Tag Archives: tax havens

Out-of-Fashion: Aggressive Tax Planning

In December 2019, Royal Dutch Shell voluntarily published its revenue, profit, taxes and other business details in each of 98 countries. The disclosure aligns with a drive by the energy company, which often attracts criticism from environmental activists, to present itself as forward-thinking, transparent and socially-minded.  That didn’t stop the information feeding a predictable host of headlines in the U.K., where the company is partly based, that it didn’t pay taxes in the country (because of losses carried forward and tax refunds). In the U.S., Shell accrued $137 million of tax—a rate of 8%.  This kind of detailed reporting is required by tax authorities in about 100 countries including the U.S. since 2017, based on rules agreed by the Organisation for Economic Cooperation and Development, but it is rarely made public.

Companies that don’t jump may soon be pushed. Economy ministers from European Union countries are considering a proposal that would require all large companies with total revenue of more than €750 million ($834 million) operating in the bloc to publish the information annually. The Global Reporting Initiative, an organization that establishes sustainability standards, recently agreed to include a similar requirement. Greater transparency could also spur reform efforts and reduce incentives for complex tax arrangements. Companies, investors and states all agree that it is best to find a global solution to the problem of aggressive tax planning.

Excerpts from Rochelle Toplensky, Beginning of the End of Tax Secrecy, WSJ, Dec. 20, 2019

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

Predators: Tax Avoidance in 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

Tax Havens in the USA

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

From Switzerland: Stolen Money Trickles Back to Nigeria

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

The Flow of Dirty Money through Trade

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

The Airport as a Tax Haven

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 v. Switzerland

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

Tax Havens under Attack

[In] the Cayman Islands,  corruption would have been high on the list of election issues in a society where “everybody expects that you are going into politics to make your money”, as a former auditor-general recently put it. But there is plenty more to worry Caymanians and the inhabitants of Britain’s other remaining scraps of empire in the Caribbean: Anguilla, the British Virgin Islands (BVI), Montserrat and the Turks and Caicos Islands. Tourism and international finance have brought prosperity but the “twin pillars” are showing cracks. Fiscal fumbling has compounded the problem and has strained relations with Britain, which has long provided an economic backstop. The region’s two big tax havens, Cayman and the BVI, are under attack as never before.

The world economic slowdown hit these small, open economies hard…. In some cases Britain has pushed for income taxes to supplement the fees and indirect taxes that the territories rely on. But these do not go down well with footloose offshore types. Under pressure from the Foreign Office, Cayman’s government last year proposed a 10% levy for foreigners, who make up half the 38,000 workforce. This was scrapped when businesses squealed. Wary of scaring away business, the BVI has not raised the $350 fee for incorporation since 2004.

Avoiding fee rises is seen as important at a time when tax havens are under bombardment, especially from Europe. The five territories, Bermuda and others have been arm-twisted into backing a multilateral scheme for the automatic exchange of tax information. A longer-term threat is the growing international call for public registration of the “beneficial” (ie real) owners of companies and trusts. Standards must be applied evenly, says Orlando Smith, premier of the BVI, “otherwise, businesses will simply go to other jurisdictions.”

Offshore optimists note that China and Russia, whose citizens are big users of Caribbean havens, have not signed up to the information-sharing pact. But remaining attractive to clients while complying with ever more stringent international rules is “an increasingly difficult needle to thread”, says Andrew Morriss of the University of Alabama. No wonder the territories are trying to diversify away from finance, which in the BVI’s case accounts for 60% of government revenues. Anguilla is looking at fishing, Cayman toying with medical tourism. But hip replacements will not be as lucrative as hedge funds.

Britain is gently encouraging these efforts, while recognising that, as an official puts it, “There isn’t a long list of options.” It is trying to improve governance, too. After it threatened to veto a Cayman port project which had been awarded to a Chinese company without an open tender, bidding was restarted. Britain retains the power to block laws, suspend constitutions and dismiss governments. The Turks and Caicos constitution has been suspended twice, most recently in 2009 after an inquiry found “a high probability of systemic corruption”. This led to three years of direct rule by the British-appointed governor.

Putting your man in charge is one thing, putting money on the table quite another. To avoid it, Britain will have to play its hand carefully. It has to be seen to join the likes of France and Germany in taking a firm stand against offshore financial shenanigans, especially now that the prime minister, David Cameron, has made tax and transparency themes of this year’s G8 agenda. On May 20th he told Britain’s dependencies to “get [their] houses in order”. But if the havens lose their cash cow, they might have to go cap-in-hand to London. “Taxpayers Bail Out Tax Havens” is the last headline Mr Cameron wants to see.

The Caribbean: Treasure islands in trouble, Economist, May25, 2013, at 35

Mining Companies Love Least Developed Countries

An expert panel led by Kofi Annan, a former UN secretary-general, looked at five deals struck between 2010 and 2012, and compared the sums for which government-owned mines were sold with independent assessments of their value. It found a gap of $1.36 billion, double the state’s annual budget for health and education. And these deals are just a small subset of all the bargains struck, says the report, which Mr Annan presented in Cape Town, South Africa, on May 10th.

The report highlights some puzzling details. For instance ENRC, a London-listed Kazakh mining firm, waived its rights to buy out a stake in a mining enterprise owned by Gécamines, Congo’s state miner, only to acquire it for $75m from a company owned by Dan Gertler, an Israeli businessman, which had paid $15m for it just months earlier. Mr Gertler is close to Joseph Kabila, Congo’s president. ENRC, which is being investigated by the Serious Fraud Office in Britain, was Congo’s third-largest copper producer last year. Both ENRC and Mr Gertler deny wrongdoing.

African countries often fail to collect reasonable taxes on mining, says Mr Annan’s panel. For example, Zambia’s copper exports were worth $10 billion in 2011, but its tax receipts from mining were a meagre $240m. The widespread use by mining firms of offshore investment vehicles as conduits for profits creates scope for tax avoidance. Their use is not restricted to rich-world companies. Much of the oil that Angola ships to China is via a company called the China International Fund. Its trading prices are not made public…

Congo’s prime minister, Matata Ponyo Mapon, promises change. In January 2013… Mr Ponyo said he would rein in the state-owned mining companies and increase transparency in the industry. “We must avoid situations where we’re not publishing our mining contracts, where our state assets are undervalued, and where the government doesn’t know what its state mining companies are doing,” he told miners and officials at a conference in January….

Last year miners in Congo, which include Freeport-McMoRan and Glencore Xstrata, shipped $6.7 billion-worth of copper and cobalt from the country.

Business in the Democratic Republic of Congo: Murky minerals, Economist, May 18, 2013, at 74

 

Tax Havens: Micro-States in Europe

Armed with a cache of more than 2m documents, leaked from two offshore service providers, a group of investigative journalists has spent the past week publishing articles that lift the lid on thousands of companies and trusts set up in the British Virgin Islands and Cook Islands. The vast client list ranges from Asian politicians to Canadian lawyers—and no fewer than 4,000 Americans. For an industry that peddles secrecy and likes to operate in the shadows it is all rather embarrassing.

Opinions vary on the impact of the leaks. Tax campaigners have cheered it as a “game changer”. Offshore operators counter that most of the activity uncovered is legal. So what if President François Hollande’s former campaign treasurer has a Cayman Islands company? So do thousands of banks and hedge funds. Nevertheless, the affair will add to international scrutiny of tax havens. The pressure on them has grown as governments scramble to plug fiscal holes and push for the systematic exchange of tax information across borders. Germany’s finance minister welcomed the leak, hopeful that it would provide leverage to force more co-operation from “those who have been more reticent” to rein in the havens.

Faced with an end to the days of easy money, offshore jurisdictions are being forced to rethink their strategies. One of the more proactive has been Liechtenstein, nestled between Switzerland and Austria. The principality has long been popular with European tax dodgers, but growth accelerated when Swiss banks hawked Liechtenstein foundations to clients worldwide. This lucrative niche was damaged in 2008 when the former head of Germany’s postal service and many others were caught hiding money in the principality.

Under pressure from Germany and America, Liechtenstein buckled, agreeing to dilute bank secrecy and to exchange tax information. It has since signed many bilateral tax agreements and clamped down on money-laundering. The local financial industry has paid a high price for this. Liechtenstein banks’ client assets declined by almost 30% in the five years to 2011, to SFr110 billion ($118 billion)…

Other offshore centres must also attempt to square this circle. Next may be Luxembourg, a leader in offshore banking and tax avoidance. Bowing to greatly intensified pressure from its neighbours since the Cyprus debacle, the Grand Duchy has dropped its long-held opposition to swapping information about non-resident depositors with other EU countries. Jean-Claude Juncker, the prime minister, said the policy shift was about “following a global movement”, not caving in to German demands. Whether automatic information exchange can be introduced “without great damage”, as he confidently declared, remains to be seen.

Offshore finance: Leaky devils, Economist, April 13, 2013, at 71

The Essence of Imperialism: Australia in the Pacific

Nor is it the first time Vanuatu has clashed with the Australian Federal Police (AFP). In 2004 its government closed down the AFP offices in the capital, Port Vila, and expelled officers, after allegations that they were spying and interfering with domestic politics. The AFP’s main concerns in Vanuatu have been over the country marketing itself vigorously as an international tax haven, and over the risk posed by the volatile Vanuatu Mobile Force, the paramilitary wing of the local police force. Protecting Australia’s national interests under the guise of so-called capacity-building can quickly lead to tensions.

The AFP’s activities in Vanuatu have been part of a broader expansion over the past decade of Australian policing across the Pacific. Peacekeeping missions to Timor-Leste since 1999 and to the Solomon Islands, beginning in 2003, boosted police numbers. In the past decade, the AFP has trebled in size and increased its budget fivefold. The AFP commissioner now has an influential role on the Australian cabinet’s national-security committee. In Australia most domestic policing is carried out by state police forces, leaving the federal force largely free, outside aboriginal communities in the Northern Territory, to focus on international deployments.

Their efforts have often led to accusations of heavy-handedness. In 2005 a mission to Papua New Guinea was abandoned after that country’s Supreme Court ruled that legal immunities granted to AFP officers were unconstitutional. In 2006 the Solomon Islands’ police chief, Shane Castles, an Australian, was sacked and declared an “undesirable immigrant” after a raid by his police officers on the office of the prime minister. That raid was connected with the AFP’s long-standing pursuit of the Solomon Islands’ then attorney-general, Julian Moti, on charges of sex with an underage girl. Mr Moti was deported to Australia in 2007, arrested and brought before the courts. In December 2011 the High Court threw the case out, finding that Australian officials had colluded in Mr Moti’s illegal deportation.

The Australian Federal Police in the Pacific: Booting out big brother, Economist, May 19, 2012, at 49