Investment Treaties, Offshore Finance, and the Resource Curse

By Lockhart, Karl M. F. | Boston College Law Review, January 1, 2018 | Go to article overview

Investment Treaties, Offshore Finance, and the Resource Curse


Lockhart, Karl M. F., Boston College Law Review


Introduction

Offshore financial centers,1 despite their moniker of "secrecy jurisdictions,"2 cannot seem to stay out of the news. In 2016, an anonymous figure leaked more than 11.5 million documents from a Panamanian law firm named Mossack Fonseca. These documents-which became known as the "Panama Papers"-unveiled tax evasion and avoidance committed by over 140 politicians, celebrities, and other individuals at the highest levels of society in countries worldwide.3 The repercussions of the leak shook global power structures, leading to the resignation of Iceland's prime minister,4 historic Supreme Court cases in Pakistan banning a prominent politician for life,5 and the sentencing of Argentinian soccer superstar Lionel Messi to twenty-one months in jail for tax fraud.6 Sadly, it also led to the death of a journalist in Malta, who was killed by a car bomb after investigating corruption based on documents from the leak.7 One year after the Panama Papers, another leak of over 13.4 million records known as the "Paradise Papers" further implicated elites around the world,8 from the U.S. Secretary of Commerce to Queen Elizabeth.9 Tax havens also took center stage in the indictment and prosecution of Paul Manafort. A former advisor to President Trump, Manafort has been investigated by U.S. Department of Justice special counsel Robert Mueller and faced trials for bank fraud, tax fraud, tax evasion, and money laundering in two federal courts.10 In addition to these leaks and Manafort's criminal charges, Congress debated offshore jurisdictions in relation to the Tax Cuts and Jobs Act of 2017. The new law includes a key provision11 which allows multinational companies with cash hoards stowed in offshore subsidiaries to repatriate the funds at steeply discounted tax rates.12

With these events in the public eye, the question of what to do about offshore financial centers ("OFCs")13-countries that have low or zero tax rates,14 strong banking secrecy regulation,15 and easy-to-form legal entities16-is a constant topic of discussion among reporters, politicians, and academics.17 Notions of how best to understand OFCs and what, if anything, the international community should do about them remain fixed on the agenda of national and international discourse.18 Although tax, corporate, and international criminal law are usually the focus of academic research on OFCs,19 these conversations have rarely been extended to the field of international investment law. This Essay seeks to unite these two strands of discussion by providing a new theoretical perspective on tax havens and applying this perspective to the cross-border legal regimes that govern international investment.20

This new analytical framework sees OFCs as countries that are victims of the "resource curse," as that term is described in economic development literature.21 Often physically small, isolated islands with scant natural resources, OFCs lack a true commodity to exchange in the global marketplace. As a result, OFCs have transformed their legal systems into a resource, "selling" their favorable laws to businesses and individuals in exchange for corporate registration costs and money management fees as a means of gaining revenue for the state and its inhabitants.22 Applying this framework to international investment law yields new insights into why countries enter into bilateral investment treaties ("BITs") and how the true social costs of international investment should be understood.

This Essay examines some of the arguments in support of and against OFCs through the novel lens of the resource curse and suggests possible implications for international investment law. Part I describes the two main view-points on OFCs through explaining each approach's policy rationales and analytical frameworks.23 Part II lays out a third perspective based on the resource curse.24 Part III applies this perspective to international investment law and offers several observations based on the new framework. …

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