Javier García-Bernardo

University of Amsterdam

Mar 13th, 2017

Nature, origins and political consequences of corporate networks in modern economic life?

corporate networks

Nodes:

• Companies

E.M. Heemskerk, F.W. Takes, J. Garcia-Bernardo and M.J. Huijzer ‘Where is the global corporate elite? A large-scale network study of local and nonlocal interlocking directorates‘, Sociologica 2016(2): 1-31, 2016. 

Nodes:

• Companies

corporate networks

PARt 1: how to gain knowledge from complex structures?

``Uncovering Offshore Financial Centers: Conduits and Sinks in the Global Corporate Ownership Network''

https://www.nature.com/articles/s41598-017-06322-9

Javier Garcia-Bernardo, Jan Fichtner, Frank Takes, Eelke Heemskerk

OFFSHORE FINANCIAL CENTERS

Offshore Financial Center (OFC): a jurisdiction (country) that attracts financial activities from abroad through low taxation and lenient regulation.

• So, which countries are OFCs?
  • Definitions differ
  • Highly contested and politicized


• FDI/GDP ratio approach: substantially more Foreign Direct Investment than expected based on GDP


• Problematic because:
  • No exact investment flows, just dyadic relationships
  • OFC homogeneity assumption
    • Large countries hard to detect
    • No differentiation in roles

sinks and conduits

We look at which countries are used disproportionally in transnational ownership chains.

sink-OFCs

sink-OFFshore financial centers

siNKS ARE RELATIVELY STABLE OVER TIME

siNKS ARE geographically specialized

conduit-OFCs

conduit-OFFshore financial centers

Larger flows towards sink-OFCs

decline of the netherlands

importance of the netherlands

• 23% of all the value flowing to a sink-OFC flows through a Dutch Special Financial Institutions

   

• Percentage of chains that go through the Netherlands and end in:

  • Luxembourg: 40%

  • Cyprus: 30%

  • Malta: 71%

  • Curaçao: 90%

  • Lichtenstein: 30%

PARt 2: why the netherlands?

Historical reasons:

• Curaçao: Just before World War II, Dutch multinationals moved to CW to avoid the confiscation of assets.
• Curaçao developed a prominent and flexible management industry.
• Used to avoid withholding taxes (no longer applicable)
• Effective tax rate in CW: 2.4 - 3%

During the 80s there was a push towards attracting corporations in the Netherlands.

importance of the netherlands

Reasons

(PwC / EY / DELOITTE / KPMG)

• Logistic:
  • Located in the heart of Europe.
  • Outstanding infrastructure.
  • Highly educated and multilingual workforce.
• Well-developed trust and management services.
  • Easy to start Special Purpose Entities (SFIs in NL)
• Beneficial tax regime:
  • No withholding taxes for interest and royalties.
  • No real withholding tax for dividends.
    • Participation exemption.
    • Large number of tax treaties.
  • Advance Tax Rulings (ATR) and Advance Pricing Agreements (APA)
• Investor protection
  • Large number of bilateral investment treaties
  • Advanced tax ruling system (increases certainty)

INDIVIDUALS INVESTING Through THE NETHERLANDS

Orbis data, blanked

INDIVIDUALS INVESTING Through THE NETHERLANDS

Orbis data, blanked

PART 3: the intermediaries

• Asset management structures are complex for two reasons:
  • Mergers/acquisitions make them complex (for corporations)
  • Are created complex (for corporations/individuals):
    • To hedge against failures
    • To avoid regulations
    • To avoid taxation
• They are created by intermediaries:
  • Law/trust firms (Appleby, Mossack Fonseca, Intertrust)
  • Accounting/auditor firms (The Big Four)
  • In the case of private investors there are usually several layers of intermediaries involved.
• 25% of all Dutch entities are registered in 1% of all addresses; 41% in Luxembourg.

the intermediaries

Source: Internal presentation by the director of compliance (Woods)

• - Terrorist financing offences: “We have a current case where we are sitting on about 400K that is definitely tainted and it is not easy to deal with.”
• - Set up a trust and accepted money on his behalf “without question.”

• Intermediaries typically advise clients to go offshore:
  • Reduces or eliminates taxes
  • Prevents courts control over assets
  • Privacy: Exchange of information only on request
  • "Business-friendly" legislation
• A typical trick to increase privacy is to give up legal ownership of your assets (but maintain beneficial ownership)
  • Foundation/Stichting: Not private
  • Trust:
    • Originated from common law
    • Person (trustee) accepts assets from another person (settlor), for the benefit of a third person (beneficiary).
    • Private relationships, no legal entities, no record whatsoever.
    • "Flee" clauses: In case of specified "trigger" events, automatically transfers the trustees, assets, and governing law of the trust to another jurisdiction.

the intermediaries

• Another trick to increase privacy is to use layering:
  • Layer a trust through four countries for the trustee, settler, beneficiary and governing law.
  • Add layers of shell companies within your structure in different countries.
    • Exchange of information is on request. Takes 2-3 months to answer.
    • The registry of corporations lie with the intermediaries.
    • An investigation involves asking the company for information about one of their clients.
• How to prevent this?
  • More transparency (EU, OECD)
  • Using a big data approach, combining databases.

the intermediaries

1. Offshore financial centers can be divided into sinks and conduits

• Sinks are:
  • EU: Luxembourg, Malta, Cyprus, Jersey, Gibraltar
  • Other former colonies/territories of the United Kingdom
• Conduits are:
  • Netherlands, Ireland, Switzerland, Singapore, United Kingdom

2. The Netherlands is the largest conduit in offshore finance:

• Long history of offshore asset management
• Great infrastructure, services and taxes
• It is declining: more strict regulations in the last decade

3. Asset management structures are becoming more complex. We need new techniques to be able to detect tax fraud.