From tax havens to cryptocurrencies: secrecy-seeking capital in the global economy

Abstract

The global backlash against tax havens has pushed secrecy-seeking capital to explore alternative opportunities in non-tax-haven countries and new financial technologies (FinTech). We identify two major corporate practices—organizational ring-fencing and swarming—that have enabled secrecy-seeking capital to adapt to new regulatory realities and illustrate these practices empirically with the extreme case of Estonia. In the 2010s, several Nordic banks turned their Estonian offices into hotbeds of high-risk transactions, ring-fencing their Baltic affiliates from their group-level systems and generating several money laundering scandals with global repercussions. More recently, secrecy-seeking capital ‘swarmed’ into Estonia’s large cryptocurrency sector and thereby thwarted effective supervision of the activities of the firms involved. Neither swarming nor organizational ring-fencing have been sufficiently explained by existing approaches in International Political Economy (IPE) as new core practices of secrecy-seeking capital. We study both practices in a mixed-methods research design and provide novel empirical insights to illuminate this phenomenon. In filling this gap, our study paves the way for a second generation of global tax governance scholarship amidst the cryptocurrency and FinTech boom, and calls for a research agenda that addresses these new practices that take advantage of the lack of administrative capabilities in non-tax-haven jurisdictions.

Keywords:

• Estonia
• cryptocurrencies
• FinTech
• tax governance
• tax evasion
• money laundering

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

Data on board interlocks are available from Bureau van Dijk’s ORBIS database (https://www.bvdinfo.com/). We used the data under license and restrictions apply to its availability. Data are available from the authors with the permission of Bureau van Dijk. The nationally aggregated and processed data, more supplementary material, and the Python script are freely available at the Open Science Framework (https://osf.io/5ju2k/).

Notes

1 Tax havens are sometimes called offshore financial centers or secrecy jurisdictions. The term corporate haven is also sometimes used for centers that rely more on exploiting loopholes in international corporate taxation.

2 While secrecy-seeking capital is typically associated with tax evasion, money laundering or other illegal activities, avoiding expropriation or sanctions can be legal. Furthermore, multinationals may have incentives to hide assets or transactions that have not been deemed illegal. Such behavior can occur if the legality transactions is uncertain, or if companies want to hide asset-specific financial or reputational risks from stakeholders.

3 We thank an anonymous reviewer for suggesting the division between two generations of global tax governance research.

Additional information

Funding

This project has received funding from the European Union’s Horizon 2020 research and innovation programme (grant 867454) and from the Estonian Research Council (grant PRG1125).

Notes on contributors

Matti Ylönen

Matti Ylönen is a University Lecturer in World Politics at the University of Helsinki, with a focus on International Political Economy. He has published extensively on the politics of multinational enterprises, tax havens, consultancy firms, and global development, and is currently working on a research project on the power of big tech companies in the European Union.

Ringa Raudla

Ringa Raudla is Professor of Fiscal Governance, Ragnar Nurkse Department of Innovation and Governance, Tallinn University of Technology, Estonia. Her main research interests are fiscal policy, public budgeting, public administration reform, financial regulation, and institutional economics. Her recent publications include articles in Public Administration Review, Governance, Policy Studies Journal, Journal of Public Policy, and Journal of Comparative Policy Analysis.

Milan Babic

Milan Babic is an Assistant Professor in Global Political Economy at the Department of Social Sciences and Business at Roskilde University and PI of the DECARB project. His work deals with the transformations of the global political economy in the transition from a neoliberal towards a post-neoliberal global order. His latest book is The Rise of State Capital (Agenda 2023).