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tax havens/ money launderingA tax haven is a country or territory where taxes are low or even non-existent which allows individuals and corporations, from other parts of the world, to exploit the possibility of tax avoidance or even tax evasion. Tax havens come in many shapes and sizes and they are found all over the world. It might surprise many to know that the UK is responsible for several dependent states which operate offshore banking centres. Apart from the three crown dependencies of Guernsey, the Isle of Man and Jersey, the UK Treasury is responsible for the following Overseas territories - Anguilla; Bermuda; British Antarctic Territory; British Indian Ocean Territory; British Virgin Islands; Cayman Islands; Falkland Isles; Gibraltar; Montserrat; Pitcairn, Henderson, Ducie and Oeno Islands; St. Helena and St Helena Dependencies (Ascension and Tristan da Cunha); South Georgia and South Sandwich Islands; Sovereign Base Areas of Akrotiri and Dhekelia in Cyprus; and the Turks and Caicos Islands. Many of these 'Bounty Bar' islands have been successful in attracting huge amounts of foreign money and one of them, the Cayman Islands, is now the 5th largest financial centre in the world after London, New York, Tokyo and Zurich. There, in just one office building housing a legal practice in George Town, the capital, 18,000 corporations alone are registered.
One notorious offshore centre, in the middle of the Pacific Ocean, is the island of Nauru. There, if you have a spare $25,000 (£16,000), you can set up your own bank and enjoy life with little or no regulation. It is even estimated that almost 400 banks operate there from the same government mailbox. And it was in Nauru, in 1998, that according to the Russian Central Bank, $70bn (£44.9bn) vanished never to be seen again. According to the 2011 Financial Secrecy Index published by the Tax Justice Network, Nauru is the most secretive of all offshore jurisdictions. And almost in the same league are considered to be Maldives, Belize, Turks & Caicos Islands, Marshall Islands, St Lucia, Vanuatu and Seychelles. Tax havens don't normally tax interest on the bank accounts of non-residents* leaving the accountholders with the decision of whether or not to declare it to their own tax authorities. As many tax havens refuse to exchange tax information with foreign tax authorities, this encourages individuals from overseas to park large amounts of assets there. (*non-residents comprise two classes of people who are exempt from paying tax. Taking the UK:- 1) non-doms. People born outside the UK or whose father was born outside the UK who do not regard the UK as their permanent home. They, therefore, pay no UK tax on overseas income or gains that is not brought into the UK. However, after 7 years they must pay an annual fee of £30,000. 2) non-residents. People who have moved overseas on a full-time contract and who spend less than 90 days in the UK every year. Also those who leave the country and make a clean break and limit visits to 90 days a year.) Large multinational corporations (MNC's) also find it convenient to 'maximise' their profits on their overseas trade by directing the paperwork relating to these transactions through offshore tax havens. An example of how this is done comes from the Tax Justice Network (TJN). TJN has found that large banana companies have created elaborate structures to move profits through subsidiaries to offshore centres to evade paying a higher rate of tax in countries where the bananas are grown and where they are sold.
As a result of this offshore accounting 60% of global trade now consists of internal transactions within multinational companies and a vast accounting and legal industry has grown up in the last 10 years calculating transfer prices and justifying them to tax authorities. It is calculated that through trade transactions and funds stacked away in offshore tax havens by companies, the UK government loses £18.5bn annually through tax evasion. Similarly, the US government foregoes an estimated $100bn (£67bn). Many tax havens have a 'light' regulatory touch making it easy to set up a company or trust and this results in offshore centres attracting another element. Dirty' money is the fruit of many kinds of criminal activities e.g. drug dealing, secret arms sales, counterfeiting, protection rackets, smuggling, embezzlement, insider trading, computer fraud etc. The rewards of such activities usually come in one of two forms - cash or money transfer. In the form of notes and coins there is usually very little that can be done to prove that cash has been gained illegally unless, of course, the money is forged. However only small amounts of cash can be carried without arousing suspicion and small amounts are not what big criminals are about. Large amounts of cash are usually paid by money transfer which requires funds being paid into the payee's bank account. And money laundering is the process by which the proceeds of crime are accepted by a financial institution into an account opened under the control of the criminals. Money laundering can occur anywhere in the world but criminals will generally seek out areas like offshore tax havens where there is a perceived low risk of detection due to weak and ineffective government legislation. (Another avenue open is find a 'friend' somewhere on the inside of a bank/ financial institution in their own country who is willing to help them.) Offshore tax havens are seen as the perfect place to launder ill-gotten gains. Apart from minimal controls, tax havens are usually reluctant to divulge information and investigators find that companies they are looking into have been set up and registered without revealing shareholders, directors or owners. At the same time, by the time any investigators get there, any stolen money has usually been moved on. It was in 1989 that the Organisation for Economic Co-operation and Development (OECD) first started to consider taking action to counter money laundering by international criminals. To this end they set up the Financial Action Task Force (FATF) based in Paris. It was charged with drawing up a set of universal standards covering law enforcement, financial regulation and international co-operation. This list eventually ran to 40 recommendations which has now been adopted by all 34 member states. What this now means is that:-
These guidelines, now, also require banks to become policemen and so they are in the forefront of tackling this crime. To this end they must carry out Customer Due Diligence (CDD) which requires them to 'know your customer' which includes finding out the purpose of any account and then monitoring the expected profile of it. And any suspicious transactions must be reported immediately to the Financial Intelligence Unit (FIU). But it is not just banks that can be used to 'clean' money - lawyers, accountants, betting shops, casinos, car dealers, real estate agents, dealers in precious metals, insurance companies and securities houses - can all be involved and these groups have now all been included, which requires them to have their own compliance officers. After 9/11 international financial regulations and co-operation took on greater force. Draconian measures to impound terrorist assets were introduced and the US threatened immediate sanctions against countries and institutions that failed to co-operate. As a result, hundreds of bank accounts were frozen, and the search for the origin of their funds given top priority. This brought to light the fact that it was not always through money laundering that terrorist groups received most of their funds but often from legitimate sources. The OECD now wants worldwide compliance with all countries adopting its uniform code of conduct based on 40 recommendations on anti-money laundering (AML) compliance and 9 special recommendations on combating the financing of terrorism (CFT). Currently two countries (Iran and North Korea) are identified as high-risk and non-cooperative jurisdictions and the OECD have applied counter-measures against them. At the same time there are several countries that are considered by the OECD not to have made sufficient progress in addressing deficiencies. These nations are Bolivia, Burma, Cuba, Ethiopia, Kenya, Nigeria, Sao Tome/Principe, Sri Lanka, Syria and Turkey. There is also a third group of countries that are currently showing a high-level of political commitment to addressing the deficiencies but are not yet there in terms of passing legislation. These nations are Algeria, Angola, Antigua/Barbuda, Argentina, Bangladesh, Brunei, Cambodia, Ecuador, Ghana, Honduras, Indonesia, Kyrgyzstan, Mongolia, Morocco, Namibia, Nepal, Nicaragua, Pakistan, Paraguay, Philippines, Sudan, Tanzania, Tajikistan, Thailand, Turkmenistan, Trinidad/Tobago, Venezuela, Vietnam, Yemen, Zimbabwe. These measures set up by the OECD should now start to bear fruit in getting to grips with money laundering and helping to counter terrorism. However, despite this tightening up of financial regulation, the IMF estimates that $1 trillion ($1,000,000,000,000) is still laundered annually, equivalent to 3% of global Gross National Income. And it seems
it is not just offshore tax havens that continue to have problems addressing
this issue for some OECD countries are still not managing to enforce laws
already passed. For example, in the US, it is estimated that nearly 2m
companies are still being set up annually without the need of the identity
of the people behind them. Jason Sharman, an academic from Griffith University
on Australia's Gold Coast, has recently done some research in this area.
Armed with a personal computer and, a modest budget, he tested the difficulty
of setting up anonymous bank accounts around the world, with striking
results. His findings showed that the centres with the highest standards
were the small island offshore centres. At the other end of the scale
were Somalia, and worst of all, the US, where service providers were prepared
to set up anonymous bank accounts without proper identification. UK providers
mostly required the right paperwork but, in one case, an anonymous company
was set up in less than a day at a total cost of just over £500.
At the same time, though, the OECD should have gone further. Operating a level playing field is all very well and it should deter ‘money laundering’ in the future, but what about those who have already slipped through the net. All banks now have access to lists of Politically Exposed Persons (PEP) which contain the names of all government ministers in all countries of the world. Surely it would not be difficult to go backwards and produce a 'Who was Who' in past governments. And armed with this FATF investigators could search anywhere for personal accounts and 'dig' down through front companies and client fund accounts to look for money that may have been stolen in the past. In this way, for example, money embezzled by ministers in the governments of Marcos of the Philippines and Mobutu of Zaire could possibly be traced and, then, if proved to have been stolen, sent back to the country of origin. In this way perpetrators of financial crimes in the past as well as the present will never be able to rest, thinking they have beaten the system. And at the same time, offshore centres will take on added respectability, and some of the poorest countries in the world should see stolen money repatriated and become available for tackling social deprivation there. In February, 2011 the Swiss authorities went some way towards doing this when they enacted a new restitution law which makes it easier for banks to freeze fortunes and return money acquired dubiously by foreign dictators to their home country. The first victim of this new law is the former leader of Haiti, Jean-Claude 'Baby Doc' Duvalier who is currently facing charges of corruption and crimes against humanity in the country he ruled through terror for 15 years. For a hundred years Switzerland has been the first point of call for dictators when it came to salting away their pension plans but this new legislation allows the authorities to freeze their assets even if the home country has not placed a formal request. Now, unless dictators can prove that they acquired their assets legally, the money will be returned back to the country of origin. As for as tackling the problem of high worth individuals stashing away assets out of the prying eyes of their tax authorities, OECD countries and tax havens have now signed up to an agreement under the auspices of the OECD's Global Forum on Transparency and Exchange of Information. This tackles issues relating to the implementation of international standards and removes impediments in the exchange of bank information for tax purposes. As a result, non-OECD countries are now signing up to new tax information agreements. 82 countries, including all OECD nations and Jersey, Guernsey and the Isle of Man, have now substantially implemented this internationally agreed standard which requires information on request in all tax matters for the enforcement of domestic tax law. Another 8 jurisdictions have committed to this standard and will implement it shortly. As a result of this further commitment to tackling tax evasion the Swiss authorities have just signed a deal with the UK government which has ground-breaking ramifications for residents of the UK who hold foreign bank accounts there. It could raise up to £7bn for the UK Treasury. The deal comes in two parts. Firstly there is a one-off windfall tax for past liabilities levied at between 19% and 34% on the funds held by UK residents in Swiss banks. These amounts will be deducted in May 2013 on accounts opened before 2010 and this will settle all income tax, capital gains tax and inheritance tax owed. Secondly these Swiss accounts held by UK residents will be subject to a withholding tax on all future interest, investment income and capital gains levied at 48%, 40% and 27% respectively. The money collected from this withholding tax will be sent direct to the UK Treasury thus allowing British account holders in Switzerland to keep their identities secret. Any UK residents who try to move their money out of Switzerland to other tax havens before 2013 will be reported to the British authorities. UK residents who already co-operate with the UK tax authorities will not be charged these new levies. However, the Swiss government will also provide information to the UK government if HM Revenue and Customs can show that accounts are being used to evade tax. This agreement is already in place with the authorities in Liechtenstein where the resulting proceeds have exceeded expectation. The recent global economic downturn has further concentrated the minds of OECD governments as they try to confront their budget deficits. And tax evasion is seen as potentially playing a valuable role in helping achieve this as well as being politically astute. For example, the UK Treasury is considering introducing a 'statutory residency test' which could affect tax exiles like racing driver Lewis Hamilton, Jackie Stewart, and the Barclay brothers, which could come into place as early as 2011. And it looks like the UK courts have got there already for in a ruling, in February, 2010, on the tax status of Seychelles-based multimillionaire, Raymond Gaines-Cooper, the Court of Appeal found that he is now liable to pay £30 million in back taxes because England remained 'the centre of gravity of his life and interest' even though he adhered to existing rules by spending fewer than 91 days, on average, in any 4 year period, in the UK. As far as the UK is concerned, then, it appears that in future different considerations may come into play to decide residency. Is your house here? Is your family here? Are you a member of any UK clubs? Do you have a string of racehorses in training at Newmarket? Shortly after this ruling was handed down, Her Majesty's Revenue and Customs (HMRC) office started to receive numerous calls from tax exiles worried about the possibility of facing huge tax bills. And the rewards for the UK government could be exceptional. The 'tax gap' - the amount HMRC does not collect because of tax evasion - is about £35bn per annum, according to government estimates, but nearer to £70bn per annum, according to Tax Research UK, an independent consultancy. But high worth individuals also have other things to consider. As a result of the freezing up of money markets and resulting credit crunch, many banks in offshore banking centres became exposed leading to fears that governments in tax havens may not be able to stand behind bank deposits. For example, it is no problem for the British government to guarantee the first £85,000 of all individual bank deposits in the UK, but it is impossible for the government of the Isle of Man to do likewise. Also, recently, there has been several cases of data relating to the bank accounts of wealthy customers being stolen and finding its way into the hands of various tax authorities prompting a huge debate about the use of stolen data. In 2007, a DVD containing the details of over 1,000 German customers, was stolen from LGT Treuhand, a bank in Liechtenstein, and sold to the German tax government for Euros 4.2 million (£3.8m). The German authorities pursued hundreds of alleged tax evaders, including the head of Deutsche Post, who was fined and given a suspended prison sentence. Tax authorities in the US and UK are also supposed to have benefited from this piece of good fortune. The most recent theft occurred in March, 2010 when an IT employee at the HSBC Private bank in Switzerland stole information concerning 24,000 customers past and present. French authorities are believed to have paid up for this data. Record low interest rates is another reason to ponder keeping money overseas. For various reasons, then, it looks like the writing is on the wall, and maybe it is time for the rich in OECD countries to consider the repatriation of their overseas bank/money market accounts. For one way or another, OECD tax authorities are now likely to exert heavy penalties on individuals who they think are not coming clean or, who may still live abroad but who still park a lot of their assets in individual OECD countries. |
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just1world@just1world.org |
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A
bunch of bananas might leave Colombia at a price of 13p made up of labour
and production costs. Only 1p profit is made here in a country where the
rate of corporation tax is 30%. Then, through a series of elaborate offshore
centres with small or zero rates of corporation tax, the bananas pass
on paper through various subsidiaries all of which charge for 'services'
e.g. for using their purchasing network 8p, for financial services rendered
8p, use of brand name 4p, insurance costs 4p, management fees 6p, cost
of shipping 17p. With all these 'services provided' the total cost of
this bunch of bananas, which started off in Colombia at 13p and has now
physically arrived in the UK, is 60p. The company now sells the bananas
to a large supermarket for 61p making 1p profit in a country where the
rate of corporation tax is 26%. In this way many multinational corporations
make huge, mostly untaxed profits, through the use of tax havens, to the
detriment of the producing and consuming countries.
no longer will anonymously numbered bank accounts be tolerated
Bringing
standards
up all over the world and keeping them there is paramount in tackling
financial crime. But it beggars belief that some of the major players
in the rich world are unable to address the problem effectively themselves.
That simply is not good enough.