02 July 2008Tax Havens Creating Turmoil
George Town (CNS)OFCs Face Major Criticism in UK Treasury Submission
Describing, tax havens as a pernicious cancer that distort capital accumulation and investment patterns, while facilitating grand corruption and embezzlement, the UK wing of the Tax Justice Network has pulled no punches in its assessment of offshore financial service centres (OFCs) for the UK House of commons Treasury Committee's report. The Cayman Islands, alongside numerous other offshore and onshore jurisdictions, is criticised over secrecy and for paying only lip service to regulation.
In its submission entitled 'Tax Havens Creating Turmoil' by Richard Murphy of Tax Research LLP, a chartered accountant who trained with KPMG, the tax lobby group says that until the cancer is tackled, there is no prospect of an end to aid dependency or for the creation of economically stable, democratic states able to feed, educate and provide health care for their populations.
"Tax havens undermine effective democratic government and deny the supply of information that markets need if they are to operate properly. So significant is the challenge they pose to global economic and social stability that the risk cannot be assessed within the financial domain alone; it permeates the infrastructure of society,"
the report states.
The evidence gathered in the 192-page report criticizes the jurisdictions themselves and the financial experts working in them who facilitate the use of tax havens. The report defines the tax haven as the jurisdiction, for example the Cayman Islands, and then the offshore financial centre as the accounting firms, lawyers and other service providers that operate within the actual location. The report acknowledges that Cayman has better regulation than some, but believes the jurisdiction is very definitely a tax haven that enables large corporations and wealthy individuals to evade their tax obligations.
It also says that Tax Information Exchange Agreements (TIEAs) have failed because of their limited use. "The Cayman – United States agreement signed in 2001 is not believed to have been used on more than ten occasions," the report states. "This is because the terms of these agreements make it very hard for an enquiring nation to assemble a request for information, since they basically have to be in full possession of all the facts they are requesting before actually making the request and it is very easy for the tax haven to refuse the information on the grounds that they do not think there are reasonable grounds for supplying it. The whole arrangement does, therefore, appear to be a window-dressing exercise designed to imply progress rather than any real indication that such progress is being made. As a result the boldest initiative on tackling tax havens has failed."
The report points the finger at onshore jurisdictions as well, in particular the UK, which it says must address its own status as a tax haven and then do something about its overseas territories. "The UK government can no longer turn a blind eye to problems that it has played a major role in creating," states the report.
The report is extremely critical of secrecy laws and the lack of transparency, which it says enables the OFCs to operate within the tax havens. "That world is one of deliberately constructed 'secrecy spaces' that are usually, in a legal sense, neither in the locations that provide the legislative structure they use or anywhere else come to that," it states. "Without secrecy almost nothing would happen in tax havens. Low tax rates are of no benefit to the tax evader if it is obvious to their domestic tax authority that they are availing themselves of them." The report suggests this is why information exchange is so heavily resisted by the providers of offshore services.
Despite Cayman's insistence that it is effectively regulated and compliant with global regulations, the report states that regulation in Cayman is wholly deficient for the volume of business it handles, especially as it is considered the fifth largest banking centre in the world. The report also agrees with the omission of Cayman from the recent European Union list, deemed to have equivalent regulatory standards to the UK with regard to client identification and other procedures meant to tackle money laundering activities.
The report uses evidence from the UK National Audit Office, which suggest that Cayman and other jurisdictions are not reporting suspicious activity as effectively as they should. "Despite the protests it is impossible to believe that their standards are as good as those in the UK and some of the other countries listed, even if that list does include Russia. That is because of the nature of small island life," the report says. "Reporting of suspicious activity is at the heart of anti-money laundering arrangements but at least in the smaller financial centres, the number of reports is so low as to indicate that some financial institutions either do not know or monitor their customers sufficiently or are unaware of their obligations to report."
However, in several tables and graphs Cayman is revealed to have made more reports and even prosecutions compared to other small island offshore financial centres.
The report has been submitted to the UK Treasury Committee, which asked for written submissions from offshore jurisdictions and interested parties in April this year in order to assist the committee with its investigation into the importance of OFCs on the global economy.
The Cayman Islands Government, the Cayman Islands Financial Service Association and Maples and Calder have also submitted evidence and reports to the committee. So far, however, none of the Cayman documents that were submitted have been made public.
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