A new policy research working paper published by the World Bank finds that offshore financial centres benefit perversely from aid disbursements to highly aid-dependent countries. The paper finds that foreign “aid payments coincide with sharp increases in bank deposits in offshore financial centers known for bank secrecy and private wealth management, but not in other financial centers.”
The new research paper was authored by Jørgen Juel Andersen (BI Norwegian Business School), Niels Johannesen (University of Copenhagen and CEBI), and Bob Rijkers (The World Bank) and is a product of the Development Research Group, Development Economics at the World Bank. The World Bank describes this as being “part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world.”
While it is possible that foreign aid donated by the Isle of Man Government is at risk of such diversions, fortunately, strict Manx rules against money laundering appears to deter foreign aid leaking to the Isle of Man. The researchers reported:
“The overall increase in haven deposits around aid disbursements is driven by accounts in Switzerland and Luxembourg while the responses in Belgium and Jersey (combined with Guernsey and Isle of Man) exhibit statistically insignificant changes. This is consistent with the notion that the increase in haven deposits around aid disbursements reflect diversion to secret private accounts.”Elite Capture of Foreign Aid – Evidence from Offshore Bank Accounts, p.18
“This research shows that European jurisdictions such as Luxembourg and Switzerland are likely being used to launder money taken from some of the poorest nations in the world. The European Union needs to crack down on such money laundering,” said Michael Josem of the Manx TaxPayers’ Alliance.
7.5% of foreign aid “leaks” to money laundering havens in mainland Europe
The World Bank-published research found that “The implied leakage rate is around 7.5 percent at the sample mean and tends to increase with the ratio of aid to GDP. The findings are consistent with aid capture in the most aid-dependent countries.”
The researchers confirmed that “the estimates are not confounded by contemporaneous shocks such as civil conflicts, natural disasters, and financial crises, and are robust to instrumenting with predetermined aid commitments.”
The fact that money does not flow to high-quality jurisdictions such as the Isle of Man and other Crown Dependencies, but does flow to tax havens known for money laundering in mainland Europe, is consistent with corruption by Government leaders. The paper found that “Aid capture by ruling politicians, bureaucrats and their cronies is consistent with the totality of observed patterns: it can explain why aid does not trigger flows to non-havens, why the capital outflows occur precisely in the same quarter as the aid inflows and why the estimated effects are larger for more corrupt countries.”
The paper is available online in full from the World Bank.
This paper is a product of the Development Research Group, Development Economics. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world.