Tuesday, September 01, 2009

Mission Accomplished? Dream on.

OECD Secretary-General Angel Gurria's comments in The Guardian and other international media about the end of tax havens smack mightily of hubris and may come back to haunt him. In the build-up to the G20 summit later this month, Gurria boasts that:

A quiet revolution is under way in international governance. Building on more than a decade of work at the OECD, governments are finally getting to grips with one of the biggest threats to fair and effective public financing.

Hmm. We don't disagree that tax havens are amongst the "biggest threats to fair and effective public financing". Au contraire, we're in total agreement on that point. But we're in total disagreement with Gurria's proposition that governments are finally getting to grips with these places. If the G20 countries want to deliver on their promises, their efforts will need to be a great deal more ambitious in scope than those being pursued by the OECD team in Paris. Back to Gurria:

It seems almost unbelievable, but the era of banking secrecy for tax purposes will soon be over. In tomorrow's world, there will be no more havens in which to hide funds from the taxman.

Err, is this an innocent case of wishful thinking or a cynical exercise in trying to delude the public in advance of the Pittsburgh Summit? We'd prefer to think its the former, but another article, this one published in the right-wing Daily Telegraph, suggests that the tax havens (Jersey taking the lead again, ho-hum) are mounting a major public relations exercise to re-assure the public that the anti-tax haven mission is accomplished and everyone can go home safely to their families.

Don't be deceived.

We have previously commented in the Financial Times that the OECD standards for tax information exchange are timid and woefully inadequate. Don't take our word for it: look at what British satirical magazine Private Eye has exposed about the pitiful track record for information exchange between Britain's Crown Dependencies and its treaty partners. If this is the best that can be achieved after 10 years of OECD effort, then that quiet revolution Gurria boasts about is going to be a long time in the making.

Far from setting a new standard for international cooperation, the OECD has ploughed ahead with an agenda based on lowest common denominator standards that will fail miserably in deterring tax evasion. This explains why, despite the orchestrated huffery-puffery from the tax havens, they have been quietly happy to sign up to tax information exchange agreements based on the OECD model: they know that the 'by request' model is little more than a window-dressing exercise, and that it will be business as usual once the current fuss dies down.

But lo, what's this? Here's another article which has attracted far less attention than Gurria's but which makes for far less comfortable reading. Titled "A convenient hypocrisy on tax havens", the article outlines why it is way, way premature to be talking about the end of the tax haven era. Why? Because the OECD has scarcely begun to tackle the real engines of financial secrecy: the offshore trusts, foundations and companies, which used in combination allow wealthy people to set up bank accounts in Alpine states with almost total impunity. Don't take our word for this: the author of this article is none other than Josef Pröll, finance minister to the Austrian government, leader of the right-wing Austrian People's Party, and a strong advocate of Austria's banking secrecy laws. A member of TJN he ain't.

But Pröll is absolutely correct when he points out that trusts and offshore companies are the principal tools of the British and American tax havens, led by London and Delaware respectively, and these places play a quite different game. They pretend to be cooperative with information exchange processes, but do so secure in the knowledge that so long as they do not collect any information about the actual persons who benefit from these legal entities they face no obligation to share information which they do not have. This is what Pröll says on the subject:

In the US, for instance, assets can be held anonymously. The simplest way to do this is to form a ‘shell corporation' in a state such as Delaware, Montana, Nevada or Wyoming, whose procedures mean that the beneficial owner of the company may remain unknown, even to the authorities.

If such a company then opens a bank account, the account is, in essence, anonymous – something that countries such as Austria, Switzerland and Luxembourg ruled out long ago.

Much the same holds true in common-law countries for trusts – a legal form that does not exist in Austria (or most of continental Europe). As the G7's Financial Action Task Force on Money Laundering has noted, only South Africa has a register in which it is possible to look up the beneficial owners of assets held by trusts.

If a trustee opens a bank account, tax authorities know neither who the account's beneficial owner is nor in which country he or she is taxable.

It is therefore easier for Anglo-Saxon members of the Organisation for Economic Co-operation and Development (OECD) to subscribe to the OECD's standards of information exchange, since those standards state that no country can be expected to hand over information it does not hold: when there is no national trust register or when the beneficial owner of a company is unknown, no information is exchanged.

Do you begin to see why we are confused about Gurria's motives? The OECD is an organisation dominated by the world's most powerful countries. And they don't come more powerful than the United States and its close allies like the United Kingdom. So here we have an organisation that attacks banking secrecy laws in Alpine states but does nothing, nada, rien du tout, to tackle the secrecy spaces provided by trusts and offshore companies. Conspiracy theorists would be having a field day here, but we'd like to think that there is a process underway, with trusts, etc., being next in the firing line. Trouble is we know from discussions with senior OECD officials that this is not the case: there is currently no political momentum within the OECD to take on the issue of trust and company secrecy.

So any hint of mission accomplished is hogwash. The OECD hasn't even started to map out a holistic agenda for tackling tax havens, and until such time as they do their efforts will, in the blunt language this blogger learnt whilst ocean racing, be "pissing into the wind".


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