Back to story > Why fiction is clouding fact: Efforts taken by offshore centres to tackle financial crime

The assault on offshore financial centres isn’t new. Onshore governments, as well as intergovernmental organisations, such as the Organisation for Economic Co-operation and Development and the EU, have been attacking offshore financial centres for years. Over time, these efforts intensified as technologies slashed communications costs, opening the door to increased international competition. This history gives onshore governments and inter-governmental organizations a range of methods with which to pressure offshore financial centres.

First, onshore jurisdictions can pressure the offshore community with calls for harmonisation or a level playing field regarding taxation and financial regulation. Faced with the reality of massive competitive disadvantages – such as high tax rates and burdensome labour regulations – Europe’s welfare states have set out on a campaign attempting to prop up tax rates, eradicate financial confidentiality and impose a form of global financial regulation.

Through harmonisation, onshore jurisdictions attempt to force upon the more nimble offshore jurisdictions a set of protectionist rules designed to promote the interests of large onshore bureaucracies.

Second, the threat of treaty suspension or, more commonly today, onshore legislation can be used as a tool to persuade the offshore community to comply with onshore policies.

The former is exemplified by the US actions regarding the Netherlands Antilles’ treatment of Eurodollar interest. A 1950s tax treaty between the US and the Netherlands Antilles contained language that allowed interest payments paid to foreign investors to avoid a 30 per cent withholding tax by the US. In 1984, the US, after unsuccessfully attempting to negotiate a tax information agreement, cancelled the treaty and repealed the US withholding tax, eliminating the need for US firms to use the Netherlands Antilles to gain access to the Eurodollar market.

The Stop Tax Haven Abuse bill is an example of prospective legislation aimed at destroying the offshore competitive advantage by increasing transaction costs associated with offshore financial centres. This act attempts to stifle the use of offshore jurisdictions by employing a combination of presumptions concerning control of offshore entities, disclosure rules and increased penalties. The bill provides a list of 34 secrecy jurisdictions and grants the US Treasury authority to take special measures against foreign jurisdictions and financial institutions that do not change their privacy and tax laws to facilitate the extra-territorial enforcement of US tax laws.

Third, the OECD and onshore jurisdictions have compelled the implementation of information exchange agreements by threatening blacklisting and possible sanctions. In March, Austria, Andorra, Hong Kong, Luxembourg, Singapore and Switzerland agreed to loosen their banking secrecy laws in an attempt to avoid being added to the G20’s global blacklist. These nations agreed to adhere to the OECD’s Model Tax Convention’s Article 26. The convention provides for an exchange of information between tax authorities, on request, if there is probable cause for tax evasion.

Germany’s finance minister, Peer Steinbrück, articulated the power of blacklisting. He compared the Swiss to the Native Americans running scared from the US cavalry. Mr Steinbrück said that the threat of putting Switzerland on the OECD list of non-cooperative countries was "like having the Seventh Cavalry in Fort Yuma that can be ordered to ride out but doesn’t have to. The important thing is that the Indians know it exists".

Finally, paid informants provide a means by which onshore regulators circumvent the restrictions in tax information agreements and mutual legal assistance treaties that prevent fishing expeditions. This is a long-standing practice. The US, through its whistleblower/informant programme, has been paying for tax information since March 1867. Under the rule, the Secretary of the Treasury may pay such amounts as deemed necessary "for detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same".

The use of paid informants expanded significantly when, in 2008, an international tax scandal erupted after the theft and sale of confidential client financial data from a Liechtenstein bank. This data was sold by the thief to the German intelligence agency in exchange for a new identity and US$7.4m (the British authorities paid an additional $190,000). Investigators in Britain, Australia, Canada, France, Italy, New Zealand, Sweden and the US are initiating enforcement actions in connection with the data illegally obtained in Liechtenstein. Interpol, at Liechtenstein’s request, placed the bank employee on an international most-wanted list for allegedly stealing and selling the confidential financial data. He remains at large.

The preceding examples are but a small sampling of the devices available to onshore nations. While waging war against offshore financial centres, in an attempt to "level the playing field", the international community must thoughtfully consider the notion that competition among dissimilar regimes provides the most efficient means of obtaining good policy decisions without stifling creativity and innovation. Finding the balance between competition and harmonisation is essential so society can continue to benefit from globalisation and international trade.

Brian Singer
J.D. University of Illinois College of Law

T. + 1 (312) 285 6125
E. brian@singerconsultants.com