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Global Resistance to Tax Havens Grows

Tax havens cause hundreds of millions of euros in annual damage to national economies around the world and they create an uncontrollable parallel economy. The recent Offshore Leaks investigative reports are helping to fuel efforts in Europe and the US to have them eliminated.

Monday, 4/8/2013   01:48 PM

What do a now-deceased German playboy and the daughter of the former Philippine dictator have in common? What connects a Russian oligarch and the former campaign manager of the French president?

Gunter Sachs and Maria Imelda Marcos Manotoc, Mikhail Fridman and Jean-Jacques Augier have all parked assets in countries that expect little in taxes and guarantee absolute confidentiality. And they are not alone. More than 130,000 people do exactly the same thing, and those are only the ones whose names appear in a data set called "Offshore Leaks," which was analyzed by a group of international media organizations.

But the real scandal is much bigger than that, namely that no one knows how much money is on deposit in anonymous bank accounts in countries that are euphemistically referred to as tax havens. Estimates by the non-governmental organization Tax Justice Network put the figure at about €16 to 25 trillion ($21 to 33 trillion). In this manner, the native countries of these individuals and companies are deprived of hundreds of millions in taxes, sometimes legally but often illegally.

The billions deposited in offshore accounts come from the United States and the rest of North America, and recently from emerging economies and the Third World, as well. Many Russian oligarchs manage their companies through offshore firms, while wealthy Southern Europeans use offshore accounts to protect their assets from a collapse of the euro -- and from the taxman.

But it isn't only tax fugitives who use the discreet services offered by these countries.

A Global Shadow Realm

Drugs and other criminal funds are hidden and laundered there, shady deals are arranged, and hedge funds whose speculative activities could shake the financial system once again use them as a base.

As a result, a global shadow realm has developed in the last few decades, with bases on all continents, a parallel economy that escapes all democratic scrutiny, and from which many profit: banks that provide assistance to tax refugees, as well as attorneys and companies that devise sophisticated systems to obfuscate the path the money takes.

The number of tax havens has gone from a handful only a few decades ago to 60, 70 or even more today. Years ago the British Virgin Islands (BVI), Belize, the Cayman Islands, Cyprus and the Marshall Islands were, in some cases, dirt-poor -- until they decided to charge no or almost no taxes on money brought into the country, as well as guarantee the owners of the asset anonymity through company and foundation structures. In return, they collected fees from the offshore companies.

The British Virgin Islands, for example, transformed itself into one of the most affluent parts of the world in less than a generation, after the group of islands adopted laws to guarantee secrecy in financial transactions in 1994. Today the BVI, which is formally part of the United Kingdom and has a population of about 31,000, is home to almost half a million foundations and letterbox companies.

Trust companies and law firms worldwide help create such trusts and offshore companies. They include firms like Portcullis Trustnet in the Cook Islands and Commonwealth Trust Ltd. in the BVI, the companies whose 2.5 million documents are now making headlines. The purpose of their business is to establish anonymous trusts and letterbox companies for their generally affluent clients. But instead of the actual owners, the tax evaders use straw men as the offshore companies' supposed shareholders and managing directors. A deed of trust between the customer and the trustee ensures that the funds are managed in the customer's interest.

For the last two decades, the European Union and the Organization for Economic Cooperation and Development (OECD), the club of industrialized nations, have insisted again and again that they intend to dry out these fiscal swamps. But so far the differing national interests of the member states have largely stood in the way of effective international agreements. In the fight for international capital and jobs, there are diverging opinions on where legitimate tax competition ends and unfair competition begins.

'The Kind of Tax Scam We Need to End'

That could now change, and Offshore Leaks seems to have come at the right time. The determination to address abuses has grown considerably, at least in the United States and Europe.

In his first election campaign, US President Barack Obama called for clamping down on tax havens. In one speech, he gave a detailed description of the Ugland House in the Cayman Islands, where more than 12,000 companies are registered, saying, "either this is the largest building in the world or the largest tax scam in the world." He added: "And I think the American people know which it is. It's the kind of tax scam that we need to end."

The debt-ridden countries of the Western world can no longer afford to be deprived of such massive revenues. In addition, the public is sharply critical of the fact that some wealthy people can escape their responsibility for their countries through tax flight, even as the gap between rich and poor widens. Taxpayers also have trouble understanding why the euro countries are using their money to rescue banks, while the banks are simultaneously helping the wealthy shelter their money from the tax authorities.

Almost all major German banks have branches and subsidiaries in a number of tax shelters. According to its annual report, Deutsche Bank has 13 subsidiaries in Singapore alone. And according to the Offshore Leaks data, Germany's largest bank has used its Singapore office to establish 300 trust companies and foundations in tax shelters.

Germany's Commerzbank, which received a government bailout, insurance companies like Allianz and state-owned banks like LBBW and HSH Nordbank, also operate subsidiaries in Singapore. HSH, whose survival is still a heated subject of debate among German politicians, also has a presence in exotic places like the Majuro Atoll in the Marshall Islands.

There can be many motives for the German financial sector's fondness of tax havens. But institutions where portfolio management and financial consulting for the wealthy play an important role are especially active in the offshore arena.

Deutsche Bank uses the websites of its offshore subsidiaries to actively recruit wealthy customers. The bank also officially confirms that it offers its affluent customers services like the establishment of trust companies, albeit under the condition, as it notes, that their tax affairs are handled legally.

'Tax Optimization, not Evasion'

In fact, businesses in all industries use tax havens to optimize their tax burdens within the letter of the law. "Of course banks advise their customers on setting up foundations and trust companies. As a rule, this is for purposes of tax optimization, not evasion," says Christoph Kaserer, a professor of finance specializing in banking at the Technical University of Munich. Publicly traded companies that pay more taxes than necessary, he says, must justify their actions to their shareholders and, in extreme cases, make themselves liable to pay damages. Nevertheless, says Kaserer, publicly traded companies in Germany have an average tax burden of 30 percent.

Deutsche Bank also reports an average tax rate of this magnitude. Nevertheless, the company's tax experts were recently called before the financial committee of the German parliament, the Bundestag, to justify their tax policy. The inquiry was triggered by a remark the bank had made in its annual report, stating that it partially attributes its tax rate to an "advantageous geographic distribution of consolidated profits."

The lawmakers suspected that the bank was deliberately shifting profits to tax havens. "When a bank has more than 2,000 subsidiaries, with 500 of them in tax havens, it makes sense that there are tax reasons for that," says Lothar Binding, a member of the center-left Social Democratic Party (SPD) on the Bundestag's Finance Committee.

Critics find the industry's claims that it doesn't support tax evasion hard to believe. Although banks require their customers to certify in writing that they do not engage in tax evasion, there is reason to suspect that they do this primarily to cover their legal bases. "This formally legal pseudo-correctness should no longer be allowed," says Binding.

He wants banks to have to take more responsibility for the questionable business dealings of their customers. "If banks were required to report such transactions in Germany, it would be easier to assess whether customers are truly acting within the law when it comes to taxes," he says. Binding also believes that tougher sanctions are the right approach. "If banks don't have to worry about losing their licenses, it will not be possible to effectively put a stop to questionable transactions."

It is quite possible that Offshore Leaks will now give a boost to such efforts. The data will also have "political consequences," says Kaserer. "If there are reactions directed against countries that have made tax optimization and evasion their business model, it's to be welcomed."

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