Should governments use taxpayers’ money to pay crooks for stolen data to gain information on the money stashed away by their wealthy citizens in so-called ‘tax havens’ elsewhere in the world?

This is one of the easier questions begging to be answered as the governments of particularly the developed western economies and international financial/economic organisations clamour for bigger checks on and transparency from tax havens.

More complex and even more elusive are the answers to questions like how you can enforce rules and regulations for tax havens without establishing jurisdiction over what are presently sovereign territories, destroying the very fundamentals on which their businesses are built and their positive contributions to the global economy with the dangers inherent to their operations.

Should there be European Union or other multi-national organisation rules on tax heavens? Is such tax evasion morally wrong or a clever use of accountants?

On a very practical level, dealing with the challenges posed by tax havens in the global economy is not only as complex as the reasons for their very existence but could easily also be counter-productive.

An official from Liechtenstein – whose present stand-off with Germany over tax-dodging German citizens’ accounts in this tiny princedom triggered the latest acute focus on tax havens – perhaps said it best in a recent interview with the United Kingdom’s The Observer on Sunday: “Money is a very shy animal. The biggest mistake politicians are making is that they think if they dry up an oasis, the camel won’t walk to the next one. Look at the number of East Asian locations – Macao, Hong Kong, Singapore, Labuan – that European high net worth individuals have already settled on. “Why … set up in these places with European clients? It’s because their European clients flee areas that Europe can influence. You can’t say it will go to east Asia. It already has.”1

As the global economy has been maturing over the last decade or more on the back of the Internet, there has been very strong exponential growth in the funds going to tax havens. While confidentiality, discreetness, secrecy and soft cost structures are at the heart of the very existence of tax havens, exact figures are not easy to come by.

A recent BBC report by economics editor Sean O’Grady stated that “globally, estimates of the total funds parked by individuals in offshore havens vary from $7 trillion to $12 trillion”.2

The German Finance Minister Peer Steinbruck recently claimed that tax evasion is costing his country alone in the order of €30 billion
per year.

Tax havens have for some time already not been the exclusive playground of the super rich or large corporations. Grace Perez-Navarro, deputy-director of the Centre of Tax Policy and Administration of the Organisation for Economic Cooperation and Development (OECD) – the 30-nation organisation of the world’s richest economies –, recently said about tax havens:

“Are they more popular, more useful, more dangerous? They’re probably all of those things. Back in the day, when you didn’t have the Internet, you had people carrying suitcases on a Pan Am flight to a European tax haven. Now all that’s changed.”

She explained that tax havens are no longer just for the wealthiest or shadiest characters. Through electronic banking and credit card programs, they have begun to appeal to upper middle-class professionals around the world.

Under these circumstances, tax havens have become a threat to the integrity of the tax-bases of a number of mature developed economies. OECD secretary-general Angel Gurria was recently quoted on the organisation’s website as saying that “the openness of the global economy can only be sustained if participants assume mutual responsibilities, as well as sharing benefits. Excessive bank secrecy rules and a failure to exchange information on foreign tax evaders are relics of a different time and have no role to play in the relations between democratic societies.”

He is also quoted as saying that “as long as there are financial centres that refuse to co-operate in bilateral tax information exchange and that fail to meet international transparency standards, residents in other countries will continue to be tempted to continue to evade their tax obligations.”

Since the attack on the World Trade Centre in New York on 11 September 2001, there has also been growing concern about the role that tax havens and other liberal banking procedures and structures play in what Loretta Napoleoni describes as “The New Economy of Terror” in her book Terror Inc; Tracing The Money Behind Global Terrorism.3

Napoleoni estimates in her academically well researched book the “new economy of terror” to be approximately 5% of the world GDP.

In his introduction to this book, George Magnus, chief economist of the largest Swiss private bank UBS, writes that the study tells the story of how “state-sponsored terrorism during the Cold War evolves into self-financed armed groups relying on crime and then into organisations which use and manage sophisticated business techniques and financing vehichles in order to promote their goals.

“Globalisation allowed non-state entities to promote a variety of liberal causes, social change and economic advancements, but has also facilitated the networking of terrorist movements like al-Qaeda and the growing sophistication of the ‘terror economy’.

“Privatisation, delegulation, openness, the free movement of labour and capital, technological advances – all hailed as the key ingredients of economic success in the last 20 years – have been exploited by and adapted into the terror economy in a macabre form of geo-political ju-jitsu. In other words, the very strengths of legitimate economies have been turned into double-edged swords.”

Another often-used argument goes that, depending on assumptions about returns and tax rates, the sizeable funds hidden in tax havens could yield around $250 billion for legitimate public spending. “That ought to be enough, for example, to achieve many of the United Nations Millennium Development Goals by 2015,” O’Grady stated in his report.

The sceptics would argue that this line of thought is more emotional propaganda used to occupy the moral high ground than it is a realistic expectation.

In March, as the EU was moving towards new measures to come to grips with tax evasion and money laundering and the role of tax havens in facilitating it, there were some serious questions about the measures to which certain Western governments were willing to resort in gaining information on alleged tax dodgers.

The German government was entangled in controversy after it allowed its “Secret Service to pay a thief more than €4 million for data on wealthy and allegedly tax-dodging Germans,” The Times of London reported.4

O’Grady’s report has brought to light that the UK government, after originally turning down the information offered to it, has also since paid for information from the same source. It yielded information on about 100 people who could collectively owe the UK as much as £100 million.

According to a report by The Observer, the source was a convicted criminal, who has now benefited handsomely on at least three occasions from his theft of data from a private bank in Liechtenstein.

“Heinrich Kieber, a 42-year-old now thought to be living under a new identity in Australia, allegedly used the information to bribe Liechtenstein authorities into reducing a prison sentence he faced. Liechtenstein obliged, the discs were returned, and it thought the matter ended there.

“The problem was that Kieber made copies of the files. In 2006, he touted the data to the UK Inland Revenue which, strangely, refused to buy the information.

“But last June, the German secret service paid €4.2m for the discs. The information was shared with US authorities. Seven months later, on Valentine’s Day, German investigators made their first move with the arrest of one of the country’s most prominent businessmen. There will be many more,” The Observer reported.

Since then, raids against wealthy Germans have seen the detention of, amongst others, Klaus Zumwinkel, head of the postal group Deutche Post and, ironically, Karl Betzl, the data protection watchdog for the state of Bavaria.

By early March, it seemed as though the EU’s sub-structure for economics and finance ministers, Ecofin, was about to move on a strategy to bring the continent’s tax havens under control. They were hoping to beef up the EU’s savings tax directive.

Tax experts were sceptical about the change for success. One expert was quoted by The Observer as saying that while tax evasion was illegal, “Tax avoidance is the second oldest profession in the world, and just as difficult to control. The tax havens will survive. There are stacks of money out there. If they close down the ones in Europe, the money will move to Dubai and Singapore.”

There are also mutterings about other possible measures that could be used like official sanctions, levies on money going to tax havens and international co-operation to make life difficult for these havens. South Africa will also not find it easy to remain outside such attempts.

The Guardian recently reported that the UK department of Revenue and Customs, as part of a “co-ordinated global crackdown” on tax evasion, “was working with tax authorities in Australia, Canada, France, Italy, New Zealand, Sweden, Spain, South Africa and the US …”5

In fact, the United States’ fight against tax havens goes back some time and illustrates that, for at least the UK, a global effort could pose its own challenges.

Tax havens like Jersey, Guernsey and the Isle of Man have already come under the scrutiny of US senator Carl Levin, who headed the investigation the eventually led to the collapse of Enron. They were also included in a bill aimed at stopping tax haven abuse in a move that was supported by presidential candidate Barack Obama in his position as senator.

How complicated the situation can become is illustrated by an argument put forward by professor Mihir Desai of Harvard University’s School of Business Administration. Tax havens may actually bring business to nearby economies.

“The intuition is, are you more likely to locate in Germany if you know you can use a nearby tax haven to reduce the cost of capital,” he argues.

In a recent paper which he co-wrote, he also alludes to how measures in one area of financial/economic activity can have unintended impact on another area: “… a 1997 regulatory change with unrelated objectives lowered the cost of tax avoidance for a subset of firms … The regulations were intended to reduce the administrative burdens faced by small firms … it also had the unintended consequence of facilitating tax avoidance by large US-based multinational firms through the use of what is known as hybrid entities.”6

Reuters recently reported Perez-Navarro as saying that the OECD “don’t want to put tax havens out of business, just pressure them into adopting more effecitve and transparent regulations.”

But, as the Reuters report aptly remarks, “As the case of Liechtenstein shows, however, sometimes peer pressure may not be enough.” Perhaps it is exactly the lack of those things suggested by Peres-Navarro that prevent the funds at stake going totally underground.

Officials in Liechtenstein maintain that by paying for data, Gemany has effectively incentivised data theft. They believe that Germany has declared economic war on a practice that – under Liechtenstein law – is perfectly legal.

The head of the Liechtenstein Banker Association also maintains that all accounts are monitored and that they act within anti-money laundering frameworks which are completely standardised.

Piet Coetzer

1
Nick Mathiason. “A journey from haven to hell”. The Observer, Sunday March 2, 2008.

2 Sean O’Grady. 4 March 2008

3
Terror Inc: Tracing The Money Behind Global Terrorism. Penguin, 2003, 2004.

4
Roger Boyes. 12 February, 2008.

5
David Gow. “ECD leads crackdown on tax evaders”. The Guardian, 27 February, 2008

6
Mihir A. Desai & Dhammika Dharmapala. Corporate Tax Avoidance and Firm Value. University of Connecticut and University of Michigan, August 2007.