There’s a Link Between Tax Havens, Amazon Deforestation, and Criminal Activity

Craig Donofrio

Tax havens are typically associated with ultra-wealthy individuals and large corporations that stash money overseas to avoid paying taxes. But tax havens—and how countries choose to regulate business taxation—also play a part in how a host of environmental issues, like illegal fishing operations, can be monitored and policed. The same shell companies used to avoid tax collectors can also be used to limit public knowledge of large-scale environmental destruction.

A recent study, published in Nature, found that tax havens shield the money going in and out of some Brazilian soy and beef companies, whose deforesting operations harm Amazon rainforest ecology. According to the study, illegal fishing vessels, often associated with criminal and environmentally harmful activity, were also found to be commonly registered in tax havens.

Over an 11-year period, $18.4 billion of foreign capital funneled into Brazil’s nine largest soy and beef manufacturers was transferred through tax havens. The study analyzed billions of foreign capital transfers provided by the Central Bank of Brazil between 2000 and 2011, which indicates that loads of tax-sheltered cash has been used to fund businesses whose main products require major deforestation. Funding businesses this way also deprives local governments of badly needed tax money.

How tax havens are used – and why they flourish

Tax havens are regions where there are little or no taxes. Companies can register their headquarters in a tax haven—like the Cayman Islands—and hide millions of dollars in income that would be taxable in their home countries.

Of course many of these companies don’t want the world knowing they’re avoiding taxes, so they operate through a subsidiary ‘shell’ company registered in tax havens, to filter money in and out surreptitiously. The practice effectively obscures where the profits go, and prevents anyone from knowing where investments in these companies are coming from.

Rather than make their income from tax revenue, tax havens make money through the cost of registering new shell companies and re-registering existing shell companies each year—even though the cost of registering a company could be just a few hundred dollars, there are thousands of companies endlessly registering or renewing.

“It’s a perpetual evergreen of money,” says David Weber. Weber is a lawyer and certified fraud examiner who also worked as the Securities and Exchange Commission’s chief investigator; he aided journalists as they worked through the Panama Papers before their official release, and is currently a forensic accounting professor at the Robert H. Smith School of Business at the University of Maryland.

Illegal fishing and other crimes

On top of negligible tax rates, tax havens also provide cover for companies who want to work anonymously, allowing them to operate shipping vessels under “flags of convenience.” Flags of convenience are countries offering local registration to companies’ foreign shipping vessels with little regulation and minimal identification requirements. Additionally, these countries ask for lower registration fees, and generally feature an atmosphere of lax law enforcement.

Of all registered shipping vessels globally, more than 4 percent were flagged in tax havens. Among those vessels flagged in these countries, 70 percent were identified as illegal, unreported, and unregulated (IUU) vessels. In addition to overfishing, IUUs have been linked to sex and migrant trafficking, drug smuggling, weapon smuggling, hazardous waste dumping, trafficking in natural resources, the fishing of endangered species, and tax evasion, according to a 2011 report by the U.N Office on Drugs and Crime.

Some of these may sound like far-off problems, and for many, they are. But chances are, you’ve eaten some illicit fish in your lifetime.

For example, back in 2002, after a decade-long demand for the Patagonian Toothfish—rebranded for Americans as Chilean sea bass—the fish was in danger of extinction. Despite two-and-a-half years of international regulations, the U.S. Department of Commerce said that two-thirds of all Chilean sea bass sold were harvested illegally.

The Chilean sea bass (which usually doesn’t come from Chile and is actually a kind of cod), is just one example of illegal fishing, a criminal activity that affects the entire fishing market. A 2009 study estimated that 15 percent of total worldwide catch is associated with IUU fishing, and tax-related monetary losses can amount from $10 billion to $23.5 billion annually.  Another 2014 study estimates that between 20 and 32 percent of wild-caught imported fish in the U.S. are illegally caught.

Deforestation: It’s what’s for dinner

In the Amazon Rainforest, the majority of which is located in Brazil, hundreds of thousands of acres, once teeming with exotic species shaded under thick foliage, have been mowed down to flat, clean-shaven land tracts for soy and beef farming–a process that isn’t illegal, but does create a cycle of environmental problems in the one of the world’s most fragile ecosystems.

The resulting deforestation “reduces forest cover and could cause the Amazon to tip into a savanna system,” explains Beatrice Crona, co-author of the study. That shift into a drier ecosystem means the land “will be more vulnerable to fires, [which] release large amounts of carbon into the atmosphere. Savannahs store much less carbon, so [the rainforest] will go from being a carbon sink to a carbon emitter—from our friend to our foe, as far as climate is concerned.” And if these operations are paying little or no taxes, which many are thanks to tax havens, Brazil’s people bear the burden but reap no rewards.

While the study itself does not name the companies, the researchers provided the data they used. A list of nine identified companies highlighted for their extensive use of tax havens—which altogether received $18.4 billion through the practice between 2000 and 2011—includes ADM, Bunge Ltd., Cargill Inc. and Louis Dreyfus, known as the “ABCD” soybean sector players. The world’s largest meat packer, JBS SA, also appears.

According to Yale’s School of Forestry and Environmental Studies, cattle ranching accounts for 80 percent of deforestation in the Amazon. Large-scale cattle farming in the rainforest involves clearing forests and burning the land to implement pastures and grazing systems. In Brazil, one of the world’s top beef exporters, cattle farming is a huge business, exporting $5.1 billion worth of beef in 2017 alone.

And soy farming is an even bigger business in Brazil; the country is expected to be the world’s largest soy exporter in 2018. Soy farming is also environmentally damaging and often goes hand-in-hand with cattle farming. According to the Food and Agriculture Organization of the United Nations, rainforest soil is unsuitable to sustain soybean crops; within three years the soil is used up, the soybean farmers leave, and then cattle farmers move in. Long-term, this cycle of soy-to-beef farming leads to water pollution, soil degradation, and increased carbon dioxide emissions from slash-and-burn clearing.

“The deforestation dynamics in the Amazon are complex,” says Crona.

Paying the price

“What’s unsavory about these agribusinesses is that they’re destroying the environment and not paying their fair share at the same time,” Weber says. Some of those taxes, he notes, would be allocated to environmental protection funds.

Those are tax funds which Brazil clearly needs. The country recently climbed out of the worst recession it has ever had, its economy shrinking by almost 8 percent over two years until it finally grew 1 percent in 2017. Last year the country had its biggest roll back of environmental protection laws in more than 20 years and cut its environment ministry’s budget by 40 percent, according to Reuters.

“The situation is dire,” says Paulo Barreto, a Yale School of Forestry affiliate and senior researcher at the rainforest conservation nonprofit Imazon, which is based in Brazil. “The government and lawmakers have been trying to decrease protection even more by proposing weakening the environmental licensing process and the reduction of protected areas.”

Tax havens – more than just taxes

While governments definitely lose money when companies operating in their country use tax havens, the link between tax havens and environmental degradation requires further study. Crona says that given the lack of transparency between what happens when a company uses a tax haven and how it allocates that tax sheltered money, the extent of the problem is hard to currently gauge.

“We cannot say if foreign capital transferred from tax havens is used to fund the establishment of new crushing capacities or slaughter houses, for example. I think it will be very hard for anyone to prove this link without access to the internal accounts of these corporations,” she explains.

And while Brazil would benefit from recouping the additional income lost to tax havens, some of which would end up directed toward environmental programs, that money is not the answer to eliminating deforestation in the rainforest. “Weak governance and lack of enforcement and monitoring are directly linked to lack of funds—and corruption—so more tax revenues certainly wouldn’t hurt. But [it] is unlikely to be sufficient,” says Crona.

However, regulating the use of tax havens more aggressively could have an impact that reaches beyond tax receipts, shedding light on illegal activities that could then be investigated by authorities, and revealing legal, but environmentally harmful, actions that the public could use to hold participants accountable.