Towards Global Banking Transparency, Trust?
Are global leaders boldly moving towards greater trustworthiness and cooperation? EBBF member and anti-corruption expert Jean-Pierre Méan sends in his comments on the recent G20 moves to end banking secrecy. He sets out the context of the new discussion and reflects on its historical significance: Are we a step closer towards appreciating the values of trustwothiness and honesty?
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One of the objectives of the G20 meeting in London was to address the issue of offshore centres which are accused of having offered an environment free of regulations to hedge funds and of providing a tax shelter to the wealthy. Both accusations are correct. However, this state of affairs is well known and, until now, there had been very little political will to tackle the problem.
In a global economy, there is indeed little point in reigning in the financial sector to avoid the recurrence of the abuses of the past 10 years, if the long arm of the law does not reach everywhere. It can only be hoped that the lesson has been learned and that the new regulatory environment will be all encompassing.
The same holds for the tax sheltering aspect of offshore centres. There are some 50 tax havens in the world (including not only a large number of small islands or countries such as the Bahamas, the Cayman Islands, the British Virgin Islands, Jersey, Andorra, Monaco, Liechtenstein and Switzerland, to name a few, but also some more prominent places like the City of London and the state of Delaware). These places are not only tax havens because residents pay little or no tax (which is not the case of all of them) but because non-residents who deposit their money there can do so in such a way that the tax man in their country will never know about their hidden wealth. There is no valid reason why this should be tolerated any longer, especially not in times of crisis like the one we are experiencing now.
Since there is no way to hide wealth only from the tax man, confidentiality has to be complete. Tax havens are thus black holes in the financial system. Funds deposited there cannot be traced back to their beneficial owner. This means that not only tax evaders but also criminals use them for the discretion which they offer. There are of course international conventions to which many offshore centres have subscribed which provide for a lifting of the confidentiality veil in criminal cases but in practice the procedures are too long and cumbersome to be effective. They need to be streamlined in order to have some success in fighting crime and especially organised crime.
In the wake of the London meeting, several off-shore centres had signalled that they were prepared to cooperate. In a move which has been considered at home as dramatic, Switzerland agreed to lift its strict banking secrecy in tax evasion cases. So far, in tax matters, Swiss law has been making a distinction between tax fraud–i.e. the use of false documents to support a false declaration, considered to be a crime and for which banking secrecy was lifted (like for all other crimes)–and tax evasion–i.e. the omission of a declaration, not considered as a crime under Swiss law and for which banking secrecy was thus maintained. Assistance will now be provided in tax evasion like in fraud cases; however, banking secrecy will only be lifted in specific cases where there is a founded suspicion of tax evasion. It remains to be seen how this will work in practice but it seems that those who have best hidden their money will not have to fear much since their hiding skills will protect them from even a suspicion of tax evasion.
Some countries would like full transparency of financial transactions. This would permit to detect abnormal accumulations of wealth by individuals which cannot be explained by the declared sources of income of this individual and which must therefore have an illegal source. Having access to such knowledge would indeed be of considerable help in cases such as corruption where it is difficult to obtain other evidence. It is, however, unlikely that full transparency on the international level will be realised following the G20 meeting.
Be it as it may, there are only two instances where banking secrecy has some merit. The first instance is the need of protection for individuals living in countries where kidnapping is rampant and where wealthy individuals are favoured targets. The second instance is the need of protection of individuals living in a totalitarian state and victims of persecution. (Persecution of the Jews by the Nazis is generally cited as the source of Swiss banking secrecy; actually, Swiss banking secrecy is more likely to have been motivated by the intent to protect French conservative politicians fearing a rise of the left to power.) Beyond offering some protection in these two instances, there is little merit to banking secrecy.
The results of the G20 meeting will still need to be evaluated. It is, however, already apparent that all the pressure has been put on small countries while some financial centres are conspicuously absent from the lists of countries who are not cooperating (black list) or who still have to demonstrate better cooperation (grey list). All observers have been surprised to find no mention on either list of the State of Delaware, Jersey, Guernesey, the Isle of Man or the City of London (with respect to trusts where the beneficiaries may remain anonymous), among others. The conclusion has quickly been drawn that the large countries have been able to protect their financial industry and indeed to give it a competitive advantage over that of countries which have to comply. This is most unfortunate. No judgment can be made and no policy followed without transparency because without it things are not what they seem to be and the premises, on which the judgment or policy are based, are vitiated. Except for the two instances mentioned above where secrecy has some merit, the very purpose of a lack of transparency is to hide what cannot be avowed because it runs counter to social goals accepted by consensus in a democratic society. But Transparency is not only a technical matter, a decision tool. It is also a constituent part of integrity and as such an essential element of trust and trustworthiness.
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What are your thoughts? Have the steps been significant, or are we seeing the triumph of money over values? Are we a step closer towards global transparency and the end of tax evasion?
May 6th, 2009 at 03:15
Dear Jean-Pierre,
I have gone through your comments and would like to add a few words. While I agree that tax heavens need to be regulated, I would like to extend the debate to those countries that have been using low corporate tax rates to attract Foreign Direct Investments. I believe that any country has the right to define and put in place fiscal policies in support of their industrial competitiveness. This tool has been successfully used by several countries on their way to development and there are many examples also in Europe. My concern is here that the fight against financial tax heavens becomes a cheap witch-hunt against less-developed countries that work hard to attract FDIs.
Of course, we may also see things differently and wonder why a multinational corporation should move their production sites from a country to another with the objective of saving corporate taxes. Work mobility is a meaningless definition in many countries and people who loose their jobs in a country cannot empathize with whom will be taking over their old job in a different country.
Fiscal competitiveness is only part of the broad concept of ‘competitiveness’; currency exchange rate is also a powerful tool that cannot be used any longer in the European Community… China, instead, has been using it wisely – in my opinion – to the benefit of their economy.
Well, what I am trying to say it that we should monitor that less-developed countries:
1) Are not weakened by the upcoming (?) regulation on tax-heavens
and
2) Investigate if their FDI regulation preserves them from multinational corporations leaving the country in the aftermath of a witch-hunt or simply because of systemic behaviour (please remember the Asian Tigers crisis!).
I would love if we could extend this debate maybe into a workshop. Title? “Is competitiveness ethical?”
My apologies for being too long.
Kind regards,
Irene