“We are small in size but we have a lot of things to offer. We want to be taken seriously and engage in the great debates of our time.” Speaking in his soft, American accent, His Serene Highness, Albert II, Prince of Monaco, gazed out at a roomful of journalists gathered earlier this month in the splendour of The Ritz hotel on Piccadilly. It is rare for a sitting monarch to do his own public relations, but Albert II and his sunny principality are in something of a bind. They have been caught up in a controversial debate that they would have preferred to avoid: how can a country that insists on banking secrecy put a stop to unwelcome whispers about tax evasion?
Later the same day, Albert left the press behind and moved on to more congenial company: a private party to celebrate the opening of Monaco’s new London headquarters – the Maison de Monaco. This grand town house near Grosvenor Square is intended to serve several functions – it’s a private office for Albert when he is in London, it houses the Monegasque consulate and now it serves as an upmarket recruitment office where wealthy Britons interested in relocating to Monaco’s soothing climate and even more soothing tax regime can take their first steps and meet representatives from the principality.
The guest list that evening included wealthy Britons with – crucially – easily traceable fortunes from the City, business and property, who are considering joining the existing 2,000-strong British contingent in Monaco. This includes some of the best-known names in British business: Sir Stelios Haji-Ionnaou, Easyjet founder, Peter Cruddas, founder of the online trading firm CMC Markets, and retail tycoon Sir Philip Green.
Knowing where their money has come from matters more to Monaco than ever. The tiny Mediterranean city-state, covering just 2 sq km, has never quite managed to shake off the novelist Somerset Maugham’s disparaging description of The Riviera, where he lived from the late 1920s as “a sunny place for shady people”.
The OECD tax haven list 2000
Andorra; Anguilla; Antigua and Barbuda;Aruba; The Bahamas; Bahrain; Barbados; Belize; British Virgin Islands; Cook Islands; Dominica; Gibraltar; Grenada; Guernsey/Sark/Alderney; Isle of Man; Jersey; Liberia Liechtenstein; The Maldives; The Marshall Islands; Monaco; Montserrat; Nauru; Netherlands Antilles; Niue; Panama; Samoa; The Seychelles; St Lucia; St Christopher & Nevis; St Vincent and the Grenadines; Tonga; Turks and Caicos; US Virgin Islands; Vanuatu.
Uncooperative tax havens 2002
Andorra; Liberia; Liechtenstein; Monaco; Marshall Islands; Nauru; Vanuatu.
Remaining unco-operative tax havens 2007
Andorra; Liechtenstein; Monaco.
Its disreputable image, while hyped by socialist French politicians, has been fuelled by a string of minor scandals. In 2002, Stephen Troth, a British-born banker, was sentenced to four and a half years in jail by a Monaco court for embezzling millions of euros from the accounts of clients – such as Michael Schumacher, the Formula 1 champion – that he managed at HSBC Republic. This exclusive private bank had originally been built up by Edmond Safra, a reclusive billionaire who died in a fire in his penthouse apartment in 1999. His death spawned theories about the involvement of the Russian mafia or Israeli commandos – although his American male nurse was later convicted of deliberately starting the fire, apparently in a bizarre attempt to pose as his wealthy employer’s saviour.
In the aftermath of 9/11, as international attention on money laundering intensified, Monaco’s banks – which have over €70bn under management – have been forced to implement strict rules on tracking dirty money. Its refusal to relinquish its secretive banking laws has brought Monaco extra worries. In 2002, Monaco found itself on a international blacklist of seven “unco-operative tax havens”, amid expressions of “disappointment” about its refusal to co-operate. Today, the list is down to three. Monaco is still on it.
Financial privacy is prized by Monaco’s residents – and the government is holding firm – but the ruling Grimaldi family and other leaders are deflecting attention from the privacy issue in an effort to attract new, and obviously legitimate, residents and businesses. They want to prove that Monaco is not just somewhere people go to hide their money. They are seeking a younger generation of tax exiles drawn from the ranks of the financial services and entrepreneurial classes, preferably with businesses and families – and definitely without any hint of ambiguity over the source of their wealth.
Twenty years ago, the guidebook that accompanied our summer holidays in France fumed that Monaco was a monstrosity: “This tiny independent principality has lived off gambling and class for a century and is one of the greatest property speculation sites in the world.” This impression was underlined over the years by lurid tales of the jet-setting lifestyles of its rich-and-famous residents who had a lot of fun and paid no direct taxes at all.
But visiting this summer, I saw a different side to Monaco that softened those early impressions. It’s not beautiful, but it feels safe, cosmopolitan and fun. The shopping boulevards mix high-end fashion and goods with everyday needs, and there’s a surprisingly good nightlife and bustling arts scene. The expatriates I met were friendlier than I had expected and enthused at length about the lively, hard-working town than lay behind Monaco’s glitzy image (in which there are more jobs in industry than in finance). As they saw it, Monaco’s refusal to buckle under pressure and open up its banking system seemed less an act of defiance than a guileless response by a small and conservative country that did not want to promise something that it would not deliver.
I am not the first Brit to be seduced by Monaco’s charms. Evelyne Genta, the elegant and immaculately coiffed London-educated Monegasque consul general, lives with her Swiss husband and two children in Belgravia. She admits that her mission of encouraging more Britons to consider Monaco is not too onerous a task: “The British discovered the Cote d’Azur. It is a long-standing relationship.”
Rather improbably, Genta insists that Monaco’s lenient tax regime is not its sole, or even its main attraction: “I am not sure that the British like to live there for tax reasons. There is also the weather, security, fantastic medical facilities and quality of life. People have the peace of mind that their children can walk to school.” With Nice airport just a six-minute helicopter ride away, visiting the UK takes no time at all, she says. “Some people take just as long to get to their country house.”
Genta may have a point – there are strings attached to becoming a tax exile. Americans are taxed by the Internal Revenue Service wherever they live – unless they give up their US citizenship. British people can find themselves subject to UK inheritance tax even if they have lived abroad for years. They also need to be scrupulous about counting the times that they visit the UK. In the pre-Budget report, Alistair Darling changed the rules that allow tax exiles to spend 90 days a year back home. Previously, they could ignore the days spent travelling, but now the days of arrival and departure will count towards the 90-day rule. That is bound to cramp the style of some “Monaco millionaires” who regularly fly in and out of the UK.
Monaco’s popularity brings its own problems. Property prices are among the highest in the world. A tiny studio flat in the centre of Monte Carlo is on the market for €1.1m, while a four-bedroom villa near the port recently changed hands for €60m. Even when money is not an issue, the right property is scarce: large apartments rarely come on to the market. Monaco is set to expand its territory by 10 per cent as Albert has ambitious plans for land reclamation from the sea, but that is only likely to ease, rather than solve, Monaco’s chronic space shortage.
Monaco is not for everyone. But Genta is keen to broaden the appeal beyond the super-rich. “The British have only one view of Monaco: as a rich person’s playground. Monaco has become more active, more business-oriented, with a younger population.” You do not, she says, need to be “vastly wealthy” to become resident in Monaco.
Setting up a grand London office to lure taxpayers out of reach of the Revenue might seem a provocative act, but Genta firmly brushes off any hint of impropriety. It is no different, she says, from Switzerland which offers lump-sum tax agreements to wealthy new residents; Belgium, which does not impose capital gains taxes; and indeed Britain which – even after this month’s announcement of a £30,000 fee – will impose little tax on the overseas income of its foreign residents – the “non-domiciled” rich, known as “non-doms”. “People forget that England is good for tax exiles, too.”
What is a tax haven?
Say “tax haven” and most people will think of a small, sun-drenched island which has prospered on the wealth secretly siphoned off from neighbouring states. But the concept is complex, and covers a wide range of offshore centres.
The origins of tax havens date back centuries. Switzerland, which passed its bank secrecy laws in the 1930s first earned its reputation as a safe haven for funds back when noblemen were fleeing the French Revolution.
The wider uses of havens for tax planning became popular in the early-20th century, when wealthy individuals started to use offshore trusts established in places like the British Channel Islands to lower their tax bills. The Liechtenstein private foundation was set up in 1926, while in 1929 Luxembourg invented a new tax-efficient form of holding company.
Offshore financial centres began to proliferate in the 1960s and 1970s, largely to get round the strict regulations on the financial sectors of industrial countries.
In the post-9/11 climate there have been crackdowns on tax havens, defined as those places that maintain strict financial secrecy and an unwillingness to exchange information. In 2000 the OECD listed 35 places that fell into this category.
But some tax havens are far more mainstream, and are simply places that offer a low rate of tax on certain categories of income.
On that score Britain might qualify: it is attracting growing numbers of foreign-born residents who use their non-domiciled status to pay little tax on their overseas income. On some measures the Netherlands would also count: a row broke out when U2 moved their music operations there to cut the tax bill on their royalties.
Even more provocatively, the US is often singled out as the most important tax haven in the world. It does not tax the bank interest earned by foreign nationals and only routinely exchanges information on earnings from such accounts with Canada. In some states, notably Delaware and Nevada, it’s possible to set up a company without disclosing ownership information.
The glossy PR is good for Monaco’s business, but it can’t hide the underlying problem of the global crackdown on tax evasion. The Paris-based Organisation for Economic Co-operation and Development (OECD) branded Monaco as an “unco-operative tax haven” in 2002 because – with the exception of its decades-old agreement with France – it does not exchange financial information with other countries.
Monaco feels stigmatised. In the tranquil surroundings of the Ministère d’Etat, a stately building on the rock of Monaco, Jean-Paul Proust, the French civil servant who became the principality’s minister of state two years ago says: “It is not fair. We want to shake off the image of a tax haven. It is not really a tax haven. Companies pay taxes in Monaco.” Monaco, he says, will fully co-operate in criminal investigations involving tax. “But we care about banking secrecy, if there is no penal offence.”
Monaco’s commitment to banking secrecy reflects the value placed on privacy by many of the seriously wealthy. This may not be because they want to avoid paying tax. They fear that financial information can end up in the wrong hands, leaving them exposed to kidnapping or extortion.
Proust does not believe that the OECD’s opprobrium has stopped people wanting to move to Monaco. “It is not a big drama. It is not very serious but I would prefer not to be on the list.”
Political changes in the US could put tax havens such as Monaco under renewed pressure to share information. Small countries – and with the exception of the Vatican, they do not come smaller than Monaco – do not have the clout to withstand too much pressure.
Big countries are getting increasing anxious about the ease with which their taxpayers seem able to opt out. The concern is not so much about the relatively small number of people who uproot themselves for tax reasons; it is about those citizens who stay put, moving only their assets to tax havens. This is no longer the preserve of the ultra-wealthy. Offshore tax planning is now regularly advertised in in-flight magazines, alongside ads for hair transplants and serviced offices.
Well-off individuals can gain online access to offshore havens immediately and anonymously. Some of this activity is not illegal, although many legally defensible schemes rely on complexity and ambiguity – and governments have stamped them out where they can. But tax authorities view a lot of offshore transactions by individuals as outright evasion.
The risks for investors in less-than-transparent offshore schemes is that electronic transactions leave footprints. Retrieved e-mails and trails left by credit cards processed onshore have allowed the tax authorities in the US, Australia and the UK to prise open offshore account details in a way that would have seemed unthinkable a decade ago. On top of that the OECD has secured promises of transparency from the 35 tiny states or islands it identified as tax havens, with the exception of Monaco, Andorra and Liechtenstein.
The European Union went in for a similar blitz, while international police investigators are involved in a global crackdown on money laundering, terrorism and drug money. These campaigns are having results. Many tax havens are now distancing themselves from what they call “the Grisham effect” – the thrillers and films that suggest offshore centres are a new Wild West for dodgy characters who arrive armed with suitcases of cash.
John Christensen is a thoughtful 56-year-old, who has charted the growth of tax havens ever since he worked in the booming trust industry in his native Jersey in the 1980s. Convinced that capital flight to tax havens was blighting African economies, he helped create the Tax Justice Network, which campaigns against tax avoidance. He says the havens are slowly changing: “Some really marginal operators have been closed down, and I suspect more will follow. Some of the smaller island havens have brought new statutes on the books but implementation remains seriously patchy.”
Even though offshore trusts and companies remain largely impenetrable, banking secrecy is starting to be eroded. He predicts that even the Swiss banking system may open up. “The pressure is building up. I think Switzerland is no less vulnerable than other places.”
But closing one avenue for tax evasion simply redirects it to other offshore centres. Some, like Panama, have not implemented promises to become more transparent; others, like Singapore, were too powerful or too diversified to be brought within the scope of the OECD’s tax initiative. Several new centres are trying to get in the game. Jeffrey Owens, an economist who is in charge of tax policy at the OECD, is painfully aware of the problem. He was furious when he discovered that Singapore had marketed itself as “the ultimate secrecy jurisdiction”.
But Owens thinks the battle against secrecy is at an important turning point, as a result of the growing strength of the Democrats in the US. They have proposed to clamp down on abuses which they say are draining the US Treasury of $100bn a year. As countries such as Singapore are keen to forge and update their network of tax treaties, particularly with the US, Owens predicts they will have to accept a dilution of secrecy. And he thinks “Monaco could very easily come on board”.
Monaco isn’t going to budge without a fight, but its appeal to a new generation of tax exiles puts it in a strong position to cope if it is forced to yield to pressure. As Genta observes, going abroad to save tax is no longer seen as a drastic step. “I think half Europe is moving. Before it was only the vastly rich. Now more normal people are aware of the benefits of moving.”
Vanessa Houlder is the FT’s tax correspondent
