Stop this timidity in ending tax haven abuse

The Liechtenstein Affair could be a watershed in the fight against tax evasion, organised crime and corruption. Germany is rallying support in Europe to crack down on tax havens and financial secrecy. News commentary headlines such as "Blockade the Tax Havens" capture a fast-changing mood. In the US, Democratic senators Barack Obama and Carl Levin, and Norm Coleman, a Republican senator, have sponsored the Stop Tax Haven Abuse Act. The expanding credit crisis has helped underline the dangers of a lack of trans-parency in international finance, poor regulation and insufficient

co-operation. Fighting tax haven abuses requires tackling all of these.

Yet the world risks wasting this political capital on the wrong targets. We are pursuing the timorous policies of a past age to tackle tax havens.

Last month in the Financial Times, the secretary-general of the Organisation for Economic Co-operation and Development called on Liechtenstein to "restore its reputation in the inter-national community by establishing a network of bilateral tax agreements to improve co-operation". This exemplifies the feeble efforts of the past. The OECD's approach is piecemeal. Developing countries, especially vulnerable to tax abuse, are all but absent.

The OECD has removed all but three jurisdictions - Liechtenstein, Andorra and Monaco - from its list of uncooperative tax havens. Yet tax evasion remains rampant. The World Bank estimates annual cross-border flows from criminal activities, corruption and tax evasion at $1,000bn-$1,600bn (£504bn- £806bn), of which half comes from developing and transitional economies. This puts OECD countries' $100bn-odd in annual foreign aid into perspective.

Other schemes are as ineffective. The intergovernmental Financial Action Task Force (FATF) to combat money-laundering and terrorist financing has removed all jurisdictions, including Liechtenstein, from its blacklist. Liechtenstein's prime minister recently noted that the International Monetary Fund had twice examined his country thoroughly and given it "positive marks". Liechtenstein has adhered to Europe's Savings Tax Directive on the taxation of interest income, yet loopholes have allowed business as usual.

The OECD, the FATF and others focus on tiny aspects of the problem, such as narrowly defined moneylaundering, while not properly tackling tax evasion and other forms of tax abuse that are far more important. All these activities use the same subterfuges: offshore trusts, bank secrecy and so on. The current initiatives have, in effect, legitimised the illegitimate.

It is time for radical approaches to make international finance more transparent. The focus must shift towards the infrastructure of cross-border econ-omic crime, including accountants, lawyers and financial institutions - not just the legal mechanisms that underpin secrecy. Both of the main mechanisms - bank secrecy and secrecy of beneficial ownership of assets through offshore trusts and the like - must be tackled. Harmful yet legal tax practices must be targeted too and US legislators should enact the Stop Tax Haven Abuse Act.

The OECD's approach to tax transparency requires information to be exchanged with other jurisdictions only on request. In other words, you must know what you are looking for before you request it. This is shockingly inadequate. We need the automatic exchange of tax information between jurisdictions and all developing countries must be included.

Tax, not aid, is the most sustainable source of finance for development, and tax havens undermine developing countries' efforts to pay their way. The United Nations' 2002 Monterrey Consensus and the 2005 UN World Summit require developing countries to mobilise domestic resources for development. This means tackling illicit capital flight and tax evasion. A forthcoming UN Code of Conduct on inter-national co-operation in combating tax evasion offers a useful framework.

Finally, international taxation has been mostly ignored by aid organisations and other civil society groups, partly because it is seen as too complex. It is time for them to wake up. Ending tax haven abuses not only would help the citizens of rich countries but also could do more for developing countries than all foreign aid combined.

John Christensen is a former economic adviser to the States of Jersey and the UK government and is director of the Tax Justice Network. David Spencer is a practising lawyer in New York, specialising in tax and banking law