Tax havens: Can promises to shut them down be believed?

G-20 nations pledge to address this subject at meeting in London next month. Analysts are skeptical.

White House Chief of Staff Rahm Emmanuel famously said in January, "never let a serious crisis go to waste."

In that same vein of thinking, John Christensen had hoped the global financial crisis would lead to reforms reducing bank secrecy and closing many of the world's 90 or so tax havens. It was, after all, a lack of transparency in banking in the United States that allowed the creation of trillions of dollars of complex derivatives, which contributed to the damaging credit freeze.

But now, the director of Tax Justice Network in London is "feeling pessimistic" that leaders of the world's most powerful nations will tackle the issue seriously at the Group of 20 meeting in London April 2.

In recent days, many officials from various tax-haven nations have pledged to ease secrecy laws that enable citizens of the US and other nations to avoid paying taxes on their investments and savings. It's estimated the US alone loses $100 billion in tax revenues as a result of the flight of capital to tax havens.

To Mr. Christensen, "These initiatives are not worth the paper they are written on," though news of several pledges made the front page of the Wall Street Journal this month. "They are window-dressing," he adds.

Tax havens have existed for decades, and rich industrial nations have not taken stern measures to wipe them out. Reason: Banking industries "have very powerful lobbies," explains Christensen.

After World War II, Switzerland – famous for pocketknives and yodeling, as well as providing the world's largest tax haven – often noted that Jews and opponents of Hitler were able to hide assets safely in the mountainous nation. Christensen regards this as "a clever argument" because banking secrecy also helped Nazis, thieving African rulers, the Mafia, and others to hide their money. "This secrecy actually fosters criminality," he says.

If the G-20 fails to tackle bank secrecy, it could lead to another financial crisis in the years ahead, warns Raymond Baker, another anti-tax-haven activist and director of Global Financial Integrity in Washington. Last November, the G-20 put greater banking transparency on a par with banking regulation reform as necessary to deal with the financial crisis. Now, adds Mr. Baker, G-20 leaders appear to be backing off secrecy reform.

A possible exception is Germany. Last week the German finance ministry in Berlin promised to push for international measures to crack down on offshore tax havens at the London summit.

The issue is bigger than just a bunch of millionaires trying to reduce their tax burden. In the US, the "effective" federal income-tax rate (what is actually paid after all deductions) for the wealthiest 1 percent was 19.4 percent in 2005. In some European nations, the burden on the rich is higher.

Mr. Baker estimates that half of global trade and capital movements, legal and illegal, move through what he calls the world's "shadow financial structure." This system, expanding for half a century, consists of tax havens, secret jurisdictions, disguised corporations, anonymous trust accounts, and fake foundations. This murky setup contributed to the difficulty of appraising the quality of assets held by financial institutions. So major US and European banks no longer trust one another and do less business.

Last week, a task force on "Economic Transparency" from Baker's organization estimated that $1 trillion a year of illicitly generated money is shifted abroad from developing countries through this shadowy framework. This, the report says, constitutes "the most damaging economic condition hurting the poor, undermining poverty alleviation, and delaying sustainable growth." (That sum far exceeds all foreign aid that rich nations send to poorer nations.)

Both the task force and the Tax Justice Network this month have proposed reforms. For instance, the task force urges automatic cross-border exchange of tax information on personal and business accounts, and confirmation of beneficial ownership in all banking and securities accounts (who owns what).

Last Tuesday, Sen. Max Baucus (D), chairman of the Senate Finance Committee, held a hearing on a bill "to detect, deter, discourage offshore tax evasion." If passed, it would greatly damage tax havens.

Considering this legislation, and a possibility of G-20 action, some major depositors in Swiss accounts have been taking out money, reports Harald Malmgren, a Washington consulting economist. They are encountering resistance from banks to these withdrawals, making depositors "fearful" about the safety of their money.

Interestingly, both Baker and Christensen reckon Switzerland could remain a banking giant in the world without secrecy because it has so many qualified economists, accountants, and lawyers.

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