More questions over UK party funding

Labour MPs have demanded an urgent meeting with Britain's elections watchdog over possibly offshore-sourced funding for Britain's Conservative Party. From The Guardian:

The Lib Dems are also demanding action before the election. Lord Oakeshott, the party's treasury spokesman, said: "Democracy is in danger if Lord Ashcroft has been pouring millions into Conservative campaigns through an offshore pipeline from a Caribbean tax haven.

"The general election is already well under way, so the referee needs to say whether the Tory team is playing by the rules. It's pointless showing the red card after the match is over."

Read the full story here.

Why Has Domestic Revenue Stagnated in Low-Income Countries?

A new paper by the Center for Development Policy and Research at the School of Oriental and African Studies in London sets out to answer the question posed in our headline, drawing on extensive disaggregated data. It argues that:

There has been miserably slow progress in increasing domestic revenue in low-income countries since the 1990s. . . the reigning 'tax consensus' has placed an inordinate emphasis on boosting domestic indirect taxes, and the value added tax (VAT) in particular.
. . .
At the same time, the 'consensus' has advocated eliminating import taxes (in order to liberalise trade) and lowering tax rates on corporate profits (in order to compete with other rate-cutting countries). Consequently, trade taxes have been particularly hard hit while increases in direct taxes, which cover mainly personal income and corporate profits, have generally been anaemic.

Overall revenue has ended up stagnating because of the resultant reliance on boosting revenue from only one major component, i.e., taxes on domestic goods and services."

And their conclusions include this:

"Increases in direct taxes have generally been unsatisfactory, due partly to widespread slashing of rates on corporate profits, based on the expectation that more profits would thereby be generated and hence more revenue collected. But the evidence of such an effect is weak or conflicts with such a rosy expectation."

Which dovetails neatly with what we have been saying for some time. A key reference for the above paper, providing more detail, is here.

Calls for review of U.S. spending buried in tax code

For those interested in the details of U.S. tax policy, they would be well advised to read a new report from tax experts Citizens for Tax Justice in Washington, explaining why it's time for the federal government to finally follow through on its long-unfulfilled promise to evaluate the usefulness of special tax breaks. As they say:

"Does the research and experimentation tax credit, for example, actually encourage research? Or does it simply enrich high-tech firms? Does the mortgage interest deduction increase homeownership, or does it only reward people who would have purchased homes anyway? Shockingly, these types of fundamental policy questions have not been addressed in any type of systematic and transparent fashion by our government.
. . .
It is difficult to imagine a desirable scenario under which the U.S. government could restore fiscal sustainability without taking a closer look at the more than $1 trillion spent annually through the tax code."

Automatic information exchange is the emerging standard

The OECD works hard to get member states to tout its woefully flawed information exchange scheme as "the internationally agreed tax standard." Yet to assert that this is the internationally agreed standard is pure nonsense, as Bob and Michael J. McIntyre, two top U.S. tax experts, noted in testimony last week to the U.S. Senate Committee on Foreign Relations:

"The emerging international standard for effective exchange of information requires information not only on specific request but also automatic and spontaneous exchanges.

They explain further:

In a spontaneous exchange, a country provides its treaty partner with information about likely tax cheats if it happens to uncover such information during its own audits. An automatic exchange, sometimes called a “routine exchange” can take many forms. One of the most useful forms is the exchange in electronic form of information regarding various items of periodical income (e.g., dividends, rents, royalties, interest) received in one Contracting State by residents of the other Contracting State."

And they note of the OECD standard for its Tax Information Exchange Agreements (TIEAs):

That standard is obsolete. It is common knowledge that the OECD TIEA (2002) has been ineffective in limiting international tax evasion and aggressive tax avoidance. . . . The United States needs to shoulder some of the responsibility for the weakness of the OECD TIEA (2002).

Quite so. Speaking about three income tax treaties that the U.S. is proposing signing (with France, Malta and New Zealand,) notes that:

"At a time when our European allies are working hard to reach agreement within Europe for an effective exchange of information, the United States, in its treaty policies, is lagging behind the times."

Much of the problem dates from May 2001, when U.S. Treasury Secretary Paul O'Neill, "under pressure from U.S. banking interests and anti-tax zealots," said that the OECD had gone too far in combating tax evasion, and saying that the Treasury Department was only willing to support the OECD initiative if it was limited to “exchanging specific and limited information necessary for the prosecution of illegal activity.”

Our recent blog notes how widely automatic exchange is already being used - and we are planning to update this with more information soon.

The McIntyres add, by way of conclusion:

"We respectfully suggest that the committee return the proposed treaty and treaty protocols to the Treasury Department with a stern request that it negotiate an effective information exchange provision in each of these agreements. If it should turn out that these three countries are not interested in such a provision, so be it. The chances are high, however, that one or more of these countries would join the United States in endorsing the emerging international standard for transparency and effective information exchange.

By encouraging a codification of that standard in U.S. tax treaty policy, this committee will have taken a significant step in combating the widespread international tax evasion that is undermining the U.S. tax system and the tax systems of countries all around the globe."

NB TJN supports not only automatic information exchange, but multilateral information exchange too. Read more here.

A tax on empty houses

The Tax Research blog has an interesting and important item, aimed at the UK but with potentially wider relevance. It starts by quoting an Observer story which says:

"Alistair Darling should levy a £5bn "empty property tax" on up to a million homes left vacant by absentee landlords, to help meet the costs of the financial crisis, trades unions will argue tomorrow."

and moves on to analyse it in more detail, with snippets such as this:

"evidence is available that many occupied and rented properties are now being registered through offshore, tax haven companies registered in locations such as the British Virgin Islands, Jersey, Guernsey and Switzerland. For all practical purposes it is almost impossible to determine who really owns these companies. The reality is that they could be owned by UK resident people who are hiding that fact by registering these properties in the names of tax havens companies."

Sweden bans aid funding via tax havens

Development Today has just published the following news item:

The Swedish Ministry of Foreign Affairs has instructed the aid agency Sida to avoid new engagements in funds and companies facilitated through so-called tax havens. Sida was informed about the decision in a recent addendum to the Letter of Appropriation. The risk capital fund Swedfund also has a temporary ban on investing through tax havens, following a critical report from the Swedish Auditor General. (See DT 8/09)

The ban on tax haven investments is valid until the Swedish government has formulated a policy on how Swedish aid institutions should relate to tax havens, likely to be completed later this year, Development Today is told. "We are now working on developing a policy in this area and our ambition is to move fast," says Director Sten Johansson at the Ministry of Foreign Affairs in Stockholm.

Tax havens have come under increasing international scrutiny as they facilitate massive capital flight from developing countries, corruption and money laundering. Such offshore financial centres offer partial or total exemption from taxation and owners can conceal who controls businesses.

South Africa’s finance minister calls for tax crackdown

TJN's director, John Christensen, was in a meeting at the UK House of Commons described by the FT:

"Pravin Gordhan, South African finance minister, has called for a crackdown on tax avoidance and evasion by multinational corporations, arguing the use of such tactics is draining essential revenues from developing countries.

Addressing a British House of Commons committee on Monday, Mr Gordhan deplored the current “catch me if you can attitude” of multinational companies. He warned that the global community needed to introduce more consistent and effective taxation systems."

Blowing our own trumpet, we know, but at the meeting Gordhan and other speakers praised TJN for its work in raising the issues. Also:

"Mr Gordhan yesterday argued that tax evasion and aggressive tax avoidance, or legal efforts to reduce tax bills, drains developing countries of essential revenue needed to assert their “fiscal sovereignty, [which is an] indispensable part of nation-building”.

He said that there was a “direct relationship” between an increase in tax revenues in developing countries and the creation of the sort of sustainable institutional infrastructure essential for good governance."

Which is crucial to remember. Read more on this here.

Gordhan noted that the ANC government in South Africa inherited a fiscal deficit of 8% of GDP in 1994, and has turned this into a surfeit of 1% or so. Until the government initiated its programme tackling tax evason, the attitude among most South Africans was: pay if you want to.

There has been a huge effort towards engineering a comprehensive philosophical reorientation towards taxation, and had emphasised a three- part compliance model: first, educating public about the importance of tax; second, providing better services to the public, and third, creating an effective enforcement arm. Civil society, he noted, had been instrumental in helping change the culture of taxpaying, a central component of the citizen-state relationship.

Crucial to all of this is the strength of political will and support for the tax department. It is very difficult to change the culture of taxpaying if politicians themselves don’t support this change.

Getting close to a surplus is a crucial political issue for a developing country: Gordhan noted that once a budget surplus is achieved, with a solid tax base, this leads to self-sufficiency which then seems to lead on to greater self-respect, and protects countries against being dictated to by suc outsiders as the IMF: it restores countries' sovereignty and helps them set their own own policies. In short, fiscal policies are an indispensible part of national self-determination.

As Michael Waweru of the Kenya Revenue Authority said two years ago:

"Pay your taxes, and set your country free.

Gillian Tett of the Financial Times chaired the meeting, and because Britain's Conservative Party declined to take part, the role of political opposition fell to Britain's forward-thinking Liberal Democrats. According to Lord Oakeshott, Liberal Democrat policy specialist and a pension fund manager, British companies are world leaders in aggressive tax schemes. People do not put their money into Aruba or Cayman because they are centres of excellence for fund management: no, they go for the opportunities for tax tricks.

The next major item on the African tax agenda is the African Tax Forum meeting in Kampala on November 19th. See more about that here.

India to renegotiate tax treaties

This looks interesting, from India:

"I have asked Revenue Department to reopen negotiations for all 77 double tax avoidance agreements with all countries which we have entered so far so that we can have real time exchange of information on tax evasion and tax avoidance," Finance Minister Pranab Mukherjee said at the India Economic summit."

Liechtenstein exits OECD list

Liechtenstein has passed into the OECD's whitewash, sorry, white list category.

Liechtenstein scored an 87 percent opacity score on our Mapping the Faultlines project. It sauntered over the OECD hurdle simply by signing two more utterly inadequate OECD-styled agreements.

It is a sad day that this is what passes for being considered acceptable. Shame on the OECD, for legitimising the illegitimate.

Lending must support the real economy - so attack tax havens

The title of this blog is partly drawn from the FT a few days ago, noting that:

"The share of lending by US banks to the US financial sector – instead of to the real economy – went from 60 per cent of the outstanding loan stock in 1980 (up from 50 per cent in the 1950s) to more than 80 per cent in 2007."

(Mathematically this could be misleading: given that overall lending rose very sharply, the rise of lending to the financial sector in absolute terms is far, far greater than the 50-to-80 jump suggests on its own.) And he notes the obvious but oft-forgotten point that:

"Profit and capital gains may look much the same to the individual bank – a stream of revenues – but they have different macroeconomic consequences. Lending to the real sector is self-amortising: it creates a debt, but also the value-added to repay principal and interest. Such loans enlarge the economy in proportion to the debts created and are financially sustainable. By contrast, loans to create or buy financial assets and instruments are not, by themselves, self-amortizing."

And the author reaches a conclusion which is, similarly, something of a no-brainer:

"The crisis and recession were not all that difficult to predict once you started to look at the flow of funds – at credit and debt – and at the financial sector as separate from the real economy. Following the same logic, it should now be fairly uncontroversial what our long-term aim in financial reform is. It is to redirect lending away from bloating the financial sector and towards supporting the real economy, rather than loading it down with debt."

Which brings us right back to the question of leadership, unilateralism, and our recent blog on the subject: something essential to remember. And the FT article notes this:

"In the 1980-2007 era of cheap credit and deregulation, banks had every incentive to move from real-economy projects, yielding a profit, towards lending against rising asset prices, yielding a capital gain"

and the incentive towards capital gains, of course, is spurred by lower taxes on capital gains than on other forms of income - a differential which is in turn spurred by the things TJN has always been worried about: tax havens, and tax competitition.

And in the context of the bloating of the financial sector, who ever studied the relationship between the bloating of the financial sector, and what was noted in this other comment in the Financial Times in May:

"in recent separate surveys by the US Government Accountability Office and the Tax Justice Network, the largest user of tax havens in every country surveyed was a bank."

It is time to start joining the dots.

Mapping companies in secrecy jurisdictions

Our Mapping the Faultlines project, a foundation for our Financial Secrecy Index, is continuing to generate analytical reports. One latest report, produced by Markus Meinzer, looks at the data involving the number of companies in various secrecy jurisdictions.

One graph shows, strikingly, that the British Virgin Islands appears to have nearly as many companies registered as the United States, with Hong Kong not far behind - but both jurisdictions are dwarfed by the United Kingdom.

The number of companies will generally indicate two main things: first, how easy it is to incorporate, and second, how useful the jurisdiction is in terms of providing facilities for residents elsewhere to evade or avoid home rules, laws and regulations. Of course, these are just indicators: many companies do carry out genunine economic activity (obviously, the U.S. will have a far higher share of real companies doing real things than the British Virgin Islands. And, as the report indicates:

"Because of the secrecy that surrounds companies in most of the jurisdictions surveyed it is almost impossible to tell where these companies do actually trade, and where they should have tax liability or be subject to regulation. This is the danger that arises from the use of these entities. These so-called “shell companies”, “letter-box companies”, or “brass-plate companies” usually serve just one purpose, which is to conceal the identity of the real beneficiaries of a
transaction behind a corporate structure.

The companies are often complemented by other secrecy structures (e.g. trusts, which are often recorded s the owners of secrecy jurisdiction companies with the deliberate intention of creating layers of impregnability) and so make it difficult or even impossible for tax and other law enforcement authorities to connect a particular financial flow (e.g. a suspicious payment) with a real human being who might be held accountable for it as a result."

Again, you can find the full report here.

Mutiny in the Caribbean

The United Kingdom has strong and deep ties to tax havens in the Caribbean; in August it dissolved the parliament of Turks & Caicos and restored direct rule. This latest BBC story highlights the trouble that seems to be brewing:

"We currently have petitions going on about concerns of new taxes that are coming on stream. I think we'll see a greater agitation on part of the people," says Douglas Parnell, the new leader of the Peoples Democratic Movement party (PMP). "My view is that if he [the Governor Gordon Wetherall] doesn't correct course very shortly, you'll see that people will become ungovernable."

Memo: the Turks & Caicos achieved a remarkable 0% transparency rating in our Mapping the Faultlines project. Will the British government do something about this?

Secrecy jurisdictions: interactive map

Click here.

Tax havens: fraudsters and rent-seekers

John Kay in the Financial Times:

"You can become wealthy by creating wealth or by appropriating wealth created by other people. When the appropriation of the wealth of others is illegal it is called theft or fraud. When it is legal, economists call it rent-seeking."

Which is what secrecy jurisdictions (tax havens) do - they appropriate wealth, and they foster the appropriation of wealth. Kay isn't particularly driving at the offshore system, but he is right to say

"Rent-seeking can be effected through rake-offs on government contracts, or the appropriation of state assets by oligarchs and the relatives of politicians. But in more advanced economies, rent-seeking takes more sophisticated forms. Instead of 10 per cent on arms sales, we have 7 per cent on new issues."

As a solution, Kay wisely advocates constraints on the concentration of economic power. Vigorous pursuit of such constraints, he continues,

"is the difference between a competitive market economy and a laisser-faire regime, and it is a large difference."

True. Once again, the secrecy jurisdictions are the proponents and supporters of a laisser-faire, not a competitive, economy. For just one example of this, read more here.

Setting Jersey straight

From the Jersey Evening Post:

We note your editorial ‘Harder work for the critics’ (JEP, 5 November). We suspect you would include us among the ‘critics of Jersey’, although that is not true; we are critics of the offshore financial services industry wherever it is to be found. The recently published Tax Justice Network Financial Secrecy Index is solid evidence of that.

Jersey scores poorly in the work that underpins that index. It had an opacity score of 87%, which is nothing to boast about.

It is almost impossible to determine any practical information about Jersey companies, their ownership or trading. No data is available on Jersey trusts. 43% of EU resident account holders in Jersey deny their own governments information on their income from Jersey bank accounts, and the Jersey government is currently refusing to change to automatic information exchange to stop the enormous systematic tax evasion that this facilitates.

Jersey promotes the use of protected cell companies, foundations and other arrangements designed to create a veil of secrecy that undermines the effectiveness of markets, assists tax and other fraud, and undermines the tax systems of democratically elected governments.

While Jersey continues to promote such abuse we have an easy time in pointing it out to a world now all too willing to understand that globalised financial markets require transparency and mutual co-operation to curtail illicit financial flows through secrecy jurisdictions such as Jersey. For that reason we won’t be going away.

Richard Murphy
Markus Meinzer
The Tax Justice Network

Panama defies the United States on transparency

As the Seattle Times noted recently:

"Panama's "comparative advantage" is tax evasion. . . More than 350,000 corporations registered in Panama conduct virtually no business there."

Now, sent to TJN from U.S. Congressman Doggett's office:

"Last Friday, U.S. Congressman Lloyd Doggett (D-TX) and U.S. Senator Carl Levin (D-MI) urged President Obama to clarify the United States’ response to Panama’s continued recalcitrance on tax cooperation before proceeding with the Panama Free Trade Agreement. Specifically, Rep. Doggett and Sen. Levin asked the Administration to outline what commitment Panama has made to signing a tax information exchange agreement, if a date for formal negotiations has been set, or if the U.S. has made any other progress with Panama on tax transparency issues.

The letter is the second that Rep. Doggett and Sen. Levin have written to the administration stressing the importance of securing Panama’s cooperation. Earlier this year, they urged President Obama to make action on the Panama Free Trade Agreement contingent on Panama’s cooperation with efforts to combat international tax evasion. Rep. Doggett and Sen. Levin are the House and Senate sponsors of the Stop Tax Haven Abuse Act that targets offshore tax evasion and was endorsed by the Obama Administration.

“In these challenging economic times, we especially cannot afford to ignore Panama’s portion of the billions of U.S. taxpayer dollars stashed in offshore banks,” said Rep. Doggett. “We cannot move forward with an agreement on trade while ignoring Panama’s status as one of the world’s recognized tax havens with a fortress of secretive banking and regulatory practices.”

“While some offshore jurisdictions around the world have said they will no longer use bank secrecy to help tax cheats, Panama apparently still refuses to negotiate a tax information exchange agreement with the United States. We should not reward Panama with a free trade agreement unless and until it agrees to disclose information on U.S. tax dodgers,” said Sen. Levin."

Read more here.

On a separate matter, for those interested in the minutiae of U.S. legislation, Doggett had something useful to say on a legislative amendment with the beautiful title "Net Operating Loss Carryback provision to the Unemployment Compensation Extension Act."

"Economists advise that every dollar we invest here on unemployment benefits, spurs economic growth (GDP) by $1.61 cents—very effective, a winner.

“But the corporate giveaway added to this bill – the so-called “loss carryback provision”—yields, according to the same economist, 19 cents for every dollar we invest—a real loser.

“Today’s bill allocates $2 billion to the winner and $10 billion to the loser."

Sigh.

More on UK offshore accounts

Emma Bergh-Apton, author Offshore Personal Savers-Dispelling the Myths, a report presented to the Treasury Select Committee in February, has been commenting on our recent blog, noting that:

"My current research so far reveals that the UK is the only country of the 95 polled thus far, which allows banks and building societies to refuse accounts to non-resident citizens in their home country
. . .
While high net worth individuals may prefer to keep their sterling offshore, it is hard to justify why the majority of we ordinary, hard working and retired Expatriates should be denied our right to open the account of our choice in our home country - particularly now that our funds are even more at risk if the Isle of Man, Guernsey, Jersey et al decide to limit their existing and, in the case of Jersey proposed, Deposit Compensation Schemes to 'resident protection only'."

Quoted in IFAonline last March, Bergh-Apton said that

"the 10,000 plus depositors in the two failed Icelandic bank subsidiaries would not be without the majority of their savings if crown dependency residents had no choice but to hold their savings offshore.
. . .
According to Bergh-Apton's survey of 57 banks and building societies based in the UK, only two small building societies were prepared to open accounts for UK citizens living in the crown dependencies and only upon personal application at the branch and subject to identity checks."

Britain's Financial Services Authority (FSA) has declined to challenge this situation, and has allowed a false rumour to circulate that this has something to do with money-laundering regulations. We know this isn't true: earlier this year Colin Powell, (then) chairman of the Jersey Financial Services Commission told us in an interview that there was no legal requirement for banks to force UK expatriate savers offshore, and a top UK anti money laundering official, who prefers to remain anonymous, also confirmed to TJN's director, John Christensen, that money laundering regulations have nothing to do with this.

No, it is British banks that are forcing savers to do this: as we have noted before, if the money is offshore the banks can use it to squeeze out all sorts of benefits such as increased leverage, tax advantages, easier capital requirements, and so on. As if they hadn't got enough support from taxpayers; they get a free ride from the regulators too! This scandal needs to be stopped by Britain's regulator. Once again, the FSA has been shown to be asleep at the wheel.

ActionAid: The G20 broke my heart

We are grateful to Martin Hearson of ActionAid, for the following blog summarising the whole G20 process to date:

"On Saturday I found myself on a ludicrously long train journey from London to St Andrews in Scotland, clutching my top-security accreditation for the G20 Finance Ministers summit, the culmination of the Outlandish Revenue Service's feverish project activity.

But I'm afraid to say it was a bit of a let down.

You know the story. Boy meets G20. G20 really like his proposals for greater transparency in international taxation. Boy gets his hopes up, follows G20 all the way to a remote Scottish golfing resort...

It all began in March, when the PM promised that, "at the London Summit we will set out new measures to crack down on the tax havens that siphon off money from developing countries - money that could otherwise be spent on bednets, vaccinations, economic development and jobs."

And they did, promising "proposals, by end 2009, to make it easier for developing countries to secure the benefits of a new cooperative tax environment."

It was not a question of "leesten very carefully, I shall say zis only once," either. Gordon Brown was at it again in July, getting his mate French president Nicolas Sarkozy in on the act, with the two promising that:

"We will work together through the G20 to ensure that proposals are developed by the time of the next G20 Summit to ensure that developing countries can benefit from the new cooperative tax environment, including through a new multilateral tax information exchange agreement."

In that same month, the G8 lent its support, and the government's new policy paper on international development had tax written all over it. Literally!

Was I getting the wrong impression? The signals looked clear to me.

Keen to seal the deal, my Outlandish Revenue Service colleagues and I bombarded the Treasury with 3000 letters, and spent hours making them a compilation tape.

Stephen Timms, the Minster with responsibility for tax, was the man for me. Yes, there was the matter of that video of him with one of my colleagues. But I forgave him all that when he wooed me with his talk of a "robust review mechanism to evaluate the benefits of information sharing to developing countries" and the "possibility of a shift to automatic tax information exchanges". Here was a guy that understood what I wanted. A guy that really got me.

With all these promises in the run up to Saturday's G20 summit, I travelled up in the hope that there would be an end to all this teasing. Were the G20 ready to commit?

Alas, the answer was no. Instead of the concrete promises I had been hoping for, all they would say was that they was that they welcomed "the possible use of a multilateral instrument."

Alas, not even the tasty Arbroath smokies could make make up for this crushing disappointment. Without the political pressure that results from unequivocal G20 support, it will be much harder for the OECD (the boffins behind any multilateral instrument) to build an ambitious proposal and persuade everyone (including tax havens and rich countries) to join it.

Sure, I'm prepared to give the G20 a second chance next year. It's still possible for them to do more to help developing countries benefit from the crackdown on tax havens.

In the meantime, there are other fish in the sea. I hear the European Parliament has a bit of a thing for country-by-country reporting, for one…"

Incorporation transparency in the USA: testimonies and webcast

Last week we blogged the forthcoming testimony by TJN Senior Adviser Jack Blum to the US Senate Homeland Security Committee in support of new pro-transparency legislation, the Incorporation Transparency and Law Enforcement Assistance Act. Blum said:

"The single most important tool in the toolkit of people trying to hide money from law enforcement and tax collection is the anonymous shell corporation. These shell corporations have no physical place of business, use nominee officers and directors, and as a rule do no business in the place of incorporation."

Now, a little late (apologies), we bring you further testimony. Senator Levin noted that:

Viktor Bout, a Russian, is one of the most notorious arms traffickers in the world, and is featured in a book called Merchant of Death. Last year, the United States indicted him for conspiracy to kill United States nationals, the acquisition and use anti-aircraft missiles, and providing material support to terrorists. To carry out his activities, he is known to use a network of shell companies around the world, including companies formed in countries like Liberia, Moldova, and the United States.

Chart One lists the names of ten Texas and Florida companies alleged to have been used by Viktor Bout over the years. It also includes two Delaware companies that were alleged in a 2002 Interpol notice, based on information from Belgium, to have been used by Viktor Bout to transfer $325 million to carry out his activities.

The end result is that a U.S. company may be associated with an alleged arms trafficker and supporter of terrorism, but we are stymied in finding out, in part because our States allow corporations with hidden owners."

You will find the rest of Levin's testimony, and all the other statements, here. A live webcast of the proceedings is available here.

Why do banks push depositors offshore?

An anonymous commentator on a recent blog about one woman's experience with the Isle of Man, responding to a comment that different interest rates push expatriate savers decisively towards offshore banking, noted this:

"it's not just the interest rates themselves that drew (or pushed) UK expats into offshore banks - the availability of onshore sterling accounts for UK citizens living abroad was extremely limited, something the Treasury Select Committee on the Icelandic banks' collapse itself accepted - my own experience was that availability was effectively zero, and that only changed as a result of the collapse.

Nearly everyone has accepted that this was in fact the case - the British Banking Association (BBA) even put a tool on its website to assist expats in finding banks that didn't have the (unnecessary) requirement to prove a UK address as part of the KYC anti-money-laundering checks. UK anti-money-laundering legislation does not require this, so why were UK banks unilaterally - under the guise of over-zealous "regulatory compliance" - pushing depositor expats into their offshore vehicles?

Could it be that their business model found this offshore source of "cheap money" (cheap from both a regulatory and a commercial perspective) attractive? The money sourced generally ended up in the bank's head office, so why did the FSA collude in this occurring by allowing these circumstances to arise?"

Good points. Why is nothing being done about this?

Keep tax havens or eliminate child poverty?

A meeting in London on November 25th, featuring TJN senior adviser Richard Murphy. Click to enlarge.

Also note Polly Toynbee's Guardian article, pointing out the Faustian pact that Labour has struck with the City of London.

"The sum total of Labour's tax regime has been little change in tax distribution. A graph would not reveal to a Rip Van Winkle that a social democratic government had been running tax policy. Compare that to Labour in the 1960s with its radical changes to corporation tax and capital gains, or Denis Healey's inheritance tax. New Labour has not used the tax system to make the country fairer, while green taxes have gone down, not up. Brown thought it enough to use the proceeds of tax for progressive purposes, without redistributing tax itself. As a result Britain became less equal, and income and wealth were shared less fairly. Instead of shifting attitudes to appreciate the social value of tax, he colluded with an anti-tax ideology that calls all tax a burden."

Financial Secrecy Index - 70 countries and counting

So far, we have counted 70 countries that have hosted media coverage of our Financial Secrecy Index - and our trawl for stories was by no means comprehensive. Read more here.

UN corruption talks must consider tax havens: FT

A conference has begun in Doha, Qatar, involving the 141 signatory countries to the UN Convention against Corruption (UNCAC,) to decide whether to adopt a review mechanism that would give the treaty teeth. Most conference delegates seem to be unaware of the elephant in the room, but at least the Financial Times has noticed it:

"Corruption is a symbiotic affair. Not only recipients of bribes benefit from bribery; so too do bribe payers – often rich-country companies. Despite a recent crackdown on tax havens, ill-gotten gains still get a warm welcome in global financial centres. The World Bank cites estimates putting illicit financial flows – including bribes, profits from criminal activities and tax evasion – at a staggering $1,000bn a year, half of which comes from low- and middle-income countries."

It is worth noting that the FT also got one particular point right: they spoke about "illicit flows," not "illicit outflows," as a recent G20 statement, and many others, have put it. (The profound importance of this seemingly arcane point is explained here.) And the FT adds, very appropriately, that

"States gain advantages from keeping standards lax or unenforced; some base their entire economy largely on skimming the cream of illicit flows."

Well said. Helping to point out these obvious but oft-ignored facts was one of the key points of our recent Financial Secrecy Index.

Financial services: leadership is possible

It has become an article of faith among media commentators that certain policy actions - such as what UK Prime Minister Gordon Brown recommends - "insurance fees to reflect systemic risk; collective or individual resolution funds; contingent capital arrangements; and global financial levies" -- must be adopted at a global level, or not at all. Brown has just said this in a comment article entitled How we can restore trust in financial institutions and added:

"in a global economy and with a global financial sector, any such measures could work only if applied globally."

A strong version of this statement -- that if one single jurisdiction gets captured by the financial industry and refuses to implement, then the whole house of cards falls down -- is a counsel of despair. It is a way of saying "give up! give the bankers everything they want!" and is the same argument used by secrecy jurisdictions when they say 'we won't move unless there is a level playing field.'

But this logic is fundamentally wrong. It comes from the notion that "if we do this alone, the money will flee."

The answer to this is, of course: this is just what we need. We need to cut finance down to size, so that it no longer eviscerates our democracies, so that it no longer transfers vast resources from poor to rich; and so that it no longer destabilises our economies.

Societies have come to realise that much of what bankers is, to put it timidly, socially useless (to put it more realistically, it is socially harmful.) The answer is: drive out the harmful parts. Tax the banks and the bankers properly, and you will drive out much of the harm, generally leaving the bits that are actually useful to the economy.

And you don't need international co-operation for that: it is easy to achieve unilaterally. All you need is leadership.

No law, no crime: the Hidden Treuhand

Shelley Stark is the author of the book Hidden Treuhand: How Corporations and Individuals Hide Assets and Money and, like the subject of the previous blog, someone who has suffered personally from secrecy jurisdiction operations. She writes for us here as guest blogger about the Hidden Treuhand, complementing our earlier work on trusts.

NO LAW, NO CRIME

Financial crises linked to tax havens that offer legal protection and security to facilitate covert economic activities; lack of transparency and accountability a central issue.

by Shelley Stark

While many continue to blame the sub-prime mortgage crisis in the US for the financial crisis, it is becoming increasingly obvious that tax havens play a contributing role because these havens, especially in Austria, Liechtenstein, Luxemburg, and Switzerland foster the availability of hidden ‘Treuhand’ and particularly their protection. According to Prof. Picciotto, a Tax Justice Network senior advisor, there is a close link between tax avoidance dealings in offshore tax havens and the speculation that has fuelled the current financial crisis. He claims: “Large multinationals are as much financial as business entities, they have freedom to devise complex financial structures, and financial institutions such as banks, even more so: in recent surveys by the US Government Accountability Office and the Tax Justice network, the largest user of tax havens in every country was a bank.”

The use of hidden trusts has been identified as a means of operating without transparency because beneficial ownership and control of any asset, located anywhere in the world, operates in anonymity. Hidden trusts created in tax havens operate under very different rules and are referred to as ‘Treuhand’ in the German language. A hidden ‘Treuhand’ is completely non-transparent, only somewhat legal, and operates covertly by owning the asset through a corporate structure, where real shareholder identity remains anonymous in all business dealings.

Lawyers are often called upon to act as a ‘trustee’ in a hidden ‘Treuhand’. There is no law regulating hidden ‘Treuhand’, only law specifying that the lawyer cannot divulge any secrets pertaining to the client. This kind of trust is not so much protected by law as protected by lawyers. If questioned, the lawyer will simply evoke attorney-client privilege.

‘Treuhand’ contracts enjoy great protection by law. The Austrian Lawyers’ Chamber has taken great steps to alleviate any fear of embezzlement by a lawyer through a Treuhand contract registration process. Registration is optional and ensures beneficiaries that the asset held in a Treuhand contract is accessible only to the parties involved, while providing bank assurances that the responsible parties are accountable.

In the early 1990s, cavalier ‘Treuhand’ activities gave way to multiple cases of embezzlement and threatened to destroy the institution of ‘Treuhand’ in Austria. The client’s anonymity was used against the client to embezzle property, much to the chagrin of banks financially involved. Banks, caught in the fray, forced the legal community to take action to ensure both clients and lending institutions that embezzlement by lawyers would cease to occur.

The solution to this dilemma is detailed in a legal brief written in 1996 by the current Vice President of the Lawyers’ Chamber, Dr. Gerhard Horak: if lawyers are going to create hidden ‘Treuhands’, keep them as flexible as possible, and yet not have the legal authorities involved, then lawyers themselves would have to find a way to regulate their colleagues.

Dr. Horak writes: “Accumulated abuse and embezzlement by lawyers…caused great consternation among private investors and financial lending institutions, provoking hesitation to commission lawyers with trust activities. This development and ensuing lack of trust especially affected younger colleagues in the legal profession, who were unable to convince clients in the ‘Treuhand’ business sector that they were worthy of the necessary trust for ‘Treuhand’ transactions.”

As problems mounted and the actions of lawyers came under further scrutiny, the desire for a more effective means of securing ‘Treuhand’ activities increased, forcing a seminar to be held in Salzburg in 1995 to avert further damage. Dr. Horak claims: “Earlier attempts (only tentative) by the Chamber of Lawyers to intervene by regulating ‘Treuhand’ was strictly declined at the time by colleagues under the dogma and illusion of freedom within the legal profession to make contracts as they like.”

The response from the Austrian legal community was the creation of the ‘Treuhand Handbook’—an agreed upon set of guidelines drawn up by the Lawyers’ Chamber and a registration system. Their goal was to offer clients security and efficient control regarding ‘Treuhand’ transactions while maintaining freedom to arrange contracts and operate as flexibly as possible.

The Vienna Bar Association purchased a computer system for registering ‘Treuhand’ contracts and beneficiaries, to be supervised only by lawyers. The legal community considered it unfortunate that any control of trusteeships would be necessary. Dr. Horak noted: “The Lawyers’ Chamber knows that the legal trusteeship handbook is a tightly fitting corset. The wearing of this corset is much easier for all of us if the noted ‘confidentiality crisis’ could be ended.”
The registration of a Treuhand raises several points relevant to the current financial crisis. Firstly, participation by either the lawyer or client is optional. Secondly, if the client opts for registration, the client can be assured of maintaining control without being present because the lawyer has carry out all orders kept on file.

The third point is that even “anonymous Treuhand contracts” can be registered. Dr. Horak’s brief states: “In case of controlling “anonymous” trusteeships, the control is restricted to the inspection of the trusteeship index, where the trusteeship is only evident by a sequential registered number.”

Lastly, clients could not even turn to tax records as a means of getting their property back. In essence, Dr. Horak’s brief provides proof that hidden ‘Treuhand’ facilitates tax evasion and that the Austrian legal community is painfully aware of this fact. The Austrian Legal Chamber provides special conditions and security for ‘Treuhand’ clients, whereby the client’s beneficial ownership of an asset can be registered under a number much like an anonymous Swiss bank account. Banking secrecy only protects money from public knowledge, but a registered hidden ‘Treuhand’ offers the beneficial owner security and secrecy for assets capable of producing equally secret income.

Lawyers have formed their own ‘Treuhand’ regulating system to keep lawfully binding regulations from being imposed on the industry and yet maintain the freedom to make contracts that reflect the will of the parties without losing the cooperation of the banks. The lack of lawfully binding regulation offers a Wild West land of opportunity for those who can conceive of a business plan made more advantageous when the identity of the benefactors is completely concealed from public.

Perks for lawyers and their clients range from tax avoidance to outright tax evasion because neither one need declare income that cannot be traced. Moreover, it is an industry for which the lawyers themselves are the first line of defense. These lawyers have created secret legal structures despite efforts from the international community to work within and enforce the rule of law as practiced in democratic societies.

Now banks are again caught in the fray, only this time they are both perpetrators and victims. Dodgy debt in the US sold as a risk hedge to banks worldwide is one of the reasons the financial crisis is so viral. The lack of transparency involved in these transactions is why many are beginning to feel that tax havens bear a huge responsibility for transpiring events.

Nebulous financial undertakings and ‘Treuhand’ accounts in Austria, Liechtenstein, Luxemburg, and Switzerland are now impacting economies outside their borders. For example, the UBS indictment concerning 52,000 US citizens with Swiss accounts and Germany’s scandal regarding the LGT bank in Liechtenstein. High net worth individuals and corporations from all over the world come to these jurisdictions not just to evade taxes, but also to hide their beneficial ownership of an asset in another country. The key role played by hidden ‘Treuhand’ is to prevent transparency regarding economic activities, not just beneficial ownership. As a result, non-transparent economic activities are encouraged.

Shelley Stark is the author of Hidden Treuhand: How Corporations and Individuals Hide Assets and Money, published by Universal-Publishers.

One woman's experience with the Isle of Man

It can be easy to forget that secrecy jurisdictions, at the end of the day, affect the lives of ordinary people. This short video is worth watching: it is the kind of thing that has happened to so many people. "Because we were expats and living abroad, we had to move our savings offshore - to the Isle of Man."

Although this is not quite true - expatriates can bank onshore - they are generally only given access to onshore accounts with interest rates that are very significantly lower than what is available offshore. Banks, it seems, push expats offshore.

ActionAid, Christian Aid: G20 finance ministers fail to keep promises

ActionAid and Christian Aid separately issued statements on Saturday about the G20 finance minister's meeting. Christian Aid says:

"G20 Finance ministers today forfeited an historic opportunity to enable developing countries to claw back the billions of dollars that they currently lose each year to tax dodgers, says Christian Aid.

In April, G20 Ministers promised to produce a plan by the end of this year to help developing countries benefit from global cooperation on tax matters. The meeting in St Andrews was the last chance for them to fulfil their pledge. They have failed to deliver anything concrete - only that a global deal is a vague possibility."

ActionAid say pretty much the same thing:

"At today's G20 meeting, Finance Ministers have failed to keep the promise they made to developing countries in April, ActionAid says.

At the London summit in April, the G20 made a commitment to deliver proposals on tax havens to benefit developing countries by the end of 2009. But today's communiqué merely suggests "the possible use of a multilateral instrument" for this purpose.

ActionAid's Martin Hearson, who is at the summit, said:

"This is a real disappointment. The communiqué is vague and unsubstantiated and leaves developing nations out in the cold as far as tackling tax evasion is concerned.

'We now have a two two-tier system: tax havens must exchange information with rich countries or face the threat of powerful sanctions, but there is no pressure on them to do the same with poorer nations, which suffer the most from tax evasion.

'The G20 promised that developing countries would not be left out of the tax haven crackdown, and today was their last chance. They've gone back on that promise - at least for now. We will continue to push for a better outcome in 2010.'"

For the G20 statements, click here. Christian Aid's full statement is below:

*G20 LETS DOWN POOR COUNTRIES WITH BROKEN PROMISE ON TAX AND WASTED OPPORTUNITY ON CLIMATE*

G20 Finance ministers today forfeited an historic opportunity to enable developing countries to claw back the billions of dollars that they currently lose each year to tax dodgers, says Christian Aid.

In April, G20 Ministers promised to produce a plan by the end of this year to help developing countries benefit from global cooperation on tax matters. The meeting in St Andrews was the last chance for them to fulfil their pledge. They have failed to deliver anything concrete - only that a global deal is a vague possibility.

Christian Aid calculates that at present, tax dodging by multinational companies is robbing poor countries of at least $160 billion every year. This money, if spent in the same way as existing tax revenues, would save the lives of 350,000 children under the age of five every year.

'We understand the that the UK government did everything in its power to push for a multilateral deal on tax information sharing, but were unable to ensure concrete progress,' says Dr David McNair, Christian Aid's Senior Economic Adviser.

'We are disappointed but this means there is an even more urgent need to ensure progress going forward.

'A multilateral deal would have been better than the present situation, in which tax havens do bilateral deals with other countries, almost all of which are rich. This does nothing for developing countries. A global agreement is now a possibility, but it is incumbent on the G20 to ensure rapid progress, towards *multilateral *and *automatic *sharing of tax information, with a review process to ensure that the system is working.

'Only then are poor countries likely to get the information they need in order to claw back some of the billions of dollars that they lose each year to tax dodgers - money they urgently need in order to improve public services such as health and education.'"