Unsafe havens

The world's tax havens are reeling as a wave of international action prises open their secrets. Photo / Kenny Rodger

Home to 160 powerful United States congressmen, Rayburn House in Washington was the venue last month for a desperate resistance movement at its darkest hour.

In the basement of the sprawling, whitewashed classical complex, 70 senior politicians and their advisers heard that prising open to increased scrutiny the secretive and corrupt world of tax havens - where trillions of dollars are stashed far from the reaches of the taxman - was akin to an evil Big Brother conspiracy that would smash civil liberties and hamper world growth.

It was organised by Dan Mitchell, co-founder of the right-wing Centre for Freedom and Prosperity, and Richard Rahn, a senior fellow at influential libertarian Washington think-tank the Cato Institute, a former board member of the Cayman Islands Monetary Authority and a regular Washington Post columnist. They told the high-powered audience that moves to force so-called secrecy jurisdictions to share information with tax authorities were "hypocritical", "racist" and would destroy "defenceless" island economies.

Mitchell, a high priest of light-tax, small-state libertarianism, argued that current moves to encourage information exchange between secretive tax havens and the international community would see unscrupulous government officials sell highly sensitive information about the world's richest companies and individuals to drug cartels and warlords. Tax transparency would lead to kidnapping and murder.

For Mitchell, this is familiar territory. In 2001, when the Organisation for Economic Co-operation and Development (OECD) was intent on stamping down on "harmful tax competition", his ferocious lobbying pulled off a stunning victory, persuading President George W. Bush to bring a halt to the plan.

Eight years later, Mitchell is on the warpath again. "Tax competition leads to low tax rates and increased prosperity," he told the Observer. "Sovereign entities have the right to secure tax privileges. Even if the US Government does not like it."

His audience last month sat in rapt silence. But the world's power brokers don't appear to be listening as attentively.

US President Barack Obama, German Chancellor Angela Merkel, French President Nicolas Sarkozy and British Prime Minister Gordon Brown are all intent on shining a light into so-called secrecy jurisdictions. Tax havens, whatever Mitchell and Rahn argue, have moved to centre stage.

These are desperate days for offshore financial centres. Never before have the world's most powerful countries united in their determination to expose the shadowy banking system that has mushroomed unchecked for the past 15 years. Lobbyists have been hired at huge cost to ensure that senior bankers and politicians from Cayman Islands, Switzerland and the Channel Islands brief influential policymakers and congressmen.

Even so, in the past two months a surge of tax treaties have been signed by countries including Liechtenstein, Singapore, Switzerland, Austria, Andorra and Belgium in an effort to abide by global protocols. Last month the Isle of Man, Jersey and Guernsey signed more agreements with France, Germany and Ireland.

Such has been the capitulation by tax havens that senior international regulators say more has been achieved in the past 13 weeks than in the previous 13 years. Even the usually cautious OECD, which sets standards for international tax policy, admits that automatic multilateral information exchange - the holy grail for those seeking transparency in tax - is now on the agenda. Jeffrey Owens, head of tax at the OECD, said he would not allow countries to stall.

But well-placed Washington sources say ambassadors of Caribbean countries are putting pressure particularly on black congressmen in a bid to ward off this gathering storm of intrusion. They are being asked to water down any legislation and international regulations affecting the likes of the Caymans, Antigua and Bermuda.

It is a tactic that may work. In the US, it is understood a draft discussion paper from powerful Senate finance committee chairman Max Baucus on the Stop Tax Haven Abuse Act waters down key parts of the proposed legislation.

The Caymans, singled out by Obama on the campaign trial for being home to Ugland House, where 18,857 shell companies were registered as of last year, is in a state of high alert. Although the target of criticism when John Kerry ran for President in 2004, scrutiny faded after he failed to defeat Bush. So when Obama first turned his attention to the island's role in heaping more of the tax burden "on ordinary hard-working Americans", no one blinked.

Now, though, it is very much in the public eye. Recently the Cayman Government has hosted visits from the International Monetary Fund, which was checking that the islands meet international standards, and Michael Foot, a one-time inspector of banks for the Central Bank of the Bahamas, whose review into British-linked tax havens will be published this month.

The island authorities are keen to play down the visits as routine. Kurt Tibbetts, leader of government business for the Caymans, said: "The Cayman Islands was one of the first jurisdictions to commit to OECD standards for transparency and exchange of information in tax matters ... [We] have done and will continue to do all we can to receive equitable treatment, as by any rational analysis our financial services sector is transparent and co-operative.

In particular, the 16 tax co-operation arrangements in fact represent over-compliance with the OECD benchmark of 12 such arrangements with OECD member states."

In Jersey, which during the leveraged boom became a world leader in securitisations, the island's leaders are keen to push forward the media-friendly Geoff Cook. As Jersey Finance's chief executive, he spends his life promoting the island as an offshore centre throughout the world.

Cook is adamant that Jersey is one of the best regulated jurisdictions in the world. "We are not a tax haven," he said. "We do not have banking secrecy, we are a co-operative, transparent, well-regulated centre. We are tested by outside organisations and we have been found not wanting. If anybody thinks otherwise let them name names, bring evidence and I will happily notify the authorities."

Though Cook admits that the island does not have a register of trusts, he argues that fund managers know who the beneficiaries are. He concedes that in the seven years since the island signed a tax agreement with the US, Jersey has exchanged information with American investigators on just "five or six" cases.

Last month Switzerland ended centuries of bank secrecy by offering to enter into "bilateral" tax information exchange agreements with rich countries.

The fallout has created huge problems for the country's ruling coalition.

Half the population saw the move as a humiliating capitulation to hypocritical bullying by the US and Britain.

They point out that the US continues to offer corporations high levels of secrecy in the state of Delaware (see page 14) while Britain's own tax havens of the Channel Islands and its overseas territories based in the Caribbean, plus the non-domicile tax laws, allow the world's super-rich to legally evade taxes on the bulk of their income.

The other half believe the Government should have acted earlier to avoid the embarrassment of Switzerland being frozen out of this week's crucial G20 talks to restore the world's economy. It was obvious to many that once the giant Swiss bank UBS became the centre of a hugely damaging tax evasion scandal in the US, life for Swiss wealth managers would never be the same again.

And so it has proved: Swiss banks have now instructed their top executives not to travel abroad for fear of being arrested in wide-ranging tax investigations in the US and Europe. A Swiss journalist last month posed as a rich individual with 3 million ($7 million) of tax-evaded income to invest, asking wealth managers in five banks to hide his windfall. Five years ago the stunt saw all the banks suggest concrete measures to ensure the cash pile stayed intact.

Last month just one bank offered advice.

Swiss leaders are suggesting their concession ending bank secrecy will take years to implement and they will argue that the law should not be applied retrospectively, so protecting the country's status as banker to the world's super-rich. Others argue they will implement the measure only if the US drops its legal action against UBS which is seeking the banking details of up to 52,000 US citizens.

Influential commentators such as Martin Wolf in the Financial Times and Avinash Persaud maintain that the agenda to clamp down on so-called secrecy jurisdictions is a distraction. It is music to the ears of the leaders of Switzerland, Jersey and the Caymans, who quote their pieces back almost verbatim denying their jurisdictions and financial sectors are remotely linked to the chaos gripping world markets.

Yet senior officials at the OECD say most of the world's insurance firms, hedge funds and private equity houses are registered in jurisdictions where reporting requirements are minimal. And the global banking system has hundreds of thousands of subsidiaries in offshore centres. HSBC revealed in February that it has 2008 legal subsidiaries around the world including in Liechtenstein, the Bahamas and Jersey.

And as countries spend trillions bailing out banks, running up huge deficits in the process, Treasury ministers are mindful of the US$11.5 trillion locked away in tax havens which could provide US$250 billion in taxable income.

As the prospect of increased supervision comes closer, the growing army of campaigning groups, churches and unions which have lighted on tax as the missing link in the poverty alleviation debate fear that proposals to increase information exchange will not go far enough.

We will soon know if Mitchell and his friends can keep the storm from lashing the world's tranquil financial havens.

Tax Havens

What are they?
According to the OECD, tax havens have: no taxes, or only nominal taxes; a lack of transparency; laws or practices that prevent the effective exchange of information for tax purposes with other jurisdictions; no requirement to have any substantive local presence.

How much is at stake?
Estimates of the amounts held in "offshore tax centres" range from US$1.7 trillion to US$11.5 trillion.

How many?
The OECD lists 35 jurisdictions which have now agreed to improve transparency and exchange information for tax purposes. They range from the well-known - the Cayman Islands and Jersey - to more obscure locales such as San Marino and Montserrat. Three more "unco-operative tax havens" - Andorra, Liechtenstein and Monaco - have recently agreed to take steps toward meeting the OECD's demands.

- OBSERVER