Time to black-list the tax haven whitewash

The international edition of the Financial Times has a comment by TJN's Nick Shaxson and John Christensen evaluating how far the G-20 countries have progressed towards their stated goal of tackling banking secrecy and tax havens. The title says it all: "Time to black-list the tax haven whitewash."

In April 2009 British prime minister Gordon Brown, the then G-20 president, issued the following commitment:

"to take action against non-cooperative jurisdictions, including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over. We note that the OECD has today published a list of countries assessed by the Global Forum against the international standard for exchange of tax information"

By the autumn of that year French president Nicolas Sarkozy, current G-20 president, stated "there are no tax havens any more."

Bold stuff, but is there substance behind these claims?

In the spirit of sending the fox to guard the hen-house, the G-20 commissioned the OECD (whose members include such prominent secrecy jurisdictions as the United States, Luxembourg, Switzerland, United Kingdom and its dependencies and overseas territories, the Netherlands, and Austria) to lead the attack.

The OECD promptly published its black/grey/white list, which ran into trouble within a matter of days when the entirety of the black-listed tax havens were shifted to the grey list on no more than a commitment to cooperation. Many of the world's major secrecy jurisdictions were placed directly on the white list on the basis that they has already negotiated tax information exchange agreements (TIEAs) with at least 12 other countries. On this rather weak and arbitrary basis, the OECD signalled to the rest of the world that prominent secrecy jurisdictions like the British Crown Dependencies (Guernsey, the Isle of Man and Jersey) were all squeaky clean.

It got worse. During the course of 2009 and 2010, many of the grey-listed jurisdictions scurried round the globe to negotiate the 12 TIEAs required to graduate to the white list. The Nordic country bloc proved particularly useful in this respect since a single agreement with the bloc counted as seven separate agreements, including Faroe, Greenland and Iceland.

To make matters even more farcical, grey-listed jurisdictions simply signed TIEAs among themselves. By the end of 2010 a mere nine secrecy jurisdictions, accounting for less than 2 percent of global trade in offshore financial services, remained on the OECD grey-list. On paper Sarkozy's wild boast seemed to have come to fruition. Or maybe not.

But once a secrecy jurisdictions has signed up to 12 TIEAs, are these agreements all they're cracked up to be? Shaxson and Christensen are sceptical. As they comment in the FT: "A country cannot use a TIEA to ask for general information about its citizen's assets and income. Instead it must already know (and specify) who the tax cheat is, and what they are suspected of, to force the haven to act. This is better than nothing - but it does little to deter tax evaders."

And therein lies the problem. The G-20 should have aimed at creating an effective deterrent to offshore tax evasion. Instead it peddled backwards under pressure from OECD members determined to protect their lucrative offshore banking industries.

Shaxson and Christensen describe this failure of political will as indefensible. They propose a significant raising of the bar to entry to the OECD white list to at least 60 TIEAs. But they go further by calling for the OECD to regularly publish information on how much data is actually being exchanged (something which OECD nations seem curiously reluctant to do). Better still, they argue, the OECD should shift from its feeble "on request" exchange model to the far more effective "automatic" exchange system adopted by the European Union and now used as the model for the US FATCA.

Raising the bar further still, they also call for the identities of those who control or benefit from companies and trusts to be on public record, and for tax evasion to be made a predicate crime for money laundering purposes.

President Sarkozy will be convening a summit of G-20 leaders in Cannes this coming November. He needs urgently to restore public confidence in the financial system, which remains fragile and prone to crisis. Tackling the tax havens is a crucial part of this process. At this stage his claim that "there are no tax havens any more" is without substance. He would be well advised to raise the bar by several orders of magnitude.

You can read the FT article here.