy and tyranny

And tax evasion and avoidance.

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28 TMC November 30, 2017 at 4:09 pm

Why? Did Jimmy Carter die?

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29 Bill November 30, 2017 at 5:13 pm

No, the Russian oligarchs need to have someplace to park their cash other than Trump properties. It’s getting to hot for them.

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30 A Truth Seeker November 30, 2017 at 5:34 pm

They can park it at my parking slot.

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31 JWatts November 30, 2017 at 4:09 pm

You probably should have added Greece to that list. It’s 6th and just barely behind Argentina and I’d be surprised if the difference is statistically significant. Effectively they are tied. Whereas, there’s a sizable gap between 6th and 7th place (Tawain).

Also of note, the top 15 list includes most of Western Europe, but at a much lower level.

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32 NYSHLONSF November 30, 2017 at 4:34 pm

Every time Tyler posts one of these trollish sophistical columns, my opinion goes down. For example, despite the whole argument being that wealthy offshore account holders in repressive countries *might* use the wealth to foment desirable opposition, no actual examples of this are given. There are some available examples, such as Guo Wengui recently (if not yet effectively), but Tyler chooses not to mention them.

There is literally zero factual support given in the column for the assertion that “in many contexts wealth aids liberty, and the freedom to keep one’s wealth can limit political degeneration”. None. We get some samples of despotic governments taking other people’s money (“even if those individuals didn’t earn all of that wealth justly or honestly”, as Tyler helpfully points out), but no examples supporting the article’s core thesis. No time for any research? It’s almost as bad as the WSJ opinion page, and a good reason for serious academics to avoid the opinion pages altogether.

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33 Anon7 November 30, 2017 at 5:58 pm

Montesquieu made a similar point regarding the Jews: “It is known that under Philip Augustus and Philip the Tall, the Jews, driven out of France took refuge in Lombardy and there they gave the foreign traders and travelers secret letters [of exchange] for those to whom they had entrusted their effects in France.” (Spirit of the Laws, Book 20, Chap. 20, n14; also, Book 22, chap. 14, “How exchange hampers despotic states”).

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34 NYSHLONSF December 1, 2017 at 2:04 am

I’m thinking that just replacing the Bloomberg columns with selections from Montesquieu relevant to current events would be much more informative and well argued.

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35 Tom December 3, 2017 at 5:28 am

Once NYSHLONSF turns away, all is lost.

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36 Emanuel Noriega November 30, 2017 at 4:35 pm

Tyler just got it up to purchase some bitcoin and it started its downward spiral.

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37 rayward November 30, 2017 at 4:38 pm

Many of today’s economists are either stupid or frauds: http://www.bradford-delong.com/2017/11/economics-as-a-professional-vocation.html#more As I’ve commented many times, I’m an advocate (I’m a lawyer), so I can advocate my client’s case whether I believe in it or not. How did economics become like law, an adversarial system in which each side presents its case and a third party (?) determines which side is believable. What’s the point of “research” when it’s nothing more than propaganda for one’s ideological side?

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38 byomtov November 30, 2017 at 8:34 pm

Economics became like law when it was discovered that advocacy was often easier and more rewarding than actual research.

Further, economic advocacy is easy – much easier than litigation, I suspect. Your client really just wants a set of talking points that can be based on whatever simple-minded, or even outright false, assumptions you want.

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39 Fazal Majid November 30, 2017 at 4:47 pm

Let’s take the premise seriously: if there is a mechanism to protect wealth by moving it offshore, that reduces the incentive to resist tyranny by making flight easier than fight. Thus offshore banking would have the opposite effect of what Tyler suggests.

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40 Anon7 November 30, 2017 at 5:43 pm

So consumers restricted to only one seller will be better off than if they had the choice to buy from multiple sellers because they would be more likely to complain and the seller would be more responsive. Seriously?

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41 Viking November 30, 2017 at 6:54 pm

Would the same argument apply to accepting refugees from despotic regimes? By letting out the pressure, toppling the regime might take forever.

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42 CG November 30, 2017 at 5:08 pm

Despite the flack Tyler’s receiving for this column, I think he’s exactly right. I live in South Florida, where “offshore banking” is a huge part of the local economy. Our real estate market is kept afloat by South and Central Americans investing and banking here in the U.S. Many of them successful business owners in their home countries that have had little choice but to move their money to the U.S. to avoid a significant destruction of the wealth they’ve worked hard to build, either via government seizure or inflation. And their presence is not limited to the banking industry, as they also start businesses and invest here. As a result the economy in South Florida has thrived.

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43 Anon November 30, 2017 at 8:16 pm

“In essence, those accounts make it harder for autocratic governments to confiscate resources from their citizens.”

Isn’t exactly the opposite happening in Saudi ? You go to Ritzy imprisonment , unless you bring back 60% of your wealth to the Govt ( and perhaps 10% to my overseas account ?)

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44 Pat November 30, 2017 at 9:29 pm

Tyler conflates, or does not distinguish between, three aspects of offshore banking: offshore location; zero or no tax; and bank secrecy. His arguments are fine for the first two, but not, I think, for the last. Where there is bank secrecy , income taxes are taxes on honesty and this will corrode an economy’s capacity to finance public goods. Greece is a good example of what happens to an economy when paying income tax is optional.

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45 Stormy Dragon November 30, 2017 at 9:31 pm

The top five countries on this list, [offshore wealth] measured as a percentage of GDP, are United Arab Emirates, Venezuela, Saudi Arabia, Russia and Argentina, based on estimates from 2007.

To steal a bit from P. J. O’Rourke, one of the fundamental rules for organizing society is to never let the people with all the guns and the people with all the money be the same people.

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46 Larry Siegel December 1, 2017 at 3:30 am

Wise man he.

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47 jorod November 30, 2017 at 9:32 pm

Ask the Kennedy’s…

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48 Shazams November 30, 2017 at 9:42 pm

>based on estimates from 2007.

Ten-year-old guesses, eh? OK, thanks, I’m done pondering.

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49 Benjamin Cole November 30, 2017 at 10:29 pm

If developed democracies rely on the income tax to run civilized states, then offshore banking is a really bad idea. Offshore banking encourages parasites to freeload.

It is notable that influential people calling for “tax reform” never suggest moving away from national income taxes and moving to national property taxes, fossil fuels taxes, pollution taxes, Pigou taxes, sales taxes and import tariffs. That would be substantive reform.

I sense the battle is lost on income taxes; the upper classes know how to avoid such levies, whether through the 75,000-page tax code or offshore banking or entities. There is also a huge amount of US cash in circulation, nearly $5,000 per resident.

I doubt we will ever see tax reform in the US. The elites like it the way it it.

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50 Donald Pretari November 30, 2017 at 10:42 pm

” But it seems to me opinion has turned against these institutions, without much serious consideration of the political economy issues”

We don’t need to read The Grand Inquisitor every day to get the point, which isn’t that he’s right. An open mind isn’t no mind, except maybe in some esoteric traditions. We can have more than enough experience to conclude we don’t ever have to accept accretions to centralizing power.

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51 Marcus November 30, 2017 at 10:51 pm

It’s called voting with your feet. When the polling booth either doesn’t work or doesn’t exist, it’s the only form of voting available. And the fear of losing their most productive citizens is the one thing that keeps unelected rulers in check.

The justification for secret bank accounts is the same as the justification for secret ballots. The government has no right to know how I intend to vote.

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52 Bill November 30, 2017 at 11:20 pm

Yesterday

It was Bitcoin

Today it is offshore banking

What do they have in common?

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53 Joe B. November 30, 2017 at 11:36 pm

Cash in circulation is soaring too.

Gee, do I see a common thread? Do you?

Offshore banking, cash bitcoin….hmmmm. I wonder.

Let’s call in Sherlock Holmes.

Leona Helmsly said, “Only the little people pay taxes.”

I feel real small quoting her.

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54 Bill December 1, 2017 at 12:32 am

If you have an offshore bank account, or are using bitcoins for online transactions, you might also be interested in some burglar tools as well. That is based on my new predictive analytics program.

Or, you could be pregnant.

We still have to work out some bugs.

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55 Bob November 30, 2017 at 11:36 pm

Any country with old school banking secret/numbered accounts set up whose banking system wasn’t all about tax avoidance could easily just maintain a list of countries from which it guarantees protection, and a list of those that it does not. When a country goes in the wrong direction, they can be added to the list immediately.

But, knowing plenty of people in pretty democratic countries, and my fair share of Swiss bank workers, there’s just a lot of profit to be made by shielding accounts from western tax authorities. Before it was anyone and everyone: Today you just have to talk to put a shell company in between, and pay some more money.

Another interesting thing I learn from talking to drunk, boasty swiss bank workers is that they are not above bribery either: The same guy that helps an Emir bypass regulation will also let said Emir peek at a political enemy’s transaction history for the right amount.

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56 Tom December 3, 2017 at 5:37 am

Not quite on the level of using the NSA to spy on the opposition candidate, but still.

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57 cw December 1, 2017 at 12:21 am

What is “liberty” exactly?

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58 clockwork_prior December 1, 2017 at 1:55 am

Come now, any billionaire knows precisely what liberty is.

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59 Vivian Darkbloom December 1, 2017 at 3:59 am

An “offshore bank account” is simply a bank account located in a jurisdiction other than the one in which the account holder resides. Nothing particularly or automatically suspicious here. There are many reasons to maintain an offshore bank account other than tax evasion. I live in France and am an American citizen. I maintain a bank account in France (“offshore” from the US perspective) but, most of my funds are maintained in a *US* “offshore account”(from the French perspective) for the simple reason that is easier and cheaper to invest money there, the largest global market, through a US account. The US now also makes it particularly burdensome for US citizens living abroad to maintain accounts abroad and for the banks that wish to serve them, even in the country of physical residence. Banking is a competitive business like any other. Sometimes, an “offshore” bank provides better services at lower cost. Many here seem to support the idea of “free trade” except when it comes to services.

The following is in response to these comments (and others like them):

“If you have an offshore bank account, or are using bitcoins for online transactions, you might also be interested in some burglar tools as well.” (Bill)

“If developed democracies rely on the income tax to run civilized states, then offshore banking is a really bad idea. Offshore banking encourages parasites to freeload.” (Benjie Cole)

Step back a moment and consider again the countries that Tyler lists as having the greatest percentage of offshore accounts as measured by GDP. See anything in common? These are not “developed democracies” and experience shows that the greatest burglars in world history have been those acting under the auspices of “government”, not private citizens. They lack stability and, above-all, trustworthy legal systems that most commenters here seem to take for granted.

A number of years ago I had a Dutch client who had a successful business in the Netherlands. He had obtained a US green card and maintained a US bank account. He came to us each year and, at great expense, complied with both US and Dutch tax rules. This included filing annual US tax returns, not only for himself but for his “controlled foreign corporations” (translating the books and records for corporations to include on US information returns is no small task). Due to our unique system of “double tax relief” and the AMT limits on the foreign tax credit, he also had some US tax to pay. This went on for a number of years despite the fact that the client had no apparent intention to go to the US to reside. At some point we had a frank discussion. Is this really worth it, I asked? The client was Jewish and had lived through WWII and survived the holocaust. Decades later he still felt the need for an escape route following one of the greatest “burglaries” and genocides in the history of “civilization”. My client (and many others like him) was certainly not a”parasite”, although I seem to recall that was a term used for him and his kind by the burglars in chief.

Those who resided in Venezuela (for example) and had the prescience to maintain an “offshore bank account” can consider themselves lucky. While those accounts might have made it easier to flee, ironically, they may also have made it easier to stay. I’m surprised South Africa is not currently on the list. But, I’m not surprised Zimbabwe is not on the list—all their wealth was burgled a long time ago.

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60 TMC December 1, 2017 at 8:15 am

Very good comment. A nice bit of sanity injected.

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61 msgkings December 1, 2017 at 12:11 pm

Agreed.

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62 JWatts December 1, 2017 at 8:24 am

“I’m surprised South Africa is not currently on the list.”

South Africa was 16th on the list. Figure 5, near the end of the paper, lists all of the countries.

http://www.nber.org/papers/w23805.pdf

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63 ʕ•ᴥ•ʔ December 1, 2017 at 10:19 am

Step back a moment and consider again the countries that Tyler lists as having the greatest percentage of offshore accounts as measured by GDP. See anything in common? These are not “developed democracies” and experience shows that the greatest burglars in world history have been those acting under the auspices of “government”, not private citizens. They lack stability and, above-all, trustworthy legal systems that most commenters here seem to take for granted.

It seems a strong possibility that these accounts, especially the biggest of these accounts, are set up by the burglars themselves.

And a disagreement among princes, or ex-kgb oligarchs, is not really main street capitalism in the most civic sense.

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64 clockwork_prior December 1, 2017 at 10:20 am

‘An “offshore bank account” is simply a bank account located in a jurisdiction other than the one in which the account holder resides.’

Not precisely – an EU citizen living in EU country does have an ‘offshore account’ when residing in a country different than their passport. On the other hand, having an account in the Cayman Islands is definitely an offshore account.

‘I live in France and am an American citizen. I maintain a bank account in France (“offshore” from the US perspective) but, most of my funds are maintained in a *US* “offshore account”(from the French perspective) for the simple reason that is easier and cheaper to invest money there, the largest global market, through a US account.’

Though essentially technically correct in terms of how the U.S. views any American citizen’s account anywhere outside of the U.S., it is extremely unlikely that the French consider your American accounts ‘offshore.’ That is certainly the case in Germany, for example, which has zero interest in paying any attention to non-citizen accounts that have nothing to do with Germany. The U.S. is extraordinary in this area, as your Dutch example shows – the Dutch government was simply treating him like any Dutch citizen, whereas the U.S. was treating him as if his Dutch citizenship was absolutely irrelevant when dealing with the U.S. due to having a green card.

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65 clockwork_prior December 1, 2017 at 10:44 am

Oops – ‘does *not* have an ‘offshore account’ when residing in a country different than their passport.’

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66 ʕ•ᴥ•ʔ December 1, 2017 at 10:26 am

By the way, I do see a genuine connection from this to:

President Donald Trump’s commerce secretary, Wilbur Ross, is doing business with Russian President Vladimir Putin’s son-in-law, a bombshell new report revealed Tuesday.

A large leak of financial documents called the Paradise Papers revealed several weeks ago that Russian billionaire Kirill Shamanov, the son of a close friend of Putin, does business with Ross—but until Tuesday, the exact connection between Shamanov and Putin was unclear.

Katerina Tikhonova—a wealthy dancer married to Shamanov—has finally been confirmed to be the daughter of Putin, Reuters reported.

In worst possible interpretation, Cowen dislikes Paradise Papers because they reveal how the American rich would like to kick it up a notch.

They, the whole rich but thankfully dim Trump crew, would like to be international oligarchs, set above democracies worldwide.

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67 ʕ•ᴥ•ʔ December 1, 2017 at 10:40 am

Oh! Ross connects in another, still all about secret accounts:

https://www.theguardian.com/us-news/2017/nov/07/wilbur-ross-forbes-rich-list-exaggerated-wealth

The question in this context is, when was Ross really lying? Was it to Forbes, or is it now to the (his!) government?

Maybe the Forbes number was real, but the money was so successfully hidden that he has to keep it so, rather than go to jail.

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68 ʕ•ᴥ•ʔ December 1, 2017 at 11:18 am

We have a Commerce Secretary who says of his family wealth “believe me, I was lying.”

This is, to borrow a phrase, life in Trump’s America.

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69 Bill December 1, 2017 at 11:19 am

Vivian, Thoughtful reply, but you can be both…particularly if you are an African government official who wishes to hide a bribe, a tax evader, and, as you pointed out, someone who made money legitimately and wishes to protect from expropriation some assets.

But, Vivian, you also missed a point as well: Disclosure. Foreign banking accounts combined with shell corporations can HIDE illegal assets.

So, what would you think of having a system of disclosure. If a person legitimately had assets to save offshore, just disclose the identity at the bank. What we have now is disclosure via settlement agreements with Swiss banks and hacks into law firms, followed up by government investigations.

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70 collin December 1, 2017 at 9:06 am

There are many possible outcomes here, and it is also possible that offshore finance can make tyranny worse. But it seems to me opinion has turned against these institutions, without much serious consideration of the political economy issues.

I still say we cut our military spending by $200B – $300B by focusing on national defense and not the defense of foreign nations and assets. Most of the military spending has nothing to do with protecting our citizens. Then we hope one of islands of offshore banking gets invaded by a foreign will take all the assets from the offshore banks.

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71 Evans_KY December 2, 2017 at 1:25 pm

“Wealth aids Liberty.”

Is this the theory of trickle-down liberty?

Don’t those that have offshore accounts have plenty of resources to pay others to defend them? See Annie Lowrey at The Atlantic as an example of advocating for those who are in need of defense.

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72 Tom December 3, 2017 at 5:45 am

Bill Gates, Warren Buffett and Mark Zuckerberg among others have no offshore accounts yet pay little or no tax. How about a midnight raid tax on trusts and charities? (“Oh no, we taxed the Ford Foundation! And Harvard, slayer of Russia!”)

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