4. The impact of tax haven financing on developing economies within BlackRock investments

In the previous article, we have covered the output: tax optimization techniques allowed by financial products provided by BlackRock (and other asset managers). That is, how investors use BlackRock’s products to reduce their tax bills in the United States. 

Now let’s look at the input, or how BlackRock enters the capital of groups domiciled in tax havens, and how it impacts the financial debt and ecology of developing countries. 

It is an established fact that multinational groups use tax havens, also known as offshore financial centers, to create branches that are often mere postal boxes in a building hosting hundreds of other similar empty businesses. It is less acknowledged that these offshore branches can emit shares or other types of financial products, which are in turn purchased by institutional investors like BlackRock, who repackage them into investment products, such as ETFs, to sell them on stock markets across the globe. 

The motives for a company to create a financial branch in a tax haven are the object of intense discussion. Bankers, accounting consultants and the companies themselves may argue that offshore financing offers political stability and legal technicalities that are fit for their commercial purpose, as per this Wall Street Journal opinion from 2008. I couldn’t find a more recent defense of tax havens. Critics on the left argue that the real motivation is none but greed, and that fiscal optimization of foreign investments in developing countries is damaging their economy and forcing them into a debt trap. Developping economies with high levels of inequality rely on the tax income collected from the wealthy. When foreign corporations apply tax optimisation on the extraction of labour and natural resources, the state is unable to collect its budget for public services and has no other choice but to borrow once more. This, in a nutshell, is the debt trap.

In addition to the fiscal argument, the ecological cost of tax haven financing needs to be exposed, and consequently the responsibility beared by financiers like BlackRock, with their unique control over capital flows and capacity to act over investment decisions. 

Tax havens impact ecology by offering financial secrecy to companies conducting destructive operations, and by offering means and incentives to corrupt individuals willing to enrich themselves at the expense of nature and the wellbeing of the community who depends on it. 

In a report released in 2016, Interpol sounded the alarm of increasing environmental crime fueled by a high demand for food, grain, timber and endangered species. Continued development is causing humans to push back on wild nature wherever it remains. But economic growth and consumption are not the sole factors fueling ecological destruction. Tax havens play an active role by allowing perpetrators to hide from justice and provide legal conduits for money laundering. Offshore shell companies allow organized crime to stealthily mix legal and illegal timber, for example, while laundering the proceeds of criminal activities at the same time. As nature becomes increasingly scarce, tax havens provide criminals with legal methods to cash in on the high demand for natural products, while the world is trying to figure out how to preserve its depleting biological reserves. 

Although academic research on the ecological impact of investments routed through tax havens is not easy to find, some of it has been well received. Nature published a paper establishing a correlation between tax haven investments and deforestation in the Amazon, as well as between illegal fishing and vessels flagged in tax havens. 

In addition to the ecological impact of tax haven financing, it must be said that multinational groups based in the Northern hemisphere tend to invest in developing economies of the South through tax havens. Corporate structure analysis suggests that Northern groups systematically use tax havens to invest in countries characterized with high capital flight, which is used to measure how much capital is leaving the country for tax havens. Capital flight in developing countries is also correlated with the abundance of natural resources. BlackRock possesses the most sophisticated financial data of Northern corporations, so it has unique knowledge, and potentially control, over this corporate tax optimization practice.

These economic investigations make it clear that multinationals of the Global North deliberately shift the proceeds of the extraction of natural resources in Southern developing economies to low-tax, secretive jurisdictions. 

Tax havens provide an efficient way to avoid paying taxes in the countries where the natural resources are extracted, while fiscal institutions of developing countries are hardly equipped to challenge the legal staff deployed by Northern corporations to defend their interests in court.

In parallel, the presence of tax havens creates an incentive for powerful actors in the Global South to capture a rent from the exploitation of natural resources instead of allocating this income to the common good. Where public institutions and the justice system are fragile and insufficiently funded, tax havens create an environment of corruption and lawlessness where it becomes dangerous, almost impossible for entrepreneurs and civil servants to abide by the law and manage natural resources responsibly.   

This article is the fourth in a series: Sink logic: how BlackRock and tax havens worsen the climate and debt crisis