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. 2017 Jul 24;7(1):6246.
doi: 10.1038/s41598-017-06322-9.

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

Javier Garcia-Bernardo  1 , Jan Fichtner  2 , Frank W Takes  2   3 , Eelke M Heemskerk  2
Affiliations

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

Javier Garcia-Bernardo et al. Sci Rep. .

Abstract

Multinational corporations use highly complex structures of parents and subsidiaries to organize their operations and ownership. Offshore Financial Centers (OFCs) facilitate these structures through low taxation and lenient regulation, but are increasingly under scrutiny, for instance for enabling tax avoidance. Therefore, the identification of OFC jurisdictions has become a politicized and contested issue. We introduce a novel data-driven approach for identifying OFCs based on the global corporate ownership network, in which over 98 million firms (nodes) are connected through 71 million ownership relations. This granular firm-level network data uniquely allows identifying both sink-OFCs and conduit-OFCs. Sink-OFCs attract and retain foreign capital while conduit-OFCs are attractive intermediate destinations in the routing of international investments and enable the transfer of capital without taxation. We identify 24 sink-OFCs. In addition, a small set of five countries - the Netherlands, the United Kingdom, Ireland, Singapore and Switzerland - canalize the majority of corporate offshore investment as conduit-OFCs. Each conduit jurisdiction is specialized in a geographical area and there is significant specialization based on industrial sectors. Against the idea of OFCs as exotic small islands that cannot be regulated, we show that many sink and conduit-OFCs are highly developed countries.

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Conflict of interest statement

The authors declare that they have no competing interests.

Figures

Figure 1
Figure 1
Strategy used to avoid double counting flows. (A) Four chunks matching to the same country-level chain (A|B) originated from the same GCOC (A 1|A 2|B 1|B 2). Companies present in the original chain but not in the chunk are depicted in gray. The upstream of the chunks is underlined. B 1 corresponds to the first owner in country B. (B,C) Finding conduits using overlapping chains. A,B,C,D and E are individual countries. (B) Conduits would be counted only once after splitting the chain in chunks of size three and counting all the fragments. (C) Conduits would be double counted if the chain is split in chunks of size four.
Figure 2
Figure 2
Sink and conduit centralities. (A) Absolute value of the sink-OFC centrality versus absolute value of the sink-OFC centrality without the GDP normalization. The color of the node indicates the sign of the sink-OFC centrality (green are negative, orange are positive). The size of the node is proportional to the sum of the value entering and leaving the country. (B) Inward vs outward conduit centrality. (C) Average conduit centrality (in and out) versus average entropy of the distribution of value (in and out). (D) Value flowing through the conduit to non-sink-OFC countries versus non-normalized conduit centrality (value flowing through the conduit to sink-OFC countries). Color in plots B–D indicates function; sink-OFCs are colored in red, conduit-OFCs are colored in green, and all other countries are colored in blue.
Figure 3
Figure 3
Network of ownership flows between countries. Node size is proportional to the unnormalized conduit-OFC (value flowing through the conduit towards sink-OFCs). Node color is sink centrality (value entering minus value leaving the country, divided by the GDP). Edge size is proportional to the value flowing through countries. Edge color is proportional to the significance of the flow in relation to a null model. See Supplementary Methods for an explanation of the null model.
Figure 4
Figure 4
Geographical specialization. The value going through each conduit in chains of size three ending in sink-OFCs is depicted. The first column visualizes the source countries, the second column represents the sink countries, and the horizontal axis shows the conduit countries. Sink-OFCs are marked red and conduit-OFCs are marked green, all countries representing less than US$1010 are combined together in gray. Dark gray corresponds to companies with unknown location. (inset) Value invested from companies located in sink-OFCs (horizontal axis) into other countries.
Figure 5
Figure 5
Sectoral specialization. (A) Distribution of sectors (NACE Rev. 2) in terms of their dominant position in the chain (Source (SO), Conduit (CO), Sink (SI), Source + Conduit (SC), Source + Sink (SS), Source + Conduit + Sink (SCS)). (B) Percentage of revenue going through each country in chains of size three, by sector. The first column visualizes the distribution of sectors in the source country, the second columns visualizes the distribution of sectors in the conduit (horizontal axis), and the third column shows the distribution of sectors in the sink country.
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