Offshore Schemes and Tax Evasion: The Role of Banks

Abstract

We use mandatory Russian banks’ reports to the Central Bank to construct a novel measure of offshore-banking. Individual bank involvement in offshore operations is calculated as a fraction of total transactions with foreign countries that goes through offshore financial centers. We find that offshore-active banks perform less core financial intermediation activities and instead focus on performing international wire transfers. Furthermore, we document a positive relation between banks’ offshore activities and tax evasion of non-financial companies sending money through such banks. Taken together, these findings provide the first systematic empirical evidence for the often contemplated connection between operations through offshore financial centers and tax evasion. Finally, we show that the Central Bank can eventually detect such behavior and sanction involved banks, as those banks have a higher likelihood of license revocation, money laundering charges and criminal investigation against top management.