Detection of UN arms embargo violators and their connections to tax havens : an empirical analysis of global arms companies in the time period 2005 to 2020

In this thesis, we attempt to detect arms companies that have been involved in UN arms embargo violations and study their connections to tax havens. We hypothesize that the opaque structure of tax havens may provide a cover of the substantial proceeds stemming from illegal arms trade. Our sample consists of data on 108 arms and defense companies in the time period 2005 to 2020. We use an event study approach to investigate whether individual arms companies obtain abnormal returns around an unexpected event that impacts the conflict intensity within an embargo-affected country or region. We base the detection method on the assumption that insiders and well-informed investors are aware of the company’s hidden profitable behavior. Thus, a significant abnormal increase (decrease) in the stock price following the news of a hostility-increasing (hostility-decreasing) event may indicate that insiders change their expectations of future earnings. In other words, the insider or well-informed investor expect a shift in arms demand, suggesting that the company is thus guilty of illicit arms trafficking. Out of 108 global arms companies, we detect 19 possible UN arms embargo violators in five out of the six analyzed embargoes. When we base a list of tax havens on the consensus of three organizations (OECD, Tax Justice Network and IMF), that only includes small states and islands, we do not find evidence that companies with tax havens are more likely to violate arms embargoes. However, when extending the list to include bigger states, suggested by the tax haven lists of both Tax Justice Network (2007) and IMF (2008), we find that companies with tax haven presence are statistically significantly more likely to violate embargoes. In contrast to our expectations, we do not find any evidence that embargo violators with tax haven presence obtain higher abnormal returns around conflict dates than violators without tax haven connections.