Money laundering, terrorist financing and discriminatory taxation no longer top Europe’s regulatory agenda. ‘Transparency’ is the new name of the game, says Christopher Owen
The year 2008 will remain indelibly etched on the collective psyche of the offshore banking sector. Switzerland and Liechtenstein, the heights of European banking secrecy, were assailed by tax investigations of unprecedented severity while the near collapse of the global financial system injected renewed vigour into international efforts to pierce the offshore veil. Probes into Bernie Madoff’s $50bn fraud look set to pile further opprobrium on opaque investment structures.
The German authorities chose St Valentine’s Day 2008 to call on Klaus Zumwinkel, chief executive of Deutsche Post, seeking evidence that he had transferred millions of euros to a bank in Liechtenstein to evade German taxation. It was to be the first of many such raids across Germany.
The German government said that it had paid an informant €4.2m for a CD containing bank data from LGT Group, the biggest bank in the Alpine tax haven of Liechtenstein. It also said the BND, Germany’s intelligence service, had been involved. LGT, owned by the principality’s ruling family, admitted that the data comprised bank information on 1,400 clients. It had been stolen by a former employee who had “abused his position of trust to compile information about clients”.
The highest proportion of clients, about 600, were resident in Germany but information had also been sold to the tax authorities of the US, the UK, Australia, Canada and France. The German government said it was willing to share relevant data on non-German individuals or entities with other governments: tax authorities in Ireland, Norway, Sweden, Finland, the Netherlands, Italy, Greece, Spain, and the Czech Republic all indicated their interest.
Liechtenstein’s acting head of state Prince Alois, accused Germany of using “draconian methods that defy the rule of law” and failing to respect his country’s sovereignty. “Germany has clearly failed to understand how one behaves towards a friendly state,” he said. But as the investigation snowballed, such a stance looked increasingly untenable.
Liechtenstein has subsequently concluded a Tax Information Exchange Agreement (TIEA) with the US and also indicated its willingness to cooperate with individual EU countries. Reigning Prince Hans-Adam II noted that the process of rethinking should have begun earlier. “I do believe that, with respect to our financial centre, Liechtenstein has always waited until no other option was available, until the pressure from abroad became so great that we had to implement reforms.”
The second seismic case involved Switzerland’s largest bank, UBS. An investigation by the US Internal Revenue Service (IRS) into Igor Olenicoff, a Russian-born property developer in California who pleaded guilty to tax fraud in December 2007, had also brought the name of Bradley Birkenfeld, his private banker, to the attention of the authorities. Birkenfeld, a US citizen, was employed as a director in UBS’s private banking unit from 2001 to 2005. In May 2008, he flew to Boston, from Switzerland, for a school reunion. Arrested as he stepped off the plane, Birkenfeld was later charged with conspiring to defraud the US by creating bogus trusts and corporations to hide some €150m in assets. Birkenfeld, who had been cooperating with US investigators for over a year from Switzerland, entered into a formal plea agreement to reveal what he knew about UBS’s offshore private banking business.
In 2001 UBS had committed, under the US’s new Qualified Intermediary (QI) regime, to provide US tax officials with information on any customers receiving taxable US income. Instead, according to Birkenfeld, it assisted wealthy US clients to conceal their ownership of assets held offshore by creating sham entities and then filing IRS forms falsely claiming that the entities were the owners of the accounts. UBS had approximately €15bn of assets under management in ‘undeclared’ accounts for US taxpayers.
Battle lines were drawn on 1 July 2008 when a federal judge in Miami approved an IRS summons obliging UBS to turn over records on 19,000 US citizens thought to have undisclosed offshore accounts. This was a direct challenge to Swiss bank secrecy. IRS commissioner Doug Shulman said in a statement: “People should take notice that the secrecy surrounding these accounts is rapidly fading.”
Later that month, Mark Branson, UBS’s chief financial officer of global wealth management and business banking, apologised to the US Senate Permanent Subcommittee on Investigations for “any compliance failures that may have occurred” and said UBS would no longer provide offshore banking services to US citizens.
But, on 6 November, the US upped the ante. A grand jury in Florida indicted Raoul Weil, chairman of global wealth management at UBS, on one charge of conspiring to help US citizens hide assets from the IRS to maintain a “profitable’” business for the Swiss bank. Weil, who denies being aware of, engaged in or tolerating any illegal conduct in the operation of UBS’s US cross-border business, was declared a fugitive from US justice on 13 January this year.
UBS currently finds itself torn between US demands for disclosure and the Swiss banking code. Already the ramifications have led to regulatory action: last October the IRS issued new rules, effective from 2010, to tighten the QI regime that allows participating foreign banks to withhold tax overseas on behalf of US clients without disclosing their names to the IRS. Banks will be required to determine whether US investors are behind the foreign accounts they set up and to alert the IRS to any potential fraud they detect, whether through their own internal controls, complaints from employees or investigations by regulators.
Likewise, the Liechtenstein case prompted the EU to strengthen its Savings Tax Directive. Last November, the European Commission adopted a proposal to close existing loopholes and expand the Directive to cover the taxation of interest payments channelled through intermediate structures and to income derived from investments in certain financial and insurance products.
At the same time, the EU is attempting to extend its geographic reach. The Directive currently applies in 42 jurisdictions: the 27 EU member states, five non-EU ‘third countries’ – Switzerland, Liechtenstein, Monaco, Andorra and San Marino – and 10 dependent and associated non-EU territories – Anguilla, Aruba, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, Montserrat, the Netherlands Antilles and the Turks & Caicos Islands. The European Commission started discussions on applying the Directive with Hong Kong, Singapore and Macao last year. Formal negotiations are expected to take place with Norway, at its request, while Bermuda and Iceland have shown interest in participating. EU tax commissioner Lászlo Kovács said the measures “will ensure a level playing field for financial intermediaries throughout the world.”
These moves are taking place against the backdrop of an ongoing supranational initiative, led by the OECD, to bringing greater transparency to financial centres. In September, the OECD’s Global Forum on Taxation announced that although advances had been achieved, progress on exchange of information on tax issues had been more limited. It said significant restrictions on access to bank information for tax purposes remained in three OECD countries – Austria, Luxembourg and Switzerland – and in a number of OFCs, notably Liechtenstein, Panama and Singapore.
Crucially, after the ebb tide of the Bush administration, the current is now running back in the OECD’s favour. At the emergency summit to address the economic crisis in Washington DC last November, leaders from 21 nations committed “to protect the integrity of the world’s financial markets by… preventing fraudulent activities and abuse, and protecting against illicit finance risks arising from non-cooperative jurisdictions.” At a follow-up meeting in Paris in December, EU finance ministers agreed to collect case studies on non-EU countries and jurisdictions that are not cooperating in combating illegal tax activity, and give them to the Financial Stability Forum, a body set up to enhance global oversight of financial markets and address loopholes.
The European Commission also agreed to present an action plan for anti-tax haven policy in early 2009. “Non-cooperation mostly refers to areas of taxation,” said EU internal market commissioner Charlie McCreevy. “Primarily the focus is in Europe but there are tax havens all over the globe. There is also a lack of cooperation in regulatory matters.”
Nor can OFCs expect any respite from across the Atlantic. US President Barack Obama made the fight against tax havens a key part of his campaign and as a Senator, in February 2007, he co-sponsored the Stop Tax Haven Abuse Act (STHAA), which was introduced in both houses of Congress but not enacted.
The main plank of the STHAA is a provision that would force taxpayers to prove that they do not have control over offshore entities with which they contract. US individuals will be presumed to control any entity – including trusts, corporations, and partnerships – created or domiciled in an offshore jurisdiction if the US person directly or indirectly formed, received assets from or is a beneficiary of that entity. Obama’s aides have indicated that similar legislation will be considered, possibly in the early months of 2009.
There can be no doubt that 2008 was a tumultuous year for the offshore sector and the reverberations will continue to be felt long into the future.
Banking secrecy is facing an assault of unprecedented ferocity and all forms of financial engineering that add opaqueness look set to be targeted. If offshore centres are to survive the backlash, they will have to demonstrate that they add real value to the global economy.
The Future of Tax Havens
Tax havens, or offshore financial centres as they prefer to be known, have long been the bête noire for governments of industrialised nations, who claim they offer illegitimate tax competition and a refuge for tax evaders. And now that governments have sunk trillions of euros into shoring up the global financial system, they will not tolerate money leaking away into opaque jurisdictions.
The extent to which OFCs have become integral to world capital markets and investment flows can be seen from even a casual glance at the City of London‘s Fourth Global Financial Centres Index, published last September.
According to the Index, London and New York lead the field and continue to be the only two truly global financial centres; but Singapore, Hong Kong, Zurich, and Geneva occupy the next four slots.
And other OFCs punch way above their weight — Dublin (13), Jersey (14), Luxembourg (15) Guernsey (16), Isle of Man (19), Cayman Islands (21), Dubai (23), Gibraltar (25), British Virgin Islands (29), Bahamas (35), Monaco (37), Bahrain (43) and Qatar (45). Put into perspective, Beijing is at 47 and Mumbai at 49.
These offshore and niche centres, says the report, continue to grow in importance and are typically low tax environments that specialise in private banking, asset management and wealth management. It notes that the tax environment is now being mentioned as a crucial area of competitiveness.
Speed of decision-making and a coherent regulatory regime are also increasingly seen as important in a centre’s competitiveness; people and infrastructure are also vital.
Even the OECD, which has spearheaded the international drive to stem the flow of capital offshore and bring OFCs into line with regulatory norms, has increasingly recognised that genuine tax competition among sovereign nations should not itself be thwarted, provided that it is accompanied by real transparency and performed on a level playing field.
Last October, it announced the signing of 16 new bilateral Tax Information Exchange Agreements (TIEAs) between OECD members and the British Virgin Islands, Guernsey and Jersey. The BVI signed TIEAs with Australia and the UK; Guernsey and Jersey signed with the Nordic economies — Denmark, the Faroe Islands, Finland, Greenland, Iceland, Norway and Sweden.
These agreements brought to 44 the number of TIEAs since 2000. The Isle of Man has 11, Jersey 10, Guernsey nine, the Netherlands Antilles four, and the BVI three. Bermuda, with three, signed its first bilateral agreement with the US in 1986. Antigua has two, while Aruba, The Bahamas and the Cayman Islands all signed one apiece.
The latest agreements, says the OECD, are a significant extension of information exchange networks in place in these jurisdictions, and show their commitment to implementing standards of transparency and exchange of information regarding tax matters.
The OECD says progress is also being made in other financial centres: Cyprus and Malta have removed the last impediments to a full exchange of information; Belgium has negotiated its first tax treaty with full exchange of information; Bahrain and the United Arab Emirates are implementing the OECD standards; and the government of Hong Kong (China) recently launched a review of its policy on exchange of information.
Now that the market in offshore securitisations and fund registrations has shrunk and the rich flows into bank deposits and financial products can no longer be taken for granted, there must be serious question marks over the futures of OFCs that cannot, or will not, comply. Using them will simply raise too many red flags or attract punitive sanctions.
Andrew Corlett, managing director of Isle of Man law firm Cains, says: “OFCs must come within the circle. Their regulatory systems must stand scrutiny and their tax systems must be comprehensible, not predatory. Information should be available through formal gateways such as tax treaties or tax information exchange agreements.
“If jurisdictions choose to stand outside the ring then they can expect to be targeted. OFCs must be able to demonstrate that they are oiling the wheels of international commerce, not simply siphoning off money.”
ไม่มีความคิดเห็น:
แสดงความคิดเห็น