The Elusive Banker: Using Hurricanes to Uncover (Non-)Activity in Offshore Financial Centers

Abstract

This paper studies financial service provision booked through offshore financial centers (OFCs). Based on several novel data sources and recent advances in event study methodology, I exploit the natural experiment of re-occurring hurricanes hitting small islands and compare local reactions to reactions in financial service activity. I find that local conditions, captured by monthly satellite data on nightlight intensity, deteriorate significantly for nine months. However, in OFCs, the international bank sector does not react. Non-OFC islands on the other hand do show strong negative reactions. Similar (non-)reactions are visible in equity prices. Additionally, a link of OFC service provision to activity in London, Tokyo, and New York is visible in leaked data. Finally, a long term relationship between offshore finance and local development is absent, but only on OFCs. These results indicate that international regulation attempts that aim at forcing OCFs to provide information on financial service activity could be targeted better, they show that we mis-allocate financial risk to OFCs, and they cast doubt on offshore finance as a valid development strategy.

So close and yet so far: The ability of mandatory disclosure rules to crack down on offshore tax evasion

“…We retain all country-pairs for the purpose of our main analysis, but we exclude cross-border inter-bank deposits because they are not identified as a channel for tax evasion (Johannesen and Zucman 2014). Although the data exhibit certain limitations in terms of coverage and granularity, 16 they are extensively used in the literature on cross-border tax evasion because they offer a sound proxy for capturing the reaction of tax evaders to increased scrutiny (e.g., Casi et al 2020;Johannesen and Zucman 2014;Langenmayr and Zyska 2021;Miethe 2020)). Specifically, the BIS-LBS data enable us to observe, for example, the total amount of deposits French residents own in active banks located in 31 deposit countries, including several well-known tax havens.…”

Tax Haven Welfare and the Crackdown on Secrecy: Evidence from Night Light Emissions

“…Tax haven countries and offshore financial centres act as hubs for an increasing share of international capital (Alstadsaeter et al, 2018;Milesi-Ferretti and Lane, 2017;Zucman, 2013;Damgaard et al, 2019;Miethe, 2020). These tax havens are often considered as instruments to conduct profit shifting, tax evasion, and illicit financial flows (Miethe, 2020).…”

“…Our research relates to and expands several strands of the literature. One strand has studied the effect of policy measures on cross-border bank deposits (Johannesen, 2014;Johannesen and Zucman, 2014;Langenmayr, 2017;Menkhoff and Miethe, 2019;Miethe, 2020). There are also papers that look at the effects of policy measures on the outbound investments coming from tax haven jurisdictions (Hanlon et al, 2015;Heckemeyer and Hemmerich, 2020;Miethe, 2020).…”

“…The allocation of (hidden) wealth is considered in Andersen et al (2017Andersen et al ( , 2020 and Miethe (2020).…”

“…Firms often use subsidiaries in tax haven countries in order to avoid taxation. For an overview, see Beer et al (2020), Riedel (2018), Slemrod (2015), or Miethe (2020). The literature draws on discrepancies in international financial statistics (Clausing, 2020;Torslov et al, 2020;Zucman, 2013;Miethe, 2020) or uses microeconomic data for multinational firms (Becker et al, 2020;Johannesson et al, 2017;Miethe, 2020).…”