Invade Cheaters' Island

The tax writer David Cay Johnston has written two fine articles: one, in Mother Jones Magazine (hat tip Richard Murphy), and another in the tax journal Tax Notes International (hat tip TaxProf.) They are about the Cayman Islands.

Johnston is a high-level U.S. campaigning tax writer with excellent books to his name, who has made a career out of highlighting extraordinary distortions in the U.S. tax system.

Both articles are worth reading, though this blog focuses on his Tax Notes article, entitled (jokingly, we presume) "Invade the Caymans!" This is the second time in two days that we've seen people proposing invading a tax haven - the Comedian Mark Thomas mentions the possibilty of invading Jersey (and earlier, the FT's Willem Buiter in an excellent earlier article entitled "Blockade the Tax Havens" suggested, with tongue similarly in cheek, annexing Andorra, Monaco and Liechtenstein.)

Johnston starts off:

"according to some calculations . . . the bailouts equal all of the individual income taxes collected during the George W. Bush years, plus the last year of the Clinton administration . . . . The wild spending of the Bush administration means that the equivalent of all the individual income taxes paid from January through sometime in May go just to pay interest on the national debt."

He adds this detail:

"just as the Bush tax cuts were heavily weighted to benefit the richest among us, so is the Bush administration’s bailout a huge redistribution scheme that transfers wealth upward. Indeed, a report by two IMF economists on how governments handled 42 banking crises in the past 37 years found that bank bailouts generally result in a redistribution of wealth upward."

And this brings him to his next big point:

"Now America needs to raise a lot of tax revenue to pay for the bailouts. And the best place to start raising that money is in the Cayman Islands, a British protectorate that could properly and accurately be called the Cheaters Islands . . .
And because all public policy must be branded these days, let’s call this Operation CHEAT (Conquering Havens Evading American Taxes)."

We like it! But he goes on to note something that tax havens always seek to do: obfuscate

"We don’t know how much tax evasion the Cayman government is facilitating, but we do know that it boasts that it is doing nothing wrong. When the Government Accountability Office issued a gingerly worded report last July 24, the Caymans publicity apparatus was eager to obscure what the report said. (For the GAO report, see here.)

Caymans publicists said that the GAO report supports ‘‘our position that tax compliance in relation to U.S. persons is an obligation of those persons’’ and even claimed the report showed a ‘‘high degree of transparency and assistance’’ from Caymans authorities in pursuing tax cheats, drug traffickers, terrorists, and other malefactors of hidden wealth. The GAO report does not use the words ‘‘high degree.’’ Read closely, it says that when American authorities have already identified a suspect and are in pursuit, then they get cooperation."

This is just as we argued in a Financial Times article last year:

"The OECD’s approach to tax transparency requires information to be exchanged with other jurisdictions only on request. In other words, you must know what you are looking for before you request it. This is shockingly inadequate. We need the automatic exchange of tax information between jurisdictions and all developing countries must be included."

Johnston goes on, in exact agreement:

"That (information exchange on request) is an utterly unreasonable standard of cooperation in light of what the Cayman Islands government went on to say in its statement:

'As the report recognizes . . . the U.S. Congress and those who are responsible for drafting and enforcing U.S. tax laws and regulations necessarily must play the principal role in enhancing compliance with those laws and regulations by U.S. taxpayers.'

In plain English, that means tax cheats are free to use the Caymans, and abuse the United States, unless they are identified one by one by the American government."

There is another important point worth making at this juncture. By general consensus there has been no co-operation on tax matters between judiciaries in different nation states, encapsulated in what has become known as the "Revenue Rule" - effectively prohibiting enforcement of foreign tax laws in domestic courts. An important recent ruling in this respect is known as the Pasquantino ruling. Eva Joly, the tenacious French investigating magistrate who cracked open the giant Elf Affair, Europe's biggest corruption investigation since before the Second World War, poured particular opprobrium on Britain, in this respect, talking in a memoir about

"The City of London,that state within a state which has never transmitted even the smallest piece of usable evidence to a foreign magistrate."

Cayman is certainly one of the places that hides behind this conventional position - that nation states are under no obligation to help other nation states to collect their taxes. This idea, in a world of globalised capital markets -- that nations do not help others -- is an abominable one - it is simply a charter for the cheater islands to harbour criminal activity – and it must be overturned as a matter of priority.

Back to Johnston's piece. He notes, then, that the Cayman government spends less than 1 percent of the $499 million total budget on financial intelligence matters (TJN: we note from the 2008/09 budget that the financial intelligence services will receive just $946,000! Enough said - though we hope to bring you more stories (spicy stories!) on Cayman very soon.

Next, Johnston outlines what the United States could do. We'll reproduce these in full, for some of them are quite entertaining, if occasionally a little flippant.

1. Congress should pass a new Taxpayer Abuse Act, making it easier to convict serious tax cheats by making the signing of multiple tax returns with more than $50,000 of tax not reported a felony on its face. This law should be designed to minimize the Snipes defense, in which jurors bought the argument that the advisers alone were truly culpable. This law should also bar any connection between American and Caymans businesses without explicit government permission, modeling this action on the one taken more than four decades ago against Cuba. That would mean not just no banking and business deals, but no tourists, either.
   
   
2. Congress should fund a law enforcement program based on specific deterrence, not general deterrence, under which every major tax cheat will be prosecuted. Think of it as part of a stimulus package, creating jobs for lawyers, auditors, economists, computer technicians, and guards.
   
   
3. This law should contain a provision that any taxpayer that the IRS believes shorted the government $50,000 or more for two or more years using any offshore arrangement will have his or her name, tax returns, and government calculation of his or her income and tax obligations made public.
   
   
4. Fourth, each taxpayer who comes forward within 30 days and acknowledges that he did not pay his taxes in full should be exempt from disclosure and from prosecution provided that, within six months, a new set of tax returns reflecting the sums actually owed is submitted and payment is made or arranged. This is the carrot—fess up and you can go on with your secret intact; lie and deny, and you will be prosecuted.
   
   
5. Demand that the Caymans government make available all records on American-related entities and individuals, which is apparently half of its business, according to public statements by Maples and Calder.
   
   
6. If the Cayman government refuses, send in the Marines — and a legion of computer technicians, auditors, and clerks. The Caymans has no military, only about 300 cops, so marching up the tourist-laden beaches should be a breeze. The U.S. Joint Forces Command says it has never conducted a war game on invading the Caymans, though a decade ago a class at the Army War College once did a class exercise on invading St. Kitts to oust imagined narco-traffickers. (A Caymans spokesman, Ted Bravakis, notes that the Caymans are supposed to get any needed military protection from the British.) Once the Caymans records are in hand, whether by obtained request or invasion, the president should announce that Bermuda is next. Long before we get to Switzerland, the point should be well made that America has zero tolerance for offshore tax cheats. But if that doesn’t happen, perhaps we can count on the French to help with an invasion of Lichtenstein.
   

The tax justice agenda - it's spreading!