Tax Havens Under Scrutiny

But the discussion isn’t over as to how far countries should go to fix what some activists call the shadow financial system, which aids not only tax dodgers but also organized criminals and corrupt officials.

Ugland House, in Georgetown, the Cayman Islands, has a sole tenant – the law firm Maples and Calder – but the building's address is listed, according to Bloomberg and other financial news organizations as the address of 18,857 corporations.Last month, the world’s biggest economies in the G20 made commitments to end banking secrecy and to share information between countries. Those commitments included prodding tax havens to share information when another country requests it. The participants also established a short-lived “black list” of countries that would not commit to earlier openness rules handed down by the wealthy countries in the Organization for Economic Cooperation and Development (OECD). The list was only four countries long – Costa Rica, Malaysia, the Philippines and Uruguay – and it died after those countries promised to make changes and were rewarded by promotion to the “gray list.”

While the anti-tax-evasion activists generally approved of the new focus on havens, some say the new measures haven’t gone far enough, and wealthy countries have yet to crack down on the havens and secrecy in their own backyards. The US and the UK are beginning to make strides towards putting their own houses in order. And the European Union has a model in place for information-sharing between countries that could be used internationally.

Tax evaders aren’t the only ones who use tax havens, offshore bank accounts and shell companies. Organized criminals and corrupt officials also use fthem, and one way to make law enforcement’s job easier is to make it harder for crooks to launder money through the international financial system.

“If we want to tackle organized crime at any level, you’ve got to open up the financial markets, to make it difficult to handle their money,” said John Christensen, who heads the public policy nonprofit Tax Justice Network’s international secretariat in London. “It’s only by tackling corruption and the enablers of corruption – bankers and lawyers – the ‘willfully blind professionals’ – that we’re going to be able to tackle organized crime effectively.”

OECD Wrong Institution?

But the Organization for Economic Cooperation and Development (OECD) is the wrong organization to handle this, he said. That is because they are subject to the interests of their members – Switzerland once threatened it would end funding to the OECD if it wasn’t removed from the gray list – and because OECD countries have skeletons in their own closets.

“It’s the completely wrong organization to tackle this issue, because so many OECD countries are tax havens. So when they tackle tax havens, they go after the small fry, the ones in mythology,” Christensen said. Tropical islands and tiny European countries, he said, are less of a problem than London, which he described as “the big daddy of the tax havens.” The US state of Delaware is a close second.

A recent study by an Australian political science professor bears this out. Using Google and $20,000, Griffiths University’s Professor Jason Sharman was able to set up anonymous shell companies in 17 jurisdictions, 13 of which were in OECD countries. Notorious island offshore centers like Bermuda and the Cayman Islands, he found, require far more certified ID from anyone wanting to establish a company or bank account than do the US states of Nevada and Wyoming, which require no certified ID documents at all. Sharman was also able to pay a UK financial services company less than $3,000 to register an anonymous Seychelles company with a Montenegrin bank account.

“The states that have been most vociferous about complaining about standards, the US and Britain, are the ones who are the least rigorous about complying with these standards,” Sharman said in a telephone interview.

Anonymous corporations, because they’re the first step in accessing the international financial system, are useful for not only evading tax, but also for financial fraud, laundering money, and for receiving or giving bribes. Various international conventions prohibiting such companies have come down from the UN, the OECD, the Financial Action Task Force and others, but Sharman’s experiment showed that these international rules are nearly useless.  

Nor will the G20 measures do a thing about it, he said. “I think one of the issues in the G20 summit, it’s being portrayed as an ‘information exchange,’ but if you don’t have the information you have nothing to exchange,” he said. “And Nevada has so little to exchange that it’s useful to financial criminals.”  

Sharman said the US doesn’t need to make any new rules to fix the problem, but just enforce the international rules when it comes to states like Delaware, Nevada and Wyoming.

Obama’s new Proposals

But the US now seems interested in creating new rules. Obama unveiled new proposals for offshore reform earlier this month, including closing tax loopholes and cracking down on global financial institutions that may be hiding taxable US income. He also plans to hire 800 new IRS agents who will hunt for tax cheats.

U.S. Senator Carl LevinThe news was welcomed by Michigan Senator Carl Levin, who has led investigations into offshore tax havens since 2001 and authored the Stop Tax Haven Abuse Act. A source in Levin’s office called last month’s G20 meeting “quite remarkable” for putting tax havens on the front burner, but said: “The next step is that the US has to clean up its own house.” Levin has sponsored another bill that would require all states to get the names of the beneficial owners of companies, and to release that information to law enforcement after a subpoena.  

Whether that bill, S-569, will become law is still an open question. A similar bill Levin introduced in 2006 went nowhere. Delaware, a state that allows the companies to be formed without revealing the identity of the owners, is opposing the new bill. But constituents may be more irritated by secrecy and offshore tax havens now than they were before the financial meltdown; the Stop Tax Haven Abuse Act is in committee and has the support of the president, who co-sponsored a version of the act when he was in the Senate. 

Across the Atlantic, the other major offender – the UK – is making its own progress. The British government last December announced an independent review of British offshore financial centers and appointed former Financial Services Authority chairman Michael Foot to head the review. After the G-20, Prime Minister Gordon Brown wrote to all crown dependencies and other territories demanding that they get their ducks in a row by September. The places included seven jurisdictions on the OECD’s “gray list” – Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat and the Turks and Caicos – as well as the crown dependencies of Guernsey, Jersey and the Isle of Man, which are on the “white list” but are routinely used by companies to avoid taxes.

Questioning British Approach

Christensen said the letters were a good start. But he said that the government study headed by Michael Foot is not off to a good start because neither Foot nor the Financial Services Authority (FSA) is raising the right questions.

“Private Eye magazine called the FSA the Fundamentally Supine Authority, and that for me captures the spirit of this organization,” he said. “Chaps talk to chaps, and they never discuss any awkward questions; no one ever rocks the boat. We need someone who asks the big questions: How do tax havens operate in the global economy, do they benefit public interest or do they undermine public interest?”

Christensen also dismissed the new information-sharing agreements. “The tax havens love to sign up to tax information agreements, because they don’t work,” he said. Jersey, for example, signed an agreement with the US in 2002 – but the US has gotten information on only four cases.  Jersey, like Switzerland, only shares information if US officials demonstrate that they already know nearly everything they need to know to mount a case of tax evasion.

“It takes too long, it’s too expensive, it’s incredibly cumbersome, and you have to have the smoking gun to begin with,” he said. A better model, Christensen said, would be the EU savings-tax directive, which despite its cumbersome name is a streamlined model that has required automatic information exchange since 2005. If, for example, a British tax dodger opens an account in France, he won’t be able to avoid paying tax on his money, because the French authorities will automatically send the information to Her Majesty’s Revenue and Customs in Britain. The directive’s current faults do include the reluctance of Austria, Belgium and Luxembourg to join, and its focus on individuals rather than limited companies, trusts or foundations. In practice, that means, for example, that a British tax dodger could establish a trust in Jersey that owns a company in the British Virgin Islands whose sole business is to own a bank account in Liechtenstein. But the directive’s aim for automatic information exchange is still a better idea than the OECD’s information exchanges on request, said Christensen.

“That’s the model for the future,” he said of the EU directive. “Why the heck set such a weak standard and say, ‘This is what we want to make the international standard,’ when EU has better standard, and it actually deters people from doing it? We don’t want to bang everyone up in jail; we want to deter them from doing it.”

-- Beth Kampschror