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tax havens and money launderingA tax haven is a country or territory where taxes are low or even non-existent. 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 numerous individuals from OECD (Organisation for Economic Co-operation and Development) countries to move much of their banking business there. 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, has now become 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.
In total, in 2007, it was estimated that there were 72 offshore tax jurisdictions where some 4,800 licensed banks controlled an estimated $6 trillion (£4 trillion) in assets. Tax havens usually have a light regulatory touch making it easy to set up a company or trust. And 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 transnational 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 and individuals the UK government loses £18.5bn annually through tax evasion. Similarly the US government foregoes an estimated $100bn (£67bn). With lax regulatory controls, however, tax havens also attract 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 or find a 'friend' somewhere on the inside of a bank/ financial institution 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 they get there, any stolen money has usually been moved on. It was in 1989 that the OECD first started to consider what action was needed 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 32 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. 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 all countries to adopt their uniform code of conduct and make it difficult for all criminals to enjoy the fruits of their illegal actions. Initially, in 2001, 23 jurisdictions were deemed to fall short of OECD requirements and were designated as Non Co-operative Countries and Territories. However, after continual monitoring, all these countries, including Nauru, have now been removed from this list. These measures set up by the OECD then should be getting to grips with money laundering as more and more countries start to address the issue. 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 seem to have continuing problems
tackling this issue. Some OECD countries are still not managing to enforce
laws already passed for 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 also recently found the system wanting in
some countries. 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. As far 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 which 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. 66 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 20 jurisdictions have committed to this standard and will implement it shortly. But the recent global economic contraction has further concentrated the minds of OECD governments as they try to cut 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 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 will come into play to decide residency. Is your house here? Is your family here? Are you a member of any UK clubs? Shortly after this ruling was handed down Her Majesty's Revenue and Customs office started to receive numerous calls from tax exiles worried about the possibility of facing huge tax bills. But non-doms and high worth individuals also have other things to consider. After the US sub-prime mortgage crisis and resulting freezing up of money markets, have also other considerations to weigh up. As a result of the 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 £50,000 of all individual bank deposits in the UK but it is impossible for the government of the Isle of Man to do likewise. So this question also has to be considered. 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. 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 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 both rich individuals in OECD countries as well as non-doms to consider the repatriation of their overseas bank/money market accounts. For one way or another OECD tax authorities now have the bit between their teeth and are now likely to exert heavy penalties on any individual 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 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 again is 30%. 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.