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How dark offshore money has threatened democracy

Wednesday, January 03, 2024 - 5 min read

Tax havens are particularly useful for people who have ill-begotten wealth derived from bribes, theft, and other forms of corruption.

By BD REPORTER

Democracies around the world face two major threats: a crisis of legitimacy, and increasingly aggressive authoritarian regimes.

What links both and makes them much more dangerous is the pernicious effect of dark money transfers, particularly those that pass through offshore tax havens and jurisdictions with excessive financial secrecy.

Tax havens are particularly useful for people who have ill-begotten wealth derived from bribes, theft, and other forms of corruption. Being able to hide the identity of parties in any financial transaction is a key requirement to operating a successful haven.
This form of financial engineering corrupts democracy. Even worse, it exacerbates the second major threat we face: the strengthening of authoritarian regimes. Dark offshore money makes it easier to support candidates, manipulate public opinion, and persuade people to vote for a dictator.
The dark money of the Russian oligarchs has long been a mainstay of the country’s economy and political system. President Vladimir Putin’s close relationships with sources of dark money have been well documented. Less widely appreciated is the way that non-transparent transactions have allowed the Chinese government to construct a vast global empire of influence.

Specifically, there needs to be full disclosure to G7 tax authorities regarding who owns what assets and who makes which payments to whom.
Alas, some tax evasion is legal, owing solely to the lobbying power of the ultra-wealthy and powerful consultants and accountants, who will no doubt argue that productive businesses will move elsewhere if loopholes are closed. This should be countered with a simple principle that should be shared across the G7: business profits are taxed in proportion to where sales occur.
For tech barons who continuously talk about using AI for good, here is a challenge: support the quick rollout of new AI-based tools for clamping down on tax evasion and tax havens.

Simon Johnson, a former chief economist at the International Monetary Fund, is a professor at the MIT Sloan School of Management. Daron Acemoglu is Institute Professor of Economics at MIT. Project Syndicate