Organizational Governance

Study Reveals How Tax Havens Are Subsidizing Environmental Destruction

The release of classified documents such as the so-called Panama and Paradise papers in recent years has provided a glimpse into the opaque world of tax havens and their role in the global economy.

By Sustainable Brands | Published 6 years ago | About a 5 minute read

The release of classified documents such as the so-called Panama and Paradise papers in recent years has provided a glimpse into the opaque world of tax havens and their role in the global economy. The subject brings to mind any number of nefarious business dealings — from funding human and drug trafficking to terrorism — so it should come as no surprise that a new study by a group of researchers from Sweden and The Netherlands shows tax havens’ role in supporting economic activities linked to environmental destruction, and shielding participating companies from accountability.

The study, published this week in the journal, Nature Ecology and Evolution, is the first to elaborate on and quantify connections between tax havens and the environment — in this case, with regard to global fisheries and the beef and soy industries in the Brazilian Amazon. The secrecy that companies gain from using tax havens helps them reduce their tax payments, by transferring money among jurisdictions to take advantage of low tax rates. But the lack of transparency also enables companies to easily hide their involvement with any environmentally destructive activities.

As the study points out, billions of dollars travel through the 52 countries and territories internationally recognized as tax havens, depriving the world of roughly $200 billion USD per year in global tax revenue, which the authors assert undermines "socially and environmentally beneficial public investments" such as the ambitions outlined in the UN Sustainable Development Goals and the Paris Agreement. As Beatrice Crona, associate professor at the Stockholm Resilience Center at Stockholm University and co-author of the study, told the Guardian, the funds traced for the study likely represent only a fraction of the total amount channeled through tax havens that ends up funding environmentally destructive activities.

Victor Galaz, also of the Stockholm Resilence Centre and lead author of the study, told the Guardian: “The use of tax havens is not only a sociopolitical and economic challenge, but also an environmental one. While the use of tax haven jurisdictions is not illegal, financial secrecy hampers the ability to analyze how financial flows affect economic activities on the ground and their environmental impacts.”

For example, the study found that 68 percent of all investigated foreign capital to nine focal companies (which the study does not name) in the soy and beef industries in the Brazilian Amazon — as recorded by the Central Bank of Brazil — was transferred through one, or several, known tax havens. This represents as much as 90–100 percent of foreign capital for some companies investigated. Soy and beef production are both considered culprits for rampant deforestation in the Amazon.

On the oceans front, the study has, for the first time, linked tax havens with illegal, unreported and unregulated (IUU) fishing, which has been identified by the UN General Assembly as "one of the greatest threats to fish stocks and marine ecosystems." The study found that while only 4 percent of all registered fishing vessels are currently flagged in a tax haven, 70 percent of the known vessels implicated in IUU fishing are, or have been, flagged under a tax haven jurisdiction.

The ownership of fishing vessels has long been of interest to environmental groups, because of the vast differences that exist in the monitoring and regulation of fishing in various regions. Vessel owners can use so-called “flags of convenience” — countries to which vessel owners can register their vessels with limited or no sanctioning mechanisms if they are identified as operating in violation to international law — to obfuscate their activities. The huge overlap identified by the study of vessels known for IUU fishing and flying flags of convenience from acknowledged tax havens shows the extent of the problem.

Tony Long, CEO of Global Fishing Watch, told the Guardian: “[The paper] adds to the growing evidence illustrating the criminal and shady practices providing cover for IUU fishing. An international focus on flags of convenience and their insufficient diligence in monitoring their flagged vessels is long overdue.”

In light of the results of the study, environmental groups are calling on both governments and business to make financial flows more transparent.

“This is dirty money, used for fuelling illegal activities that are driving the global environmental crisis,” Elaine Gilligan, international campaigner at Friends of the Earth, told the Guardian. “Aggressive tax evasion deprives communities of funds needed for a range of measures, among them environmental protections that play a part in fighting climate chaos.”

“Nature is facing unprecedented threats as we continue to take more resources from the world’s richest natural areas,” added Andrea Marandino, sustainable finance manager at WWF. “Tax havens make it very difficult to track international flows of capital and that means there is no accountability. If we are to secure a future for areas like the Amazon, we need to see greater corporate transparency and traceability of flows of capital around the world that fund the destruction of nature.”

The study also highlights key research challenges for the academic community that emerged from its findings and presents a set of proposed policy actions that would put tax havens on the global sustainability agenda.