Follow the money
As countries share more information, opportunities to squirrel away cash abroad will continue to narrow
AMONG the sins that have most angered the austerity-weary everywhere is the use of undeclared offshore accounts to stash the wealth of the rich. Greeks were particularly enraged when data stolen from Swiss banks showed in 2010 that politicians and other prominent Greek figures had been taking advantage of Switzerland’s strict banking-secrecy laws. Their new prime minister was in tune with the times when he promised war on tax-dodging “oligarchs” during his campaign.
But the rich and tax-shy already have fewer places to hide. America’s Foreign Account Tax Compliance Act (FATCA), passed in 2010, forces thousands of foreign financial institutions to report American clients’ balances to its tax authority, the IRS, or face stiff penalties. The European Union is strengthening its savings-tax directive, which requires member states to exchange information. And last year more than 80 countries agreed on a “common reporting standard” (CRS) set by the OECD, a club of mostly rich countries. Though not loophole-free, the CRS is “potentially a giant step forward”, says the Tax Justice Network, a campaign group.
America’s gumshoes have not yet finished with the Swiss—they have just announced a new tax-evasion probe into UBS. But they are also following the money to other havens of secrecy (see chart). Investigations are under way in Asia: IRS officials are said to be stationed in the American consulate in Hong Kong. Late last year Bank Leumi, Israel’s largest bank, paid $400m to end a probe into help it allegedly gave to American tax evaders. Asked if any country has got off lightly thus far, a senior American official points to Panama, whose law firms are giants in offshore incorporation, and not always choosy about their clients.
Other countries, keen to replenish depleted public coffers, are following suit. Spain is going after footballers and a princess; Italy after fashion icons. Britain is investigating celebrities who used aggressive tax-avoidance schemes, one of which involved tax breaks for films. So keen are German states to catch cheats that they have bought stolen bank data. UBS has paid a €1.1 billion ($1.26 billion) bond as part of a French investigation that could cost the Swiss bank a further €3 billion or more. And the hunt is moving beyond bank accounts. In December Italian police searched Credit Suisse’s Milan offices for evidence of alleged tax evasion by Italians who bought insurance policies.
European countries are borrowing tips from America, which has collected more than $7 billion from 50,000 evaders since 2009 under a programme that allows them to avoid prison by coming clean and paying a fine. Italy, which had accepted payment of as little as 5% of the undeclared money, has stiffened its terms. Fines can now equal the total amount hidden, and those who do not come forward and are later caught face up to eight years in jail.
As growth slows in emerging markets, they too are looking for new revenue. Argentina has filed a criminal complaint against HSBC for allegedly harbouring untaxed money. India’s tax agency is scrutinising wheezes including the issuance of global depository receipts—shares that can be traded on multiple markets—by fake Indian firms to bring in black money under the guise of investment. Sanctions-battered Russia is targeting the “Cyprus sandwich”, where money is routed through Cyprus (for tax planning) and the British Virgin Islands (for its combination of secrecy and English law).
The road to global tax transparency is not all smooth. Though FATCA has nudged China to do more on enforcement, Hong Kong’s position as home to offshore shell companies and way-station for the foreign wealth of China’s elite mean it is reluctant to clamp down hard. And it is unclear how the CRS will mesh with American and European plans, or whether poor countries with lots of tax cheating will benefit from the OECD initiative. A report published on February 1st estimates that Africa loses more than $60 billion a year in illicit financial outflows—though most of this is misinvoicing and deliberately mispriced intra-group transfers by multinationals, rather than individual evasion.
And though FATCA makes stiff demands of foreign banks, America is being slower to agree to send reciprocal data elsewhere. Moreover, individual states are resisting calls to collect information on the beneficial (ie, human rather than corporate) owners of shell companies, which are used to shield corrupt officials and money launderers as well as the tax-shy. The sincerity of Switzerland’s conversion to transparency is also open to question. It has signed up to FATCA, and its banks have been telling customers to comply or go elsewhere. But it may prove slow to swap data with other countries. Further reforms must be approved by parliament, and perhaps even put to a referendum.
Many tax agencies have seen their budgets slashed. Whether they will make full use of the data soon to be flowing across borders is not clear. Already, says a leading tax lawyer, the IRS has “reams of data that have been left unanalysed for years”. Governments will also struggle to keep up as rich cheats’ advisers come up with new tricks, from leasing schemes to annuities and complex insurance products. But the countries that matter have taken bigger steps towards transparency than most would have predicted just a few years ago. And public fury at tax-dodging by the global elite has not yet run out of steam.
