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Financial Crisis: Secrecy jurisdictions under pre-G20 summit pressure

by Eurodad

20 March 2009

The financial crisis has definitely put tax havens on the spotlight. In the run up to the G20 London summit on 2 April, secrecy jurisdictions are on the front pages of most newspapers. This has risen to the top of the agenda after an apparent change of position by G20 host Gordon Brown, who wants to announce concrete measures at his meeting. European countries and territories with tax haven regimes have been forced to react - announcing a series of new measures in recent days.

When European leaders gathered in Berlin a month ago to prepare the EU position for the G20 tax havens were a major element. The German and French governments pressed for sanctions and new black lists for un-cooperative jurisdictions. The UK then joined in. "How much safer would everybody’s savings be if the whole world finally came together to outlaw shadow banking systems and outlaw offshore tax havens?" Gordon Brown told the US Congress. Richard Murphy of Tax Justice Research clearly explains the importance: “Tax havens provide unfair economic advantage to the already wealthy. They undermine the credibility of markets. They over-reward financial risk and result in too little reward being earned by real economic activity that employs people. All three have harmed job prospects. The financial crisis was not created offshore. But offshore massively amplified it”. Dealing with tax havens can have very important benefits for citizens in Europe and in developing countries, indeed it is a necessary condition for building effective states.

Last weekend G20 finance ministers only made vague declarations on tax havens at their preparatory meeting. Their communiqué only mentions plans to identify "non-cooperative jurisdictions" and a "tool box of effective counter measures" without committing to any concrete actions. This is both because negotiations are still ongoing and because it is for the heads of state to make the major announcements. The most likely outcome from 2 April is a blacklist, but it is not clear what will be the criteria or what sanctions will be attached.

The “blacklist effect”

All governments are increasing their budget deficits to stimulating their economies and rescue banks. Preventing hundreds of billions of dollars in tax evasion and avoidance thus naturally becomes a major priority, and forcing tax havens to share information is a useful first step.

The chosen approach is to threaten to put non-cooperating jurisdictions on a blacklist. When considering blacklists the OECD, the body currently in charge, adopts a demand driven approach. Information exchange upon request means that the requesting authority needs to provide the burden of the proof in order to obtain the information. This is not an effective model and is especially for poorer countries with weaker tax administrations and regulatory bodies. This is not always possible, particularly when tax authorities do not have a strong enough capacity to obtain the proof requested in order to levy the secrecy. This is why civil society organisations are calling for an automatic information exchange system that would oblige the automatic disclosure of information and therefore enhance transparency in a comprehensive not selective manner. This system is already applied by the EU for individuals’ savings and should be extended globally, to companies and all other legal entities as well.

Even the limited blacklist approach currently being considered has triggered a number of quick reactions, at least in terms of good intentions. A few weeks ahead of the G20 summit, no jurisdiction is keen to be stigmatised in the new blacklist the OECD is currently working on. Things are therefore moving very fast from some prominent European tax havens.

On March 10, just ahead of an event there organised by Eurodad, Tax Justice Network and others, Jersey announced its intention to sign a bilateral tax information exchange agreement with the UK. Two days later, Andorra and Liechtenstein announced their intention to partially withdraw bank secrecy. Andorra committed to pass legislation on this before November this year. This was in reaction to Sarkozy’s recent statement on the need “to review France’s relationship” with the principality. The Liechtenstein government “accepts the OECD standards on transparency and information exchange in tax matters and supports the international measures against non-compliance with tax laws," the principality said in a statement.

Similarly Belgium recently announced it would relax bank secrecy. "From next year we are going to start exchanging savings tax information as part of the European tax directive," Belgian Finance Minister Didier Reynders said in response to questions from lawmakers. Belgium, Austria and Luxembourg are the only EU countries that don’t share information about savings account holders from other countries with their tax authorities and instead apply a withholding tax.

Austria and Luxembourg have not announced any action, and on 6 March formed with Switzerland a working group with the goal of defending bank secrecy. Swiss finance Minister explained that the three countries “need to be together in order to preserve the private sphere against any kind of intrusion” adding that “Switzerland is not a tax haven”. In other words, the minister was in favour of strengthening the fight against tax fraud without renouncing bank secrecy. This seems quite a difficult task, particularly when one takes into account that Switzerland holds 30% of all private rich individuals’ deposits and US tax authorities are calling on Swiss bank USB to disclose information on some 52,000 undeclared accounts. The pressure has eventually led Swiss authorities to announce on March 13 their intention to comply with OECD standards for tax information exchange.

Elsewhere, Singapore, Hong Kong, the Isle of Man, and the Cayman Islands have made similar announcements. Singapore said it would adopt OECD rules earlier this month, while in February, Hong Kong declared it would be exchanging tax information with foreign authorities. It remains to be seen if these good intentions are followed by effective measures.

Next stop: tax dodging banks

Tax havens not only host private accounts of rich, corrupt or criminal individuals wanting to escape taxes and regulation. They have also been used to create a shadow banking system that hosted special purpose vehicles for securitisation of assets, hedge funds and other speculative investors. The fact that almost every international bank has subsidiaries in a number of tax havens is not a secret today. Nor is the fact that most transnational companies do as well, as a recent French study shows on French companies.

The difficulty comes when one tries to find out about these subsidiaries. A recent article in The Guardian argued that the newly nationalised Royal Bank of Scotland had tied up at least £25billion in complex international tax-avoidance schemes in the last few years, costing the UK and US treasuries more than £500 million in lost revenue. This is even more scandalous as the bank is now 70% owned by tax payers. Lloyds, that accepted toxic asset insurance and is now three quarters owned by the state, would not respond when asked if it will abandon similar trades, which have totalled £4 billion. Lloyds is currently fighting the UK government in court over tax-avoidance schemes. An even more explosive article was published by the same newspaper this week on Barclays bank. The paper was banned some hours later by the court from publishing documents showing how this bank set up companies to avoid paying hundreds of millions of pounds. The internal Barclays documents - leaked by a Barclays whistleblower - showed executives from Barclays’s structured capital markets division, seeking approval for a 2007 plan to sink more than $16 billion (£11.4 billion) into US loans which would generate profits via an elaborate circuit of Cayman Islands companies, US partnerships and Luxembourg subsidiaries.

The link with corruption is also another secret that banks would like to keep under wraps. A recent study released by UK NGO Global Witness names some of the major banks who have done business with corrupt regimes. European banks have been complicit in “holding billions of dollars stolen from developing country citizens”, as Oxford University researcher Paul Collier told a major UK government conference last week. Some initiatives have been developed on this in recent years, such as the UN/World Bank Stolen Assets Recovery initiative, but these are moving very slowly and there is no news that they will be enhanced during this year’s summit.

Will transnational companies be next in the spotlight?

It is estimated that intra group trade within transnational corporations accounts for about 60% of global trade. This allows for tax evasion and avoidance schemes. Global Financial Integrity estimates that around $1 trillion of illicit capital flows across borders every year, mostly through tax havens and that almost 65% of these illicit flows are due to commercial tax avoidance and evasion schemes. This is an urgent concern for developing countries. Christian Aid estimates that developing countries lose $160 billion in tax losses each year due to transfer mis-pricing schemes. This is more than global official development assistance. The amounts are huge and their effective repatriation to the countries they belong to should be a priority. Civil society organisations are calling for country by country reporting standards to be applied by all transnational companies, to allow identification of where profits are made and therefore where taxes must be paid.

Beyond good intentions, are we facing the beginning of the end of secrecy?

Does this all mean that tax havens are giving up their secrecy and have decided to make themselves transparent and compliant with tax information exchange? Are we witnessing the beginning of the end of tax havens, as Gordon Brown recently said? Not exactly. These moves represent an important step in the right direction. Pressure put through the blacklist system can work. But the measures taken so far will not make a substantial change.

Firstly, secrecy jurisdictions or tax havens need to be addressed globally. Some countries have started to react but a global response is needed. As Jersey unionist and activist Rose Pestana clearly summarised “The move has to be a global one. All tax havens need to close down the same day, at the same time”. Indeed, if other financial centres keep operating, illicit flows will be simply transferred there. According to some experts, the city of London represents around 40% of all the activities related to tax havens. Around one third of global currency transactions transit through the UK, making some authors state that “London is with no doubt the largest tax haven in the world” 1.

Many other secrecy jurisdictions are dependencies or overseas territories of European countries, such as: Anguila, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Montserrat, (all UK dependencies), Aruba and Netherlands Antilles (dependencies of the Netherlands) . Other European tax havens, like Switzerland, Monaco, Andorra and Luxemburg account for 30% of all offshore activities. The remaining 30% is covered by the Pacific and Caribbean territories.

This is why a global binding framework needs to be put in place. Bilateral agreements should be replaced by a comprehensive global agreement. The blacklist is part of this framework but needs to be accompanied by sanctions for non compliant territories.

Towards a just transition

A large group of European activists gathered in Jersey on March 12 and 13 to discuss the tax havens industry and its impacts on developing countries and on local populations. Mr. Southern, a Jersey legislator, requested a just transition of Jersey’s economy. Dismantling offshore havens will need to be accompanied by efforts to reconvert their economies to sustainable models that do not have beggar thy neighbour effects. This is all the more needed in all small developing countries that heavily rely on the tax haven industry. The organisers of the Jersey event issued a final declaration “A just transition for all” and agreed to write to the Jersey authorities in order to engage in a constructive forward looking dialogue on a transformation change of the tax haven economy for the benefit of their population.

For a detailed view of CSO proposals, see:

Tax Justice Network position paper. Ending the offshore secrecy system

Sanctions on secrecy jurisdictions, Tax Justice Research.

Euro IFInet position paper and responses to the crisis

World Social Forum declaration. Let’s put finance in its place

(1.) C. Chavagneux and R. Palan. 2007. « Les paradis fiscaux », p.81.

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