Thursday, April 02, 2009

Economist: The G20 and tax - Haven hypocrisy

Finance and economics

The G20 and tax

Haven hypocrisy

Mar 26th 2009 | BERLIN
From The Economist print edition

Big economies are leaning on offshore tax havens. But greater abuse may be taking place at home

MONEY launderers are moved by greed, unlike Jason Sharman, a political scientist at Australia’s Griffith University. Yet with a budget of $10,000 and little more than Google (and the ads at the back of this paper), he showed how easy it was to circumvent prohibitions on banking secrecy, forming anonymous shell companies and secret bank accounts across the world. In doing so he has uncovered an uncomfortable truth for many of the leaders of Group of 20 nations meeting on April 2nd to discuss, among other things, sanctions against offshore tax havens. The most egregious examples of banking secrecy, money laundering and tax fraud are found not in remote alpine valleys or on sunny tropical isles but in the backyards of the world’s biggest economies.

Panoramic Images Wyoming, the Switzerland of the Rocky Mountains

At issue is not banking secrecy as the Swiss once knew it, where discreet men in plush offices promised to take the names of their clients to the grave. This is a more insidious form of secrecy, in which authorities and bankers do not bother to ask for names, something long outlawed in offshore tax centres such as Jersey and Switzerland but which has persisted in America. For shady clients, this is a far better proposition: what their bankers do not know, they can never be forced to reveal. And their method is disarmingly simple. Instead of opening bank accounts in their own names, fraudsters and money launderers form anonymous companies, with which they can then open bank accounts and move assets.

Nowhere is this more prevalent than in America. Take Nevada, for example. Its official website touts its “limited reporting and disclosure requirements” and a speedy one-hour incorporation service. Nevada does not ask for the names of company shareholders, nor does it routinely share the little information it has with the federal government.

There is demand for this ask-no-questions approach. The state, with a population of only 2.6m, incorporates about 80,000 new firms a year and now has more than 400,000, roughly one for every six people. A study by the Internal Revenue Service found that 50-90% of those registering companies were already in breach of federal tax laws elsewhere.

A money-laundering threat assessment in 2005 by the federal government found that corporate anonymity offered by Delaware, Nevada and Wyoming rivalled that of familiar offshore financial centres. For foreigners, America is a particularly attractive place to stash cash, because it does not tax the interest income they earn. Thus with both anonymity and no taxation, America offers them all the elements of a tax haven.

Change may be coming in America, but slowly. In March Senator Carl Levin proposed a law forcing states to identify the beneficial owners of corporations. “For too long, criminals have misused US corporations to hide illicit activity, including money laundering and tax fraud,” said Mr Levin. “It doesn’t make sense that less information is required to form a US corporation than to obtain a driver’s licence.”

Yet a similar bill introduced last year died a quiet death in committee.

America is not the only rich nation Mr Sharman tested. He tried to open anonymous shell companies and bank accounts 45 times across the world. These were successful in 17 cases, of which 13 were in OECD countries. One example was Britain, where in 45 minutes on the internet he formed a company without providing identification, was issued with bearer shares (which have been almost universally outlawed because they confer completely anonymous ownership) as well as nominee directors and a secretary. All was achieved at a cost of £515.95 ($753).

In other cases Mr Sharman formed companies by providing no more than a scanned copy of his driving licence. In contrast, when trying to open accounts in Bermuda and Switzerland, he was asked for documentation such as notarised copies of his birth certificate. “In practice OECD countries have much laxer regulation on shell corporations than classic tax havens,” Mr Sharman concludes. “And the US is the worst on this score, worse than Liechtenstein and worse than Somalia.”

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Readers' comments

The Economist welcomes your views.

Dirk Gently wrote:

April 2, 2009 8:06

The article seems to provide useful tips for anyone wanting to hide wealth. I only wish I were wealthy enough to take advantage of it!

However, some comments here have suggested that the article is misleading and that the USA (for example) is less of a tax haven than it implies. I don't know the truth of the matter, but I suppose we shouldn't believe everything we read, even in The Economist.

danwun wrote:

April 1, 2009 17:29

I just found proof of the UK tax hypocrisy. Right on the Economist's main page, right at the bottom of classified ads, there is this link:

Offshore & UK Companies
Wealth Protection
Confidential Banking
Trusts and Foundations
By UK lawyers and Accountants

Again, outrage over so much lies and hypocrisy! But don't worry UK and US, it will be your turn to be the scapegoats soon! I really cannot believe this, it's absolutely outrageous! No wonder the US and UK could cheat the world into the Irak war, just keeping telling lies without blushing.

Petlura wrote:

April 1, 2009 8:13

Dear Geri964 - Maybe the US can find the US$300 bln leakage by overhauling the tax system. Simple and lower taxes is a great incentive to compliance. The second thing is using those tax US$s wisely and not on a vendetta war. There you go, I found your US$300 bln.

danwun wrote:

April 1, 2009 5:15

Congratulations, Economist! Once again, we can see which magazines and newspapers offer quality journalism. And which ones just aggravate the scapegoat spiel of the OECD. The Financial Times is a very bad example of the latter.

As a Swiss, I both feel deeply shocked by what sort of criminal bankers our bank secrecy managed to cover. It was really hard to believe, we feel deeply ashamed. Frankly, I am also outraged, however, by the hypocritical bashing of non-G20-"tax havens". A lot of people in Switzerland, Austria and other so-called tax havens see the global crackdown on tax havens as just a forceful way of financial protectionism, chiefly by the US and the UK. I'm sure other people in other nations realize this, too. E.g. the German magazine Spiegel had an article on UK tax haven hypocrisy, too.

poiu qwer wrote:

March 31, 2009 23:40

I hope honourable delegates at the G20 summit will read this article and analyze their own shortcomings. It is much harder to clean up at home than bashing so called tax heavens. Probably populism will prevail.

Geri964 wrote:

March 31, 2009 19:33

"G-20 Summit by Jonathan Weisman, Wall Street Journal: U.S. officials preparing for the group of 20 economic summit on Thursday in London are playing down fiscal-stimulus targets and focusing on objectives such as new rules for TAX HAVENS and coordination of financial regulation."
Financial resources are limited and when too much is siphoned off due to income tax evasion (U.S. alone $300 billion) and stashed away in offshore tax havens, the entire economic system collapses. Economic disparities and imbalances do count because all resources, including financial ones, are limited.
The only way to get the worldwide economy going again is to collect all of the back taxes and penalties and get this money back into circulation. There is no other way.
If Switzerland is doing nothing wrong, then they should having nothing to hide and be willing to disclose banking information. It is Switzerland's own fault that they have been designated as a tax haven for many decades. If they didn't want to be designated as a tax haven, then they should never have engaged in tax haven activities.

sammy yuka wrote:

March 31, 2009 10:44

The USA cannot bow to the wishes of the EU and their high tax regimes. the reason why they want the Swiss banks out of the picture is so they can raise taxes. Soon, we will follow. Those rich people would gladly pay some taxes. But not when the taxes are spent by a bunch of liberal baffoons.
The other banks in the world should emulate the Swiss, not try to destroy them. If all countries were "tax havens", the citizens would keep their money at home.
All these high tax liberal socialist countries would rather destroy the Swiss banks than to COMPETE with them. What happened to the US competitive spirit. Our desire to be competitive has been the reason why we are so great. Let's COMPETE with the Swiss. Let's have an incentive for our US citizens to keep their money in the USA. Let's beat the Swiss at their own game.
Senator Levin spent years trying to force the Swiss to give up the names of US citizens that have accounts at Swiss banks. If he would have spent all that time and our taxpayer money finding ways to COMPETE with them, we wouldn't be talking about it today .And besides that, let the USA once and for
all quit meddling in the affairs of another country.
If the Swiss have no privacy, look for a WORLD WIDE SURGE IN TAXES

Danila_FTC wrote:

March 30, 2009 7:28

BankingITGuru wrote: "Money from poor countries is hashed away in swiss banks which are deploying that money in the developed world thus funding credit and growth".
It is partly rightly, of course, especially for money of individuals. But don't forget that in vast majority of cases hidden and washed money returns back to developing countries in a view of foreign investments. In relation of corporation in emerging country and not just, final beneficiary in either case is not offshore-based holding company, but shareholders in country of operating.
Moreover, tax evasion and so-called "tax avoidance" (agressive tax planning's shemes) are different terms.

BankingITGuru wrote:

March 30, 2009 4:30

Tax evasion is the value proposition of these havens for developed economies only. For the third and under developed world's rich, the proposition is 'hiding away' ill-gotten money.

There is an urgent need to unlock these depositors to ensure the developmental plans of world bodies and governments are effectively applied.It is so painful to realise that money swindled by the exploitative rich of the 3rd world (that is sorely needed for the developing world) is in the coffers of a few swiss banks.

It is all a wonderful cycle. Money from poor countries is hashed away in swiss banks which are deploying that money in the developed world thus funding credit and growth. (One cant expect the cash to be in lockers). Poor countries then 'borrow' from IMF etc. Its a bit quirky to know who is funding whom.

It is high time that something is done about this.

Danila_FTC wrote:

March 29, 2009 20:47

I don't think it is a best time to tussle with an offshores in the current economic climate. In either case, it will not give short-term effect for both G20 countries' budgets and companies. Even vice versa: when many companies are looking for any ways for cost reduction, maybe, efficiency of tax structure can be a top-of-the-table point which will allow it to stay alive? It should be in spotlight to improve transparency and attractiveness of your own tax system. But internal offshores are separate theme, of course.

jterry wrote:

March 29, 2009 19:29

Finally Bermuda is getting some good press for its status as a tax haven. T

jterry wrote:

March 29, 2009 19:29

Finally Bermuda is getting some good press for its status as a tax haven. T

bornhoaxer wrote:

March 29, 2009 18:34

this can be a wake up call for everyone concerned in the rich developed is indeed surprising to know the shockingly low level of scrutiny that is exercised in the opening up of companies.....

nino01 wrote:

March 29, 2009 1:28

It is a simple law of arithmetics. Hiding 100 millions dollars in a large economy like the USA , and moving it around should be more easy that in Lichtenstein, where the day you make such a deposit , the whole town will know.
The story of tax heavens have been popularized by the film industry . Sure there have been famous cases like dictator Marco from the Phillipines, but I doubt that tax heavens are used by the drug mafias of the world.
I think that law enforcements just do not know. As usual the criminal gangs are a few steps ahead of the law.

Scott Free wrote:

March 28, 2009 18:39

This article is interesting but misleading. These US States offer easy and economical company incorporation in line with that of tax havens. However to avoid USA controls and taxation they tend to have bank accounts offshore and are managed outside of the USA (normally from a tax haven). It is the offshore tax haven that is the operational arm of these corporations. Only the registered office remains in the US State.

Davesh wrote:

March 28, 2009 13:11

The author has rightly pointed out the double speak on the a bigger country/economy first they should clean their backyards before preaching others. Yes there should not be any place called tax heaven. Also ther should be standard procedure to be followed by all financial institutes in the world regarding customers. yes, we can not move in haste but with a resonable time frame to adopt those standard procedure. World is in a great financial mess .we have to work towards new financial order for the world..

M.L.Jones wrote:

March 27, 2009 20:11

As the former owner of a Delaware company, I am a little puzzled on how one can hide money from taxation without violating various US tax laws - perhaps lax enforcement is the real issue. In order to open a bank account, I needed a corporate tax id. While this could be done over a lawyers name, once the id number is issued, the corporation itself must pay income tax on any income, or if an S corp provide reports to the IRS on who got the income so that they can be taxed.

t309494 wrote:

March 27, 2009 17:22

Very interesting:Mr Obama and his fellow Sen Levin need a lot of nerve to denounce Switzerland es a tax havens in front of the G 20 without looking behind their back the mist in their country.

Petlura wrote:

March 27, 2009 7:13

The hypocrisy of all gov'ts targeting tax havens is appalling!! If their tax systems were fair in the first place and most citizens believed in the way the money was being spent, there would be no need for tax havens. God help us all if gov'ts ever succeed in eliminating tax havens. Then they will have a free hand in taxing us al the way to the moon and back!!

paul mason wrote:

March 27, 2009 6:40

So is the Economist going to knock back those ads in future? It would be a tad hypocritical not to.

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