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Offshore Tax Havens

Paradise Besieged


While the Taiwanese open their eyes to the hidden power of money laundering, the veil is being lifted from offshore tax havens around the world, as these hush-hush sanctuaries of secrecy face heightened scrutiny.



Paradise Besieged

By Yi-Shan Chen, Shu-ren Koo
From CommonWealth Magazine (vol. 404 )

For the first time, the alarm is ringing shrilly in the ears of the Taiwanese people, made suddenly aware of the hidden influence of offshore money laundering.

After Taiwan's former president Chen Shui-bian and his family became embroiled in allegations of laundering US$31 million through private bank accounts in Switzerland and the Cayman Islands, the Taiwanese have been alerted to the significant role that offshore banking plays.

"The Chen Shui-bian scandal has made me feel for the first time that money laundering isn't just a statute in a textbook, but something that really happens," one vice president of personal finance at a foreign-based bank comments. "Now, it seems certain that every bank will do a new filtering of all their sensitive clients."        

Overnight, Taiwanese people, who once thought the phenomenon of money laundering was far removed from their own lives, have received a shocking education. Even more startling was that the Cayman Islands and Switzerland, traditionally known for rigorously safeguarding client privacy, had brought the affair to the light of day.

The money-laundering scandal of the former first family underscores a new trend that has arisen since 2001, in the wake of the September 11 terrorist attacks and the Enron scandal: the entire world is becoming more stringent in investigating the role offshore bank accounts play in abetting terrorists, laundering money and dodging taxes. This campaign is being led by the United States, whose Federal Bureau of Investigation (FBI) and Internal Revenue Service (IRS) have taken to monitoring the minutiae of global money flow with increasingly invasive and focused attention. As more and more cases come to light, offshore havens are heaven no longer.

A Fortress Breached

In a June 2008 article titled "A Wake-Up Call for Global Tax Cheats," the U.S. journal Businessweek clearly delineated this trend.

While money laundering only became the focus of concern in Taiwan this August due to the former first family's alleged improprieties, the problem of offshore law-breaking had already made headlines in the West. On May 13 this year, the United States accused the Swiss bank UBS AG of helping American real estate magnate Igor Olenicoff conceal US$200 million in assets, and evade US$52 million in taxes. The tycoon's lawyer let slip a somewhat ominous warning of things to come: "They're getting some momentum going, and they're going to keep going."

Indeed, within a month, a tremor began in little Liechtenstein, eventually rocking Wall Street.

A small independent principality bordering Switzerland, Liechtenstein is one of only three countries on an international blacklist of uncooperative tax havens. Surprisingly, even this impenetrable fortress was breached. Client data from such banks as LGT and Landesbank were leaked, and the governments of Germany, the United States and Australia have already brought a number of moneyed individuals to court on tax-evasion charges.

And banks are not the only subjects of robust investigation – the "tax evasion industry" that has long been the provenance of lawyers and accountants is now facing the heavy hand of the law. In 2005, the well known accounting firm KPMG was investigated for assisting several enterprises and affluent clients in moving funds offshore to evade taxes, by means legal and otherwise. KPMG eventually reached a settlement with the U.S. government, agreeing to pay US$456 million in penalties in order to avoid prosecution. In addition, after being audited, both the investment bank Merrill Lynch and the accounting firm Ernst & Young signed settlements with the IRS in which they agreed not to provide unlawful tax-shelter schemes to their clients.

World Public Enemies

As more and more of the rich get cozy with offshore tax havens, tax havens have become the public enemies of governments all over the world.

In 2001 the U.S. government passed the Patriot Act, giving the IRS the legal foundation to forcibly demand the records of offshore banks. In 2004 the U.S., Britain, Australia and Canada (later joined by Japan) established the Joint International Tax Shelter Information Centre, which runs out of the IRS headquarters in Washington D.C. and engages in collective surveillance of money laundering and tax evasion. In 2005 the European Union passed a law declaring that any member state can demand bank records related to tax evasion from any other member state.

Even the developing countries Brazil, India and South Africa signed a joint declaration in 2006 agreeing to exchange information on transnational money laundering operations.

No More Heyday for Havens

One of the main reasons that offshore tax havens are now under threat is the sheer volume of tax-shirking money they hold – so large it can no longer be overlooked.

In his book Offshore: The Dark Side of the Global Economy, former BBC producer William Brittain-Catlin reveals that nearly all of America's Fortune 500 corporations, and other multinational companies aggressively expanding overseas, possess bank accounts in offshore tax havens. At the beginning, they established these accounts to minimize the overhead of global expansion.

But the magnitude of the tax evasion accompanying offshore havens is striking. The ugly face of offshore tax havens came to light in 1992, when the IRS accused Apple Computer of evading taxes to the tune of US$586 million.

The world was astounded to discover that Apple, known for its innovation, was equally adept at maintaining a Byzantine, arcane tax-filing structure. In Ireland, Holland, the British Virgin Islands and the Cayman Islands, Apple had established shell companies under a variety of names, allowing the majority of its profits from years of computer sales to touch down in these tax-free havens without ever setting foot in countries where they would be taxed. Added up, these funds became the capital that Apple used to expand into the markets of the world.

Apple ultimately reached an out-of-court settlement with the IRS, but the fact remains that offshore havens have become a "tax dollar funnel," and the dollars are rushing down the tubes at an astonishing rate.

According to the most recent report on the tax haven of the Cayman Islands, released by the U.S. Senate Finance Committee at the end of July this year, only 2,677 American individuals or companies had bank accounts in the Caymans in 2002, but by 2007 the number had tripled, to 7,937.

At a hearing this July, U.S. senator Carl Levin stated that offshore tax-dodging has stolen US$100 billion in taxes from the American people. Individual income taxes accounted for US$40 billion to US$70 billion of that amount, and corporate taxes about US$30 billion.

World Bank statistics reveal that transnational monetary flow derived from criminal activities, corruption and tax evasion has reached the scale of between US$1 trillion and US$1.6 trillion per year. Levin asserts: "Offshore tax havens have declared economic war on honest U.S. taxpayers by helping tax cheats hide income and assets that should be taxed in the same way as other Americans."

Germany is also launching an energetic assault on offshore tax evasion. Former German minister of finance Hans Eichel once averred: "A person who receives stolen goods is no better than a thief."

A Basic Issue of Fairness and Integrity

The second reason that the party is over for offshore tax havens is political pressure. Currently, what is attracting the most attention globally is the Stop Tax Haven Abuse Act, sponsored by American presidential candidate Barak Obama.

Introduced in early 2007 by Obama and fellow senators Carl Levin and Norm Coleman, the law created an initial watch list of 34 "Offshore Secrecy Jurisdictions" including Switzerland, Hong Kong and Singapore that could be subject to sanctions. It also authorized the United States Treasury Department to sign information disclosure agreements with watchlisted countries, obliging "accredited withholding agencies" – for example, banks – in these tax havens to report the banking details of American citizens and corporations.

"This is a basic issue of fairness and integrity," media-darling Obama declared. "We need to crack down on individuals and businesses that abuse our tax laws, so that those who work hard and play by the rules aren't disadvantaged."

The Rats Flee to a New Ship

One veteran accountant in Taiwan who specializes in offshore tax issues notes that the United States' increasingly draconian attitude toward offshore tax havens is causing a sense of alarm in many wealthy people who hold American citizenship. Because major banks are attracting the glare of the international spotlight due to their sheer scale, many affluent individuals have switched to small or medium-sized European banks. Others have moved their money to locations that still attract less attention.

A report by Financial Times noted that the South Pacific island of Vanuatu, located east of Australia, has for the last several years been aggressively touting its own status as a tax-free environment.

Of the 40 tax havens currently being monitored by the World Bank, only three tax havens have been declared uncooperative: Monaco, Liechtenstein and Andorra. All three of these small states enjoy remarkably excellent business.

One attorney with a relative employed at a private bank in Monaco reports that Monaco has become the most confidential location for the rich of Europe and the former Soviet Union to hide their money.

In Monaco, the attorney reports, the most impolite question one can ask is: Where do you work? "Because there, lots of people have never worked a day in their lives."

Singapore and Hong Kong are also generally recognized as new tax-free havens. Daniel Truchi, chief executive of Societe Generale Private Banking (SGPB) Asia-Pacific, notes that as European states are currently pushing to revise their banking secrecy laws, Singapore and Hong Kong are the greatest beneficiaries, receiving a huge influx of funds.

Yet in the wake of the Liechtenstein bank data leak, the international community has reach a nearly universal consensus supporting the movement to stop tax evasion.

"My recommendation is to come clean. Tax havens are pretty vulnerable to attack," comments Sue Holmes, a specialist in investigation at Smith & Williamson, a professional services firm involved in several cases related to Liechtenstein.

The battle between light and shadow continues as always. But as global trends develop, they attest to the reality that offshore tax havens are no longer the risk-free bastions of days gone by.

Translated from the Chinese by Brent Heinrich

Chinese Version: 境外不再是天堂