Author: Juan Carlos Ladines Azalia, Professor at the Academic Department of Social and Political Sciences at Universidad del Pacífico and Bożena Zakrzewski, research assistant.

1. The Panama Papers and IR Theory

Over a year ago, the Süddeutsche Zeitung (SZ), the leading newspaper in Germany, was reached out by an anonymous source who gave the journal access to 2,6 terabytes of data from Mossack Fonseca, law firm known to offer services in creating offshore companies around the world. Thus, SZ and the International Consortium of Investigative Journalists (ICIJ) teamed up with many reporters from all over the world in order to make an in depth investigation. As a result, the so called “Panama Papers” have appeared in the world media news. These documents expose how heads of state, celebrities and criminals have been using tax havens as secret hideouts (Vice News, 2016).

Offshoring is a mechanism that allows enterprises to develop an international business strategy. These enterprises can be located in economies irrespective of the special treatment they may receive by their local authorities, such as exemptions from taxes, tariffs, or duties. “This treatment applies to enterprises such as those engaged in the assembly of components manufactured elsewhere and in the processing of re-exported goods, to those engaged in trade and financial operations, and to those located in special zones (e.g. special trade zones, free-trade zones, or tax-havens)” (OECD, 2001) In that sense, it is important to emphasize how a tax haven is identified. The OECD set out four key factors (OECD, 2009):

• No or only nominal taxes on the relevant income;
• Lack of effective exchange of information;
• Lack of transparency;
• No substantial activities.

In international Relations, one perspective that can help us to understand how the international systems works, is International Security, specifically economic and financial securitization. According to the OECD, financial security is expressed under the limits of disclosure of information.

“an efficient disclosure control method provides protection against exact disclosure or unwanted narrow estimation of the attributes of an individual entity, in other words, a useful technique prevents exact or partial disclosure. The security level is accordingly high. In the case of disclosure control methods for the release of microdata this protection is ensured if the identification of a respondent is not possible, because the identification is the prerequisite for disclosure” (OECD, 2005).

The OECD has taken the recommendations of good practices as an integral part of the Council for Further Combating Bribery of Foreign Public Officials in International Business Transactions. Thus financial security is described as “a system of financial and accounting procedures, including a system of internal controls, reasonably designed to ensure the maintenance of fair and accurate books, records, and accounts, to ensure that they cannot be used for the purpose of foreign bribery or hiding such bribery” (OECD, 2010).

Under this scope financial security has been more focused on data protection and control of information flows as two main key objectives. In this perspective, the financial system has brought security to investors in terms of disclosure and privacy in how wealth is being created. Although this can bring risk in other aspects such as money laundry activities for example, the secureness of information is a priority in the system.

2. Economic and financial security theory

Economic theory has provided support on how to allocate resources in the security arena and how consistent (in economic terms) a security strategy can be. Still the approach of securitising the economy has found difficulties in linking these two fields of research. Helen Nesadurai has been one of the few researchers discussing about this topic. On her paper: “Introduction: economic security, globalization and governance” she presents the argument that there are many risks in attempting to merge an International Security framework in the economic arena, although it is sustained that Security Theory is based in a multidimensional analysis.

Nesadurai (2006) states:

“Clearly, there is a range of ways we can think about economic security, each differing with regard to the key conceptual specifications identified by Baldwin: who/what is to be secured, for which values, from what threats, and by what means?” (p. 473)

A natural starting point is needed to proceed with this discussion, and this would be analysing the subject of security. Who is the subject of security in the economic and financial community? The answer is complex as the literature does not show a consensus on where to focus the subject of security in the economic arena. The most promising idea comes from the conceptualization risk, which is the most proximate way to understand what to securitize. David Baldwin (1997) has been producing some efforts to “re-evaluate” economics and security under a unified framework.

In this discussion Kahler points that globalisation is changing the concept of economic security, not only in descriptive aspects, but also on the actions that are behind economic theory, in this case the transactions produced in the international system. Especially he has focussed on the kind of transactions and how these could be damaging the economic system.

He points out:

“Globalization has produced new definitions of economic security centered on 2 types of unwanted transmissions across national borders: illicit flows that are more difficult to control and easier to disguise as legitimate economic transactions increase and economic shocks that can undermine economic growth, increase inequality and threaten political stability.” (Kahler, 2006: 493)

This contribution puts the focus on firms as an important factor in the production of security. Even though its performance is not being put into question, its behaviour could produce some doubts on deliverance of economic security.

3. What is discussed as subject of security

In Nesadurai (2004), Barry Buzan points out there is an unseen danger in defining economic security and there can be a possible misunderstanding in terms of who should be secured and how it should be protected. Focusing on firms as the visible subjects of security can pose a problem for the economic system, as this implies the threat is the market economy itself, because it questions the survival of businesses in the market. This would lead to protectionism as the single model for the form to survive.

In the institutional ground, the aspects of economic security are not as clear. The OECD states that security is more related to privacy of information and, in this case the concept, is more focused in providing security in the performance of multiple-transactions and assuring the parties in relation to those ones. Regardless on the kind of transactions are being made, the secured subject is anonymity, creating a sense of a stronger market economy, although accountability is less desired producing a more unstable system in the long run.

This lack of conceptualization on “who or what are we protecting” can lead to a misunderstanding on how financial tools, like the offshore business model, are being used. The main focus of these companies is to secure the flow of capital in the international financial system. Many start-ups or medium sized businesses looking for an internationalization strategy see the offshore model as a feasible option. In addition to this, domestic tax policies can be very aggressive in diminishing the capabilities of the business to succeed. So here the problem lies in the clash of perceptions on security. (1) the securement of the best possible way to allocate financial resources, or (2) the best possible way to secure internal information for domestic purposes.

In modern economic systems the financial flow is an essential element for survival. In this case, a system with no barriers is an important factor to secure financial resources. Domestic politics can argue that in essence financial resources must be secured within a nation, and retribution are to be expected. Securing resources of private economic activity is a challenge for the state and tax bureaucracy, producing complex duty policies produces less incentives for firms to stay in one single country.

In this framework offshore companies appear to produce some relief into the business community. Trying to relocate capital in the best possible way (and developing and international expansion of the firm) and attempting to produce less harm in domestic terms (paying lesser taxes, but still upholding tax commitments). This is why in terms of economic security the subject of analysis must be re-evaluated in order to secure the system not the actors involved.

4. The political limitations of a financial tool

It has been noted that besides the importance of fiscal policies for an economy, it may also be considered as a barrier for business development. The OECD has remarked that transparency and regulation are not embedded factors, and should be main pillars of a healthy economic and finance system.

However, after the controversial Panama Papers, people who had access to the mechanism of offshore enterprises have been questioned and judged in open media discussion leading to reputational damage. Thus, questions such as; “why do tax havens still exist?” arise. The answer is rather simple: tax havens still exist because in order to shut them down, the consent of the involved countries who make transactions there is needed (Forbes, 2010) and also because changing the rules of the game could have, a negative impact on the international financial system.

That being said, Feinschreiber and Kent (2013), recommended an agenda with some initiatives to regulate the disclosure of tax information:

• The Global Forum on Transparency and Exchange of Information for Tax Purposes that was set up in 2000 with the purpose of agreeing to global tax standards. It consists of peer review report that monitors compliance with this international standard while suggesting improvements for the information exchange practices. Nevertheless, the Global forum presents failures in addressing penalties and remedies for member countries that receive a low peer review rating. It also fails to address a single treatment to non-member countries.

• Global Forum of Multinational Agreements focuses on two specific issues: dedicated tax information exchange agreements (TIEAs) and the Convention on Mutual Administrative Assistance in Tax Matters. With these agreements, “the exchange of information was only by specific requests based on the existing network of tax treaties between jurisdictions can now be between jurisdictions that do not have large tax treaty networks” (Feinschreiber & Kent, 2013, pág. 26).

• Base Erosion and Profit Shifting (BEPS) whose action plan would include six specific proposals developing transfer pricing rules that would preclude the shifting of intangibles, impose taxation based on digital goods and services and increase anti-avoidance measures through General Anti-Avoidance Rules (GAARs), Controlled Foreign Companies (CFCs) rules, Limitation on Benefits (LOB) rules and other abuse provisions through the tax treaty network.

All these measures have been discussed and taken into consideration, however, it seems that no significant changes have occurred, the apparent lack of political will to produce a significant change in the international scenario seems limited. Therefore, global leaders, politicians, and well-known characters that can influence in the domestic politics agenda will continue to use this mechanism. What remains unanswered is the kind of use that they will be giving to these financial tools. So in order to know where the money came from, what are doing with it and where the flows are headed, information is needed but it cannot be obtained due to privacy laws and the silent agreement of some nations who are not willing to implement changes.

5. Bibliography

• Baldwin, D. A. (1997). The Concept of Security. Review of International Studies, Vol. 23, No. 1, 5-26.
• Feinschreiber, R., & Kent, M. (2013, September). OECD’s Strategic Initiatives for Tax Information Exchange .
• (2010, July 22). Our Hypocrisy On Tax Havens.
• Kahler, M. (2006). Economic security in an era of globalization:definition and provision. The Pacific Review.
• Nesadurai, H. E. (2004). Introduction: economic security, globalization and governance. The Pacific Review.
• (2001, September 25). Organisation for Economic Co-operation and Development. Retrieved from https://stats.oecd.org/glossary/detail.asp?ID=1896
• (2005, November 22). Organisation for Economic Co-operation and Development. Retrieved from https://stats.oecd.org/glossary/detail.asp?ID=6988
• (2009, September 28). Countering Offshore Tax Evasion: Some Questions and Answers. Retrieved from Organisation for Economic Co-operation and Development: https://www.oecd.org/ctp/harmful/42469606.pdf
• (2010, February 18). Good Practice Guidance on Internal Controls, Ethics, and Compliance. Retrieved from http://www.oecd.org/daf/anti-bribery/44884389.pdf
• Vice News. (2016, April). Vice News. Retrieved from https://news.vice.com/article/the-panama-papers-massive-leak-reveals-the-global-elites-secret-cash-havens