This year, on 25 March, the Internal Revenue Service, the US equivalent of the Inland Revenue, announced it believed one to two million citizens were evading taxes by using offshore credit card accounts. The IRS had obliged MasterCard to supply records of 1.7 million transactions of US residents with accounts in Antigua and Barbuda, the Bahamas and the Caymans.
IRS agents estimated there might be around 100,000 cases of potential evasion but were amazed by the widespread use of offshore accounts.
Embolded by their success, the Justice Department went to court in San Francisco to compel Visa to hand over their records. In Florida, American Express agreed to follow suit.
Self-employed people from every walk of life were sending cash to the Caribbean and using credit cards on these accounts to pay their bills.
Prominent tax lawyers immediately condemned the IRS for overstepping its brief and saying that it had wildly overestimated the extent of the use of offshore accounts.
Whatever the outcome of the IRS investigation – and the huge numbers of evasion cases which may follow – the statement illustrates an aspect of the future for tax havens.
Recently, the attractions of offshore centres were simple. They offered anonymity, little or no local taxes and safe management of funds. But for all the plus points there were negatives. Many offshore centres were – and some still are – used to channel the proceeds of crime.
In the late 1990s, a series of international initiatives were launched to reform tax havens and stop their use as centres for the transmission of illegal funds. Top of the list is the Organisation for Economic Co-operation and Development’s (OECD) harmful tax practices initiative.
The programme was launched in 1998 with the aim of creating a level playing field on tax competition. In 2000, OECD published its list of tax havens, identifying those who would not co-operate with it.
A blacklist was published in 2001. Since then, jurisdictions which saw the way the wind was blowing have signed up for the scheme. The OECD set 28 February as the deadline for compliance. Failure to do so would mean inclusion on a final blacklist which would be considered for sanctions from April 2003.
Early in 2002, the OECD warned the Cook Islands, the Marshall Islands, Nauru, Niue, Samoa and Vanuatu that they were first in the firing line.
In the end, the Cook Islands, begrudgingly, offered a half-hearted commitment which was accepted with relief in OECD headquarters in Paris.
Vanuatu, Nauru, Samoa and the Marshall Islands refused to co-operate.
After a series contradictory statements Niue decided to enter the scheme.
By the end of March 11 centres remained on the list, although the OECD’s review team may accept some by before publication of the latest list in mid-April.
Most telling has been the acceptance of the main players – the Isle of Man, Jersey, Guernsey, the Caymans, the Bahamas and the British Virgin Islands – that to have any future they must play ball. ‘The role of a modern financial centre, whether it is offshore on onshore, is profoundly different from even a few years ago. Centres which will survive are well regulated and reliable, offering a range of high quality services,’ says Phil Austin, chief executive of Jersey Finance.
Traditionally Jersey was an individual investor market. Now it is targeting high net worth and very high worth individuals plus a range of corporate services supplied by the best lawyers and corporate finance specialists.
One Channel Islands regulator, who did not wish to be named, says: ‘It is all far more political now. It is not solely a matter of business. We are expected to play a part in the co-operative approach. We are fully behind the work on financial crime but are a little more sceptical about other factors. We object to having one hand tied behind our back while our strongest competitors continue to operate regimes of secrecy and anonymity.’
The Isle of Man has launched a bid for the pensions market for international companies. The Tynwald, the Manx parliament, completely revamped its pensions rules at the beginning of 2002. None of the other offshore centres have pensions legislation like the Isle of Man. Mike Lightfoot, marketing manager at the Insurance and Pensions Authority, says: ‘We want to be among the premier league of offshore centres. There is commitment among politicians, financial services providers and regulators to ensure we achieve this.’
The better managed centres remain sceptical about the long-term success of the harmful tax practices initiative. They are concerned that Switzerland and Luxembourg – both OECD members – refuse to accept the premise of greater banking transparency.
In December, Pascal Couchepin, Swiss economics minister, described his country’s banking secrecy policy as a fundamental human right. His opposite number in Italy described Switzerland as a direct ally of criminals who seek harbour illicit funds.
Precisely because of this secrecy Switzerland and Luxembourg remain formidable competitors for the offshore tax havens. The Isle of Man introduced the concept of level playing field into its letter of acceptance to the OECD. This has now been specifically mentioned by every tax haven.
Lynette Eastmond, director of international business companies in Barbados, says: ‘We are happy to co-operate with the OECD but only if its members abide by the same rules.’
Running alongside this project is the Financial Action Task Force. Set up by the OECD, its role is to promote co-ordinated action on money laundering. FATF has its own blacklist and international aid agencies have warned countries that future grants and loans will be suspended until they are removed from the FATF blacklist.
Co-operating jurisdictions are obliged to establish effective mechanisms for locating financial crime including monitoring agencies and exchange of information. Proceeds of crime laws are being passed throughout the world and the first prosecutions taking place.
Meanwhile, September 11 has given added impetus and combating terrorist crime has become a priority for the US.
Treasury Secretary Paul O’Neill has signed, to howls of anguish from sections of American society, information exchange agreements with Antigua and Barbuda, the Caymans and the Bahamas. The Treasury is negotiating with Panama and the British Virgin Islands, where local industry leaders are concerned about the effect of information exchange on their profits.
Secretary O’Neill has said he intends to conclude agreements with centres that control 50% of offshore funds by July.
The large economic powers through structures are determined to make offshore centres come within their idea of a regulated market. Over the last year jurisdictions have been introducing new regulations at a furious rate. In January both Monserrat and the British Virgin Islands placed regulation in the hands of an independent body. Centres as diverse as Malta and Liechtenstein have established or strengthened their financial investigations machinery.
The Gulf states, the Philippines and Hungary have introduced new anti-money laundering laws, and the Seychelles has announced legislation to modernise its entire financial centre.
In the future, sector analysts argue there will be three tiers of offshore centre. In the higher league will be well regulated, financial centres offering highly targeted and well managed services. Jersey is presently being used as the model for many of these. A second tier will be compliant jurisdictions which have strong niche markets. The last will be the pariah states which ignore the larger community.
Although some centres will disappear, they will do so because of market forces and their capacity to compete on an equal footing.
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