Tag Archives: tax havens

Returning Stolen Money: the Nigerian Saga (2002-2018)

Nigeria and Switzerland signed a memorandum of understanding on March 26, 2018 to pave the way for the return of illegally acquired assets…Switzerland said in December 2017 that it would return to Nigeria around $321 million in assets seized from the family of former military ruler Sani Abacha via a deal signed with the World Bank…[T]he memorandum of understanding was ratified between Nigeria, Switzerland and the International Development Association, (IDA), the World Bank’s fund for the world’s poorest countries.

Excerpt from Nigeria and Switzerland sign agreement to return stolen assets, Reuters, Mar. 26, 2018

Predator Instinct: tax avoidance in Luxembourg

luxembourg

Antoine Deltour and Raphaël Halet, two ex-employees of PwC, an accounting firm, and Edouard Perrin, a French journalist, had been tried in Luxembourg for their role in leaking documents that revealed sweetheart tax deals the Grand Duchy had offered to dozens of multinationals. ..The whistle-blowers faced up to ten years behind bars. However, the prosecutor—perhaps sensitive to the strong public and, in some places, political support for them abroad—called for suspended sentences of 18 months. In the end the judge handed Messrs Deltour and Halet suspended sentences of 12 months and nine months, respectively. But a conviction is a conviction; Transparency International, an anti-corruption group, called it “appalling”. Mr Perrin, who had published an article that drew on the leaked documents, was acquitted.

The “LuxLeaks” affair has highlighted the role played by certain European Union countries, including Ireland and the Netherlands as well as Luxembourg, in facilitating tax avoidance. Luxembourg is not a typical tax haven levying no or minimal income tax; its statutory rate is 29%. Instead, it is a haven “by administrative practice”, argues Omri Marian of the University of California, Irvine, who has studied LuxLeaks in detail. Luxembourg’s tax authority in effect sold tax-avoidance services to large firms by rubber-stamping opaque arrangements that helped them to cut their tax bills dramatically in both their countries of residence and their countries of operation.]

Excerpt from Tax avoidance: Grand dodgy, Economist, July 2, 2016

How and Where to Get a Secret Account in the USA

South Dakota, quarter---2006, image from wikipedia

After years of lambasting other countries for helping rich Americans hide their money offshore, the U.S. is emerging as a leading tax and secrecy haven for rich foreigners. By resisting new global disclosure standards, the U.S. is creating a hot new market, becoming the go-to place to stash foreign wealth. Everyone from London lawyers to Swiss trust companies is getting in on the act, helping the world’s rich move accounts from places like the Bahamas and the British Virgin Islands to Nevada, Wyoming, and South Dakota.

Rothschild, the centuries-old European financial institution, has opened a trust company in Reno, Nevada a few blocks from the Harrah’s and Eldorado casinos. It is now moving the fortunes of wealthy foreign clients out of offshore havens such as Bermuda, subject to the new international disclosure requirements, and into Rothschild-run trusts in Nevada, which are exempt.  Others are also jumping in: Geneva-based Cisa Trust Co. SA, which advises wealthy Latin Americans, is applying to open in Pierre, S.D., to “serve the needs of our foreign clients,” said John J. Ryan Jr., Cisa’s president.  Trident Trust Co., one of the world’s biggest providers of offshore trusts, moved dozens of accounts out of Switzerland, Grand Cayman, and other locales and into Sioux Falls, S.D., in December, ahead of a Jan. 1 disclosure deadline….

No one expects offshore havens to disappear anytime soon. Swiss banks still hold about $1.9 trillion in assets not reported by account holders in their home countries, … Still, the U.S. is one of the few places left where advisers are actively promoting accounts that will remain secret from overseas authorities….The offices of Rothschild Trust North America LLC aren’t easy to find. They’re on the 12th floor of Porsche’s former North American headquarters building, a few blocks from the casinos. (The U.S. attorney’s office is on the sixth floor.) Yet the lobby directory does not list Rothschild. Instead, visitors must go to the 10th floor, the offices of McDonald Carano Wilson LLP, a politically connected law firm. Several former high-ranking Nevada state officials work there, as well as the owner of some of Reno’s biggest casinos and numerous registered lobbyists. One of the firm’s tax lobbyists is Robert Armstrong, viewed as the state’s top trusts and estates attorney, and a manager of Rothschild Trust North America.

“There’s a lot of people that are going to do it,” said Cripps. “This added layer of privacy is kicking them over the hurdle” to move their assets into the U.S. For wealthy overseas clients, “privacy is huge, especially in countries where there is corruption.”….

Rothschild’s Penney wrote that the U.S. “is effectively the biggest tax haven in the world.” The U.S., he added in language later excised from his prepared remarks, lacks “the resources to enforce foreign tax laws and has little appetite to do so.”….The U.S. failure to sign onto the OECD information-sharing standard is “proving to be a strong driver of growth for our business,” …

In a section originally titled “U.S. Trusts to Preserve Privacy,” he included the hypothetical example of an Internet investor named “Wang, a Hong Kong resident,” originally from the People’s Republic of China, concerned that information about his wealth could be shared with Chinese authorities.  Putting his assets into a Nevada LLC, in turn owned by a Nevada trust, would generate no U.S. tax returns, Penney wrote. Any forms the IRS would receive would result in “no meaningful information to exchange under” agreements between Hong Kong and the U.S., according to Penney’s PowerPoint presentation reviewed by Bloomberg.
Penney offered a disclaimer: At least one government, the U.K., intends to make it a criminal offense for any U.K. firm to facilitate tax evasion.

Excerpt from Jesse Drucker, The World’s Favorite New Tax Haven Is the United States, Bloombert, Jan. 27, 2016

The United States as a Tax Haven

taxes

The world is becoming less welcoming to tax dodgers. That is the conclusion of the latest Financial Secrecy Index, published every two years by the Tax Justice Network (TJN), an NGO….. Among the biggest improvers are the Cayman Islands, once a notorious tax haven, and Luxembourg, which tax campaigners used to call Europe’s “death star” of financial secrecy.

The reason for the shift is the global, austerity-era push for countries to share more information on tax arrangements. Under the fast-spreading, OECD-sponsored Common Reporting Standard, countries will routinely exchange data on each other’s citizens so they can be taxed appropriately in their home countries. Rules on the registration of corporate ownership are being tightened, too, in order to reduce opportunities to hide dirty money in anonymous shell companies.

But America, the country that has arm-twisted so many others to join the transparency revolution, is dragging its feet. It is now the third most secretive jurisdiction, behind Hong Kong and, inevitably, Switzerland (where rumours of the death of bank secrecy have been exaggerated).

America was in the vanguard in the fight against tax havens, first targeting the Swiss, then passing the Foreign Account Tax Compliance Act, or FATCA, which forces financial firms all over the world to spill the beans on their American clients. While demanding concessions from others, however, Washington has made few itself. It has, for instance, failed to engage with the OECD’s data-sharing scheme. Worse, anonymity-friendly incorporation regimes at the state level mean America is unmatched in corporate secrecy.

This matters, because America hosts a lot of offshore business—just ask a billionaire from Caracas or Cairo where he buys property or sets up the shell companies that hold it. The TJN offers a solution: it reckons Europe should mimic FATCA by imposing a stiff withholding tax (it suggests 35%) on payments from Europe to American financial institutions, until America gives as much data as it takes. That would induce wry smiles in Zurich.

Excerpts from Tax evasion: The mega-haven, Economist, Nov. 7, 2015, at 67

From Switzerland: Stolen Money Trickles back to Nigeria

sani abacha. image from wikipedia

Geneva’s public prosecutor will send $380 million confiscated from the family of Nigeria’s former military ruler Sani Abacha to Nigeria and closed a 16-year investigation into his funds, the prosecutor’s office said.   Abacha stole as much as $5 billion of public money during his five years running Africa’s top oil producing country from 1993 until his death in 1998, according to the corruption watchdog Transparency International.

The return of the $380 million follows an agreement between Nigeria and the Abacha family in July 2014, the prosecutor’s statement said. The agreement provides for Nigeria to receive the frozen funds in return for dropping a complaint against Abba Abacha, Sani’s son.He was charged by a Swiss court with money-laundering, fraud and forgery in April 2005, after being extradited from Germany, and subsequently spent 561 days in custody. In 2006 Switzerland ordered funds held by him in Luxembourg to be confiscated.  The return of the funds is conditional on effective monitoring by the World Bank of how the funds are used.

Switzerland to return $380 million of Abacha’s loot to Nigeria, Reuters, Mar. 19, 2015

A Ready-Made Vehicle for Dirty Money: Trade

Money-laundering. image from wikipedia

A few years ago American customs investigators uncovered a scheme in which a Colombian cartel used proceeds from drug sales to buy stuffed animals in Los Angeles. By exporting them to Colombia, it was able to bring its ill-gotten gains home, convert them to pesos and get them into the banking system.This is an example of “trade-based money laundering”, the misuse of commerce to get money across borders. Sometimes the aim is to evade taxes, duties or capital controls; often it is to get dirty money into the banking system. International efforts to stamp out money laundering have targeted banks and money-transmitters, and the smuggling of bulk cash.

But as the front door closes, the back door has been left open. Trade is “the next frontier in international money-laundering enforcement,” says John Cassara, who used to work for America’s Treasury department. Adepts include traffickers, terrorists and the tax-evading rich. Some “transfer pricing”—multinationals’ shuffling of revenues to cut their tax bills—probably counts, too. Firms insist that tax arbitrage is legal, and that the fault, if any, lies with disjointed international tax rules. Campaigners counter that many ruses would be banned if governments were less afraid of scaring off mobile capital. Trade is “a ready-made vehicle” for dirty money, says Balesh Kumar of the Enforcement Directorate, an Indian agency that fights economic crime. A 2012 report he helped write for the Asia/Pacific Group on Money Laundering, a regional crime-fighting body, is packed with examples of criminals combining the mispricing of goods with the misuse of trade-finance techniques. Using trade data, Global Financial Integrity (GFI), an NGO, estimates that $950 billion flowed illicitly out of poor countries in 2011, excluding trade in services and fraudulent transfer pricing. Four-fifths was trade-based laundering linked to arms smuggling, drug trafficking, terrorism or public corruption.

The basic technique is misinvoicing. To slip money into a country, undervalue imports or overvalue exports; do the reverse to get it out. A front company for a Mexican cartel might sell $1m-worth of oranges to an American importer while creating paperwork for $3m-worth, giving it cover to send a dirty $2m back home. One group of launderers was reportedly caught exporting plastic buckets that cost $970 each from the Czech Republic to America. To lessen the risk of discovery the deal may be sent via a shell company in a tax haven with strict secrecy rules. This may mean using a specialist “re-invoicing” firm to “buy” the oranges at an inflated price with an invoice to match and charge the importer the true price. The point is to get paperwork to justify an inflated transfer to the seller. Re-invoicers are used by multinationals to shift profits around, which gives them a veneer of respectability, says Brian LeBlanc of GFI—but they also “feed a giant black market in the offshore manipulation of paperwork”…

American authorities have ratcheted up penalties for banks that assist money-launderers, knowingly or not. In 2012 they reached a $1.9 billion settlement with HSBC after concluding that Latin American drug gangs had taken advantage of lax controls at its Mexican subsidiary. And last year they imposed a $102m forfeiture order on a Lebanese bank implicated in a complex scheme involving the export of used cars to West Africa with the proceeds funnelled to Hizbullah, an Islamist group. Alternative remittance systems and currency exchanges, such as the trust-based hawala networks in Asia and the Middle East, and Latin America’s Black Market Peso Exchange (BMPE), offer another route to launder money through trade. ..A recently leaked Turkish prosecutor’s report describes an alleged conspiracy involving Turkish front companies and banks, an Iranian bank and money-exchangers in Dubai. By marking up invoices for food and medicine allowed into Iran—to as much as $240 for a pound of sugar—the scheme gave Iranian banks access to hard currency from Iran’s oil sales that was locked in escrow accounts overseas, to be transferred only for approved transactions…

In the meantime, launderers who curb their greed and invoice goods worth $10 for $9, or $11, will probably continue to get away with it. A dodgy deal is almost impossible to spot if the pricing is only slightly out and you see just one end, says one American investigator. “You can study the slips all day long, and all you see is stuff being imported and exported.”

Excerpts from Trade and money laundering: Uncontained, Economist, May 3, 2014, at 54

Automatic Global Information Sharing in Tax Matters

oecd  may 6, 2014

Forty-seven countries, including the Group of 20 and some prominent tax havens, [adopted a declaration–Declaration on Automatic Exchange
of Information in Tax Matters] on May 6, 2014 that will shake up the sharing of tax information. Under the present system, countries have to file requests with each other for data on suspected cheats…In the future the states will automatically exchange information once a year. This will include bank balances, interest income, dividends and the proceeds of sales, which can be used to assess capital-gains tax…The deal also increases pressure on banks to identify the ultimate owners of shell companies and trusts, behind which tax evaders often hide.

The catalyst for the agreement was America’s Foreign Account Tax Compliance Act (FATCA). The law, passed in 2010, will soon impose stiff penalties on foreign financial firms that fail to declare their American clients. Once America began pushing for automatic declarations, other big countries did the same.

The most eye-catching signatory to the accord is Switzerland, whose banks were at the centre of the scandals that gave rise to FATCA. The world’s most famous offshore wealth-management centre was built on supposedly ironclad bank secrecy, but it has been forced to buckle under international pressure. (The American authorities, for instance, are currently leaning on Credit Suisse to plead guilty to charges of aiding American tax dodgers.) This is momentous: for the Swiss, agreeing to swap client data systematically is the cultural equivalent of Americans giving up guns. Singapore, which has earned a reputation as the Switzerland of the East, is also a party to the deal.  Britain’s offshore satellites, such as Jersey and the Cayman Islands, are grudgingly on board. But it will be harder to corral Panama, Dubai and the havens dotted around the Indian and Pacific Oceans (although blacklisting can be a powerful tool). Until they sign up, the likes of Switzerland and Luxembourg may have an excuse to drag their feet in implementing the new rules.

Still, the pace of change has been remarkable. Global information exchange, unthinkable a decade ago, is within reach. Tax evaders can be ingenious, but their options are narrowing fast.

Tax evasion: The data revolution, Economist, May 10, 2014, at 74

The Airport as a Tax Haven

freeport singapore

The world’s rich are increasingly investing in expensive stuff, and “freeports” such as Luxembourg’s are becoming their repositories of choice. Their attractions are similar to those offered by offshore financial centres: security and confidentiality, not much scrutiny, the ability for owners to hide behind nominees, and an array of tax advantages. This special treatment is possible because goods in freeports are technically in transit, even if in reality the ports are used more and more as permanent homes for accumulated wealth. If anyone knows how to game the rules, it is the super-rich and their advisers.

Because of the confidentiality, the value of goods stashed in freeports is unknowable. It is thought to be in the hundreds of billions of dollars, and rising. Though much of what lies within is perfectly legitimate, the protection offered from prying eyes ensures that they appeal to kleptocrats and tax-dodgers as well as plutocrats. Freeports have been among the beneficiaries as undeclared money has fled offshore bank accounts as a result of tax-evasion crackdowns in America and Europe.

Several factors have fuelled this buying binge. One is growing distrust of financial assets. Collectibles have outperformed stocks over the past decade, with some, like rare coins, doing a lot better, according to The Economist’s valuables index. Another factor is the steady growth of the world’s ultra-wealthy population. According to Wealth-X, a provider of data on the very rich, and UBS, a financial-services firm, a record 199,235 individuals have assets of $30m or more, a 6% increase over 2012.

The goods they stash in the freeports range from paintings, fine wine and precious metals to tapestries and even classic cars. (Data storage is offered, too.) Clients include museums, galleries and art investment funds as well as private collectors. Storage fees vary, but are typically around $1,000 a year for a medium-sized painting and $5,000-12,000 to fill a small room.

These giant treasure chests were pioneered by the Swiss, who have half a dozen freeports, among them sites in Chiasso, Geneva and Zurich. Geneva’s, which was a grain store in the 19th century, houses luxury goods in two sites with floor space equivalent to 22 football pitches.  Luxembourg is not alone in trying to replicate this success. A freeport that opened at Changi airport in Singapore in 2010 is already close to full. Monaco has one, too. A planned “freeport of culture” in Beijing would be the world’s largest art-storage facility.

The early freeports were drab warehouses. But as the contents have grown glitzier, so have the premises themselves. A giant twisting metal sculpture, “Cage sans Frontières”, spans the lobby in Singapore, which looks more like the interior of a modernist museum or hotel than a storehouse. Luxembourg’s will be equally fancy, displaying concrete sculptures by Vhils, a Portuguese artist. Like Singapore and the Swiss it will offer state-of-the-art conservation, including temperature and humidity control, and an array of on-site services, including renovation and valuation.

The idea is to turn freeports into “places the end-customer wants to be seen in, the best alternative to owning your own museum,” says David Arendt, managing director of the Luxembourg freeport. The newest facilities are dotted with private showrooms, where art can be shown to potential buyers….Iron-clad security goes along with style. The Luxembourg compound will sport more than 300 cameras. Access to strong-rooms will be by biometric reading. Singapore has vibration-detection technology and seven-tonne doors on some vaults. “You expect Tom Cruise to abseil from the ceiling at any moment,” says Mark Smallwood of Deutsche Bank, which leases space for clients to store up to 200 tonnes of gold at the Singapore freeport.

Gold storage is part of Singapore’s strategy to become the Switzerland of the East. The city-state’s moneymen want to take its share of global gold storage and trading to 10-15% within a decade, from 2% in 2012. To spur this growth, it has removed a 7% sales tax on precious metals. (The Economist understands that the Luxembourg freeport’s gold-storage ambitions will get a fillip from the Grand Duchy’s central bank, which plans to move its reserves—now sitting in the Bank of England—to the facility once it opens. The bank declined to comment.)

Switzerland remains the world’s leading gold repository. Its imports of the yellow metal have exceeded exports by some 13,000 tonnes—worth $650 billion at today’s price—since the late 1960s, says the customs agency. The gap has widened sharply since the mid-2000s. But trade statistics do not tell the whole story, since they fail to capture the quantities of gold that go straight from runways to the freeports.

Wealth piled up in freeports is a headache for insurers. The main building in Geneva holds art worth perhaps $100 billion. The Nahmad art-dealing dynasty alone is said to have dozens of Picassos there. More art is stored in Geneva than insurers are comfortable covering, says Robert Read of Hiscox, an art insurer. Coverage for new items is hard to come by at any price….In a bid to soothe worries about concentrated storage, the private firm that operates Geneva’s freeport (which leases it from the majority owner, the local canton) is building a new warehouse a short distance from its existing structures. Most of the art is now stored in vaults under the main building. These were built in the 1970s as a way for banks to avoid a planned tax on gold held in their own vaults. The levy was repealed, the banks took back their gold, and paintings and sculptures soon began to fill the void. Luxembourg’s freeport, which is scheduled to open next summer, recently conducted a roadshow for insurers that highlighted the facility’s state-of-the-art safety features, including fire-fighting systems that suck oxygen from the air while releasing inert gas instead of water, so as not to damage art.

Insurance is cheaper for those willing to park assets in remote places. Switzerland is dotted with disused military bunkers, blasted into the Alpine rock during the second world war and cold war. The government has been selling these, and some have been bought by firms hoping to convert them into high-altitude treasure chests. One is Swiss Data Safe, which sells storage for valuables and digital archives at several undisclosed sites deep in the Gotthard granite. It claims to offer protection from “the forces of nature, civil unrest, disasters and terrorist attack”. Such places have a low risk of fire or being hit by a plane. But they cannot offer the tax advantages that freeports can.

Freeports are something of a fiscal no-man’s-land. The “free” refers to the suspension of customs duties and taxes…. this is all legal—though some countries have had to alter their statute books to accommodate the concept. Luxembourg amended its laws in 2011 to codify its freeport’s tax perks. That, plus the offer of land by the airport, helped persuade the project’s backers to put it there rather than in London or Amsterdam….Luxembourg’s government views the freeport as a useful adjunct to its burgeoning financial centre, which has been built on tax-friendliness. Deloitte, which helps firms and rich individuals minimise taxes, brokered the deal. Mr Arendt believes the freeport could help Luxembourg compete with London and New York in art finance, which includes structuring loans with paintings as collateral… As Swiss banks come under pressure to shop tax-dodgers, for instance, some are said to have been recommending clients to move money from bank accounts to vaults, in the form of either cash or bought objects, since these are not covered by information-exchange pacts with other countries. A sign that this practice may be on the increase is the voracious demand for SFr1,000 ($1,100) notes—the largest denomination—which now account for 60% of the value of Swiss-issued paper cash in circulation. Andreas Hensch of Swiss Data Safe says demand for its mountain vaults has been accelerating over the past year. The firm is not required to investigate the provenance of stuff stored there.

Western countries have started to clamp down on those who try to use such repositories to keep undeclared assets in the shadows. America has led the way. Under a bilateral accord, Swiss banks will have to deliver information on the transfer of funds from accounts, including cash withdrawals. Tax authorities are growing more interested in the contents of vaults. Americans with untaxed offshore wealth who sign on to an IRS voluntary-disclosure programme are required to list foreign holdings of art, says Bruce Zagaris of Berliner, Corcoran & Rowe, a law firm.

Tax-evaders are one thing, drug traffickers and kleptocrats another. In many ways the art market is custom-made for money laundering: it is unregulated, opaque (buyers and sellers are often listed as “private collection”) and many transactions are settled in cash or in kind. Investigators say it has become more widely used as a vehicle for ill-gotten gains since the 1980s, when it proved a hit with Latin American drug cartels. It is “one of the last wild-West businesses”, sighs an insurer.  This makes freeports a “very interesting” part of the dirty-money landscape, though also “a black hole”, says the head of one European country’s financial-intelligence agency. In a report in 2010 the Financial Action Task Force, which sets global anti-money-laundering standards, fretted that free-trade zones (of which freeports are a subset) were “a unique money-laundering and terrorist-financing threat” because they were “areas where certain administrative and oversight procedures are reduced or eliminated”.

Numerous investigations into tainted treasures have led to freeports. In the 1990s hundreds of objects plundered from tombs in Italy and elsewhere were tracked down to Geneva’s warehouse (along with papers showing that some had been laundered by being sold at auction to straw buyers, then handed straight back with the legitimate purchase documents). In 2003 a cache of stolen Egyptian treasures, including two mummies, was discovered in Geneva; in 2010 a Roman sarcophagus turned up there, perhaps pinched from Turkey.

Under pressure to respond, the Swiss have tightened up their laws on money-laundering and the transfer of cultural property. A law that took effect in 2009 brought Switzerland’s freeports into its customs territory for the first time. They must now keep a register of handling agents and end-customers using their space. Handlers must keep inventories, which customs can request to see.

In practice, however, clients can still be sure of a high degree of secrecy. Swiss customs agents still care more about drugs, arms or explosives than about the provenance of a Pollock. They do not have to share information with foreign authorities. Much of it is of limited value anyway, since items can be registered in the name of any person “entitled” to dispose of them—not necessarily the real owner.

Even greater secrecy is on offer in Singapore. Goods coming in to the freeport must be declared to customs, but only in a vague way: there is no requirement to disclose owners, their stand-ins or the value or precise nature of the goods (“wine” or “antiques” is enough). “We offer more confidentiality than Geneva,” Mr Vandeborre declared when the facility opened.  However, it is not quite true to say that Singapore and other new sites are in arm’s-length competition with the more established facilities. In fact, they share the same tight-knit group of mostly Swiss owners, managers, advisers and contractors. Yves Bouvier, the largest private shareholder in the Geneva freeport, is also the main owner and promoter of the Luxembourg freeport, a key shareholder in Singapore and a consultant to Beijing. His Geneva-based art-handling firm, Natural Le Coultre, is closely involved in running or setting up all these operations. Singapore’s architects and engineers were Swiss, as are its security consultants.

This has fuelled speculation that Swiss interests have deliberately developed a strategy to globalise the high-end freeport concept as a way to continue to benefit, even as the crackdown on undeclared money in Zurich and Geneva drives some of it to other countries. Franco Momente of Natural Le Coultre rejects this interpretation. “It’s nothing more than supply and demand,” he says. “Today many countries see the advantages of freeports for the local economy and to have a place in the global art market. They’re looking for solutions with experienced operators, and [the Swiss] have long experience.”

Barring dramatic regulatory intervention or moves to end their tax benefits, freeports are likely to grow, driven primarily by clients in emerging markets. At current growth rates the collective wealth of Asia’s rich will overtake Europe’s by 2017, reckon UBS and Wealth-X (see chart 2). As this population grows, so too could wealth taxes in the region, which are now low or non-existent. That could drive yet more Indians, Chinese and Indonesians towards the discreet duty-free depots which—if they aren’t already there—may soon be coming to an airport near you.

Freeports: Über-warehouses for the ultra-rich, Economist, Nov. 23, 2013, at 27

Offshore Tax Evasion: US versus Switzerland

switzerland tax haven

Fearful that other banks could suffer the same fate as Wegelin, a venerable private bank that was indicted in New York in 2012 and put out of business, the Swiss government has been seeking an agreement with America that would allow the industry to pay its way out of trouble in one go. Instead, it has had to make do with one covering banks that are not already under investigation, which excludes some of the country’s biggest institutions.

The deal is cleverly structured. Of Switzerland’s 300 banks, 285 will be able to avoid prosecution if they provide certain information about American clients and their advisers, and pay penalties of 20-50% of the clients’ undeclared account balances, depending on when the account was opened and other factors. Banks that persuade clients to make disclosures before the programme starts will get reduced fines. Banks will not have to take part but the legal risks are daunting for those that don’t, even if they hold little undeclared American money. Those with no foreign clients will have to produce independent reports proving they have nothing to hide if they want a clean bill of health.

One Swiss newspaper likened the deal to “swallowing toads”. Another called it “the start of an organised surrender”. The bankers’ association sees it as a necessary evil: the only way to end legal uncertainty, albeit at a cost that will strain some institutions. Small and medium-sized Swiss private banks are already struggling. In 2012 their average return on equity was 3%; the number of private banks fell by 13, to 148, mostly because of voluntary liquidations. KPMG, a consultancy, expects this to fall by a further 25-30% by 2016 as receding legal threats encourage the return of mergers.

Some of the prospective buyers in any future M&A wave still have to make their peace with the Americans. Excluded from the deal are 14 mostly large banks that have been under investigation for some time, including Credit Suisse and Julius Bär. They will have to settle individually, with fines expected to be steep, some perhaps comparable to the $780m paid by UBS in 2009. These banks are also under pressure from European countries that have suffered tax leakage, including Germany, whose parliament has rejected a deal that would have allowed the Swiss to make regular payments of tax withheld from clients while avoiding having to name names.

Swiss bankers gamely argue that bank secrecy remains intact, pointing out that privacy laws have not been dismantled. But banks are being bullied into providing enough information, short of actual client names, to allow the Americans to make robust “mutual legal assistance” requests that leave Swiss courts with no option but to order banks to provide clients’ personal details. The courts still have some flexibility because America has yet to ratify an amended tax treaty with Switzerland, thanks to blocking tactics by Rand Paul, a senator who argues it would violate Americans’ right to privacy. But this obstacle will eventually be cleared or circumvented.

All of which fuels speculation that Switzerland could lose its crown as the leading offshore financial centre, even though it is still well ahead of fast-growing rivals in Asia. It may find comfort in the fact that the Americans plan to use information harvested from the Swiss— including “leaver lists”, which contain data on account closures and transfers to banks abroad—to go after other jurisdictions. This is part of a “domino effect” strategy, says Jeffrey Neiman, a former federal prosecutor, aimed at forcing tax evaders “so far off the beaten path that they can’t be sure if the pirate waiting to take their money will be there when they return.”

Offshore tax evasion: Swiss finished?, Economist, Sept. 7, 2013, at 72

Offshore Havens: who is the next largest mass incorporator

Gambia_Export_Treemap. Image from wikipedia

After Guernsey, the Gambia? The smallest country in mainland Africa, a sliver on the west coast with a population of 1.8m, is trying to turn itself into an offshore financial centre. Central to the strategy is a state-of-the-art online corporate registry, offering quick and cheap incorporation of the types of secretive companies and trusts that drive financial investigators to distraction.

It is a counter-intuitive move at a time when offshore hubs are under fire from big economies that accuse them of aiding tax evasion or worse. But the idea of becoming a tax haven “will always loom large” for small states with few other options for economic development, says Jason Sharman of Griffith University in Australia. The Gambia’s economy is fairly open but still heavily dependent on tourism and peanuts.

With Britain cranking up pressure on its dependencies in the Caribbean and the English Channel, some of their customers will seek new homes offshore. And the overall market is proving resilient: after dipping in 2007-08, demand for offshore vehicles is back near pre-crisis levels in many jurisdictions, according to Appleby, a law firm.

The Gambia is not the only African country to take an interest. An attempt led by Barclays to develop Ghana into an offshore banking hub foundered in 2011 when the government, spooked by a warning from the OECD, declined to pass the required regulations. Tiny Anjouan, an island in the Indian Ocean, dabbled briefly with shell banks. Kenya is working with TheCityUK, which helps London’s financial district forge alliances, to set up an “International Financial Centre” (offshore centres’ preferred label for their activities) in Nairobi. TheCityUK is also in talks with Dubai, Istanbul and Moscow. Liberia is a successful shipping flag of convenience, although its registry is run from Virginia.

The Gambian registry already has “several hundred” companies, says Charlotte Pawar, a manager. But it will need many thousands to be considered a success, a tall order in a bitterly competitive market. Although it is easy to copy other places’ laws and product offerings (the Gambia’s resemble those of Mauritius), gaining traction is a struggle without the right network of tax treaties and the backing of the big corporate-service providers that buy offshore firms in bulk from favoured jurisdictions, for resale to law firms and individuals.

These sponsors are hard to impress. Only four of the many jurisdictions that have tried to enter the market since the late 1980s have proved really successful: Mauritius, the Seychelles, Belize and Samoa. The largest mass incorporator, Hong Kong-based Offshore Incorporations Limited, apparently has no plans to start selling Gambian vehicles. It could be a while before financial shells displace those around the country’s peanuts as a source of economic value

Offshore finance: Trawling for business, Economist, Aug. 24, at 65