Norway’s Sovereign Wealth Fund Faces Big Risks from Tax Havens

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The original version of this article (in Norwegian) appeared today in the leading Norwegian business newspaper and can be veiwed here:

The findings on which this piece is based can be found in the latest Re-Define Report:

The Panama Papers sparked a loud, but rather limited debate on the Norway’s Sovereign Wealth Fund and its use of tax havens. Here we present some new facts, discuss what risks the Fund really faces and suggest concrete steps for reform.

Taken together, the Oil Fund’s direct investments in tax havens amount to as much as 8%-10% of its total value. These include its investments in real estate through subsidiaries in Luxembourg and Delaware, fund managers who use tax havens and direct stakes in companies registered offshore.  Most discussions so far have focussed on getting the Fund to reduce or eliminate this kind of direct use of tax havens.

While this is important, the largest financial, reputation and ethical risks for the Fund arise indirectly from its investments in companies that use tax havens and aggressive tax avoidance strategies.

Companies within the financial, information technology, pharmaceutical and extractive sectors (many of which are aggressive users of tax havens) account for more than half of the Fund’s investments. On the basis of conversations with specialists, we estimate that about 10% of the Fund’s total investments are exposed to an aggressive usage of tax havens and avoidance strategies that may not withstand full public scrutiny.

For example, Apple, Alphabet (formerly Google) and Microsoft, all of which feature in the Fund’s top six investments, have been under investigation for their highly aggressive use of tax havens and extensive use of tax avoidance strategies. Apple, for example, is accused of having $8 bn of unpaid taxes in the EU, while Alphabet has had pay to settle with tax authorities in the UK and now in France. Microsoft has stashed almost $100 bn of earnings offshore, on which it will have to pay $30 bn in taxes when these are repatriated back to the US. For the top 10 US tech firms, many of which the Fund is heavily invested in, the earnings stashed offshore amount to more than $600 bn. The Oil Fund has also made large investments in many other firms outside of the IT sector that have been accused of, or are under investigation for, aggressive tax avoidance.

DN, the Norwegian business newspaper, has reported that more than 1,105 listed firms that had subsidiaries revealed by Panama Papers lost $ 24 bn in market capitalisation over and above normal stock market movements in the week following the revelations. This highlights the significant financial risk we believe the Oil Fund exposes itself to by investing in firms that are heavy users of tax havens.

Even more problematic are the Fund’s large investments in the financial sector, particularly banks. Many have been accused of and prosecuted for not just being aggressive users of tax havens themselves, but of actively promoting and facilitating tax evasion, money laundering, corruption and sanctions busting. The Oil Fund owns 4.94% of Credit Suisse, 3.08% of UBS, 2.07% of BNP Paribas and 1.98% of HSBC. This makes it one of the largest investors in companies promoting the use of tax havens.  

Last year BNP Paribas was fined a whooping $ 8.9 bn for its role in money laundering and sanctions busting. Credit Suisse and HSBC were also fined for such offences. In addition, Credit Suisse also paid a fine of USD 2.6 billion for its role in promoting tax evasion, and UBS has been fined $780 million so far with further action possible. Surely, as the largest shareholder of Credit Suisse, the Norwegian Sovereign Wealth Fund bears a degree of moral complicity in the immoral, illegal and indefensible actions of that bank?

Taken together, the fact that almost 20% of the Fund’s value is exposed to tax havens poses serious financial, reputation and ethical risks. What are these and what can be done to mitigate them?

Let us first consider the 10% of the Oil Fund that is directly invested through tax havens. Havens such as Luxembourg also serve as offshore financial centres, which are used as “way stations” in the flow of international investments. They have honed their treaty networks and designed legal regimes to suit the needs of investors and can help reduce frictions and costs for cross-border capital flows. The Fund uses them for these reasons as well as to lower its effective tax burden.

The main risk that arises then is one of complicity through legitimising the same jurisdictions, which also serve as tax havens and can be used for more nefarious purposes. The best way to tackle this is through full disclosure and transparency. NBIM, the subsidiary of the Norwegian Central Bank that manages the Oil Fund on behalf of the government must, in its next report, list every such direct investment, the justification for it and additional costs, if any, of channelling the same investments through onshore, non-tax haven jurisdictions. The judgment on whether it should bear these additional costs to avoid complicity in promoting tax havens should be left to the Norwegian Parliament.

It is the indirect exposure of the Oil Fund to tax havens through its corporate investments that poses the biggest financial risks. Given the change in Zeitgeist, where tolerance of tax havens and aggressive tax avoidance tactics is on a sharp decline, policy and legislation will tighten and legal actions by tax authorities will multiply. As has happened in the past, it will seriously impact the market value and future post-tax profit expectations of the companies that are targeted. The more the Fund is invested in firms that bend the tax rules, the greater the financial risk it faces.

This policy risk is significant enough that it should be measured, reported and managed alongside the present categories of market, credit and operational risks. Investments in promoters of tax havens such as Credit Suisse and UBS carry further financial risks in the form of possible large penalties, reputation risks arising from moral complicity and even legal risk for the Oil Fund, arising from negligence as one of the largest shareholders.

As part of its responsibility as a large owner, NBIM should actively promote responsible tax practices in the firms it owns. As Norwegian Church Aid has suggested, “aggressive tax avoidance” should be added to the remit of the ethical council alongside “gross corruption” as a practice that is unacceptable. If the active engagement strategy fails, NBIM should divest from the most egregious offenders. In addition NBIM should, as lead sponsor, launch a group of “Investors for fairer tax”. As a sovereign investor, the Oil Fund already enjoys tax privileges not available to private investors. With such privilege comes additional responsibility.

The bottom line is “do Norwegians really want their financial returns to come on the back of money laundering, corruption and unpaid taxes in other countries, both rich and poor”?

Sony Kapoor is Managing Director of the International Think Tank Re-Define 

The findings on which this piece is based can be found in the latest Re-Define Report: