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money laundering and tax havens'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.
But it is not just criminals that are attracted to tax havens and offshore centres. Many rich people like to park their wealth in tax havens away from the prying eyes of tax authorities in their own countries. And they are also useful centres for multinational corporations. Large multi-national corporations 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. 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. Another result of this offshore accounting is that about 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. Tax havens come in many shapes and forms and they are found all over the world. It might surprise many to know that U K 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 U K 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. One notorious offshore centre, in the middle of the Pacific Ocean, is the island of Nauru. There, if you have a spare $25,000 (£16,600) 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 (£46.5bn) vanished never to be seen again. In total, in 2005, it was estimated that there were 4,800 offshore banks licensed by nearly 72 offshore jurisdictions controlling an estimated $6 trillion (£4 trillion) in assets. And 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). So what if anything is being done to address a) money laundering and b) tax havens? a) money
laundering
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 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 set up an anonymous company 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. b) tax havens The present ongoing global economic contraction has given added impetus in efforts to tackle the secrecy of tax havens. OECD governments are keen to reduce budget deficits and tax evasion is seen as potentially playing a valuable role in helping achieve this. And politically it carries no burden. At the same time the US sub-prime mortgage crisis and resulting freezing up of money markets left many banks in offshore banking centres exposed. 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 there is now a mutual acceptance by both sides that the old ways in tax havens cannot continue. (The Foot Review set up by the UK government is due to report by the end of 2009 on regulatory issues and the continuing relationship between the UK and its Crown Dependencies and Overseas Territories) Both OECD countries and tax havens then 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. 56 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 30 jurisdictions have committed to this standard and will implement it shortly. For three reasons, then, maybe it is time for individuals of OECD countries to repatriate their overseas bank/ money market accounts. The first is that small tax havens are unlikely to guarantee any deposits if banks there hit trouble; the second is that low interest rates mean any cash invested there is basically lying idle and third tax authorities now have the bit between their teeth and are now likely to exert heavy penalties on any of their nationals who have stashed money away in tax havens and have not come clean. |
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just1world@just1world.org |
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1. bank secrecy laws meant that financial information requested from
governments abroad was often rejected. And on the occasions when information
was forthcoming, investigators found that companies they were investigating
had been set up and registered without revealing shareholders, directors
or owners. At the same time it was normally the case that the stolen money
in question had been moved on.
It was in 1989 that the Organisation for Economic Co-operation and Development
(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:-
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.