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February 20, 2008 6:53 pm
Freer, more open and better integrated financial markets have benefited people and companies around the world. They have lowered the cost of capital and encouraged greater competition in the provision of financial services. But they have also facilitated distortions such as money laundering and tax evasion.
Financial cases such as Enron, WorldCom, Parmalat, Siemens, the investigations into BAE Systems and now the German tax evasion inquiry have revealed serious weaknesses in governance and market functions. Some of the issues are for companies to address. But governments must also play their role in setting the rules and enforcing standards.
As new technologies shrink geography, opportunities have opened up for dishonest taxpayers to use tax havens to evade their tax obligations. Jurisdictions characterised by strict bank secrecy and a policy or practice of non-co-operation with law enforcement in other countries prosper by attracting brass plate banks, anonymous financial companies and asset protection trusts. But they do so to the detriment of the integrity of the world financial system and such behaviour is no longer acceptable. Money laundering and the misuse of corporate vehicles for tax evasion and other ways of exploiting financial markets for personal gain have expanded to the point where they threaten the political and economic interests of sovereign states. It is time for the governments of countries where such practices are prevalent to accept their responsibilities and crack down on them – or face the consequences.
Most Organisation for Economic Co-operation and Development governments have responded to the threats posed by financial crimes by enacting legislation to detect and deter such practices and by strengthening their law enforcement and tax enforcement capacity. Money laundering has been criminalised and financial institutions are required to report suspicious transactions. Stricter regulatory and supervisory measures have been put in place and access to beneficial ownership information and trust formation rules has been strengthened in most OECD countries and in many offshore financial centres. Almost all the jurisdictions identified as potential tax havens by the OECD in 1998 have committed to the principles of transparency and effective exchange of information. Only three still remain on the OECD’s list of unco-operative tax havens: Liechtenstein, Monaco and Andorra.
Now the cat is out of the bag. The disclosure of tax evasion schemes running through Liechtenstein’s oldest bank has confirmed what tax authorities suspected. The affair has tarnished Liechtenstein’s attractiveness as a financial centre, not just for legitimate investors but also for tax evaders, who know their affairs will now come under increased scrutiny by all countries. Liechtenstein’s next moves are critical. It can continue to ignore the trend towards greater co-operation in combating tax evasion in the hope of recapturing the business of tax evaders. Or it can work to restore its reputation in the international community by establishing a network of bilateral tax agreements to improve co-operation.
At present, Liechtenstein’s system of foundations and other entities that hold private wealth facilitate a culture of secrecy. But things are already changing. As a result of the campaign by the Financial Action Task Force, an international anti-money-laundering group, Liechtenstein now obtains information on the beneficial owners behind these foundations. For the moment, it is still not making that information available to other countries for tax enforcement purposes. But a decision to change tack is within the government’s reach.
In Wednesday’s FT, Otmar Hasler, the Liechtenstein prime minister, announced further steps, in the context of its negotiations with the European Union, that may lead to more co-operation in matters involving fraud, including tax fraud. This would be a step in the right direction. Other financial centres, such as Jersey and the Isle of Man, have made great strides in strengthening their bilateral tax co-operation and are thriving. I hope Liechtenstein continues down this path of greater co-operation. By implementing high standards of transparency and tax co-operation, Liechtenstein will not only rebuild faith in its financial services sector but may also gain benefits for the remaining 70 per cent of its economy. So why wait and pay a high price in terms of reputation and standing in the international community?
The writer is secretary-general of the Organisation for Economic Co-operation and Development
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