These Islands Aren’t Just a Shelter From Taxes — Robert Morgenthau

Tax Haven Secrecy Facilitates Transnational Crime, Financial Fraud and International Terrorism, Writes Robert Morgenthau in the New York Times

David Shankbone/Flickr*

On Sunday, The New York Times published an op-ed by Robert Morgenthau, the legendary former Manhattan District Attorney, who oversaw law-enforcement in the world’s financial capital for more than three decades. Mr. Morgenthau, who retired from public life in late-2009, highlights the systemic risks posed by tax haven secrecy around the world.

Tax havens, with little to no taxes, of course, facilitate tax avoidance and tax evasion in countries like the U.S., but it is the secrecy they provide that is the real problem. As Mr. Morgenthau, a member of Global Financial Integrity’s Advisory Board, explains:

The favorable tax rates encourage corporations to avoid paying American taxes by structuring complicated international transactions, like Apple’s “Double Irish With a Dutch Sandwich,” recently described by The New York Times. But it’s not just the low tax rates that make these jurisdictions attractive to those following the rules. The secrecy of offshore jurisdictions allows some individuals and corporations to engage in outright tax fraud, costing America at least $40 billion each year.

And that secrecy makes offshore tax fraud almost impossible for law enforcement to detect. When I was the Manhattan district attorney, we learned of offshore accounts only through whistle-blowers, cooperators and serendipity.

And this secrecy is not just about tax fraud. Indeed, as Morgenthau puts it:

The secrecy laws in these tax havens are at the root of serious crimes: fraud, money laundering and international terrorism.

He points out that nearly every big financial scandal can be connected to the secrecy provided in tax havens. Offshore secrecy jurisdictions were critical to the frauds conducted by notorious Ponzi-schemers Bernie Madoff and Allen Stanford. Meanwhile, the fraudulent accounting techniques which brought down Enron were substantially based on opaque offshore accounting. According to Mr. Morgenthau:

How much havoc can these offshore schemes wreak? Where there is no transparency, there can be no oversight. Abuses grow literally without limit. Huge bankruptcies like Enron and Parmalat have resulted when corporations faked their balance sheets using offshore secrecy jurisdictions.

Of course, the problems posed by tax haven secrecy do not stop with financial scams. They facilitate drug trafficking, criminal networks and terrorist financing. Morgenthau writes:

Offshore secrecy jurisdictions provide the perfect cover to funnel money and arms to rogue states and nonstate actors. On April 5, the arms dealer Viktor Bout, the so-called Merchant of Death, was sentenced to 25 years by a federal judge for conspiring to sell antiaircraft missiles to agents posing as foreign revolutionaries. Published reports have linked him to arms sales to Al Qaeda and the Taliban.

Aren’t there international sanctions to prevent the sale of arms to terrorists? Of course there are. That’s why the Merchant of Death found a Bulgarian weapons supplier — based on the offshore haven of Gibraltar.

But it’s not just shadowy fellows like Viktor Bout who evade sanctions to do business with rogue states or terrorists. Many American corporations, including Halliburton, have done business with Iran through their offshore tax haven subsidiaries.

Putting the significance of this in stark terms, he adds (emphasis my own):

When companies use secrecy jurisdictions to commit fraud or to evade sanctions, legal remedies may come as cold comfort. Once world financial institutions begin to fail, or a rogue regime acquires unconventional weapons, it will be too late for law enforcement to prevent disaster.

Additionally, as Global Financial Integrity points out, the secrecy in these tax havens is not just a problem for the United States; it has serious implications for poor countries. GFI estimates that tax haven secrecy costs the developing world an estimated $1 trillion per year, which could otherwise be used to invest locally in healthcare, infrastructure, and education, among other things. Moreover, the tax avoidance and evasion facilitated by these jurisdictions has undermined the European economy, the U.S.’s biggest trading partner, and brought the single currency’s continued existence into doubt.

Tax haven secrecy, and its many ills, is one of the most pressing issues plaguing the world today. Luckily there are some practical steps that can be taken if political will can be mustered. As Mr. Morgenthau notes, the bi-partisan Incorporation Transparency and Law Enforcement Assistance Act would make it exceedingly more difficult for criminals, tax evaders and terrorists to utilize anonymous shell corporations within the American financial system. Congress should move to enact that legislation before it adjourns this year.

Likewise, the CUT Loopholes Act, introduced by Sen. Carl Levin (D-MI) and Sen. Kent Conrad (D-ND) in February, would enact legislative changes to crackdown on a number of tax haven abuses. Passing that bill would be another step in the right direction.

As Mr. Morgenthau concludes, “America needs to set an example of financial accountability and insist that the world follow.”