A sunny place for shady people” was W. Somerset Maugham’s pithy summation of Monaco, the tax haven and resort of the wealthy in the south of France close to where the writer lived for much of his life.
Whether or not Maugham’s works occupy a prominent place on the bookshelves of financial regulators, the authorities have spent the past decade turning the screw on the growing number of tax havens that have sprung up around the world.
Definitions of a tax haven vary. But the IMF considers that they normally comprise centres with large numbers of financial institutions doing business primarily with non-residents and dealing in sums that are disproportionate to the needs of the domestic economy. These centres normally levy no or low taxes; apply light standards of regulation; and permit a high level of banking secrecy or anonymity.
Measuring the scale of business carried on through such centres is by definition difficult, with estimates ranging from the IMF’s $5,000bn of assets held offshore to a figure of $11,500bn by the Tax Justice Network, a UK-based campaign group.
The individual client business of tax havens typically consists of establishing trusts, companies or foundations to hold the assets that individuals want to hold outside their home country. The banks, lawyers and accountants whose brass plates cluster on the office fronts of these centres provide financial, legal and accounting advice to help individuals structure their finances in the most efficient manner. As well as personal financial planning, tax havens provide a range of services to companies, hedge funds, investment trusts and unit trusts.
Choosing a tax haven may depend on where an individual’s professional advisers have established a presence since many of the services provided by the different centres are very similar. But physical proximity is useful since active money or company management may require regular meetings. “It is essential to establish a face-to-face relationship,” says Roy McGregor, chief executive of Credit Suisse in Guernsey. “You have to get to know the people.”
The Organisation for Economic Co-operation and Development identified 47 potentially harmful preferential tax regimes in member countries in a review in 2000. Last month, the OECD announced that the Marshall Islands had become the second country in a matter of weeks, after Liberia, to fall into line with the organisation’s clean-up. Only three countries – Andorra, Liechtenstein and Monaco – remain on the OECD list of “unco-operative” tax havens.
The OECD counted 35 offshore centres when it launched an investigation in 1996 although a small number have since shut up shop under the pressure of tougher regulation and fiercer competition. The term “offshore” and the physical remoteness of many of these centres combined to promote the idea of secrecy on which they have traditionally depended.
The weight of scrutiny has meant that many of the bad old practices – facilitating tax evasion, laundering the proceeds of crime and, more recently, funding terrorism – have been reined in in the less respectable centres. But even those centres which have always adopted higher standards have found themselves subject to greater scrutiny and tighter controls.
“The historical view that these offshore islands are here to pick up disreputable money is just not true,” says Mr McGregor. “Nobody does business like that any more. Nor do they want to.”
“It has been a one-way trade to tighter regulation,” comments Michael Lagopoulos, head of RBC Global Private Banking. “The issue has been one of tighter rules around tax mitigation and tax planning and how you use the offshore centres. The institutions have reputations to protect and they need to make sure their clients’ tax plans are legitimate.”
The OECD kicked off the regulatory blitz with a study of the jurisdictions that were reckoned to constitute tax havens because they had no or low taxes, a lack of transparency and a refusal to exchange information with other authorities.
The OECD initiative has produced improvements but it ran into opposition from US lobbyists who objected on the grounds that it was stifling tax competition. The US was a fine one to criticise, some of the offshore centres responded, given the lax reporting standards in Delaware and many other US states.