Tax havens batten down as the hurricane looms

Offshore financial centres from Jersey to the Cayman Islands are rallying to defend their privileges from a wave of international action against secrecy.

Nick Mathiason
The Observer, Sunday 29 March 2009

Home to 160 powerful US Congressmen, Rayburn House on Capitol Hill in Washington DC was the venue last Monday 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 tax man - was akin to an evil Big Brother conspiracy that would smash civil liberties and hamper world economic growth.

It was organised by Dan Mitchell, co-founder of the right-wing Center 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 familar territory. In 2001, when the Organisation for Economic Co-operation and Development, (OECD) the world's most powerful think-tank, was intent on stamping down on "harmful tax competition", his ferocious lobbying pulled off a stunning victory, persuading George W Bush to bring a halt to the OECD plan.

Eight years later, Mitchell is on the warpath again. "Tax competition leads to low tax rates and increased prosperity," he told the Observer from his office in Washington. "Sovereign entities have the right to secure tax privileges. Even if the US government does not like it."
His audience last Monday sat in rapt silence. But the world's power brokers don't appear to be listening with similar attentiveness.

President Obama, Chancellor Merkel, President Sarkozy and Prime Minister Brown are now all intent on shining a light into so-called secrecy jurisdictions. This week in London, leaders of the G20 will attempt to frame a response to the growing global economic crisis. 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 last 15 years. Lobbyists have been hired at huge cost to ensure that senior bankers and politicians from Cayman Islands, Switzerland and the Channel Islands meet and brief influential policymakers and congressmen. Jersey has hired London-based Aura Financial while the Cayman Islands retain Fleishman-Hillard.

Even so, in the last 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 week, 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 last 13 weeks than in the previous 13 years put together. Even the usually cautious OECD, which sets standards for international tax policy, admits that automatic multilateral information exchange - the holy grail for investigators seeking transparency in tax - is now on the agenda. Jeffrey Owens, the head of tax at the OECD, said he would not allow countries to stall on the process.

But well-placed Washington sources say ambassadors of Caribbean countries are putting pressure particularly on black caucus Congressmen in a bid to ward off this gathering storm of intrusion. They are being requested to water down any legislation and international regulations affecting the likes of the Cayman Isles, 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 long backed by Obama.

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 away 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. In the last two months, the Cayman government has hosted visits from the International Monetary Fund, which was checking that the island meets international standards, and Michael Foot, a one-time inspector of banks for the Central Bank of the Bahamas, whose review into UK-linked tax havens will be published next month.
The island's authorities are keen to play down the visits, suggesting they are routine. Kurt Tibbetts, leader of government business for the Cayman Islands, 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 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 and hosted Granite, the Northern Rock securitisation vehicle, 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, fund managers, he argues, 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.

Earlier this 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 ruling coalition led by Hans-Rudolf Merz.

Half the population saw the groundbreaking move as a humiliating capitulation to hypocritical bullying by the United States and Britain. They point out that the US continues to offer corporations high levels of secrecy in the state of Delaware 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 meeting of talks to restore the world's economy. It was obvious to many that once the scandal broke that saw giant Swiss bank UBS become 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 America and Europe. A Swiss journalist last week posed as a rich individual with €3m 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 week 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 only implement the measure if the US drops its legal action against UBS, which is calling for the bank details of up to 52,000 US citizens.

Influential commentators like 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 Cayman Islands, who quote the pieces back almost verbatim denying their jurisdictions and financial sectors are remotely linked to the chaos that has gripped world markets for 18 months.

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 based in offshore centres.

HSBC, in a disclosure to the Observer last month, revealed it has 2,008 legal subsidiaries around the world including in Liechtenstein, the Bahamas and Jersey.

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

As the prospect of increased supervision comes closer, the growing army of campaigning groups, churches and unions which have alighted 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 whether Mitchell and his friends can keep the storm waters from lashing the world's tranquil financial havens.

Britain's record
Ten of the OECD's list of 35 tax havens are UK overseas territories or dependencies of the British crown.

Britain's crown dependencies consist of the Isle of Man, Jersey and Guernsey. All three are independently administered and do not form part of the UK. However, they are possessions of the British crown and not sovereign nations. They are treated as part of the UK for British nationality law, and the British government is responsible for their defence and international representation. The power to pass laws affecting the islands rests with their legislative assemblies.

Westminster retains the right to legislate for the islands against their will. Many key officials are also appointed by the British government. As a result, the exact nature of the relationship between the crown dependencies and the UK is hard to pinpoint.

The 14 British overseas territories are also under the sovereignty of the UK. The name came into being with the British Overseas Territories Act 2002, which granted UK citizenship to citizens of any of the territories, which include the British Virgin Islands, Cayman Islands and Gibraltar. The head of state is the Queen, who generally appoints a governor as her representative on the advice of the British government.

The governor deals mostly with foreign affairs and economic issues. UK sovereignty was recently demonstrated in relation to another overseas territory, the Turks and Caicos Islands. The British government revealed plans to take control of the islands, due to suspicion of systematic corruption following publication of an interim report by a commission of inquiry into the islands. The Foreign Office said parts of the islands' constitution would need to be suspended. Again, the British government has the constitutional right to amend or suspend the laws allowing much of the offshore tax business taking place.

Aziz Durrani



17 Sep 2008
David Cronin: Tax evasion has far-reaching consequences for the world's poor