Money laundering accounts for 2 to 5 percent of world gross domestic product (GDP), totaling to about US$1.5 to US$2.0 trillion a year. Money laundering is in demand by criminals, be they drug traffickers, criminals, terrorists, arms traffickers, blackmailers or credit card swindlers. Money laundering erodes profits of financial institutions, breeds corruption and fuels social injustice. It adversely affects the allocation of investment funds, since money is deposited in low detection locations, instead of placing it where the rates of return are the highest. All in all, money laundering is a social and economic evil that need to be fought against.

Aided by technological advances and liberalization of financial markets tax evasion is reaching new proportions. In times of stretched budgets, governments lose funds to countries with more lax tax regimes. With fewer funds available, public service provision comes under threat. For sure, tax evasion undermines legitimate tax collection so that public goods supplied are reduced. Proportions of this phenomenon may be estimated by looking at tax amnesties for income repatriation employed by the tax authorities.

Offshore Financial Centres (OFCs) are known as zones with distinct characteristics of a loose regulatory, supervisory and tax environment (Allworth and Masciandaro, 2002). In addition, strict bank secrecy laws and a non-cooperative attitude with foreign authorities make them the perfect “tax havens”. Their basic function is the provision of a safe haven for money of those evading tax payments at home, without the knowledge of home tax authorities. The value of wealth held offshore has been estimated at over US$6 trillion (Christensen and Hampton, 2002) and is still growing. Among the well-known countries are Switzerland, Luxembourg, the Cayman Islands and the Bahamas.

During the past decades, significant growth of OFCs has been observed. At the same time, there has been growth in money laundering and tax evasion. Could there be a connection between these activities? Both tax evasion and money laundering are a form of concealment of funds, which may be facilitated by OFCs. The central question of this thesis is: What is the connection between money laundering and tax evasion? What is the role of tax havens? The hypothesis is that tax havens facilitate tax evasion and money laundering.

The remainder of the thesis is structured as follows. Section 2 discusses the concepts of money laundering, tax evasion and OFCs, alongside with the possible connections among the three. Section 3 analyzes the institutional responses to the growing problem. The Harmful Tax Practices Project by the Organization for Economic Cooperation and Development (OECD) and the initiative of the Financial Action Task Force (FATF) are thoroughly discussed. Section 4 of the thesis discusses and analyses the findings from the previous sections, provides links between the concepts and raises questions on the methods used to fight money laundering and tax evasion. Finally, Section 5 summarizes the findings and concludes the thesis.