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

Uncovering Offshore Financial Centers: Conduits and Sinks in the Global Corporate Ownership Network Frank Takes FENS Greenwich May 19, 2017 Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 1 / 34

CORPNET CORPNET Corporate Network Governance: Power, Ownership and Control in Contemporary Global Capitalism What are the features, origins and power political consequences of corporate governance networks in modern economic life? Nature: map and analyze the network Origins: uncover generating mechanisms Power: understand how it operates Work with Javier Garcia-Bernardo, Jan Fichtner & Eelke Heemskerk Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 2 / 34

Corporate networks Nodes are organizations/firms/companies/corporations Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 3 / 34

Corporate networks Nodes are organizations/firms/companies/corporations Links represent: Trade Loans Ownership Board interlocks Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 3 / 34

Corporate networks Nodes are organizations/firms/companies/corporations Links represent: Trade Loans Ownership Board interlocks Figure: Board interlock network of 30 firms Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 3 / 34

Corporations Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 4 / 34

Board interlock network F.W. Takes and E.M. Heemskerk, Centrality in the Global Network of Corporate Control, Social Network Analysis and Mining 6(1): 1-18, 2016. Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 5 / 34

Community detection E.M. Heemskerk and F.W. Takes, The Corporate Elite Community Structure of Global Capitalism, New Political Economy 21(1): 90-118, 2016. Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 6 / 34

Community detection 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. Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 7 / 34

Corporate networks Nodes are organizations/firms/companies/corporations Links represent: Trade Loans Ownership Board interlocks Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 8 / 34

Ownership network S. Vitali, J.B. Glattfelder and S. Battiston, S, The network of global corporate control, PloS one 6(10), e25995, 2011. Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 9 / 34

Offshore financial centers Offshore Financial Center (OFC): jurisdiction (country) that attracts financial activities from abroad through low taxation and lenient regulation. Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 10 / 34

Offshore financial centers Offshore Financial Center (OFC): jurisdiction (country) that attracts financial activities from abroad through low taxation and lenient regulation. OFCs process $21 000 000 000 000 to $32 000 000 000 000 yearly Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 10 / 34

Offshore financial centers Offshore Financial Center (OFC): jurisdiction (country) that attracts financial activities from abroad through low taxation and lenient regulation. OFCs process $21 000 000 000 000 to $32 000 000 000 000 yearly Problematic because: Unnecessary system complexity Accountability Tax avoidance Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 10 / 34

Characterizing OFCs So, which countries are OFCs? Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 11 / 34

Characterizing OFCs So, which countries are OFCs? Heavily debated Definitions differ Highly contested and politicized Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 11 / 34

Characterizing OFCs So, which countries are OFCs? Heavily debated Definitions differ Highly contested and politicized FDI/GDP ratio approach: substantially more Foreign Direct Investment than expected based on GDP? OFC Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 11 / 34

Characterizing OFCs So, which countries are OFCs? Heavily debated Definitions differ Highly contested and politicized FDI/GDP ratio approach: substantially more Foreign Direct Investment than expected based on GDP? OFC... Problematic because: FDI systematically underreported and subject to politics No exact money flows, just A to B OFC homogeinity assumption Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 11 / 34

Characterizing OFCs So, which countries are OFCs? Heavily debated Definitions differ Highly contested and politicized FDI/GDP ratio approach: substantially more Foreign Direct Investment than expected based on GDP? OFC... Problematic because: FDI systematically underreported and subject to politics No exact money flows, just A to B OFC homogeinity assumption Solution: Networks! Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 11 / 34

Our data Orbis database Based on data at Chambers of Commerce 71,201,304 ownership links between firms Better coverage for high-income countries Poor data quality fiscal secrecy Findings likely represent lower bound Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 12 / 34

Ownership network Ownership network N = (V, E) Nodes are firms i V Have value associated to them R i Are based in a particular country φ(i) Directed links indicate ownership relation / value flow (i, j) E Have an associated weight in [0; 1] w(i, j) w(i, j) = 0.7, R i = 4000 gives: 4000 i 0.7 j Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 13 / 34

Ownership paths and value Ownership path p = (v 1, v 2,..., v l ) with (v i, v i+1 ) E for 1 i < l Multiplicative ownership l 1 w p = w(v i, v i+1 ) i=1 Path value V p = R v1 w p p = (a, b, c, d) and w p = 0.35 and V p = 1400 4000 a 0.7 1.0 0.5 b c d Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 14 / 34

Ownership paths OFCs Franziskaner 10% AB Germany Holding AB Western European Holding B.V Anheuser-Busch InBev 35% Stichting AB InBev Jointly-owned EPS Participations SARL BRC Luxembourg SA BR Global Bahamas 82% S-BR Global Investments Limited 55% Santa Erika LTD Inpar investment fund Stichting Enable Inpar V.O.F. Mr Jorge Paulo Lemann Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 15 / 34

Ownership paths OFCs Germany Netherlands Belgium Luxembourg Franziskaner 10% AB Germany Holding AB Western European Holding B.V Anheuser-Busch InBev 35% Stichting AB InBev Jointly-owned EPS Participations SARL BRC Luxembourg SA Bahamas BR Global Bahamas 82% S-BR Global Investments Limited 55% Santa Erika LTD Inpar investment fund Stichting Enable Inpar V.O.F. Brazil/Switzerland Mr Jorge Paulo Lemann Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 16 / 34

Ownership paths OFCs Germany Netherlands Belgium Luxembourg Franziskaner 10% AB Germany Holding AB Western European Holding B.V Anheuser-Busch InBev 35% Stichting AB InBev Jointly-owned EPS Participations SARL BRC Luxembourg SA 35% 50% Bahamas BR Global Bahamas 82% S-BR Global Investments Limited 55% Santa Erika LTD 45% Inpar investment fund Stichting Enable Inpar V.O.F. Brazil/Switzerland Mr Jorge Paulo Lemann Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 17 / 34

Ownership chains An ownership chain of a firm v is an ownership path p which: 1 starts at node v, 2 is a simple path (has no repeated nodes), 3 has multiplicative ownership value greater than θ, i.e., w p θ and 4 is maximal in length, i.e., cannot be extended by adding another node. Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 18 / 34

Ownership chains An ownership chain of a firm v is an ownership path p which: 1 starts at node v, 2 is a simple path (has no repeated nodes), 3 has multiplicative ownership value greater than θ, i.e., w p θ and 4 is maximal in length, i.e., cannot be extended by adding another node. Set of all ownership chains starting at v is denoted C v Enumeration is possible using a DFS search for each node Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 18 / 34

Ownership chains An ownership chain of a firm v is an ownership path p which: 1 starts at node v, 2 is a simple path (has no repeated nodes), 3 has multiplicative ownership value greater than θ, i.e., w p θ and 4 is maximal in length, i.e., cannot be extended by adding another node. Set of all ownership chains starting at v is denoted C v Enumeration is possible using a DFS search for each node Ultimately, C = v V C v is the set of all ownership chains Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 18 / 34

Ownership chunks Ownership chunk: subpath of length 2, 3,..., l (generated from a chain of length l) From all chains C, generate all ownership chunks, forming set H Ownership chunks of length x: H x. Chunk q H has an associated value V p (q) or in short V p q. Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 19 / 34

Ownership chunks Ownership chunk: subpath of length 2, 3,..., l (generated from a chain of length l) From all chains C, generate all ownership chunks, forming set H Ownership chunks of length x: H x. Chunk q H has an associated value V p (q) or in short V p q. 4000 a 0.7 1.0 1.0 0.5 b c d e Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 19 / 34

Ownership chunks Ownership chunk: subpath of length 2, 3,..., l (generated from a chain of length l) From all chains C, generate all ownership chunks, forming set H Ownership chunks of length x: H x. Chunk q H has an associated value V p (q) or in short V p q. 4000 a 0.7 1.0 1.0 0.5 b c d e Chunks of length 3 of p = (a, b, c, d, e): q 1 = (a, b, c) with V p q 1 = 2800 q 2 = (b, c, d) with V p q 2 = 2800 q 2 = (c, d, e) with V p q 3 = 1400 Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 19 / 34

Country chains Map each node v in a chunk q to its country φ(v) Merge subsequent same country nodes into country chain g New valuation function V φ (g) for country chains, aggregating value through chunks with different value origins to the country level Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 21 / 34

Country chains Map each node v in a chunk q to its country φ(v) Merge subsequent same country nodes into country chain g New valuation function V φ (g) for country chains, aggregating value through chunks with different value origins to the country level 4000 a NL q: 1.0 0.7 1.0 0.5 b c d NL LU LU e VG Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 21 / 34

Country chains Map each node v in a chunk q to its country φ(v) Merge subsequent same country nodes into country chain g New valuation function V φ (g) for country chains, aggregating value through chunks with different value origins to the country level 4000 a NL q: 1.0 0.7 1.0 0.5 b c d 4000 NL NL LU g: 0.7 LU 0.5 LU VG e VG Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 21 / 34

Country chains Germany Netherlands Belgium Luxembourg Franziskaner 10% AB Germany Holding AB Western European Holding B.V Anheuser-Busch InBev 35% Stichting AB InBev Jointly-owned EPS Participations SARL BRC Luxembourg SA 35% 50% Bahamas BR Global Bahamas 82% S-BR Global Investments Limited 55% Santa Erika LTD 45% Inpar investment fund Stichting Enable Inpar V.O.F. Brazil/Switzerland Mr Jorge Paulo Lemann Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 22 / 34

Results on our data 71,201,304 ownership links between firms 11,404,819 transnational ownership chains threshold θ = 10 3 chain value > 1 108,159,506 chunks 377,098 country chains Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 23 / 34

Results on our data 71,201,304 ownership links between firms 11,404,819 transnational ownership chains threshold θ = 10 3 chain value > 1 108,159,506 chunks 377,098 country chains 7,172 chains of size two 52,655 chains of size three Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 23 / 34

Sink countries A country is a sink if less value leaves the country than enters the country. Measured using G 2 : country chains of length 2. Sink-OFC centrality of a country c is defined as C sink (c) = g G 2 g[1]=c V φ (g) g G 2 g[0]=c V φ (g) g G 2 V φ (g) Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 24 / 34

Sink countries A country is a sink if less value leaves the country than enters the country. Measured using G 2 : country chains of length 2. Sink-OFC centrality of a country c is defined as C sink (c) = g G 2 g[1]=c V φ (g) g G 2 g[0]=c V φ (g) g G 2 V φ (g) Problem: metric depends on size of country. Solution: normalize based on value GDP c of the country, obtaining: i I C sink normalized (c) = C sink (c) GDP i GDP c Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 24 / 34

Sink countries ISO Country name C s ISO Country name C s ISO Country name C s VG British Virgin Islands 5235 MH Marshall Islands 100 BZ Belize 38 TW Taiwan 2278 MT Malta 100 GI Gibraltar 34 JE Jersey 397 MU Mauritius 75 AI Anguilla 27 BM Bermuda 374 LU Luxembourg 71 LR Liberia 17 KY Cayman Islands 331 NR Nauru 67 VC St. Vincent & Gran. 14 WS Samoa 277 CY Cyprus 62 GY Guyana 14 LI Lichtenstein 225 SC Seychelles 60 HK Hong Kong 14 CW Curacao 115 BS Bahamas 40 MC Monaco 11 Table: List of sink-ofcs, ordered by sink centrality value C s. Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 25 / 34

Conduits The extent to which a country is conduit is measured using G 3 : country chains of length 3. Inward conduit-ofc centrality measures the value flowing from a sink-ofc, into the conduit country c, out to any country: g G C conduitin (c) = 3 g[1]=sink g[2]=c V φ (g) g G 3 V φ (g) Here, g[i] = sink denotes that the i-th node in the chain is a sink. Outward conduit-ofc centrality measures the value flowing from any country, into conduit c, out to a sink-ofc: Normalize by GDP C conduitout (c) = g G 3 g[3]=sink g[2]=c V φ (g) g G 3 V φ (g) Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 26 / 34

Conduits ISO Country name Non-normalized C c out Non-normalized C cin C c out C cin NL The Netherlands 7.4 10 11 3.8 10 11 18.6 22.5 GB United Kingdom 3.8 10 11 1.3 10 11 3.1 2.4 CH Switzerland 2.2 10 11 2.7 10 10 6.9 2.0 SG Singapore 7.2 10 10 2.2 10 10 5.1 3.8 IE Ireland 6.4 10 10 3.3 10 10 5.9 7.2 Table: List of conduit-ofcs, ordered by non-normalized C cout. Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 27 / 34

Country chains Germany Netherlands Belgium Luxembourg Franziskaner 10% AB Germany Holding AB Western European Holding B.V Anheuser-Busch InBev 35% Stichting AB InBev Jointly-owned EPS Participations SARL BRC Luxembourg SA 35% 50% Bahamas BR Global Bahamas 82% S-BR Global Investments Limited 55% Santa Erika LTD 45% Brazil/Switzerland Inpar investment fund Stichting Enable Inpar V.O.F. Mr Jorge Paulo Lemann Conduit Sink 135% 65% 35% 17.5% 17.5% 9.5% 8% 8% Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 28 / 34

SI ME HR BA SM SK AT HU ML SN BJ TG GN SL BF GH EG TZ NG BE MU KZ JO SB ZA UZ IN QA LS SA KR MO BN CN AW MN TH WS KY JP FM MY PH AU NZ BH VU SE AI DM BY FI AZ DK GY II MA GE NO JE BS KH CW BO BR CO AG AR CL LK LY SR FJ AL AO CV EE IS MT IE BM SG RE LV PT MH GB LT BZ CD US TR HK NR IM VG ID CH MD UA RU DE TW VN SZ ES FR ZM RW GG KN RO CY NL LU OM DJ GM GI PL LR AE TD CI ZW KE BW GA BG SC GR IT MC PS VC CZ LI LB PY CG PK RS MK CA PA BB IL GD LC TT PG CR UY EC VE JM NI PE SV HN KW Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 29 / 34

Conduit country specialization Value x10 11 8 TW x10 12 LI 3.5 HK RU 7 MT CZKY x10 11 3.0 UA 3 2.5 6 IT FR ES LU BM CY IT CW GI BE BM 2.0 5 BE CHCY SG DE IT CA KY HKBM CH 1.5 FR SG KY DE NL LU KY AU 4 NO VG 2 VG BS 1.0 IE GB CY GB GB GB IT JE FR BM RU SG TW LU BM BM SG CY BM FR BM 0.5 3 DE IE NL NL CN KY KY BM BM KY CN GB US RU DE LU 0.0 LU LU 2 LUCH 1 NL CN NL AU HKVG HK GB CH GB NL NL CN TW LU HK VG BM CY KY JE TW MT MU LI CW BS HK HK RUVG NL SGJE HK LU GB VG LU VG 1 CH KY AU HK GB HK VG NL KY BM GB TW TW VGGB VG KY CN LU CNHKJP LU BM CY 0 0 AT SG AU HK KYCN TW NL TW LU NL GB LU HK CY BE CH VG KY BM SG IE US RU CN TW WS CW GI JE Value entering the sink-ofc Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 30 / 34

Conduit sector specialization A Fraction of value 0.30 0.25 0.20 0.15 0.10 0.05 0.00 26 28 46 62 08 26 701 82 642 46 701 09 46 64 641 SO CO SI SC SS CS SCS Percentage of value going through the country, by sector Retail Manufacture Finance Transportation Administrative B 100 681 262 104 701 245 661 649 642 80 829 089649 829 477661 650 949 701 661 642463 829 702 701 461 522 261 641 661110829 829 829 245 262 110 829 641 642 642 661 60 291 642 101 262 821 829 467 701 262 091 651 811 701 701 40 110 263 261 642 701642 089 650701 829 467 20 642 261 072 642 642 641 661 642 643 282 465 0 so NL si so GB si so LU si so CH si so HK si so SG si so IE si Extractive Unknown Consultancy/ Inform./Communic. Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 31 / 34

Findings The Netherlands is the conduit between European companies and Luxembourg Hong Kong (for China) and Luxembourg (for EU countries) serve as the main countries in the route to typical tax havens The United Kingdom is the conduit between European countries and former members of the British Empire, such as Hong Kong, Jersey, Guernsey and Bermuda Cyprus is the conduit for Russian firms Ireland is prominent in financial leasing and head offices Luxembourg specializes in support activities Hong Kong and Switzerland are dominant in financial intermediation and derivatives dealing Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 32 / 34

Conclusion Corporate networks explicitly and implicitly contain rich information on corporations and jurisdictions Offshore financial centers (OFCs) come in two flavors: conduits and sinks OFCs can be detected using corporate ownership chains Conduits are highly specialized in serving particular countries and industrial sectors Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 33 / 34

Conclusion Corporate networks explicitly and implicitly contain rich information on corporations and jurisdictions Offshore financial centers (OFCs) come in two flavors: conduits and sinks OFCs can be detected using corporate ownership chains Conduits are highly specialized in serving particular countries and industrial sectors The Netherlands is the largest value conduit in the world Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 33 / 34

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Thank you! Questions? Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 34 / 34

Thank you! Questions? http://franktakes.nl http://corpnet.uva.nl Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 34 / 34

Thank you! Questions? http://franktakes.nl http://corpnet.uva.nl F.W. Takes and E.M. Heemskerk, Centrality in the Global Network of Corporate Control, Social Network Analysis and Mining 6(1): 1-18, 2016. E.M. Heemskerk and F.W. Takes, The Corporate Elite Community Structure of Global Capitalism, New Political Economy 21(1): 90-118, 2016. 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. J. Garcia-Bernardo, J. Fichtner, E.M. Heemskerk and F.W. Takes, Uncovering Offshore Financial Centers: Conduits and Sinks in the Global Corporate Ownership Network, arxiv 1703.03016, 2017. Uncovering Offshore Financial Centers FENS Greenwich May 19, 2017 34 / 34