Europe’s top court barred Britain on Tuesday from enacting a corporate tax reform in its tiny territory of Gibraltar, ruling the scheme would amount to illegal state aid for offshore companies.

The European Union Court of Justice found that the proposed tax system was “designed in such a way that offshore companies avoid taxation,” making it “incompatible with the internal market” rules.

The ruling was a victory for the European Commission, which had stated in 2004 that the proposed system was incompatible with EU rules and would give companies in Gibraltar a lower rate than those taxed in Britain.

The commission’s decision had been struck down by a lower EU court in 2008 following a challenge from Britain and Gibraltar.

But following appeals from the commission and Spain, the Luxembourg-based Court of Justice ruled that the lower tribunal had “erred” in finding that the reform did not confer “selective advantages” on offshore firms.

The system was “specifically designed” so that companies with no real physical presence could avoid taxation because it would be based on the number of employees and the size of business premises occupied in Gibraltar, the court said.

The assessment to levy the tax “excludes from the outset any taxation of offshore companies, since they have no employees and also do not occupy business property,” the court said.

The court found in favour of the commission’s view that “the proposed tax reform constitutes a scheme of state aid which the United Kingdom is not authorised to implement.”

It’s good to note that the Tax Justice Network predicted this. As we noted in 2009:

Such a reform [as that now rejected by the ECJ] is likely to result in de facto horizontal ring fencing instrumented through taxing only locally bound activities (utilities, property, payroll, etc.). Additionally, it is noticeable that there is a special individualist tax regime applicable to High Net Worth Individuals which allows them to negotiate ‘lump sum’ taxes.

We were, as ever right.

More importantly, as ever it is shown that the UK is actively promoting this sort of abuse on behalf of the City of London which uses places like Gibraltar (population 29,000) as its branch offices.

The case for reform is overwhelming. Now when will it be done?

Thanks to ActionAid’s report Addicted to Tax Havens, we know that 98 of the top 100 companies on the FTSE have money parked away in offshore tax havens, in 9892 separate offshore subsidiaries. 1649 of those belong to just four banks.

The UK’s Channel 4 News decided to go to the Channel Island of Jersey, where over 600 of these subsidiaries are registered, to investigate the problem further. Its a great summary of the issues facing the United Kingdom, and how companies use jurisdictions like Jersey to brazenly avoid taxation.

Aggressive Tax planning can harm companies

The report makes it clear that there are strong commercial reasons for adopting these standards. Companies that pursue aggressive tax strategies face a number of risks including costly legal action from tax authorities, cash flow problems when a tax loophole is closed and ever increasing regulatory complexity as officials seek to keep up with aggressive avoidance schemes. Meanwhile government contracts often exclude offshore companies and increasingly public sector procurement procedures will seek disclosure about partner’s use of tax havens. Risk of reputational damage is also especially significant as spending cuts lead to greater public awareness of tax dodging in Europe. Protests by the Indignados in Spain and UK Uncut, have channelled outrage at individual companies’ tax arrangements.

Sustainable Tax planning can benefit companies

Research has shown that direct investors in low income countries tend to value political stability, the rule of law and human capital more than effective tax rates when deciding whether to invest. Sufficient, predictable tax revenue is needed to foster all of these conditions. High public investment is something companies need but some are not prepared to pay for.

Practical Steps for companies and investors

Christian Aid’s framework suggests steps that companies can take to demonstrate their commitment to development and a fair approach to taxation or that socially responsible investors could demand from the companies in which they invest. A company should, at all times, comply with the laws of the jurisdictions in which it operates, respecting the spirit as well as the letter of the law. A company ought to record profit in the countries where real economic activity such as manufacturing takes place and then pay up on time. Transparency must be a key principle of tax policy, therefore companies should report their tax planning arrangements and strategies to governments. Additionally firm’s should undertake full country by country reporting of its financial position in every country in which it operates, there is strong a business case for this.

The code considers companies with a presence in low income countries or states where governance is weak are at a high risk of not complying with this framework. Tax avoidance by multinational companies is especially problematic for low income countries where tax authorities are less well equipped and corporation tax often accounts for a greater share of government revenue.

The framework also recommends that some activities should be banned such as adding stages into a transaction solely to reduce tax liabilities and using secrecy jurisdictions. Unfortunately as Action Aid’s new report “Addicted to tax havens: The secret life of the FTSE 100” shows many companies on the London Stock Exchange are a long way from achieving these standards, with 98 out of the FTSE 100 using tax havens.

Previous reports have found this to be the case for the largest companies: In the extractive industries; At the Pan European level; As well as in Spain and France.

ActionAid UK

ActionAid have produced another fine report, this time about the use of tax havens by multinational corporations listed on the FTSE 100. The statistics are staggering: for example more than half of the financial sector’s overseas subsidiaries are in tax havens. More precisely:

• The FTSE 100 largest groups registered on the London Stock Exchange comprise 34,216 subsidiary companies, joint ventures and associates.
• 38% (8,492) of their overseas companies are located in tax havens.
• 98 groups declared tax haven companies, with only two groups, Fresnillo and Hargreaves Landsdown, who did not.
• The banking sector makes heaviest use of tax havens, with a total of 1,649 tax haven companies between the ‘big four’ banks. They are by far the biggest users of the Cayman Islands, where Barclays alone has 174 companies.
• The biggest tax haven user overall is the advertising company WPP, which has 611 tax haven companies.
• The FTSE 100 companies make much more use of tax havens than their American equivalents.
• There are over 600 FTSE 100 subsidiary companies in Jersey (more than in the whole of China), 400 in the Cayman Islands and 300 in Luxembourg – all tiny tax havens.

Alongside the financial sector, oil and mining companies are also huge users: TJN recently noted that they are often headquartered in Canada, and ActionAid noted that

“BP and Shell have almost 1,000 tax haven companies between them, including more than 100 in the Caribbean (hardly a major source of oil).”

(Recently we noted the huge role that the Netherlands plays in hosting offshore subsidiaries of oil companies, and another report by Publish What You Pay Norway noted the huge role played by Delaware too.)

ActionAid points to the artificiality of it all:

“In locations such as Mauritius, Jersey and Delaware we have identified hundreds of subsidiaries owned by dozens of different multinationals that are registered at a handful of individual addresses, belonging to offshore law firms.”

And to the crucial development angle:

Corporate tax avoidance, one of the main reasons companies use tax havens, has a massive impact on developing and developed countries alike. The lack of transparency makes it difficult for developing country tax authorities to identify and collect taxes owed by global companies operating in their countries.

All credit to ActionAid for this:

This research is based on information that had never been disclosed, let alone analysed, until this year.11 UK law compels companies to report all of their subsidiary companies, together with their country of registration. When we looked for this information in early 2011, we discovered that more than half of the FTSE 100 were not complying with this legal obligation. When enquiries to individual companies failed to persuade them to disclose the information, we submitted complaints to Companies House, forcing the disclosures as part of companies’ annual returns and sparking Business minister Vince Cable to announce an investigation.

The Guardian, reporting this, (and providing a listing of the FTSE 100 and their subsidiaries) notes that:

“There is no standard definition of what constitutes a tax haven.”

Indeed. We use the terms ‘tax haven’ and ‘secrecy jurisdiction’ interchangeably, and recently produced a two-pager (as part of our Financial Secrecy Index) entitled What is a Secrecy jurisdicsion? which says exactly that, and explores ways to think about the phenomenon.

Also see The Independent reporting on this, along with the Press Association, and Metro.

Older reports, involving the use of companies in tax havens by Swiss, US, France, and the Netherlands, are here. Further information on Spain, is here.

SPD Plans to Block Rubik Ratification in Germany

The SPD’s financial concept note published last Monday rejects the agreement with Switzerland. It is now quite likely that the deal will be rejected by the Upper Chamber, the Bundestat. North Rhine Westphalia’s Finance Minister Walter Borjans argued that effectively giving an amnesty to tax evaders was unconstitutional. Nicolotte Kressl and  SPD finance experts in the Bundestag said the deal should be halted as not to undermine EU efforts to secure automatic exchange of information with Switzerland.

EU to Look into Legality of the Deals

The European Commission is analyzing whether the final withholding tax deals are compatible with EU law. “We had many contacts with Germany and Great Britain, which assured us that their bilateral agreements would not infringe the European directive on savings taxation or the Union’s agreement with Switzerland. We’re going to check all that. It is clear that in the light of international law, the directive and the EU-Switzerland agreement take precedence over the bilateral agreements initialed in August,” EU Taxation Commissioner Algirdas Semeta said to reporters on 8 September. The European Council Working Party on Direct Taxation will meet on 22 September and the commission has requested that Germany and Britain present the full text of their agreements with Switzerland at this meeting.  However, it does not seem that the commission opposes the deals but rather that it might use them to win some small further concessions from Switzerland, either expanding the scope of information exchange on request or bringing in other types of investment.

Luxembourg and Austria did not want to take part in automatic exchange of information as part of the European Savings Tax Directive (EUSTD), so they won an opt-out allowing them to temporarily use a withholding tax method instead. Now Luxembourg is arguing for an extension of this arrangement in the light of the Rubik deals. The EC maintains that the original timetable must be adhered to.

If it wasn’t enough that Swiss banks have already begun to advise UK citizens to move their money to Singapore to avoid the withholding tax. There was another instance of the toothless or complicit approach of the UK authorities to tax dodging. Boilerplate concerns from business about ‘uncertainty’ were enough for the government to drop an evaluation of the UK’s double taxation treaties investigating the opportunities for tax avoidance these agreements often create. Accountants Ernst and Young cheered this saying “The Coalition pledged to take a more consultative approach to tax policy making and, from this volte face, they seem to be living up to their mantra,” i.e hastening regulatory capture and allowing companies to dictate tax policy appears to be an  official British policy.

France entered discussions with Switzerland on Rubik and rejected it for now. Some French officials reasserted their commitment to promote automatic information exchange, however other officials have hinted that the Swiss proposal might receive consideration at some point in the future. In Addition, Alfredo Gysi, head of the Association of Foreign Banks in Switzerland, one of the architects of the final witholding tax proposal, is clearly looking to tempt Italy into a similar deal. On top of vast amounts of flight capital from developing countries, it is estimated that, in total, European citizens hold roughly 700 billion Euros in Switzerland, it can be assumed much of this was never properly taxed.

The case of BCCI, (referred to by many as “Bank of Crooks and Commerce International”), is possibly the biggest banking fraud in history. BCCI is a story of massive-scale money laundering, bribery, blackmail, and organised crime, operating through a secrecy network involving deceit, fraud, and the brokering of power and influence around the world.

We blogged an update recently, and you can see a report on the breaking open of the Sandstorm Report on the website of the Association for Accountancy and Business Affairs (AABA).

After a five-year legal battle the UK government has finally released most of the Sandstorm Report on 7 September 2011. The report was prepared by Price Waterhouse (BCCI auditors) for the Bank of England though it was never finalized. BCCI was the biggest banking fraud of the twentieth century. Some 1.4 million depositors lost $11bn. Unlike many other large corporate frauds and banking scandals the UK government did not appoint inspectors to prepare a report. No parliamentary committee has ever been given sight of the Sandstorm Report. UK legislators pass laws without knowledge of the facts or opportunity to interrogate wrongdoers.

Prem Sikka had first requested the information in March 2006 and after refusal by the UK Treasury and the Information Commissioner he pursued the matter through the courts. Throughout the case, he represented himself, incurred his own costs and did not have the benefit of any legal advisers. The government used taxpayers’ resources in a futile attempt to conceal identity of many people, including convicted criminals.

Ever since 1991, most of the Sandstorm Report has been publicly available in the US though it has been considered to be a state secret in the UK. This censored version was obtained by AABA and made publicly available in UK in 1999. However, critical information on names of wrongdoers and those implicated in the scandal was withheld, blanked out. The UK government “erected a wall of secrecy around the BCCI frauds.”

Prem Sikka has analysed and compared the previous censored version with the newly released information. On the AABA site you can access this in detail.

The use of offshore, secrecy jurisdictions, played a large part in the BCCI story. Elements of these connections were withheld. For instance, “The words ‘Grand Cayman’ were purged throughout the document”. Also, the name of a Turks and Caicos company was blanked out, as were certain connections in Bahrain.

Included in the concealed information were names of people with global political and business influence, and a number of financial and governmental institutions such as the Abu Dhabi Investment Authority, Bear Steans, Dubai Islamic Bank, ATB (a UK bank), Credit Suisse, Habib Bank, Government of Cameroon, National Bank of Georgia, National Commercial Bank of Saudi Arabia, Qatar Islamic Bank, Royal Bank of Scotland, Saudi Cairo Bank, Saudi National Commercial Bank (SNCB), Security Pacific and State Bank of India.

The BCCI case, and the massive cover up by the UK government and cronies, raises some issues of vital concern:

• The UK government did not withdraw ambassadors. The UK government did not seek extradition of the culprits, shut down foreign embassies, demand trade sanctions or regime change. It just covered up the names of wrongdoers and kept parliament and the people in the dark. How can anyone trust the Bank of England or the Treasury to tell the truth about the current banking crash?
• The release of the information has considerable relevance to the current banking crisis. The UK government can now be forced to publish reports. They can be forced to publish the names of the wrongdoers.
• The UK government secrecy meant that many financial institutions were unable to make appropriate assessments of risk. Under the UK (and many other countries) law, financial institutions are required to apply the “Know Your Customer” (or KYC) tests. Since the UK government shielded the names of many wrongdoers it did not enable the institutions to assess the risks. It would be recalled that BCCI indulged in money laundering. Many of the parties associated with are still active in the business world today.
• The Sandstorm Report prepared by BCCI auditors Price Waterhouse documents a catalogue of fraud which had been taking place over a long period of time. Yet auditors continued to give a clean bill of health to BCCI. All audit reports were unqualified.
• BCCI had all the paraphernalia associated with contemporary corporate governance: audit committees, non-executive directors, mission statements, internal auditors, external auditors, vision statements and corporate social responsibility statements. Yet no one spoke up. There was no independent investigation into the governance of BCCI. The investigation and lessons may have generated a debate about better banking regulation and governance, but that was not to be. We only speculate on how the current banking crisis might have been checked if the UK government was not so keen on cover-up.

As we also mentioned previously, for a description of the offshore nature of BCCI, see Treasure Islands, as well as various books included Peter Truell and Larry Gurwin’s book False Profits. A TJN senior adviser, Jack Blum, was a central player in breaking this case open in the first place.

Cross-posted with permission from the TJN Blog…

“A special economic zone shall be deemed to be outside of the Islands and not in the Islands.“

Emphasis added. So where will this zone be? It seems that it will, for the relevant purposes, effectively be ‘elsewhere’ – which, in practical terms, means ‘nowhere.’ This ‘it’s elsewhere, don’t-blame-us, we-can’t-regulate-this’ approach is what a lot of the activity of secrecy jurisdictions is designed to do – it’s not so common, however, to see this being made quite so explicit. This is tax havenry, pure and simple.

Who is responsible for this legislation, and who will be implementing it?

“a Chairman, a Deputy Chairman and two other persons appointed by and holding office at the pleasure of the Governor in Cabinet“

And who is this Governor? Well, there’s a lot of stuff on official websites that would take quite a bit of summarising. For simplicity’s sake, Wikipedia is quite good:

“The Governor of the Cayman Islands is the representative of the British monarch in the United Kingdom’s overseas territory of the Cayman Islands. The Governor is appointed by the monarch on the advice of the British government. The role of the Governor is to act as the de facto head of state, and he or she is responsible for appointing the Premier, who is the leader of the party with a majority of seats in the Legislature.”

So the buck stops at Buck House, kind of. (For those not familiar with this terminology, British people sometimes refers to Buckingham Palace, the Queen’s primary residence, as Buck House.) And indeed the Governor has quite a role in this new Caribbean Nowhere Land:

The Authority shall comprise the following members -
(a) a Chairman, a Deputy Chairman and two other persons appointed by and holding office at the pleasure of the Governor in Cabinet; and
. . . .
4. (1) The Governor in Cabinet shall by Order designate a Department of Government as the Secretariat to the Authority.
. . .
A member of the Authority is entitled to receive such remuneration in respect of each meeting attended as determined by the Governor in Cabinet from time to time.
. . .
The Governor in Cabinet may by Order, on the recommendation of the Authority, declare a parcel or parcels of land, areas or locations in the Islands to be the whole or part of a special economic zone and such Order may add to or remove any parcel or parcels of land, areas or locations in the Islands from such special economic zone.
. . .
The Governor in Cabinet may by Order declare a person to be a developer for the purpose of developing and operating a special economic zone under this Law.
. . .
The Governor in Cabinet may, after consultation with the Authority, make regulations prescribing all matters that are required or permitted by this Law to be prescribed or are necessary or convenient to be prescribed for giving effect to the purposes of this Law
. . .
The Governor in Cabinet may, at any time, revoke the appointment of any member, including the Chairman.”

That last one is a pretty powerful one. Well, they all are, in their own way.

In addition:

Clause 7 provides for the duty of confidentiality on the part of members of the Authority.

Strangely, though, despite this special confidentiality, the UK is supposed to be responsible for the “Good Governance” of the Cayman Islands – and the official paper on what this means (click on the link on this page) says that ‘transparency’ is part of good governance. So how do we square this ‘transparency’ with this duty of confidentiality? More generally, how do we square it with the Cayman Islands’ Confidential Relationships (preservation) Law, 2009, which states:

5. (1)
Subject to section 3(2), whoever-
(a) being in possession of confidential information however obtained-
(i) divulges it; or (ii) attempts, offers or threatens to divulge it; or
(b) wilfully obtains or attempts to obtain confidential information,is guilty of an offence and liable on summary conviction to a fine of five thousand dollars and to imprisonment for two years.

So you can go to jail in Cayman not just for divulging for information, but for merely asking for it. So much for ‘transparency’ as a part of good governance.

Now take a look at Section 3.2, which does provide some exceptions to this confidentiality law. You can penetrate this ferocious secrecy law – only under certain highly restricted conditions. Most important, perhaps, is the part that explores what happens when a crime has been committed outside of the islands. This exception is highly curtailed:

“a constable of the rank of Inspector or above, specifically authorised by the Governor in that behalf, investigating an offence committed or alleged to have been committed outside the Islands which offence, if committed in the Islands, would be an offence against its laws;”

This restricts any attempts to break Cayman’s secrecy in two important ways. First, the foreign crime has to be classified as an offence in Cayman too. Given how lax they are in so many ways, this is a massive loophole (and given that they boast so much about not levying tax, then this would most likely exclude tax crimes, though I’d have to confirm that).

Second, the police officer has to get the Governor’s permission to investigate. This is unusual. Why cannot the police authority just investigate a crime, without having to ask permission from the politicians? What sort of impartial system of ‘good governance’ is this? We have plenty of evidence – including the latest legislation – that the Governor’s willingness to compromise the tax haven status of the Caymans is absolutely not to be taken for granted: breaking through Cayman’s secrecy involves getting involved in a highly politicised process, with the fierce defenders of offshore activity firmly in the catbird seat.

As we know from conversations with disgruntled offshore practitioners, what this means in practice is that the small fry may well get their confidentiality pierced, if they fall foul of the law, while those who possess real political power and influence will find that avenues of protection are often available to them, whether through political processes or other avenues. There will be symbolic and token convictions (and sometimes more than that), to help the jurisdictions show how clean and cooperative they are, but the big fish criminals will often sleep soundly. We have no reason to think that Cayman is any different in this respect.

Back to the Special Economic Zones legislation – some indication of what’s up, from a Tax-news.com story in January – the legislation:

“is expected to offer attractive terms to those looking to make tax-efficient technology-based investments in the Caribbean and Americas region. The agreement permits the creation of what has been dubbed as an enterprise city, with the contractor, Hon Cayman Property Limited expected to invest more than USD500m over ten years.”

This is a bit out of date, admittedly. A story from July notes that the zone will be

“intended to attract global science, technology, commodities and derivatives, media, and educational entities to the Cayman Islands.”

Derivatives? The rest of the story raises all sorts of other questions. Who is Hon Cayman Property Limited? Why will manufacturing and engineering be specifically forbidden from practicing in this zone?

And, importantly, who will be operating here, and under what terms? It’s hard to say. In fact, we may never find out the terms, because:

Such special economic zone enterprise shall be entitled to employ any person it chooses who either has been issued with a current and appropriate work permit or is otherwise entitled to work in the Islands without a work permit, on such terms and conditions as may be agreed between the special economic zone enterprise and that person (including remuneration of whatever kind, currency, or rate they agree) and those terms and conditions shall be regarded as confidential information as defined in the Confidential Relationships (Preservation) Law (2009 Revision);

So you may be faced with prison if you even ask for information about those terms.

What a curious thing to include in legislation.

It’s fair to say, once again, that Britain is intentionally creating new laws in other parts of the world, in order to deepen the offshore system. And, despite all the furious denials, secrecy remains firmly, and deeply, entrenched in the Cayman Islands. If the jurisdiction (although on latest evidence, perhaps we should soon be calling it a jurisdiction plus a Nowhere Land) wants to be taken seriously, it should scrap all this legislation.

Richard Murphy has also analysed the new legislation, here.

Tax deal supports financial secrecy

George Osborne says: ‘my message to those who try to hide their incomes from the Revenue in offshore bank accounts and false declarations is simple: we will find you and your money.’

A senior official at the Indian Central Board of Direct Taxes says: ‘money laundering or illegal commission are a criminal offence. So, our effort will be to not just bring back the money but also prosecute the owner.’

President Obama says: ‘if financial institutions won’t cooperate with us, we will assume that they are sheltering money in tax havens, and act accordingly. And to ensure that the IRS has the tools it needs to enforce our laws, we’re seeking to hire nearly 800 more IRS agents to detect and pursue American tax evaders abroad.’

On the face of those statements you would think that the UK, India and the US would take the same approach to tax dodging. However, despite talking tough on tax evaders, George Osborne has broken ranks with countries like the US and India and concluded a deal, branded disgraceful by Christian Aid director Loretta Minghella, that rewards those who have been avoiding paying tax in the UK on wealth held in Switzerland.

The tax deal

The deal requires the Swiss to levy a withholding tax on UK assets held in Switzerland, and the Swiss will pass on the money to the UK. Those holding the assets will pay a lower rate of tax than if they had declared them directly to the authorities in the UK as part of a tax return, and the UK will not be entitled to receive information about those on whom the taxes have been levied.

The upshot is that it rewards those who hide their money in Switzerland, giving them both a discount on their taxes, and allowing them to keep their finances secret. By signing up to this deal, Osborne has made sure that despite condemning those hiding their money in Switzerland, the UK authorities will not find them, nor their money, and those who declare all to the authorities will continue to have to make up the gap.

Global effect

Even worse is the damage that this could do to efforts to stop tax dodging globally. The best way to stop tax dodging is for information to be shared, so revenue authorities can trace the taxes they are owed. For several years global efforts have been intensifying to require just such information sharing.

By striking this deal with Switzerland, the UK appears to be breaking ranks on these efforts, and will encourage those seeking to retain secrecy to try and get others to split too. Should this happen the worst affected will be the developing countries, as they lack the political and economic clout to get any kind of deal with Switzerland.

By striking a deal to get less than they are owed, the UK government has also made it much less likely that developing countries will ever be able to get the taxes owed to them from tax havens.

This is not an insignificant issue for developing countries: in 2008 it is estimated that illicit outflows from developing countries reached $1.26 trillion. Christian Aid estimates that developing countries lose $160bn a year in lost tax revenue - significantly more than they receive in aid.

UK in minority

‘If financial institutions won’t cooperate with us, we will assume that they are sheltering money in tax havens, and act accordingly.’
President Obama

So why has the UK broken ranks? It’s not that the UK can claim that there aren’t other big hitters willing to fight for global action; only Germany has signed a similar deal, while countries like the US and India are committed to taking action.

The US has passed legislation requiring information on US accounts of over $50,000 held outside the US to be passed to the IRS, while India has made clear, ‘India will not go for such a treaty. Rather, we would prefer criminal investigation and action thereof’.

The world’s biggest economy and one of the fastest growing emerging economies are committed to getting 100% of what they are owed, yet Osborne has gone it alone and settled for significantly less.

What next?

If Osborne is serious when he says that tax evaders are ‘leeches on society’ he needs to make it clear that he is committed to taking action that will stop them, both in the UK and globally.

The only way to do that remains a multilateral solution. The G20 is the best place to start, and a firm commitment to ending tax haven secrecy by the G20 would begin to repair the damage Osborne has caused.

Take action!

Call on David Cameron, Nick Clegg and Nicolas Sarkozy to end tax haven secrecy at this year’s G20.  Click here!

Cross-posted from the Christian Aid blog…

The UK has initialed an agreement with Switzerland which we recently wrote up on the Task Force blog. In short, UK tax evaders using banks in Switzerland will have to start paying some tax – but the UK will allow those (criminal) tax evaders to avoid penalties and retain their anonymity. The UK will have to trust that Switzerland will keep its part of the bargain, even though it will be impossible to conduct any comprehensive checks. There are reasonable fears that this model may spread widely to other countries.

We at TJN think this is a thoroughly rotten and corrupt deal. For the following reasons.

• It sabotages European and other efforts to fight together for financial transparency. This has implications for countries, rich and poor, around the world.
• It lets proven tax-evading criminals off the hook.
• In colluding with criminality and puts wealthy tax evaders in a specially privileged position, above ordinary mortals. One set of rules for them, another for the rest of us. (See the UK uncut post linked to, below.)
• In creating lawlessness for the elites, while creating repression for the poor and weak, it not only distorts society, but also distorts and corrupts markets.
• At a time of national soul-searching, following the UK riots, and worries about a “moral collapse” in every corner of British society, to grant impunity and protection and secrecy to the wealthiest members of society sends an appalling message.
• From the information that’s available, it seems that although the deal will allow the UK to receive some (and we stress some) of the tax due to it, there is a gigantic loophole as regards inheritance taxes. From what we know so far, though not all details have been provided yet, no inheritance taxes will be levied. Why not?
• What are the ‘special rules’ for non-domiciled taxpayers? Non-doms already escape UK tax on their non-UK income. Does this mean they get a free and officially endorsed blanket of secrecy thrown over their Swiss affairs too?
• It contemptuously dismisses whistleblowers, an essential check on criminality and corruption in any society.
• It creates a ring-fenced fortress of secrecy for criminals to flourish in. Although there are supposedly safeguards to allow information-sharing in the case of certain classes of crimes, these safeguards are extremely weak, and are themselves subject to all sorts of caps and restrictions. If Switzerland is serious about tackling crime, why place severe caps on this?
• Many other vital details are still secret. How will the Swiss calculate marginal tax rates without having full disclosure of a taxpayer’s total tax affairs ? Is the UK therefore handing tax sovereignty to Switzerland?
• The UK should have followed the American example. They discovered that Swiss banks had been helping American commit tax crimes, and they went after them. During their probes, they put pressure on individuals caught out, obtained more information, and started bringing in more Swiss banks into the noose. They are in a far, far stronger position now to extract concessions out of the Swiss than the UK ever was. And the UK has been handed information on a plate about this. As Reuters notes: “British authorities are investigating hundreds of HSBC (HSBA.L) customers suspected of tax evasion after it obtained details of around 7,000 Swiss accounts at the bank from another tax authority, Why has the UK chosen to suddenly let all these people off the hook? The deal explicitly prevents the UK from acting on this data now.
• The Swiss government and Swiss banks have a long and shameful record in the past of outright lying to foreign tax authorities about their affairs, and breaking assurances. If you think lying is too strong a word, then read Tom Bower’s book Blood Money, about the efforts to hunt for justice for the victims of the Nazis. Your mind will be changed. The Swiss have a record that shows they cannot be trusted. And yet the UK has decided to take an awful lot on trust.
• In summary, this is a shabby, unprincipled and dangerous deal. It is a victory for Switzerland over the UK. If other countries (as well as Germany) are considering this, or if the UK is considering extending this corruption to other tax havens, then we need to fight it with everything we’ve got.

Patrick Odier, Chair of the Swiss Banking Association, is delighted: “overall, my assessment of the tax agreements is positive,” he told Swissinfo.ch. “They mark important milestones for the Swiss financial centre. As a banker, I am especially grateful that clients have been offered a fair solution for regularising their efforts.” You bet he’s grateful, and so are his clients.

Now here are a few headlines from elsewhere:

UK-Swiss tax deal ‘a disgrace’ warns Christian Aid – Christian Aid
The new tax deal between the UK and Switzerland amounts to collusion with criminality and will seriously damage poor countries’ attempts to collect the billions they lose to tax dodgers. See also Morality demands rethink of UK-Swiss tax deal, warns Christian Aid.

UK-Swiss tax deal: timid and anonymous – Financial Times
“As long as specific names and account details remain secret, determined tax evaders will have an edge over governments. So why have Germany and the UK been willing to settle for less than the standard set in this area in the European Savings Tax Directive, and for fewer concessions than the US received in 2009?”

David Prosser: Britain’s tawdry tax deal with Switzerland is a charter for tax evaders – The Independent.
How pleased should we be about the latest deal? About as pleased as we would be if someone had robbed a British bank, fled to Switzerland and then got away scot-free apart from the inconvenience of the local authorities handing back some of the proceeds.

La Tribune: London sells its fiscal soul for six billion Euros.
The headline puts it perfectly.

A series from Tax Research:

Let’s not get personal – this is a matter of right or wrong
This was a ‘Marmite’ issue – you’re either for or against it. You are either for or against letting tax criminals off; endorsing banking secrecy so that criminality may flourish; giving anonymity to who coldly plan and execute their crimes in organised fashion; encouraging an unlevel playing field for business so that the cheats get an unfair competitive advantage; H M Revenue & Customs not upholding the law; granting immunity to those banks and bankers who organised the handling of stolen property. It’s about ethics.

The friends of tax havens are delighted with the Swiss tax deal
The Sovereign Society, Swiss bankers, and many others, are delighted. Which says it all.

Labour shadow minister condemns Swiss tax deal
“The Government should ensure that all those who have broken the law face the full penalty. There is a significant risk that some who have taken part in criminal tax evasion will escape by paying less than if prosecuted – the Government should guarantee this will not happen.”

How can Dave Hartnett head HMRC when he utters nonsense like this?
The head of UK’s HMRC thinks this is a wonderful deal, and, bizarrely, is ‘fair’ for British taxpayers. Don’t talk rubbish, Dave.

Cameron and Osborne did the Swiss tax deal to support tax evasion – there’s no other explanation
The EU Savings Tax Directive, currently being beefed up, would have ensured we’d have got all the information we needed to demand all the tax due by those who have been criminally evading their tax bills. It would have applied to Jersey, Guernsey, the Isle of Man, Cayman and all other British tax havens that comprise the branch offices of the City of London tax haven. And it would also have extended information exchange to companies and trusts – which would have shattered the tax evasion industries in these British tax havens.I think the UK- Swiss tax deal has been deliberately engineered to scupper that.

Osborne’s just invited everyone to bank in Switzerland
the UK government has just handed a perpetual competitive advantage to Swiss banks over UK banks in the markets for savings in the UK. Think just how stupid that is.

How is it tax evasion’s no longer a crime but demonstrating about tax avoidance is?
The UK government is turning this deliberate blind eye to massive, large scale, organised looting of the UK’s tax system it is also bringing criminal charges against more than thirty young people who recently took part in a in a wholly peaceful UK Uncut demonstration against tax avoidance.
Astonishing.

The Swiss declare it’s a great day for tax evasion
The Swiss bankers love it.

In the words of TJN’s James Henry, author of the book, Blood Bankers, this is a bargain with the devil.

Imagine the horror of what would happen if this thinking spread. Tax haven secrecy would be entrenched. Criminality, impunity, corruption and a breakdown in trust would become entrenched.

This is an issue for all citizens of the world. Not only have other countries considered following the UK-German lead – but the UK appears to be considering extending this Swiss model to other countries. Take a look at this. Imagine it -  Swiss-style protection-for-secrecy deals spreading like a cancer around the world.

It is not too late to stop this in the UK. Let’s start to mobilise to get this stopped.

Credit: T.I.

If corruption, especially money laundering and bribery are to be tackled, we need to see action not only from developing countries, but also countries that are home to major financial centres.

Here in Africa there is wide recognition that poor governance is one of the biggest barriers to sustainable development, what is missing is recognition of the wide responsibility that parties beyond Africa have for this problem.

Some developing countries are tired of waiting for developed countries to act. While I hear a more and more African leaders who recognise that governance issues have been a major barrier to economic development, there is also frustration that global action to stop the corruption that undermines governance is so inconsistence with commitments.

It is telling, therefore, that the African Union Convention on Preventing and Combating Corruption goes actually goes further than the UN Anti-Corruption Convention in several ways, especially in private sector obligations. It tackles bribery between companies and calls on the private sector to participate in the fight against unfair competition and respect of tender procedures. It obliges governments to carry out research on the conduct of multinational companies in Africa.

Nigeria is showing that developing countries, not just developed ones, can tackle the supply side. Nigerian authorities have recently been among the most active in pursuing bribery cases against foreign companies. The resulting settlements have involved more than US$ 1.7 billion in fines and disgorgement[read more about this and other anti-bribery cases in our Anti-Bribery Progress Report here].

Here in Tanzania, the BAE case shows how bribery is becoming more sophisticated and harder to track. This should stop our efforts, but encourage us to make transparency run even deeper.

One trend we are seeing is for inducements to be offered via agents and subsidiaries, and there is also a practice of offering officials equity in their company or in subsidiaries located in offshore havens.

The African Convention also has harsher measures on illicit enrichment than the UN’s. Article 17 forbids governments from citing bank secrecy as an excuse for not providing legal assistance with investigation of suspicious assets.

In 2011 we have seen how deeply the international financial system is implicated in the stealing of assets by unpopular leaders or dictators.

Switzerland says it has frozen more than US$1 billion in assets from Libya, Tunisia and Egypt following the Arab Spring. 

How did they get there? Aren’t banks supposed to carry out enhanced due diligence on politically exposed persons? A recent report has shown that many UK banks are failing to meet this responsibility, a third of banks surveyed appeared willing to accept very high levels of money-laundering risk, half failed to apply due diligence. More worrying still, a third “ dismissed serious allegations about their customers without adequate review.” The report warns:

around three quarters of banks in our sample, including the majority of major banks, are not always managing high-risk customers and PEP relationships effectively and must do more to ensure they are not used for money laundering.

And also points out that the same failures allowed Nigerian dictator Sani Abacha to move around US$ 1.3 billion through UK based accounts during the 1990s.

What gets me is what happens to assets actually are frozen, given that they often end up in commercial banks that, according to these reports, do not do their moral homework.

Credit: dystopos/Flickr

Why should they stay with the banks who have failed in their due diligence, where governments cannot use it and where they will continue to accrue interest for the banks? They should rather be kept in escrow accounts run by international development banks, so that they can help the governments trying to help their countries recover from years of corruption, graft and misappropriation. Transparency International has called on the Group of 20 leading economies to make this happen.

If a bank has stolen assets, it is a handler of the ill-gotten gains of corruption.

This is an issue whose time has come. We saw great interest in the wealth of the deposed North African leaders, both in western countries and those involved. I hear it at meetings I attend where corruption and development are discussed, they invariably wind up on this issue.

Some countries have had success in recovering stolen assets, Nigeria from Switzerland, for example, but as the financial markets grow more complex, how many financial centres will developing countries have to deal with to recover assets if better international mechanisms are not put in place.

For all the good words we hear in international forums, what leaders trying to improve governance in their countries – and the citizens – want to see is a show of good faith.

Cross-posted with permission from the Space for Transparency blog.