Cross-posted from The Global Sociology Blog.

Via Le Monde, everybody hates tax havens but they do not exist at the margins of the global financial system. If anything, they are an integral part of it and every year, billions of dollars land there. They are an integral part of the infrastructure of international finances.

What circulates through tax havens? Clean and dirty money (proceeds from illegal activities that end up there for purposes of money-laundering), tax-evasion money. Tax havens were allowed to prosper by all the economic powers, but now, they are worried because they have realized that these havens make funding terrorism easier and more discreet. In the past months, we also discovered that these place facilitate tax fraud on a grand scale, as the case of Liechtenstein where more than a thousand Western people deposited their funds. So, it is not really a surprise that this topic has come up at the G8 meeting.

What are tax havens, exactly? According to Christian Chavagneux and Ronen Palan, authors of a book on the subject (available in French only), tax havens share 10 characteristics, including negligible or non-existent taxation for non-residents, banking secrecy, very relaxed registration procedures for corporations. These "paradises" often adopted this advantageous fiscal policies in order to develop a territory without any other value (industry or natural resource), as is the case for the Bahamas or Andorre. For others, like Switzerland or Singapore, it was a deliberate and strategic decision to base their development on the financial sector.

What I didn't know is that tax havens are an American invention dating back to the 1880 when states like New Jersey and Delaware were envious of the high presence of industrial headquarters in New York and Massachusetts. So, they adopted a cap on corporate taxes. Delaware still to this day is host to a disproportionate share of stock market listed American companies.

In the 1920, England created the "fictive residency for fiscal reason" statute when the courts decided that a British company headquartered abroad was not subject to British taxes. And in 1934, Switzerland passed a law to make it illegal to violate banking secrecy. Tax havens were born, Liechtenstein and Gibraltar were among the first. They grew and expanded along with globalization as tax havens were developed in Asia, especially with Singapore, nicknamed the Asian Switzerland.

Nevertheless, they are controversial. Even the non-radical Organization for Economic Cooperation and Development launched the ambitious Forum Mondial sur La Fiscalite in 2003 to establish fair competition in fiscal matters. Similarly, numerous civil society organizations, such as the Tax Justice Network have pushed for the outright elimination of secrecy in financial matters since tax havens are a major incentive to tax evasion which deprives states of needed funds.

Of course, free market proponents and globalists see nothing wrong with tax havens as they see them as part of the right to privacy. Any attempt by supra-national organizations to regulate or force them to change their laws would be undue interference with their sovereignty, if not a form of neocolonialism (it's always ironic to see this crowd use the vocabulary of dependency theorists to promote their pro-rich, pro-more inequality arguments).

But how much money are we really talking about here? Hard to tell of course as the official data published by the tax havens are notoriously unreliable. So we have to rely on estimates provided by the Bank of International Settlements and the United Nations Conference on Trade and Development (UNCTAD) as well as private audits and research but the bottom line is this: billions and billions of dollars (sounds like Carl Sagan), see diagram for estimates by sources, in French, trillions = US billions.

Despite their insistence on banking secrecy, most tax havens agree to open their data in cases of criminal investigations. However, they do so now that the United States has flexed its muscle and threatened sanctions if they did not cooperate. Of course, the United States is after terrorist funding networks which tend to find their way into tax havens.

More diplomatically, the OECD has encouraged tax havens to sign bilateral cooperation agreements on information and intelligence that define the conditions under which banking secrecy can be lifted; the Bahamas have only one with the United States, Monte Carlo has only one with France. Others have multiple agreements. Singapore has signed 53, but with very stringent restrictions: banking secrecy is only lifted if "fiscal national interest" is at stake, and according to Singapore, that almost never happens.

The European Union has a directive in place that mandates the exchange of fiscal information between member-states. If a country refuses to comply, then, monies deposited by non-residents are taxed up to 25% (35% after 2011). So far, Luxembourg, Belgium and Austria prefer to tax than to reveal their banking secrets. Somehow, Liechtenstein has so far avoided any regulation.

Below is a map of the 50 countries suspected of shadowy tax practices, sorry, all in French again. Click for a bigger view.