Sunday, March 29, 2009

New Banking Laws - Will It Make a Difference?

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.]


Anonymous said...

The USA cannot bow to the wishes of the EU and their high tax regimes. the reason why they want the Swiss banks out of the picture is so they can raise taxes. Soon, we will follow. Those rich people would gladly pay some taxes. But not when the taxes are spent by a bunch of liberal baffoons.
The other banks in the world should emulate the Swiss, not try to destroy them. If all countries were "tax havens", the citizens would keep their money at home.
All these high tax liberal socialist countries would rather destroy the Swiss banks than to COMPETE with them. What happened to the US competitive spirit. Our desire to be competitive has been the reason why we are so great. Let's COMPETE with the Swiss. Let's have an incentive for our US citizens to keep their money in the USA. Let's beat the Swiss at their own game.
Senator Levin spent years trying to force the Swiss to give up the names of US citizens that have accounts at Swiss banks. If he would have spent all that time and our taxpayer money finding ways to COMPETE with them, we wouldn't be talking about it today .And besides that, let the USA once and for
all quit meddling in the affairs of another country.
If the Swiss have no privacy, look for a WORLD WIDE SURGE IN TAXES.

Josef Litobarski said...

I hear what you're saying, but there are some problems.

One of the problems is probably that I was pretty loose with my terminology in the post. You probably know this already, but I'll define things properly here for other people's benefit.

Obviously, "banking secrecy" and "tax havens" are not the same thing (although they are closely related). Some of the arguments against banking secrecy don't apply to tax havens, and vice-versa.

Banking secrecy involves anonymous numbered bank-accounts, something which normal high-street banks don't use. It doesn't just protect tax evaders, it also fosters massive resource corruption in developing countries, as the Global Witness report shows. No doubt, it also helps international crime and terrorism.

The label "tax haven," on the other hand, specifically describes a low-tax (or no-tax) zone. A tax haven almost always employs banking secrecy, which is why companies and individuals use them to avoid paying taxes on their income.

The argument is that by employing banking secrecy (or simply failing to properly identify their clients), tax havens are assisting people in breaking the law.

Removing banking secrecy wouldn't eliminate tax competition. Countries could still set their own tax rates to attract investors. But tax evasion would be more difficult to achieve.