Inside the Fight to Prevent Billions in International Money Laundering and Tax Shelters
In June 2000, international groups rolled out blacklists targeting offshore refuges that shelter tax dodging and money laundering. Some observers predicted “the death of tax havens.”
By 2002 the campaign had, as one tax analyst put it, “dissolved into a series of toothless pronouncements.”
In 2009, offshore centers faced new attacks as the United States pursued an investigation of Swiss banks and nations hit by economic crisis sought to boost tax revenues. “Tax havens and bank secrecy are finished,” French President Nicolas Sarkozy declared.
By 2010 it was clear the offshore industry had once more survived mostly unscathed.
Now offshore havens are under attack again in the wake of exposÃ©s by the International Consortium of Investigative Journalists and other news outlets.
Britain has vowed to lift the secrecy covering the Cayman Islands and other financial sanctuaries operating under its flag. Dozens of rich nations have agreed — in an unprecedented example of global cooperation on offshore issues — to begin swapping information about assets stashed in foreign accounts. Another French president — FranÃ§ois Hollande — has promised to “eradicate” tax havens.
“Looks like the offshore party is over,” the Chicago Tribunesaid recently.
Will this time be different?
Many financial crime fighters are skeptical.
They fear the new initiatives mostly target small and medium tax scofflaws but allow other offshore clients — ultra-rich tax dodgers, white collar fraudsters, terrorism funders and tax-phobic corporations — to continue much as they always have.
One problem: Some jurisdictions — including Delaware and many other U.S. states — continue to harbor anonymous “shell companies” that are tools of choice for money launderers and other financial wrongdoers. The U.S. and other nations have promised to require that the real owners be revealed when companies are created within their borders, but haven’t followed through on these pledges.
Rich nations’ latest promises to crack down on offshore centers are “a lot of bluster,” Donald Semesky, former financial crimes chief for the U.S. Drug Enforcement Administration, believes. “They all look good on paper, but they’re not real good in practice.”
International groups working against offshore abuses acknowledge their efforts’ uneven history, but say there are good reasons, this time around, for optimism.
The sweeping plan for information exchange among nations shows that real change is coming, says Pascal Saint-Amans, tax policy director for the Organization for Economic Cooperation and Development, a multinational alliance that’s played a key role in efforts to quell cross-border tax evasion.
He says the OECD and its allies will continue taking an aggressive stance against offshore secrecy as the 121-nation Global Forum on Transparency and Exchange of Information for Tax Purposes meets Thursday and Friday in Jakarta, Indonesia. During the conference, the forum will announce its compliance ratings for dozens of jurisdictions, including several that will rated “non-compliant” for failing to meet its standards on financial transparency.
“There is no trick, no loophole, to what we’re doing,” Saint-Amans says.
The offshore world is a place of shadows and strange bedfellows. The politics of offshore reform are no different.
Initiatives by rich nations are often hampered by conflicts of interest. International coalitions working to reshape the offshore system include Switzerland and other countries that have long been known as tax havens. These groups’ members also include the U.S. and the U.K., nations whose banking systems serve as hubs for flows of illicit money from traditional offshore locales.
Advocates for offshore reform say the latest push on offshore abuses will fall short unless developed countries take strong action on several fronts — ending secrecy on company ownership, attacking corporate tax avoidance and making sure solutions benefit not only rich nations but also poor countries where corruption and offshore secrecy are intimately linked.
Financial transparency activists worry that big players are already beginning to backtrack on their promises to remake the offshore system.
This spring U.K. Prime Minister David Cameron made headlines by promising to crack down on British-flagged havens that provide cover for tax cheats and other seekers of financial opacity. After a meeting in May at the White House with U.S. President Barack Obama, Cameron pledged to “tackle the scourge of tax evasion” and fight for a new era of financial openness.
This fall, after getting assurances from British overseas territories and Crown dependencies that they would change laws and practices, Cameron declared that it is now unfair to call them tax havens. They “have taken the necessary action and should get the backing for it,” Cameron said during a Parliamentary session.
Richard Murphy, a U.K. accountant who had been a leading advocate for change in Britain’s offshore empire, calls Cameron’s recent remarks “absurd.”
What Cameron is saying, Murphy says, is that the Caymans and others are no longer tax havens because “they made a vague commitment to take unspecified actions at an unspecified time in the future.”
A Cameron spokeswoman did not answer questions for this story, but pointed to a recent speech in which Cameron says he continues to work to “close the door” on “shadowy, corrupt, illegal practices once and for all.”
For their part, the Caymans and other U.K. overseas territories argue that they offer not secrecy but rather legitimate confidentiality. They praised Cameron’s remarks, saying in a joint statement that they are “well regulated, independent financial services jurisdictions” and will “continue to lead on meeting international standards of tax and transparency.”
Operation Red Spider
Questions about how well global standards are enforced arose earlier this year amid a banking scandal in India.
The case began when a man introducing himself as an operative for a corrupt politician visited dozens of bankers across India, explaining candidly that he was seeking to launder “black money” and turn it into “white money.”
Almost every banker he met, he later reported, was willing to help, with many offering to channel cash overseas and use shell companies to cover the trail.
Only later did the bankers learn the man’s real identity: he was a journalist doing a hidden-camera sting for Cobrapost, a muckraking Indian magazine that codenamed its undercover effort “Operation Red Spider.”
When the magazine announced its findings this spring, it asserted that “money laundering services are being offered practically as a standard product across the country.”
Government regulators did not share that assessment.
“Let us not unnecessarily downgrade ourself,” a deputy governor of the Reserve Bank of India, the nation’s central bank, told reporters. “Our system to prevent money laundering is perfect.”
Indian authorities got support from the Financial Action Task Force, a Paris-based intergovernmental body that developed nations have deputized as the main watchdog in the global fight against money laundering.
In June, FATF released a long-in-the-works evaluation that gave India’s systems for fighting money laundering the organization’s stamp of approval. India was doing so well, in fact, that FATF said it no longer needed to do regular follow-ups to check India’s technical compliance with international standards.
Ultimately, though, Indian officials had to acknowledge that the country’s anti-money laundering regime fell short of perfect. A review by the Reserve Bank in the wake of Cobrapost’s exposÃ©s found that 25 banks had indeed violated anti-money laundering rules. Among them were some of India’s largest banks.
Aniruddha Bahal, Cobrapost’s founder, says the episode suggests FATF is more interested in shuffling papers than in cracking down on money laundering.
The United Nations Office on Drugs and Crime estimates that just a fraction of 1 percent of money that’s laundered around the globe is intercepted and recovered.
Instead of focusing on paper compliance, Bahal says, FATF “should have people on the ground. You have to have a way for international organizations to do spot checks on banks.”
FAFT acknowledged in a prepared statement that its assessment focused on India’s on-paper compliance rather than on how well its anti-money laundering regime works. It says future reviews of India and other countries will shift the focus to their on-the-ground success in reducing the flow of dirty money.
Concerns about the role of offshore havens in money laundering and tax evasion go back the better part of a century.
In 1921, the U.S. Congress raised questions about foreign subsidiaries that were used to “milk” their U.S. parent corporations, helping them cut tax bills. In 1937, U.S. Treasury Secretary Henry Morgenthau warned President Franklin D. Roosevelt that Americans were dodging taxes by setting up holding companies in the Bahamas, Newfoundland and elsewhere, resorting to “all manner of devices to prevent the acquisition of information regarding their companies.”
It wasn’t until the late 1990s that world powers began their first coordinated attack on offshore shell games.
Two multinational groups counting the U.S., Japan and other powerful nations as members led the effort. The Financial Action Task Force targeted money laundering by criminals and terrorists. The Organization for Economic Cooperation and Development zeroed in on offshore-enabled tax evasion.
In 2000, FATF and the OECD announced blacklists for “non-cooperative” jurisdictions that, for example, failed to do much to help foreign authorities investigating tax and financial crimes.
The OECD listed 35 jurisdictions, including the Bahamas, the Cook Islands and Monaco. OECD members threatened economic sanctions against jurisdictions that didn’t change banking secrecy provisions and other practices that encouraged the flow of unreported cash.
The U.S. supported the OECD’s blacklist under the Clinton administration. American support didn’t hold, though, after the 2000 election put George W. Bush in the White House.
The Center for Freedom and Prosperity — a Washington, D.C.-based group associated with corporate-funded think tanks — launched an aggressive lobbying campaign against the OECD’s efforts.
The group painted the OECD, which like FATF is headquartered in Paris, as a band of European socialists bent on destroying free enterprise. Along with calling on anti-tax conservatives in the U.S. Congress, it also enlisted the support of the liberal-leaning Congressional Black Caucus, which voiced concern that the measures could hurt island nations’ fragile economies.
The lobbying paid off.
The Bush administration announced in May 2001 that it was withdrawing U.S. support for the OECD’s tax haven assault. Undercut by the U.S.’s reversal and bureaucratic infighting in other big countries, the OECD’s blacklist dwindled into “a mixture of cheerleading and scorekeeping,” the authoritative newsletter Tax Notes said.
Saint-Amans, who joined the OECD in 2007, says the organization’s early 2000s push was “not a great success” because it allowed offshore havens to escape its blacklist by making empty promises.
“They all committed, but did nothing,” he says.
By April 2002, all but seven of the 35 jurisdictions named by the OECD — Andorra, Liechtenstein, Liberia, Monaco, the Marshall Islands, Nauru and Vanuatu — had managed to get off the OECD’s blacklist. By 2009, no countries remained on the list.
The next big push to combat offshore secrecy began in 2008.
Acting on information from a whistleblower, U.S. authorities charged that Swiss banking giant UBS maintained some 17,000 undisclosed accounts for U.S. citizens. UBS eventually turned over the names of nearly 5,000 clients and paid a $780 million to settle charges that it had carried out a scheme to defraud the U.S.
As the UBS case was playing out, governments around the globe were becoming increasingly concerned about shrinking tax collections in the aftermath of the September 2008 financial crash.
In advance of the July 2009 Italian summit of the “Group of 8” club of rich nations, Cameron’s predecessor as U.K. Prime Minister, Gordon Brown, proclaimed: “The world should be in no doubt that the writing is on the wall for tax havens.”
Tough talk from Brown and other leaders produced modest reforms.
Rich nations moved to expand what financial transparency advocates say is a mostly ineffectual method of policing offshore transactions — agreements between countries in which they promise to honor requests from each other about specific individuals suspected of hiding assets.
If Spain, for example, wants information about assets a Spaniard has stashed in the Bahamas, it lodges a request with Bahamian authorities. The catch is Spanish authorities must already know the name and account details of the suspected tax dodger, or see the request rejected as a “fishing expedition.”
By 2010 “the tax havens were sort of relieved,” says Jason Sharman, an Australian political scientist and co-author of a forthcoming book on offshore issues, Global Shell Games. “They thought that they had had a near-death experience in 2009, but that their problems were behind them.”
Over the next two years, policymakers and activists kept pushing for change, winning small victories but also hitting roadblocks.
In 2012, the European Union’s tax commissioner, Lithuanian economist Algirdas Semeta, found his efforts to fight cross-border tax evasion schemes frustrated by Austria and Luxembourg, two EU members with traditions of banking secrecy. “Tax havens give EU commissioner the runaround,” a headline in the independent EU Observer said.
Things were about to change. What Semeta called a “perfect storm” of events would soon transform tax politics in Europe, making it easier for him and like-minded officials around the world to put aggressive plans in motion.
These events included an offshore scandal in France involving President Hollande’s former budget minister and the rollout of a potent U.S. law, the Foreign Account Tax Compliance Act, which threatens to slap financial penalties on foreign banks that refuse to report accounts controlled by U.S. citizens.
The offshore issue reached a boiling point in April 2013 when the International Consortium of Investigative Journalists revealed a leak of 2.5 million secret tax-haven records, publishing stories in more than 40 news outlets, including France’s Le Monde, which added to the pressure on Hollande by exposing the offshore holdings of yet another confidant, his campaign manager.
ICIJ’s “Offshore Leaks” probe sparked official investigations in Greece, South Korea, the Philippines and other lands, and was credited with helping force Hollande to promise an end to tax havens. The EU’s Semeta called ICIJ’s disclosures “the most significant trigger” in the transformation of tax politics in Europe.
Days after the leak stories broke, France, Germany, Italy, Spain and the U.K. announced they had agreed to an expansive plan for swapping tax information across borders. Soon after, British tax havens in the English Channel and the Caribbean promised to share information on offshore bank accounts.
At a summit in September in Russia, the “Group of 20” club approved a historic plan for automatic sharing of tax information across borders — a big change from the previous one-off system of information sharing “on request.” More than 60 nations have agreed to join.
Under the plan, countries would regularly hand over data on financial activities of foreign citizens to the tax authorities in their home nations. The Netherlands, for example, would as a matter of course share information with Germany about Germans with accounts in Dutch banks.
The G20 says its members will begin automatic data exchange by 2015, and that the group will work to help developing nations “reap the benefits of a more transparent international tax system.”
In the shadows
How well the G20 plan will succeed may depend on the answer to this question: How good is the information that will be shared?
Anti-corruption activists worry that information-sharing efforts will be frustrated by the secrecy that pervades the offshore system. Few people who move assets offshore set up bank accounts in their own names. Instead, they hide behind layers of anonymous corporate structures that obscure the paper trails and the players.
A bank account in Switzerland might, for example, be controlled by a shell company in Belize that’s owned by a shadowy trust in the South Pacific’s Cook Islands and overseen, on paper, by a corporate director in Cyprus who is paid to know nothing about the company’s activities.
Most jurisdictions — offshore and onshore — don’t verify and collect the names of the real people behind companies created within their borders.
“If you don’t have a public register of who owns what companies, it defeats the purpose of having automatic exchange of information,” says Alvin Mosioma, the Kenya-based director of Tax Justice Network Africa, a non-governmental advocacy group.
Sharman, the Australian political scientist, believes automatic information sharing will limit middling tax dodgers in the EU and the U.S., but won’t do much to stop super-wealthy tax evaders who can afford to set up sophisticated offshore structures that either provide maximum secrecy or a “veneer of legality” created by accounting ingenuity.
Without transparency on company ownership, he says, “you’re only going to catch the real idiots who are maintaining bank accounts in their own names — the real small-timers.”
Around the world, shell companies are a key tool for hiding the flow of offshore money, according to a World Bank study of 150 “grand corruption cases” spanning more than three decades.
When James Ibori was governor of Nigeria’s oil-rich Delta State, for example, he and his cronies pocketed an estimated $250 million in government graft with the help of a web of companies based in Switzerland, Mauritius and elsewhere.
These companies provided cover that allowed him to shift millions of dollars through accounts at Citibank, Barclays and HSBC. He purchased a $20 million private jet, a fleet of armored Range Rovers and million-dollar homes in London, Houston and Washington, D.C.
Ibori was eventually brought to justice in London and sentenced to 13 years in prison, thanks in large measure to Scotland Yard’s discovery of two incriminating computer hard drives.
Most investigations involving shell companies, however, come up empty.
In a case highlighted by a U.S. Senate probe, U.S. Homeland Security agents investigating nearly $150 million in suspect wire transfers uncovered a network of some 800 U.S. companies that were shifting money among themselves and out to offshore havens. U.S. Sen. Carl Levin of Michigan, who has campaigned against tax havens for decades, described this arrangement as a “massive financial shell game.”
None of the incorporation documents in various states listed the firms’ real owners. The paper trail on 200 Utah companies involved in the scheme led to a Delaware-based “company formation agent” who had been questioned in at least eight earlier investigations targeting suspected money laundering by U.S. shell companies, Levin said.
The incorporation agent said he didn’t know the identities of the real owners behind the companies he set up, because the law didn’t require him to collect that information. The investigation — like the eight previous investigations that had ended up at his door — “hit a dead end,” Levin said.
The case illustrates that the U.S. and other big nations aren’t simply victims of the offshore secrecy. Western countries play a role in the offshore system through laws that allow company owners to remain hidden and through the offshore activities of brand-name companies and banks.
Apple, Google and other U.S. multinationals have embraced offshore havens and complex shelters that allow them to avoid taxes. Big U.S. banks frequently provide access to money launderers and fraudsters, government investigations have found. Wachovia Bank, for example, paid $160 million to settle charges that it had allowed Mexican drug cartels to launder billions of dollars.
Many state governments across America, meanwhile, benefit from serving as tax and secrecy havens for corporations. Delaware collects hundreds of millions of dollars each year in taxes and fees from absentee corporations, about a quarter of the tiny state’s budget.
Offshore centers’ defenders often cite Delaware’s reputation as a haven for arms smugglers and con men as evidence of the U.S.’s failure to keep its own house clean. The Cayman Islands financial industry’s trade group calls Delaware “the biggest hypocrisy of all … Delaware continues to provide probably the best option to set up a corporation without proper disclosure.”
‘We can’t wait’
Legislation proposed in August by Sen. Levin would require states to identify the real owners of companies created within their borders.
The bill faces hurdles. Similar legislation has been repeatedly shot down in Congress in recent years, and the bill has some influential opponents, including the American Bankers Association, the American Bar Association and the U.S. Chamber of Commerce. The Chamber believes such legislation would hit “every form of business, particularly small businesses, with new, costly and complex regulatory burdens.”
Global Financial Integrity, a leading anti-corruption group, notes that the U.S. and other Western nations have failed for a decade to live up to their pledges to meet even FATF’s less-than-stringent standards for transparency on company ownership.
The advocacy group wants a worldwide requirement that company ownership be verified and listed in public registries, so the information is open not only to government authorities but also to non-governmental organizations, media and citizens.
UK Prime Minister Cameron announced in October that Britain would open a public registry that names the true owners of British companies. But that decision doesn’t appear to apply yet to the country’s overseas territories and dependencies — and the EU and the U.S. have yet to follow suit.
Mosioma, the Kenya-based activist, says poor nations desperately need swift, global action on shell companies and other tools of the offshore trade.
Offshore secrecy, he argues, “lies at the heart” of corruption and poverty in Africa and other struggling regions, allowing corrupt officials and businesspeople to loot public treasuries and plunder oil and mineral wealth. Global Financial Integrity estimates Africa lost between $850 billion and $1.8 trillion in illicit financial transfers from 1970 to 2008.
“Rich nations have a reputation for making grand pronouncements and not keeping them. That for us is a reason for pessimism,” Mosioma says. “It’s also a reason to keep the pressure on. We can’t wait for another decade of talking about this.”