[Image: Credit Crunch, 2008, bitzcelt, Attribution-Noncommercial-No Derivative Works 2.0 Generic]
In the midst of a financial crisis, with the G20 summit just around the corner, the debate over "tax havens" and "banking secrecy" has been heating up. Indeed, things have been progressing at such a furious pace that The Observer newspaper today reported that "senior international regulators [believe] more has been achieved [in terms of regulating tax havens] in the last 13 weeks than in the previous 13 years put together." Exciting stuff. Earlier this month, Switzerland bowed to international pressure and agreed to sign up to OECD banking regulations. Could this be the end of the tax haven?
Let's not get carried away.
Take Switzerland, for example. Public opinion in Switzerland (where referenda are practically constitutionally guaranteed when it comes to controversial political decisions) seems to favour keeping banking secrecy intact. Of 1,004 Swiss citizens polled for a survey commissioned by the Swiss Banking Association, 78 per cent wanted to keep banking secrecy. On the other hand, a separate poll of 602 people for a Swiss weekly newspaper showed that just over half of people thought Switzerland's reputation as a tax haven was justified, and 56 per cent of people favoured Swiss banks co-operating more with international regulators to stop tax evasion.
Still, Swiss banks argue, nervous investors might pull their money out of the Swiss economy instead of running the risk of governments going through their accounts. The President of Switzerland, Hans-Rudolf Merz (who is, funnily enough, also the Swiss Finance Minister) was quoted in the Washington Post as saying "We have a tradition of privacy. I don't want the state to sniff into my bank accounts as long as I'm paying my taxes correctly."
The problem is, of course, how is the state supposed to know whether or not you are paying your taxes if it can't look at the books? I'm not suggesting a solution (I, too, feel uneasy about letting the state rummage through people's accounts) but it does seem to be a paradox.
Others have argued that the problem is being overstated. The President of the Swiss Bankers Association, Pierre Mirabaud, has angrily countered the idea that tax evasion is endemic amongst Swiss banks, saying "it is completely absurd to think that the Swiss private banking industry is based on tax evasion. This, I am sorry to say, is a very good story, but it is not the truth."
Again, the paradox arises: how can we know how much tax evasion there is if the system is secret and information isn't shared with regulators? Even after the adoption of the new regulations, Swiss banks can still refuse to hand over information unless concrete proof is presented demonstrating that tax evasion has occurred. This sort of proof is rare, unless, for example, an angry partner or spouse co-operates with the authorities.
Some critics of reform, though, have raised other potential problems. Dan Mitchell, co-founder of the right-wing Center for Freedom and Prosperity, has warned that, if banking secrecy was overturned, corrupt governments might sell information about the world's richest individuals and companies to criminals and terrorists. The suggestion being that kidnappings and assassinations would follow. This doesn't seem a particularly solid argument. Why would corrupt government officials sell information whilst corrupt bank officials wouldn't? For that matter, if terrorists wanted a global rich hit-list, why wouldn't they just open up a copy of Forbes?
Mitchell makes a better case when he argues that "tax competition leads to low tax rates and increased prosperity" and that "sovereign entities have the right to secure tax privileges. Even if the US government does not like it." The problem, however, is that banking secrecy is not a black and white issue. It contains (at best) some very legally grey areas. Yes, small countries have the right to set their own tax rates and regulations, but does that also give them the right to essentially assist in fraud, corruption and international crime?
An excellent report came out this month from the international NGO Global Witness about the link between banking secrecy and corruption in developing countries. The message throughout the report was that large-scale corruption in developing countries requires two sides - the corrupt official on the one hand, and a bank willing to deal with the money on the other. The report attacked the current system of regulation, arguing that it doesn't go nearly far enough.
There are now, for example, many ways to protect your identity that make the old system of numbered Swiss bank-accounts almost redundant. A friend of mine in the business community explained how it works:
"In most cases, the Swiss banks don't even know who the beneficial owner of the account is. A very typical configuration is a corporate account in the name of... a cayman company which, in turn is owned by many different companies which are loosely held by a trust. As long as the final owner is a trust, there is very little legal action possible - that is the purpose of it."
The Global Witness report highlights this as one of the biggest problems facing the current system of banking regulation. A bank is not required, legally, to know who the eventual beneficiaries of a trust actually are before it allows them to open an account. So, even though the current Swiss reforms grab a lot of headlines, they don't necessarily make a lot of difference.
Because of all this, although the twin issues of tax havens and banking secrecy will definitely be on the agenda at the upcoming G20 summit, it remains to be seen how effective any new regulation will be.
[UPDATE: I was sent a report (LINK) on this issue by Allen & Overy, a law firm investigating various financial issues in the run up to the G20 meeting. I haven't read it yet, but will update when I have.]