Oddly, given that it indicates the staggering reach of tax havens, from Iceland to Pyongyang, the leak of client data from a Panamanian offshore law firm has come at an opportune moment for the OECD.
The Paris-based club of mostly rich nations is developing a global transparency initiative to crack down on tax haven secrecy. Most havens have agreed to participate and from 2017 will start to share financial data automatically so that each can tax its taxpayers appropriately. But there are recalcitrants. Panama is refusing to participate seriously. Pascal Saint-Amans, the OECD tax chief, calls it a jurisdiction “that welcomes crooks and money launderers”.
The nation has for years sold secrecy. It has turned a blind eye to the laws of other jurisdictions and allowed firms such as Mossack Fonseca to flout its own weak official safeguards against financial crime. The client leaks point to links with drugs lords, Mafiosi, terrorists, arms companies and rogue states. The fact that Mossack Fonseca can state that it has never been accused or charged in connection with criminal wrongdoing shows that Panama’s financial regulators, police, judiciary and political system have been part of the system — corrupted or influenced by the lucrative flows from the dirty-money machine.
There will be intense pressure for Panama to clean up. But it is vital not to lose sight of the bigger picture. It is hard to crack down on the sprawling and many-layered system of tax havens and offshore secrecy. Any efforts will be undermined by armies of offshore enablers looking for loopholes: accounting firms, offshore company formation agents and trust companies and banks. In this case, the law firm in question has worked with some of the world’s biggest banks including HSBC, Société Générale, Credit Suisse, UBS and Commerzbank to set up thousands of offshore companies that foxed tax and law enforcement authorities worldwide.
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So action beyond the OECD’s is needed. David Cameron, UK prime minister, hosts an anti-corruption conference in May. He should announce steps to force the UK’s Overseas Territories and Crown Dependencies to create publicly accessible registries of the beneficial ownership of companies, and open trusts and foundations to scrutiny.
There are many ways to put pressure on the private infrastructure of enablers. One of the most potent brings into focus one of the biggest offshore operators: the US. America has its own anti-tax haven programme, the Foreign Account Tax Compliance Act, which does a decent job of cracking down on American tax cheats. Fatca has a big stick: it imposes a 30 per cent tax on payments originating in the US to any financial institution that does not comply. Financial institutions do not want to be shut out of US markets so they put pressure on other countries to let them share data — becoming in the process lobbyists for reform.
Though the OECD scheme is modelled on Fatca, the US will not participate directly. Instead, it promises to share data with other countries through bilateral agreements related to Fatca. However, US Congress has not approved the reciprocal promise contained in these agreements — and this means the US will in practice end up providing very little information to others. America is fast becoming a tax haven of choice. The OECD knows this but has not been brave enough to call for action.
The only other body with the clout to confront Washington is the EU. It should summon the courage to impose a withholding tax on payments originating in the union to non-compliant jurisdictions such as the US, copying Fatca’s big stick. That would unblock arguably the most powerful guardian of financial secrecy in the system.
Nicholas Shaxson is the author of ‘Treasure Islands: Tax Havens and the Men who Stole the World’