US Government agencies confirm that low‐tax jurisdictions are not money‐laundering havens
| DOI | https://doi.org/10.1108/13590790410809130 |
| Date | 01 April 2004 |
| Published date | 01 April 2004 |
| Pages | 127-133 |
| Author | Daniel J. Mitchell |
| Subject Matter | Accounting & finance |
US Government Agencies Con®rm that Low-Tax
Jurisdictions are not Money Laundering Havens
Daniel J. Mitchell
Many people assume that so-called tax havens are
money laundering centres. To some degree, this per-
ception is the result of movies and novels that include
villains with bank accounts in Switzerland or the
Cayman Islands. But popular culture is just part of
the story. In recent years, international bureaucracies,
left-wing interest groups, and politicians from high-
tax governments have all joined forces to undermine
the reputation of low-tax jurisdictions.
This coordinated assault against `tax havens' is
largely motivated by a desire to hinder tax competi-
tion. High-tax European governments resent the shift
of jobs and capital to lower-tax economies, but
politicians in these countries are reluctant to lower
tax rates and reduce the tax bias against saving and
investment. Instead, they are using international
bureaucracies like the European Union (EU) and
Organisation for Economic Co-operation and Devel-
opment (OECD) to browbeat low-tax jurisdictions
into emasculating privacy laws and legal protections
so nations like France and Germany will have the
ability to track Ð and tax Ð ¯ight capital. The
OECD's `harmful tax competition' initiative has
been particularly controversial. The Paris-based
bureaucracy created a blacklist of 41 jurisdictions
and has been threatening these nations and territories
with ®nancial protec tionism if they do not acquiesce
to the aforementioned demands.
1
But extra-territorial enforcement of bad tax law is
not a very appealing cause, particularly when it often
involves wealthy, white nations persecuting develop-
ing nations governed by people of colour. This is
why tax haven critics have latched on to the money
laundering issue. Fighting against drug-dealers and
terrorists is a noble endeavour, so proponents of tax
harmonisation are cleverly using the money launder-
ing issue as a weapon to besmirch the reputation of
low-tax jurisdictions.
This is probably a wise political strategy, but is it
true? Is there something about tax havens qua tax
havens that makes them particularly vulnerable to
dirty money? In spite of stereotypes formed by
reading John Grisham novels, tax havens do not
attract a signi®cant portion of the world's dirty
money. The US State Department, the Central Intel-
ligence Agency (CIA), and the Financial Action Task
Force (FATF Ð of which the USA is a member) each
independently assess the extent to which a jurisdiction
attracts Ð or has the potential to attract Ð dirty
money. Some low-tax jurisdictions are on these
lists, but the accompanying table (see Table 1)
shows that they are clearly outnumbered by high-
tax nations.
2
As the table indicates, every money laundering
rating system ®nds that non-tax havens outnumber
tax havens, usually by substantial margins.
3
Based
on these rankings, as well as other analyses, there is
no evidence to suggest that tax havens are a magnet
for dirty money. This does not mean every low-tax
jurisdiction has a perfect track record. After all, no
country with a signi®cant ®nancial services sector is
immune to money laundering. But it is clear that
tax havens are neither the source nor the destination
for a disproportionate share of the world's criminal
proceeds.
This even applies to terrorist funds. Following 11th
September, 2001, many policy makers assumed that
al-Qaeda had funnelled money through tax havens.
Investigators discovered, however, that the terrorists
relied on the banking systems of the USA, the UK,
Germany, and various nations in the Middle East
for the vast majority of their ®nancial transactions.
4
Broader investigations also have found very little evi-
dence that terrorists use low-tax jurisdictions for their
®nancial transactions.
TAX HAVENS AND MONEY
LAUNDERING
Tax havens attract wealth, but most of the money is
institutional investment. Bermuda, for instance, is a
leading centre for the insurance industry. Luxem-
bourg and Switzerland are world leaders in managing
mutual fund assets. The Cayman Islands is near the
top in almost all facets of ®nancial services and also
draws a substantial amount of bank-to-bank deposits.
American corporations make extensive use of o-
shore regimes, earning almost one-third of their
pro®ts in low-tax jurisdictions.
5
Page 127
Journal of Financial Crime Ð Vol. 11 No. 2
Journal of Financial Crime
Vol.11,No. 2,2003, pp. 127 ±133
#HenryStewart Publications
ISSN 1359-0790
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