Seminar - Tax Havens Against Development

Seminar by CNCD-11.11.11, 11.11.11 Koepel van de Vlaamse Noord-Zuidbeweging, ABVV-FGTB, ACV-CSC, EURODAD et CADTM

« Tax havens against development »

January 30th 2014

31 Rue de Trêves, 1040 Bruxelles

9h30 – Welcome and coffee

10h00-11h00 – Introduction panel

Moderator: Arnaud Zacharie, CNCD-11.11.11

Jean-Pascal Labille, Minister for Dev elopement cooperation :  Tax issues in Belgian development cooperation policy

Jesse Griffiths, Eurodad : Illicit financial flows and financing for development 

Jérémie Cravatte, CADTM : The debt crisis and tax justice

11h00-11h15 Coffee break

11h15 – 13h00 - Multinationals and their tax privileges

Moderator: Rudy De Meier, 11.11.11

- Ruth Kelly, Action Aid: the SAB Miller case in Ghana

- Anne-Sophie Simpere, Oxfam France: the Glencore Mopani in Zambia and Areva in Niger cases

-Renata Fontana, OECD Centre for Tax Policy and Administration: BEPS plan presentation

- Pierre Habbard, TUAC (Trade Union Advisory Committee to the OECD)

- Tove Maria Ryding, EURODAD

13h00 – 14h00 – Lunch

14h00 – 15h45 – Belgium external tax policy – Tax treaties for whose benefit ?

Moderator: Nicolas Van Nuffel, CNCD-11.11.11

- Katrin McGauran, SOMO : the impact of Netherland’s tax treaties on developing countries tax revenue

- Renaud Fossard, Latindad : the impact of tax treaties on Latin America’s tax revenue 

- Tove Maria Ryding, EURODAD

 - Dirk Vandermaelen : MP for the SPA and member of the Council of Europe parliamentary assembly

15h45 – 16h45 – Conclusions

- Anne Demelenne, FGTB General secretary, trade unions for international tax justice

- Marie-Hélène Ska, CSC National secretary, the issue of tax justice in Belgium 

- Bogdan Vanden Berghe, 11.11.11 : 2014 elections and the challenge of international tax justice

U.S. corporate taxes: and now for some tax-deductible abuses

Update April 2014 - for information on Enablers and Intermediaries see here.

In the context of our first and second blogs on the U.S. corporate income tax, it's worth pointing out a  statement from U.S. Public Interest Research Group that just has to get a mention:

Statement: No Madoff Write-Off for JPMorgan
Taxpayers Could Shoulder $700 Million Hidden Tax Subsidy Unless Agencies Prevent JPMorgan from Deducting Expected $2 Billion Settlement for Allegedly Enabling Madoff Ponzi Scheme

Statement by Francisco Enriquez, U.S. Public Interest Research Group Tax & Budget Associate, on the reported $2 billion settlement JPMorgan is reportedly close to reaching with regulators over allegations that it ignored signs of Bernard Madoff’s huge Ponzi scheme.

“It’s commendable that agencies seek to hold JPMorgan accountable for allegedly ignoring signs of the Ponzi scheme by which Bernard Madoff swindled investors across the nation. But regulators must also protect taxpayers against JPMorgan taking a massive tax windfall for its misbehavior.

“Unless regulators explicitly forbid it, taxpayers could end up shouldering $700 million of JPMorgan’s $2 billion settlement by writing off these payments on their taxes as an ordinary cost of doing business.

“Americans don’t deduct their parking tickets or library fines from their taxes. Corporations like JPMorgan shouldn’t be able to deduct their settlements for wrongdoing either.

“Once JPMorgan reaches an agreement with regulators, it will have paid $20 billion in the last 12 months to settle a wide array of criminal and civil charges.  But, how many billions will taxpayers be on the hook for as a result of these settlements?

“While federal law forbids companies from deducting public fines and penalties from their taxes, payments made as part of a settlement can be treated differently. Companies that cut deals with an agency to resolve charges through a legal settlement typically manage to deduct the penalties as a tax write-off unless specifically forbidden from doing so. In essence, companies are allowed to receive a tax break for their wrongdoing.

“Unfortunately, this ‘settlement loophole’ is far from rare. In fact, according to the IRS, experience has shown ‘almost every defendant/taxpayer deducts the entire amount’ as a business expense unless doing so is explicitly forbidden in the settlement agreement. It costs taxpayers many billions of dollars each year.

“Thankfully, Congress has begun to show bipartisan interest in addressing this outrage. Sens. Jack Reed (D-RI) and Chuck Grassley (R-IA) recently introduced the Government Settlement Transparency and Reform Act (S. 1654) that would restrict the tax deductibility of future corporate settlements.”

You can read U.S. PIRG’s research report on the tax implications of legal settlements, “Subsidizing Bad Behavior: How Corporate Legal Settlements for Harming the Public Become Lucrative Tax Write-Offs."

See also U.S. PIRG’s fact sheet for more information about how companies like JPMorgan Chase take advantage of the settlement loophole.

Time to abolish the corporate tax? Part 2: Only fools or shills would agree

Yesterday we posted a blog looking at a New York Times editorial entitled Abolish the Corporate Income Tax, exposing many of the numerous fallacies and misunderstandings at the base of it. Forgive us for going on about this, but it is important.

Now Citizens for Tax Justice in the U.S. has produced an article of their own, which complements ours and adds several more important points. It starts like this:

Another year, another campaign to give even bigger breaks to corporations and claim that this will create jobs. In 2014, the campaign opened with a January 5 op-ed by Laurence Kotlikoff in the New York Times titled, “Abolish the Corporate Income Tax.”

And it is a campaign: in the United States, the United Kingdom - everywhere, really. It's based on ideology, not practical realities. A U.S.-based correspondent to TJN, with many connections in U.S. tax circles, added in an e-mail yesterday:

"Larry is a leading right-wing Boston U economist who is otherwise best known as a former Reagan Council of Econ advisor and a deficit hawk. He means well, but he is generally clueless when it comes to the Real World. Unfortunately his piece is only the latest in a crescendo of right wing voices calling for abolition in the US. And the idea is gaining traction in business circles."

Our arguments yesterday - and CTJ's arguments to follow - illustrate that if you support the abolition of the corporate income tax you either have no idea what you are talking about, or you are a shill. We can't think of another explanation (apart from where you are a mix of both.)

Our correspondent reminded us, as we suggested yesterday:

Such a move by the world's largest economy would badly hurt developing countries like Argentina that count on corporate income taxes and MNCs for a large share of their revenue base. It would dramatically accelerate global tax competition -- the race to the bottom. 

(We at TJN have decided to stop using the term 'tax competition' and instead use the more accurate term 'tax wars' - which is what we are talking about here. Occasionally, if we do use the more common term, we will put 'competition' in quote marks.)

Back to CTJ. Their article continues by explaining, as we did, how the corporate income tax serves as an essential backstop to the personal income tax.

"First, the personal income tax would have an enormous loophole for the rich if we didn’t also have a corporate income tax. A business that is structured as a corporation can hold onto its profits for years before paying them out to its shareholders, who only then (if ever) will pay personal income tax on the income. With no corporate income tax, high-income people could create shell corporations to indefinitely defer paying individual income taxes on much of their income.

Second, even when corporate profits are paid out (as stock dividends), only a third are paid to individuals rather than to tax-exempt entities not subject to the personal income tax. In other words, if not for the corporate income tax, most corporate profits would never be taxed."

Crucial points. They then expand on our point about tax 'incidence':

"The corporate income tax is ultimately borne by shareholders and therefore is a very progressive tax, which means repealing it would result in a less progressive tax system.

This last point deserves emphasis. Proponents of corporate tax breaks argue that in the long-term the tax is actually borne by labor — by workers who ultimately suffer lower wages or unemployment because the corporate tax allegedly pushes investment (and thus jobs) offshore. But most experts who have examined the question believe that investment is not entirely mobile in this way and that the vast majority of the corporate tax is borne by the owners of capital (owners of corporate stocks and business assets), who mostly have high incomes. This makes the corporate tax a very progressive tax.

For example, the Department of the Treasury concludes that 82 percent of the corporate tax is borne by the owners of capital. As a result, the richest one percent of Americans pay 43 percent of the tax, and the richest 5 percent pay 58 percent of the tax."

And then they make another argument that we didn't make.

"Kotlikoff argues that our corporate income tax chases investment out of the U.S. and his simplistic answer is to repeal the tax altogether. He writes that, “To avoid our federal corporate tax, they [corporations] can, and often do, move their operations and jobs abroad,” and cites the well-known case of Apple booking profits offshore.

But Apple is a perfect example of a corporation that does not actually move many jobs offshore but rather is engaging in accounting gimmicks to make its U.S. profits appear to be generated in offshore tax havens. These gimmicks take advantage of the rule allowing American corporations to “defer” (delay indefinitely) paying U.S. corporate income taxes on the profits they claim to earn abroad. Lawmakers will end these abuses when they see that voters’ anger over corporate tax loopholes is even more powerful than the corporate lobby."

And, as we also mentioned:

"Kotlikoff has constructed a computer model that purports to prove that the economy would benefit greatly from cuts in the corporate income tax. But any such model relies on assumptions about how corporations would respond to changes in tax policy. Economists have failed to demonstrate a link between lower corporate taxes and economic growth over the past several decades that would justify the assumptions Kotlikoff uses."

And let's not forget something else that that last report CTJ cites mentions:

"The Corporate Income Tax raises a significant amount of revenue for the federal government—$242.3 billion in fiscal 2012, or almost 10 percent of total federal revenues. However, the corporate income tax is less important now than in the 1950s, when it accounted for about 30 percent of total revenues."

Our last blog cited a range of reasons why we need the corporate income tax - and why, in fact, it is a particularly precious tax. CTJ also has its own overlapping, but different, list. It's here. And it's well worth reading.

A final note: back to our correspondent, who makes a rather sobering observation:

"Some of us are taking the international corporate income tax for granted, and are trying to improve it -- by, for example,  refining the OECD's recent attempts to fix digital tax regimes and the the arms-length pricing approach to international corporate taxation, or by pursuing longer term objectives like  country by country reporting or  formulary apportionment.

These are worthy long term objectives.   But let us not forget that they PRESUME that countries still have corporate income tax regimes to enforce in the first place. So it is time to take seriously this latest very aggressive strategy by  the US Right and respond to it vocally."

And let's not forget: this doesn't just affect the United States. This affects everyone in the whole world. And it's potentially a very, very dangerous move that would have horrific effects on income and wealth economy, rent-seeking and much more. This campaign must be stopped.

Update April 2014: for information on corporate tax see here.

Is Federal Tax Avoidance the Biggest Threat to Social Security in the U.S./

Post-xmas blues?  Don't get depressed: get angry. Start by reading this article by Paul Buchheit about the ways in which corporate America deprives citizens of their pensions and social security.  The sums involved, according to Buchheit, are astonishing:

For every dollar they paid relative to payroll tax in the 1950s, they (companies) now pay ten cents. In just the past ten years they've cut their tax rate in half. The sum total of tax underpayments, tax haven losses, corporate tax avoidance, and tax expenditures (most of which benefit the very rich) is over $2 trillion. Although Social Security costs less than half of that, Congress is targeting Americans who have paid into it at the highest rate, while tax avoiders are left undisturbed.

And it doesn't stop with tax avoidance.  Increasingly scared of the potential reputation damage caused by avoiding taxes, companies have switched their focus to lobbying harder for tax breaks, subsidies and (their ultimate goal) abolition of the corporate income tax.  Tax "competition" is completely out of control, yet politicians scramble to accelerate this race-to-the-bottom.  According to Buchheit:

On the pretense that their presence enriches the people of their home states, and that subsidy-green pastures lie right across the border, companies have cunningly negotiated tax-cutting deals in return for the promise to stay. A Good Jobs First report describes the process, which costs state and local governments up to $80 billion a year.

Dozens of deals have been contrived, at least ten each in Michigan, New York, Ohio, Texas, Louisiana, Tennessee, Alabama, Kentucky, and New Jersey. Sixteen states have enacted the Private Income Tax (PIT) diversion, by which EMPLOYERS rather than governments get to withhold state income taxes from employee paychecks and to keep all or some portion of the funds.

Illinois' pension mess has its roots in corporate threats to bolt the state: $100 million to Motorola; $150 million to Sears; $56 million to Boeing to bring its headquarters to Chicago; and nearly $200 million to Caterpillar, which paid only 2 percent of its U.S. income in state taxes in 2011-12, and whose CEO called Illinois "unfriendly to business."

This phenomenom is not peculiar to the U.S.  Similar processes are underway in Europe, and the situation in other parts of the world is arguably worse.

Like we said: don't get depressed, get angry. Take action by pressing your political leaders to abandon this insane competition in corporate subsidy.

Time to abolish the corporate tax? Learned professor creates huge tax model to illustrate . . . nothing

Professor Laurence Kotlikoff, a professor of economics at Boston University, has written an opinion article in the New York Times headlined Abolish the Corporate Income Tax. It begins:

"In recent decades, American workers have suffered one body blow after another: the decline in manufacturing, foreign competition, outsourcing, the Great Recession and smart machines that replace people everywhere you look. Amazon and Google are in a horse race to see how many humans they can put out of work with self-guided delivery drones and driverless cars. You wonder who will be left with incomes to buy what these robots deliver. What can workers do to mitigate their plight? One useful step would be to lobby to eliminate the corporate income tax."

And on what basis does he make this claim?

Making, rather than just stating, this case requires constructing a large-scale computer simulation model of the United States economy as it interacts over time with other nations’ economies, and then seeing how the model reacts when you change the American corporate income tax. I’ve developed such a model with three colleagues through the Tax Analysis Center, a nonpartisan research group. Our findings make a very strong, worker-based case for corporate tax reform.

A worker-based case for abolishing the corporate tax? Interesting.

There is just one teeny problem with his learned analysis. It's pointless.

How do we know this? Well, there's this, for starters.

"Fully eliminating the corporate income tax and replacing any loss in revenues with somewhat higher personal income tax rates leads to a huge short-run inflow of capital, raising the United States’ capital stock (machines and buildings) by 23 percent, output by 8 percent and the real wages of unskilled and skilled workers by 12 percent."

This sentence reveals that Kotlikoff has overlooked one of the most basic aspects of the corporate income tax: that it's an essential backstop for the personal income tax. The more you cut corporation taxes, the more wealthy individuals will re-classify their income as corporate income, so as to pay the lower rate. And once they start doing that, then you have to cut your top marginal personal income tax rates to prevent this. The fact that he is advocating higher personal income tax rates demonstrates that he hasn't considered this unalterable fact.

Actually, there isn't just one teeny problem with this article. There is a multitude of them. Let's now look at the abstract from the paper on which he bases his article:

We simulate corporate tax reform in a single good, five-region (U.S., Europe, Japan, China, India) model, featuring skilled and unskilled labor, detailed region-specific demographics and fiscal policies. Eliminating the model’s U.S. corporate income tax produces rapid and dramatic increases in the model’s level of U.S. investment, output, and real wages, making the tax cut self-financing to a significant extent.

This tells us two things. First, it is just a "five-region model" - and recent experience has taught us to treat such things with great caution. Give us the real world, please! Second, by saying that the tax cut is self-financing, he is advocating the Laffer Curve! And the Laffer Curve, as we know, has been so thoroughly debunked by the evidence - particularly in the United States - as to make its adherents a laughing stock. Former president George H.W. Bush called it "Voodoo Economics" - and his son's council of economic advisers, Greg Mankiew, called its adherents "charlatans and cranks." For an irreverent look at the history of the Laffer Curve, see Deep Voodoo, an earlier article in the New York Times.

Just for example, a 2012 study by the nonpartisan US Congressional Research Services (CRS) concluded:

“Changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth.
. . .
However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.”

We could go on at length about the numerous flaws in this article. There is the fact that the corporate income tax prevents corporations (and those wealthy who have turned themselves into corporations) from free-riding on the backs of other taxpayers. Or there's the fact that abolishing corporate income tax would require an increase in other taxes especially VAT and similar indirect taxes, as well as payroll taxes - further widening inequality gaps and reducing job creation as the tax charge falls away from capital and onto labour - making labour relatively more expensive and reducing employment.

Oh, and there's the small matter that U.S. corporations are sitting on oceans of idle cash at the moment - $5 trillion in 2011 and surely more than that now - and they aren't investing it. What on earth would make anyone think that adding to their prodigious cash piles through corporate tax cuts would add a single job to the U.S. economy? What kind of unworldly model disregards five trillion dollars? See these arguments discussed here, for instance.

And let's not forget the horrific effects that abolition of U.S. corporate taxes would have on the tax systems of other countries, elsewhere - which would feel pressured to follow suit, thus making all those supposed benefits to the U.S. disappear in any case. Not to mention all these other reasons.

(And don't try the tax 'incidence' argument with us: it won't wash.)

We wish learned professors would sometimes get out into the real world. Or at least if they don't - please keep their research to themselves, and not go blasting their unbalanced, ethereal curiosities into the pages of the New York Times.

We expect that U.S. organisations will weigh in on this shortly; we'll provide links as and when they appear.

Bill Gates: Is he just a hypocrite?

Talks the talk on development

Today’s edition of The Guardian has an article challenging Bill Gate’s image as a secular saint of development and poverty alleviation.  While acknowledging the enormity of Gate’s financial contribution, which is, after all, no more than rental incomes from Microsoft’s global monopoly, author Ian Birrell questions the intellectual coherence of a man who talks the talk of tackling poverty while taking extreme measures to avoid paying tax.  As Birrell puts it:

But like those other aid apostles Bono and Bob Geldof, he risks being perceived as a rank hypocrite. For he sees nothing wrong in complex tax avoidance schemes while telling nations how to spend their revenues, notwithstanding the growing body of opinion that aid undermines development and democracy by propping up poorly run regimes.

Tax avoidance harms development processes.  The ability of transnational companies to shift their profits to tax havens (largely the fault of the OECD’s hopeless rules on taxation of TNCs) puts them into the position of being able to reduce their effective tax rates to single figures.  Microsoft provides a case study in this area:

Microsoft . . . uses sophisticated systems to shift paper profits around the planet and evade the designs of governments. Indeed, so extreme are its methods the company was used as a case study in a Senate investigation into US corporate tax avoidance, which found one example of offshoring profits through a tiny Puerto Rico office alone saved it $4m a day in taxes.

This has led to the absurd situation whereby tax havens appear to be generators of far more wealth than is actually the case, boosting the nonsensical idea that the most effective way of promoting development is through tax cuts and tax “competition”: 

A Harvard law professor pointed out that Microsoft's divisions in three low-tax nations employed fewer than 2,000 people, but supposedly recorded about £9.4bn of pre-tax profit in 2011 – more than the 88,000 employees working in all its other global divisions.

In practice, of course, tax havens like Puerto Rico and Ireland are mostly used to book profits for tax purposes, and the super-productivity of their workforces employed in such places is largely if not entirely chimerical.

TJN does not take issue with Bill Gate’s commendable interest in tackling the symptons of poverty.  But we do take issue with the idea that philanthropy is a substitute for paying taxes, and we reject outright any suggestion that tax avoidance is acceptable because it is not proven to be illegal. Whether legal or illegal, the end result is the same: either public services are cut, or public debt increases as governments borrow to substitute for lost revenues, or someone else, typically far poorer, ends up paying more tax. Very often its a combination of all three, and the development outcome is nothing short of disastrous (take a look at Britain for example).

Gates should publicly acknowledge that the most sustainable way of financing education, health, and other public services is through paying tax to a democratically accountable government.  As Birrell concludes:

His determination to push vaccinations and prevent malaria is laudable. But if he wants to discuss development, preach about poverty and tell nations how to spend taxpayers' money, he should put his own house in order first.

Read the Guardian article here.

Update April 2014: read on tax and corporate responsibility here.

Inequality watch: top tenth of UK population have 850 times the share of the bottom tenth

Update April 2014: for information on Inequality and Democracy see here.

The true shocker is in the headline. From a blog by John Hills at the London School of Economics (hat tip: CRESC), a survey on how people think ten trillion pounds of personal wealth is distributed in the UK:

Second, how it actually is distributed.

Hills:

The bottom fifth in fact has hardly any wealth to speak of – less than a tenth of a per cent of the total.  Some have ‘negative wealth’ – debts that outweigh their assets, even including personal possessions.  The next fifth doesn’t have much either – just 4 per cent of it.  But the top fifth have 62 per cent – half as much again as people think and nearly double what they say they think is fair.

And concluding: 

"The overall share of the top tenth in total wealth was 850 times the share of the bottom tenth.  Even the least wealthy of the top tenth had 75 times the wealth of the household just at the top of the poorest tenth."

Tax, of course, plays a major role in all this. And remember: this is probably an under-estimate - for these reasons.

All of which raises an interesting question: how soon will we see the world's first trillionaire?

Lebanon: a re-emerging Middle Eastern secrecy jurisdiction

This is part of a series of blogs highlighting the narrative reports from a number of secrecy jurisdictions around the world, explaining how they became offshore financial centres.

Lebanon is ranked at seventh position on the 2013 Financial Secrecy Index with 79 secrecy points out of a potential 100, which places it near the top end of the secrecy scale.

Telling the story

The earliest roots of Lebanon’s status as an offshore financial centre date back a century or so. Between the First and Second World Wars, many Lebanese emigrated to parts of the developing world, particularly to Latin America and to Africa, especially to French African colonies. This disparate group soon began to develop as a classic successful trading diaspora, initially operating as middlemen beneath colonial Europeans in the trading hierarchy, but above indigenous locals – and then, amid decolonisation, becoming increasingly powerful in many economies, tapping the diaspora’s large international trading networks, and expanding into diamond mining and many other sectors. These international networks remain substantially in place today and are a ‘patriotic’ cornerstone of Lebanon’s surprisingly resilient offshore banking sector.

Lebanon itself first became a trading nation of note following the creation of Israel in 1948, which saw Beirut supplant Israel’s commercial port of Haifa as the commercial centre of the Middle East. According to financial historian Tom Naylor (p34), the subsequent Suez crisis of 1956 boosted Beirut, helping it displace Cairo as the beachhead for European business into that region of the Middle East. That same year, Lebanon created its banking secrecy law, a major factor that helped cement Lebanon’s role as a secrecy jurisdiction.  During that period, and afterwards, Beirut sought to position itself as a commercial and financial entrepôt for the region, much as Dubai has done more recently. As one account puts it, Lebanon

“was committed, to an unusual degree, to a flexible, free wheeling form of laissez faire capitalism.”[i]

The original architect of Lebanon’s financial centre was a Palestinian Lebanese banker, Yousef Beidas, who set up the now notorious Intra Bank in 1951, which has been described as:  

“one of the Middle East's greatest financial success stories and later one of its most disastrous financial collapses.”

By the time of the bank’s collapse in 1966, the bank’s holding company controlled the Port Authority, Middle East Airlines, the Casino du Liban – the world’s largest – the main radio station, and much more: a variant of the financially ‘captured state’ that we have encountered in secrecy jurisdiction after jurisdiction - with echoes of the financial ‘capture’ of Dubai that we have noted in that jurisdiction’s narrative report. Beidas, of course, played a central role in the setting up of the 1956 banking secrecy law. However, his political links, including his role as a major funder of the Palestinian Fatah movement, are believed to have been a key factor in the bank’s demise when it ran into liquidity difficulties in 1966, and his creditors would not bail him out. As Naylor notes: 

“Although the bank’s rise and subsequent fall could be ascribed at least partly to ‘political’ factors, the situation should have highlighted the dangers inherent in financial institutions relying on hot and homeless money for funding their lending and investment.”

But by the time of the OPEC oil embargoes of the 1970s and the gigantic ensuing financial windfalls into Arab treasuries, Lebanon was well established as a financial centre for the region – and it was so successfully ring-fenced against domestic turmoil that deposits reportedly doubled between 1975 and 1980 – an astonishing feat given that Lebanon was in the grip of civil war during the period. The fact that Lebanon has a history of setting its banks up with large capital buffers – itself probably due to the history of political turmoil – is also a major factor in preventing the flight of deposits.

The civil war lasted until 1991 and although there was some eventual damage to the financial sector, it rebounded again quickly in the 1990s, helped not only by the fact that Lebanon did not default on its debts during the war, but also by the constant flow of remittances from the powerful Lebanese diaspora which, at 21 percent of GDP in 2007, is among the highest rates in the world (pp4-5). The banking system largely shrugged off the global financial crisis of 2008 onwards, with deposit inflows continuing to grow at 20 percent annually.

Lebanon's offshore centre today

Nearly half a century after the introduction of Lebanon’s banking secrecy law, secrecy remains an important pillar of Lebanon’s financial centre today. While there is some exaggeration in one offshore practitioner’s boast that Lebanon’s banking secrecy is “the strongest in the world,” it does offer a range of secrecy facilities, and its secrecy score of 79 is very high indeed.

Although official statistics suggest that non-residents account for only a small share of Lebanese deposits, this classification is not taken seriously[ii], and the IMF notes that 

“Banks fund their positions from deposits, which reached 267 percent of GDP in 2006, a large part of which held by non-residents.”

It adds that:

“Anecdotal evidence from local banks suggests that the Lebanese Diaspora (most of whom have a Lebanese address) is the largest group of depositors. This Diaspora includes a significant share of high net worth individuals, many doing business in countries with underdeveloped banking systems. Depositors from other Arab countries reportedly hail mostly from Syria, West Bank and Gaza, Iraq, Jordan, Saudi Arabia, Kuwait, and UAE.”

Most astonishingly, it adds that while Lebanon’s population is four million, the Lebanese Diaspora is estimated at anywhere between 5 million and 16 million-strong; the World Bank estimated these remittances at $7.6 billion annually in 2010-2012. Many members of the Lebanese diaspora are high-net worth individuals and they include the Lebanese-Mexican telecoms tycoon Carlos Slim, the world’s richest man, as well as Carlos Ghosn, the French-Lebanese-Brazilian boss of carmakers Renault and Nissan. Nicholas Hayek, a Swiss-Lebanese, runs Swatch, the biggest maker of Swiss watches.

The role of the diaspora makes Lebanon a very particular kind of offshore financial centre.

According to a 2013 report by the U.S. State Department’s International Narcotics Control Strategy (INCSR):

“Lebanon faces significant money laundering and terrorist financing challenges. Reports suggest that a number of Lebanese abroad are involved in underground finance and trade-based money laundering (TBML) activities. In 2011, Lebanese Canadian Bank (LCB) was designated as a financial institution of primary money laundering concern under Section 311 of the USA PATRIOT Act. Laundered proceeds come primarily from foreign criminal activity and organized crime, and Hizballah, which the United States has designated as a terrorist organization, though the Government of Lebanon (GOL) does not recognize this designation.
. . .
Lebanese expatriates in Africa and South America have established financial systems outside the formal financial sector, and some are reportedly involved in TBML [trade-based money laundering] schemes. Lebanese diamond brokers and purchasing agents are reportedly part of an international network of traders who participate in underground activities including the trafficking of conflict diamonds, diamond trade fraud (circumventing the Kimberly process) and TBML.”

Lebanon has taken some very limited steps to come into line with international standards on transparency: it created a new money-laundering law in 2001, the year of the major terrorist attacks on the United States; and in 2011 it imposed certain new restrictions on banks related to terrorist financing and money laundering, reportedly with a view to mitigating “reputational risk to which banks and financial institutions might be exposed and to protecting the utmost national interest.”

However, a 2012 report on Lebanon by the OECD Global Forum points to a litany of serious shortcomings. It noted:

“Lebanese authorities do not have access to information held by banks, fiduciary institutions and other institutions within the financial industry, for tax purposes. Although the Lebanese competent authority can exchange any information already in its possession, it is unclear whether it has powers to access information for exchange purposes when the information is not required for it has own tax purposes.
. . .
Due to strict bank secrecy obligations, the Ministry [of Finance] cannot access information regarding transactions and the identity of customers of banks and other entities within the financial sector, including fiduciaries under a Lebanese fiduciary contract. Moreover, the scope of the professional secrecy safeguards appears to be broader than the professional secrecy protected under the international standard."
. . .
Bearer shares and to-order shares may be issued by joint stock companies and partnerships limited by shares, and adequate mechanisms to ensure that the owners of such shares can be identified are not in place. Lebanese law does not ensure that information identifying the settlors, trustees and beneficiaries of foreign trusts with a Lebanese trustee is available, in particular when the trustees is acting outside the financial industry and thus not subject to AML obligations."

Combined with the secrecy, in common with many other secrecy jurisdictions, Lebanon offers significant tax exemptions for non-residents, including on profits, on stamp duties on contracts, inheritance taxes,  corporate income taxes, dividend distributions, capital gains, Interest, and more.

Lebanon’s ranking rose sharply from 22^nd position (of 73) in our 2011 Financial Secrecy Index to 7^th (of 82) in 2013. This change was largely due to a sharp spike in the scale weighting of Lebanon, based on IMF data. The IMF told us that the sharp spike was itself the result of improved data collection methods in Lebanon. Similar spikes can be seen in certain other measures, such as this one – which may also be due to data collection issues.

---

[i] Paradise Lost: Memories of a Golden Age, From the Saudi Aramco World Magazine, Sept-oct 1982, vol. 33 No. 5.

[ii] As the IMF notes, The classification of resident and non-resident deposits is essentially based on whether the holder of the deposit lists a Lebanese address, which is generally not a useful metric for establishing residence, particularly given the size of the Lebanese diaspora.

Reporting & Investigating Illicit Finance, Financial Secrecy & Asset Recovery

Journalism Training: 8-11 April 2014

With the Centre of Investigative Journalism, London, UK.

Tax Justice Network’s Illicit Finance Journalism Programme is aimed at practicing journalists and campaigners who are keen to investigate tax avoidance, corruption, money laundering and asset recovery.

Over four days, you will gain an understanding of how the secret world of offshore finance works as well as how to investigate corporate accounts and corporate corruption. We will show you where to find documents, how to analyse them and other practical tools to help uncover financial secrecy. 

A combination of hands-on training and renowned investigators will give you the basis to uncover financial secrecy and corruption as well as offering the opportunity to network with other journalists. 

This course is aimed principally at working journalists from the developing world in particular who have an interest in investigating the financial sector. Financial assistance is available. Experience in financial journalism is useful but not a pre-requisite. 

The course also welcomes journalists from the US, Canada and Europe subject to a small charge.

 For further details of the course, please click here to find an online application form.

 Or here to go direct to the application form