Hiding the World's Money

The thieves get the blame but as usual the bankers are home and dry

The lines between fraud, tax evasion and avoidance, theft of documents, duty to report crimes, etc. grow ever murkier, as evidenced by the widespread publicity given to the International Committee of Investigative Journalists, which in the past two weeks has made public a long and embarrassing list of politicians, hedge fund managers, government officials and major and minor satraps who have stuffed multiples of billions of dollars into tax havens across the world.

But the organizations at the murkiest heart of the situation are not Mexican drug cartels nor Russian oligarchs. They are some of the world's best-known financial institutions and some of its largest multinational companies. Almost every day brings news of some new case of misdeeds being exposed, whistleblowers and scapegoats alike prosecuted and politicians embarrassed.

Governments make pious noises about cracking down on tax havens but in reality they can do little. They can sit on this or that little island – goodbye Cyprus as a safe place for money – but money is fungible. This is a world with few really effective foreign exchange controls to discourage the wily and any number of places willing to hide it. That includes the likes of Singapore as well as more obviously dodgy avoidance centers like the Cayman Islands, all too keen to pick up any business driven from elsewhere (including Switzerland now that the Germans have been getting tough). The chances of achieving much are dim.

Or dim unless governments of major countries are actually prepared to take on their own big banks and the likes of major internet soft and hardware companies that use essentially dishonest transfer pricing tricks and complex devices to pay minimum taxes and keep billions of cash offshore.

The hypocrisy at the heart of the system is well illustrated by Hong Kong and its leading, though London-headquartered bank, HSBC. As Asia Sentinel readers will be aware, Hong Kong courts have taken to giving 10-year and longer jail sentences to tiny cogs in the so-called money laundering schemes – in these cases depositing funds which were alleged, without any supporting evidence, to be the profits of crimes on the mainland.

Every week Hong Kong banks knowingly launder billions of dollars of mainland money which may be the profits of crimes but more likely is the product of another crime - under - or over invoicing of trade transactions to avoid both tax and foreign exchange regulations. But the government lawyers and tame judges are either too dumb or compromised to accept that reality so give outrageous sentences to minor players and let the banks go free.

Meanwhile across the world, in Spain in this case, the Swiss government is, with the connivance of HSBC, trying to extradite a former employee of HSBC in France who provided the authorities with a list of foreign account holders with HSBC in Switzerland. Then French Finance Minister and now IMF head Christine Lagarde passed the list on to US and some European governments. The whistleblower faces prosecution on grounds of theft of information. Yet reporting knowledge of or reasonable suspicion of crimes is supposed to be a duty. In Hong Kong you can get 10 years jail for not recognizing that fact.

It may be a crime in Switzerland to reveal bank account information, but it is a national duty for a French citizen to reveal criminal activity by one of its citizens. Sorry, Switzerland. If you want to be an international banker, you have to follow foreigners' rules or stick to guarding the hoards of African dictators and assorted war criminals. An even bigger storm has broken out over the release by the International Committee of Investigative Journalists of the thousands of documents about offshore accounts held in such notorious jurisdictions as the Caymans and British Virgin Islands (BVI). Cries of theft have gone up and appeals made to the right to privacy. But transparency is also a right and obligation in most well-run countries. What gives a citizen of, say, the US or France the right to hide tax and money affairs in informational black holes such as the Caymans?

For sure there are legitimate reasons for operating through, for example, BVI holding companies. Many of the companies listed in Hong Kong do so for a variety of reasons which have more to do with procedural and regulatory issues rather than tax or other money ones. Nonetheless, every nation has a right to expect its citizens to obey its laws and hence there is also an obligation to report criminal breaches of those laws.

Hong Kong has the whole situation upside down, prosecuting locally for supposed crimes committed elsewhere, while its top bank in effect is defending its role in shielding illegal activity by citizens of the US and some European countries.

However it is hardly surprising that wealthy individuals such as the French budget minister, recently exposed as having a secret offshore account, engage in such practices given the lax attitudes of governments to tax schemes employed by corporate giants and which fail to prosecute individual bankers for their roles in the outright dishonesties which contributed to the global financial crisis.

These are usually described as "tax avoidance" and hence legal but examined closely they almost invariably involve dishonest reporting of values and of where the transactions actually took place, so that profits are retained in some offshore zero or low-tax location.

The little cartel of major international auditors who also act as tax consultants are key to creating these fictions. They often have all too close links to government revenue departments which are responsible for cracking down on such manipulations. Meanwhile governments more broadly are constantly threatened by companies that threaten to move their headquarters to Ireland or Singapore or Hong Kong if the local authorities take tax gathering too seriously.

Meanwhile the City of London feeds off the many tax havens which rely on British laws and protection, and Germany is lenient towards bank secrecy in Austria and the whole EU ignored Cyprus abuses before the recent crisis.

There is a real danger that abuses by big corporate as well as banks are turning middle classes in many countries against the idea of free markets. They are having to pay more taxes while the richest get richer. Yet as any student of Adam Smith can tell you, these are not free markets but ones manipulated by insiders against the interests of all other producers and consumers.

Some authorities have made a fetish of cracking down on money laundering in the name of fighting El Qaeda or drug cartels. This is nonsense. El Qaeda was never in the big money league and the drug cartels have networks of legitimate business through which to move money around. Open trade and open movement of money are inseparable. But the same does not apply to tax liabilities and the reasonable requirement that citizens pay taxes as required by their national laws, and that multinational corporations pay tax where they actually make money – which you can be sure is not some Cayman or Cook Islands post-box, or cloud in the Google sky.By Philip Bowring