tax havens (secrecy jurisdictions)
A tax haven is a country or territory where taxes are low or even non-existent, banking secrecy allows money to be stashed away and completely hidden and where the supervision of banks is often poor. This allows individuals and corporations from all over the world to exploit the possibility of tax evasion, money laundering or illicit dealings.
Tax havens come in many shapes and sizes and they are found all over the world. To some people it may be a surprise to know that the UK is responsible for several dependent states which operate offshore banking centres. Apart from the three crown dependencies of Guernsey, the Isle of Man and Jersey, the UK Treasury is responsible for the following Overseas territories - Anguilla; Bermuda; British Antarctic Territory; British Indian Ocean Territory; British Virgin Islands; Cayman Islands; Falkland Isles; Gibraltar; Montserrat; Pitcairn, Henderson, Ducie and Oeno Islands; St. Helena and St Helena Dependencies (Ascension and Tristan da Cunha); South Georgia and South Sandwich Islands; Sovereign Base Areas of Akrotiri and Dhekelia in Cyprus; and the Turks and Caicos Islands. Many of these 'Bounty Bar' islands have been successful in attracting huge amounts of foreign money and one of them, Cayman Islands, is now the 5th largest financial centre in the world after London, New York, Tokyo and Zurich. There, in just one office, Ugland House, in George Town, the capital, which houses a legal practice 18,800 corporations alone are registered.
One notorious offshore centre, in the middle of the Pacific Ocean, is the island of Nauru. There, if you have a spare $25,000 (£16,600), you can set up your own bank and enjoy life with little or no regulation. It is even estimated that almost 400 banks operate there from the same government mailbox. And it was in Nauru, in 1998, that according to the Russian Central Bank, $70bn (£46.6bn) vanished never to be seen again. (Today it is estimated that Russian assets worth 50% of GDP are held offshore.)
According to the 2015 TJN Financial Secrecy Index (FSI) Vanuatu, with a score of 87/100, along with Samoa 86, are the two most opaque and secretive of all tax havens. Next in line come Brunei, Liberia and St Lucia with 83 followed by Antigua/Barbuda 81 and Maldives 80. On 79 are Belize, Nauru, Bahamas, Marshall Islands, Lebanon and Paraguay. Perhaps, here the words of Vince Cable, former UK secretary of state for business, could best describe these kind of places 'no one keeps their cash in tax havens for the quality of investment advice; these are sunny places for shady people.'
to take financial secrecy a stage further TJN have taken the FSI scores
for each jurisdiction and multiplied them by the scale of their activities
to come up with the jurisdictions benefiting most from financial secrecy.
Now at the top the running order is very different:-
Using this basis TJN suggests that the traditional stereotype of tax havens is misplaced and that the world's most important providers of financial secrecy are not small, palm-fringed islands as many suppose, but some of the biggest and wealthiest countries.
again according to TJN, offer three types of 'service':-
For wealthy private individuals, usually with something to hide, tax havens come in useful as they can salt away money from prying eyes. And here a good example of the damage this can cause to the economy of a country can be starkly illustrated by the current situation in Greece. The collapse of the public finances there is largely down to the consequences of allowing tax evasion by wealthy people to become endemic. And Greece is not alone; other Mediterranean countries also suffer from this to a large degree.
At the same time, as tax havens don't normally tax interest on the bank accounts of non-residents* leaving the accountholders with the decision of whether or not to declare the gross amount of interest earned to their own tax authorities. And as many tax havens refuse to respond to requests for information from foreign tax authorities, this again encourages individuals from overseas to park large amounts of assets 'offshore'.
(*non-residents comprise two classes of people who are exempt from paying tax. Taking the UK as an example:-
1) non-doms. There are estimated to be 121,300 people born outside the UK or whose father was born outside the UK who do not regard the UK as their permanent home but live here for part of the year. Non-doms who have lived in the UK for less than 7 of the last 9 years pay no UK tax on overseas income or gains that are not brought into the UK. They do, however, pay tax on all income and gains relating to the UK. Non-doms who have lived in the UK for more than 7 years can still avoid tax on foreign earnings by paying £30,000 a year to the government. This charge rises to £50,000 per annum for those who have lived in the UK for 12 of the previous 14 years. And for those who have lived in the UK for 17 of the past 20 years the annual charge is now £90,000. Collectively they contribute £10bn per annum in to the exchequer despite their special status. Now, however, non-doms are starting to abandon Britain as the Brexit vote has prompted an exodus. Up to 12,000 have already left in the past year and and 55,000 are considering their position according to a large accountancy firm. Incredibly the non-domicile tax rule was introduced by Prime Minister William Pitt the Younger in 1799!
2) non-residents. People who have moved overseas on a full-time contract and who spend an average of less than 91 days over a 4 year period, and not more than 182 days in any year, in the UK . Also those who leave the country and make a clean break and limit visits to fewer than 91 days a year.)
Large multinational corporations (MNCs) also find it convenient to 'maximise' their profits on overseas earnings by directing the paperwork relating to their worldwide transactions through low tax offshore tax havens. An example of how this is carried out comes again from TJN.
TJN has found that large international companies involved in fruit growing have created elaborate structures to move profits through subsidiaries to offshore centres to evade paying high tax rates in both the country where the fruit is grown and where it is finally sold.
Another ruse used by MNCs is to use loans from subsidiaries to reduce profits or even establish losses. According to ActionAid, SAB Miller, the world's second-largest brewer, despite annual sales in Ghana of over US$100 million between 2007-12, its brewery in Accra managed to record losses in every single year. This was helped by borrowing from its subsidiary in Mauritius at a rate of 18% p.a.
As a result of this offshore accounting it is estimated that 60% of global trade now consists of internal transactions within multinational companies and a vast accounting and legal industry has grown up in the last 10 years based on intellectual property rights and the calculation of transfer prices and justifying them to tax authorities. In total it is estimated that this complex corporate offshore accounting MNCs avoid paying anything between US$100bn-US$240bn according to the OECD, the equivalent of between 4% and 10% of aggregate corporate tax revenues. (In 2013-14 the UK division of Facebook paid just £4,200 in corporation tax to HMRC)
With encouragement from the UK government the G20 has now vowed to make multinational tax avoidance top of the agenda at their gatherings. And already 90 nations have signed up to combating 'profit shifting', highlighting the growing support across the world for more action to tackle this nefarious problem.
(Oxfam, the UK based international development NGO, is to make MNCs and tax justice the focus of its campaigning over the next ten years.)
Many tax havens (or 'secrecy jurisdictions' as TJN likes to call them) have a 'light' regulatory touch making it easy to set up a company or trust and this results in offshore centres often attracting unsavoury elements.
Dirty money is the fruit of many kinds of criminal activities e.g. drug dealing, secret arms sales, counterfeiting, protection rackets, smuggling, embezzlement, insider trading, computer fraud etc. The rewards of such activities usually come in one of two forms - cash or money transfer. In the form of notes and coins there is usually very little that can be done to prove that cash has been gained illegally unless, of course, the money is forged. However only small amounts of cash can be carried without arousing suspicion and small amounts are not what big criminals are about. Large amounts of cash are usually paid by money transfer which requires funds being paid into the payee's bank account. And money laundering is the process by which the proceeds of crime are accepted by a financial institution into an account opened under the control of the criminals.
Money laundering can occur anywhere in the world but criminals will generally prefer to seek out offshore tax havens where there is a perceived low risk of detection. Another avenue open is find a 'friend' somewhere on the inside of a bank/ financial institution in their own country who is willing to help them.
Offshore tax havens are seen as the perfect place to launder ill-gotten gains. Apart from minimal controls, tax havens are usually reluctant to divulge information and investigators find that companies they are looking into have been set up and registered without revealing shareholders, directors or owners. At the same time, by the time any investigators get there, any stolen money has usually been moved on.
That said, according to Alexander Lebedev, a Russian oligarch and former owner of The Independent, London is now the money laundering capital of the world with UK firms aiding corrupt officials and criminals from across the globe to hide trillions of US dollars of ill-gotten gains. He claims that British-based banks have helped hide more than US$6trillion in nefarious payments and criminal proceeds since 2000 and warned that the City of London is now the epicentre of a global financial services racket. He also claims that since the turn of the millennium as much as US$1trillion has been stolen from Russia with large chunks of it invested in the London property market. The IMF has also weighed in here claiming that 'high-end' money laundering is now rife owing to the City's size, complexity, range of products, transaction volumes and interconnectedness with the international financial system. Nearly 20% of global banking activity is booked in UK. And already the UK National Crime Agency (NCA), which only came into existence in 2013, is already swamped with Suspicious Activity Reports (SARs) for in 2015, of more 380,000 SARs filed, only 0.3% resulted in action.
(According to Transparency International the UK's performance in freezing, seizing and recovering assets whilst strong compared to other jurisdictions is undeniably limited compared to the scale of the threat. The NCA estimates that around £100bn could be laundered through the UK each year whilst typical detection rates of money laundering by law enforcement agencies are believed to be in the region of 1%. Seizure rates are much lower.)
One of the most reprehensible kinds 'investments' that can be opened are blind discretionary trusts which are commonly known as 'black holes.' In these accounts the named beneficiary, often a well-known international charity whose permission has not been obtained, can be removed before any funds are distributed. As the initial principal beneficiary is a charity this reduces the requirements for identity and money-laundering checks. But now these charities are getting wise to this and are seeking to take these trusts to court. And if it is proved that they are shams in order to conceal the identity of the real beneficiary the charity will lay out a claim for the funds to be their own.
It was in 1989 that the Organisation for Economic Co-operation and Development (OECD) first started to consider taking action to counter money laundering by international criminals. To this end they set up the Financial Action Task Force (FATF) based in Paris. It was charged with drawing up a set of universal standards covering law enforcement, financial regulation and international co-operation. This list eventually ran to 40 recommendations which has now been adopted by all 34 member states plus 13 other countries. What this now means is that:-
no longer will anonymously numbered bank accounts be tolerated
These guidelines, now, also require banks to become policemen and so they are in the forefront of tackling this kind of crime. To this end they must carry out Customer Due Diligence (CDD) which requires them to 'know your customer' which includes finding out the purpose of any account and then monitoring the expected profile of it. And any suspicious transactions must be reported immediately to the Financial Intelligence Unit (FIU).
However, it is one thing legislating against money laundering but it is another enforcing it.
The UK Financial Services Authority (FSA) has recently found that one third of the British banks it has recently examined still appeared willing to accept very high levels of money-laundering risk if the immediate reputational and regulatory risk was acceptable. That means that too many people in charge of banks seem to view money-laundering rules as flexible and which they can try to get round. After all, why should they turn away a potential wealthy client that another bank will welcome with open arms. A UK Treasury assessment has also concluded that Britain's anti-money laundering procedures are inadequate claiming that while tens of billions of corrupt funds are likely to be laundered in the UK every year, investigations by the National Crime Agency cover only millions.
But perhaps this kind of reaction may be reaching a turning point. The US authorities have recently taken HSBC to task for its failures to prevent money laundering in its US and Mexican branches and fined the bank a record-breaking US$1.9bn. The bank directors accepted responsibility for these past mistakes and vowed to take concrete steps to put right what went wrong. And it is now likely that other miscreants will be discovered and fined as well.
It is not just banks though that can be used to 'clean' money - lawyers, art dealers, accountants, betting shops, casinos, car dealers, real estate agents, dealers in precious metals, insurance companies and securities houses - can all be involved and all these groups now have to have their own compliance officers.
Reputations can also be laundered e.g. by employing a PR agency and buying access to a respectable lifestyle. This then makes it harder to believe that the money has been stolen in the first place.
After 9/11 international financial regulations and co-operation took on greater force. Draconian measures to impound terrorist assets were introduced and the US threatened immediate sanctions against countries and institutions that failed to co-operate. As a result, hundreds of bank accounts were frozen, and the search for the origin of their funds given top priority. This brought to light the fact that it was not always through money laundering that terrorist groups received most of their funds but often from legitimate sources.
The OECD now wants worldwide compliance with all countries adopting its uniform code of conduct based not only on the 40 recommendations on anti-money laundering (AML) compliance but also 9 special recommendations on combating the financing of terrorism (CFT). As of October, 2014 two countries (Iran and North Korea) are identified as high-risk and non-cooperative jurisdictions and the OECD have applied counter-measures against them. At the same time there are four countries that are considered by the OECD not to have made sufficient progress in addressing deficiencies. These nations are Algeria, Ecuador, Indonesia and Myanmar.
There is also a third group of countries that may be currently showing a high-level of political commitment to addressing the deficiencies but are not yet there in terms of passing legislation. These nations are Afghanistan, Albania, Angola, Argentina, Cambodia, Guyana, Iraq, Kuwait, Laos, Namibia, Nicaragua, Pakistan, Panama, Papua New Guinea, Sudan, Syria, Uganda, Yemen and Zimbabwe.
Jurisdictions no longer subject to monitoring are Argentina, Cuba, Ethiopia, Tajikistan and Turkey
The measures set up by the OECD should now start to bear fruit in getting to grips with money laundering and helping to counter terrorism. However, despite this tightening up of financial regulation, the IMF estimates that $1 trillion ($1,000,000,000,000) is still laundered annually, equivalent to 3% of global Gross National Income.
But it seems
it is not just offshore tax havens that continue to have problems addressing
this issue for some OECD countries are still not managing to enforce laws
already passed. For example, in the US, it is estimated that nearly 2m
companies are still being set up annually without the need of the identity
of the people behind them. Jason Sharman, an academic from Griffith University
on Australia's Gold Coast, has recently done some research in this area.
Armed with a personal computer and, a modest budget, he tested the difficulty
of setting up anonymous bank accounts around the world, with striking
results. His findings showed that the centres with the highest standards
were many small island offshore centres. At the other end of the scale
were Somalia, and worst of all, the US, particularly the state of Delaware,
where service providers were prepared to set up anonymous bank accounts
without proper identification. UK providers mostly required the right
paperwork but, in one case, an anonymous company was set up in less than
a day at a total cost of just over £500.
At the same time, though, the OECD should have gone further. Operating a level playing field is all very well and it should deter money laundering in the future, but what about those who have already slipped through the net.
All banks now have access to lists of Politically Exposed Persons (PEP) which contain the names of all government ministers in all countries of the world. Surely it would not be difficult to go backwards and produce a 'Who was Who' in past governments. And armed with this FATF investigators could search anywhere for personal accounts and 'dig' down through front companies and client fund accounts to look for money that may have been stolen in the past. In this way, for example, money embezzled by ministers in the governments of Marcos of the Philippines and Mobutu of Zaire could possibly be traced and, then, if proved to have been stolen, sent back to the country of origin. In this way perpetrators of financial crimes in the past as well as the present will never be able to rest, thinking they have beaten the system. And at the same time, offshore centres will take on added respectability, and some of the poorest countries in the world should see stolen money repatriated and become available for tackling social deprivation there.
In February, 2011 the Swiss authorities went some way towards doing this when they enacted a new restitution law which makes it easier for banks to freeze fortunes and return money acquired dubiously by foreign dictators to their home country. The first victim of this new law is the former leader of Haiti, Jean-Claude 'Baby Doc' Duvalier who is currently facing charges of corruption and crimes against humanity in the country he ruled through terror for 15 years. For a hundred years Switzerland has been the first point of call for dictators when it came to salting away their pension plans but this new legislation allows the authorities to freeze their assets even if the home country has not placed a formal request. Now, there is a chance that unless dictators can prove that they acquired their assets legally, the money will be returned back to the country of origin.
As a result of this further commitment to tackling tax evasion the Swiss authorities have signed a deal with the UK government which has ground-breaking ramifications for residents of the UK who hold foreign bank accounts there. It could raise up to £7bn for the UK Treasury. The deal comes in two parts. Firstly there is a one-off windfall tax for past liabilities levied at between 19% and 34% on the funds held by UK residents in Swiss banks. These amounts were deducted in May 2013 on accounts opened before 2010 and this was reckoned to settle all income tax, capital gains tax and inheritance tax owed. Secondly these Swiss accounts held by UK residents will be subject to a withholding tax on all future interest, investment income and capital gains levied at 48%, 40% and 27% respectively. The money collected from this withholding tax will be sent direct to the UK Treasury thus allowing British account holders in Switzerland to keep their identities secret. UK residents who already have co-operated with the UK tax authorities will not be charged these new levies. However, the Swiss government will also provide information to the UK government if HM Revenue and Customs can show that accounts are being used to evade tax. This agreement is already in place with the authorities in Liechtenstein where the resulting proceeds have exceeded expectation.
The recent global economic slowdown has further concentrated the minds of OECD governments as they try to reduce their budget deficits. And tax evasion is seen as potentially playing a valuable role in helping achieve this as well as being politically astute. For example, the UK Treasury is considering introducing a 'statutory residency test' which could affect tax exiles like racing driver Lewis Hamilton, Jackie Stewart, and the Barclay brothers. And it looks like the UK courts have got there already for in a ruling, in February, 2010, on the tax status of Seychelles-based multimillionaire, Raymond Gaines-Cooper, the Court of Appeal found that he was liable to pay £30 million in back taxes because England remained 'the centre of gravity of his life and interest' even though he adhered to existing rules by spending fewer than 91 days, on average, in any 4 year period, in the UK. As far as the UK is concerned, then, it appears that in future different considerations may come into play to decide residency. Is your house here? Is your family here? Are you a member of any UK clubs? Do you have a string of racehorses in training at Newmarket? Shortly after this ruling was handed down, Her Majesty's Revenue and Customs (HMRC) office started to receive numerous calls from tax exiles worried about the possibility of facing huge tax bills.
And the rewards for the UK government could be exceptional. The 'tax gap' - the amount HMRC does not collect because of tax evasion - is about £35bn per annum, according to government estimates, but nearer to £70bn per annum, according to Tax Research UK, an independent consultancy.
(The US applies strict rules on residence based on physical presence for those who are not citizens of the country but who choose to live there. This means that anyone holding a US passport is liable for US tax, whether or not he or she actually lives in the country and has a US source of income.)
However, high worth individuals now also have other things to consider.
As a result of the freezing up of money markets and resulting credit crunch, many banks in offshore banking centres became exposed leading to fears that governments in tax havens may not be able to stand behind bank deposits. For example, it is no problem for the British government to guarantee the first £75,000 of all individual bank deposits in the UK, but it is impossible for the government of the Isle of Man to do likewise.
Also, recently, there has been several cases of data relating to the bank accounts of wealthy customers being stolen and finding its way into the hands of various tax authorities prompting a huge debate about the use of stolen data. In 2007, a DVD containing the details of over 1,000 German customers, was stolen from LGT Treuhand, a bank in Liechtenstein, and sold to the German tax government for Euros 4.2 million (£3.8m). The German authorities pursued hundreds of alleged tax evaders, including the head of Deutsche Post, who was fined and given a suspended prison sentence. Tax authorities in the US and UK are also supposed to have benefited from this piece of good fortune. The most recent theft occurred in March, 2010 when an IT employee at the HSBC Private bank in Switzerland stole information concerning 24,000 customers past and present. French authorities are believed to have paid up for this data. And in May, 2013 UK tax authorities celebrated having acquired a huge 400 gigabyte data set which had fallen into their hands and which gave details of hundreds of UK multimillionaires who have allegedly hidden billions of pounds in Singapore, British Virgin Islands and the Caymans.
Record low interest rates is another reason to ponder keeping money overseas.
1, 2016 people with funds offshore were able to declare any unpaid income
tax or capital gains tax and pay only a small penalty for non-disclosure.
However, from the start of 2016, when over 90 jurisdictions started to
share information with HMRC, anyone not declaring what they owe risk:-
And in a consulatation document issued in August 2016 the UK Treasury is now proposing that accountants and financial advisers who help people bend the rules to gain a tax advantage, which was never intended, could now face fines under new proposed penalties.
For various reasons, then, it looks like the writing is on the wall, and maybe it is time for the rich in all OECD countries to consider the repatriation of their overseas bank/money market accounts. For one way or another, OECD tax authorities are now likely to extract heavy penalties on individuals who park a lot of their assets overseas and are not coming clean.
The leaked 'Panama Papers' made public by the International Consortium of Investigative Journalists on April 3, 2016 connected thousands of prominent figures to secretive offshore companies in 21 tax havens around the world, and revealed the opaque workings of the offshore finance industry. The documents focused on the Panamanian law firm, Mossack Fonseca, with its 210,000 companies/clients, and has led to allegations that the firm aided public officials and multinational corporations to avoid taxes, dodge sanctions and launder money. Politicians implicated in these latest revelations include President Mauricio Macri, newly-elected leader of Argentina; King Salman of Saudi Arabia; Ukrainian President Petro Poroshenko and Icelandic premier David Gunnlaugsson, who has been forced to resign. People named from the world of sport include Gianni Infantino, the newly-elected president of FIFA; Lionel Messi, the world's No 1 footballer and Nico Rosberg, the German Formula 1 driver.
Companies that appear in the Panama Papers are incorporated in the following places:-
British Virgin Islands 115,000
The UK was the second most popular place for Mossack Fonseca to operate through. According to ICIJ, Mossack Fonseca worked with more than 1,900 UK professional enablers to set up companies and trusts for customers.
Following on from the dislosures in the Panama Papers the 5 largest countries in the EU - Germany, France, UK, Italy and Spain - have agreed to share information on secret owners of trusts and businesses.
And more recently, in October 2017, the Paradise Papers came to light. Like the Panama Papers they were obtained by the German newspaper Suddeutsche Zeitung. As a result light has now been shone on the legal firms, financial institutions and accountants working in the sector and on jurisdictions that attract funds due to low tax rates. But the real dynamite has come from the exposure of the financial affairs of politicians, multinationals, celebrities and high net-worth individuals. The British monarch had invested £10m offshore, Apple uses the low tax regime of Jersey, U2 pop star Bono could be implicated for tax evasion on a Lithuanian shopping mall. In total there is more than 1,400GB of data containing about 13.4 million documents so the trawl through them goes on.
Research by Transparency International shows that 36,000 properties in London are owned by companies registered in offshore jurisdictions. And according to the Financial Times at least £122bn worth of property in England and Wales is held via companies registered in secrecy jurisdictions. Now, (April 2017) in a bid to uncover the people behind anonymous companies that own property in the UK, the government is to introduce plans for a register which will aim to identify the owners of overseas businesses holding property assets in the UK. This register, the first in the world, will identify the oligarchs, foreign politicians and government officials who use opaque companies to buy expensive houses in the UK. According to the UK National Crime Agency this will increase transparency in the housing market, especially in London, and help to trace criminal assets and tackle money laundering. A recent report found that in 14 new luxury developments in London, 80% of the homes had been bought by overseas investors with 40% estimated to have been acquired through suspicious or hidden wealth.
At an Anti-Corruption Summit held in London on 12 May, 2016 hosted by UK Prime Minister David Cameron, all governments at the summit appeared to agree to establish private registers of the real owners of shell companies with a small handful of countries committing to public registers. While this is a positive step forward, it still means that many details still won't be shared between countries.
Following on from that conference on 27 Apil, 2017 the UK government passed into law Unexplained Wealth Orders, a provision of the Criminal Finances Bill, in what is deemed by Transparency International (TI) as a significant step in the global fight against corruption. This Unexplained Wealth Orders will empower UK law enforcement agencies to target corrupt money flowing into the UK and more easily return it to those from whom it has been stolen. It will work like this:-
1. Minister of Education in a country misapporpriates millions of pounds from the education budget into his own pocket. To hide the crime he decides to buy an expensive property in London.
2. The house is far beyond the reach of his salary of £50,000 per year, raising serious questions. These allegations are brought to the attention of the law-enforcement agencies.
3. The UK's law enforcement agency then takes this information to a high court judge to show that this minister is quite likely the owner of suspicious wealth beyond his means.
4. If the judge is satisfied by this connection an Unexplained Wealth Order (UWO) would be issued against the individual. And once the UWO is given the assets belonging to this minister would be frozen to prevent him moving them out of reach.
5. The minister would then be asked to eplain how he lawfully acquired his assets.
6. If the minister fails to respond, or provides an inadequate response, the assets are forfeited without the need for a criminal prosecution in the minister's home country.
(Golden visas now offer wealthy investors the opportunity to take up residency in another country. As far as the UK is concerned any investor seeking residency in the country can apply for a Tier 1 investment visa. This requires an investment of £2,000,000 and permits temporary residency in the UK for the client and his immediate family who can then apply for permanent residency after 5 years. By investing £5,000,000 the waiting time can be reduced to 3 years whilst those investing £10,000,000 can be awarded permanent residency after 2 years. Since 2008 3,050 visas have been issued with 37% given to rich people from China with 23% going to rich Russians. TI claims that at least £3.15bn has flowed into the UK from Golden Visas and it is highly likely that substantial amounts of corrupt wealth stolen from China and Russia have been laundered in the process.)