CurrentCommentary
Low-Tax JurisdictionsAre Not Money Laundering Havens - Center for Freedom and Prosperity
Dirty money is more likelyto be laundered in high-tax nations than in tax havens. That isthe conclusion of an article released by the Center for Freedomand Prosperity. The article cited reports of the State Department,Central Intelligence Agency, and Internal Revenue Service, allof which independently assess whether countries are money launderingcenters and/or have systems that make them vulnerable to dirtymoney.
By Daniel J. Mitchell
In the aftermath of September 11, many policymakers assumed that terrorists were hiding their money in so-calledtax havens. Investigators have since discovered, however, thatthe terrorists relied on the banking systems of the United States,the United Kingdom, Germany, and various nations in the MiddleEast for the vast majority of their financial transactions.
In spite of stereotypes formed by readingJohn Grisham novels, tax havens do not attract a significant portionof the world's dirty money. The State Department, the CentralIntelligence Agency (CIA), the Financial Action Task Force (FATF- of which the U.S. is a member) and the Internal Revenue Service(IRS) each independently assess the extent to which a jurisdictionsattracts - or has the potential to attract - dirty money. Somelow-tax jurisdiction are on these lists, but the accompanyingtable shows that they are clearly outnumbered by high-tax nations.
As the table indicates, every money launderingrating system finds that non-tax havens outnumber tax havens.It is especially instructive to examine the numbers in parentheses.These figures indicate the number of jurisdictions in each categorythat were given a clean bill of health by the IRS, and they showthat the so-called tax havens received significantly better gradesthan their high-tax brethren.
There is no evidence to suggest that taxhavens are a magnet for dirty money. This does not mean everylow-tax jurisdiction has a perfect track record. After all, nocountry with a significant financial services sector is immuneto money laundering. But it is clear that tax havens are neitherthe source nor the destination for a disproportionate share ofthe world's criminal proceeds.
Tax Havens and MoneyLaundering
Tax havens attract wealth, but most of themoney is institutional investment. Bermuda, for instance, is aleading center for the insurance industry. Luxembourg and Switzerlandare world leaders in managing mutual fund assets. The Cayman Islandsis near the top in almost all facets of financial services andalso draws a substantial amount of bank-to-bank deposits. Americancorporations make extensive use of offshore regimes, earning almostone-third of their profits in low-tax jurisdictions.
Individual investors also utilize tax havens,but very little of this money has criminal origins. Instead, itrepresents legitimate investment by people seeking sound moneymanagement, asset protection, and lower tax bills. This last featureis controversial, to be sure, but only because many high-tax nationsassert the right to tax income earned outside their borders andget upset when low-tax nations do not help them enforce theirtax laws.
There are several reasons why criminalsare unlikely to rely on tax havens. On a practical level, it isvery difficult to transfer money to a low-tax jurisdiction unlessthe funds already are in a financial institution. Yet if the criminalmoney is in a bank, the laundering already has taken place. Sowhy bother going "offshore?" Criminals also avoid taxhavens because of the added risk. Shifting money across borders-andthen back "onshore" when the funds are needed-significantlyincreases the probability of detection. The United Nations haseven acknowledged that criminals avoid so-called tax havens becausethey are a "red flag" for law enforcement. Terroristsare even less likely to utilize tax havens since they are motivatedby hate rather than tax minimization and/or asset protection.
High-Tax Nations andMoney Laundering
By its very definition, money launderingis hard to measure, so any effort to pinpoint where it takes placenecessarily involves speculation. Nonetheless, many "onshore"experts acknowledge that the real problem is in their own backyards.The FATF admits, for instance, that criminal "funds are usuallyprocessed relatively close to the under-lying activity; often...inthe country where the funds originate." And since most ofthe world's criminal activity takes place in North America andEurope, it should come as no surprise that tax havens are notmajor money laundering centers.
Unfortunately, the same thing cannot besaid about high-tax nations. According to a recent article inGovernment Executive, a publication for U.S. policy makers, "TheInternational Monetary Fund estimates that about $600 billionis laundered each year globally. Estimates of U.S. money-launderingtraffic hover at $300 billion, including about $60 billion indrug money alone." A more recent article in the FBI's May,2001 Law Enforcement Bulletin comes to a similar conclusion. Theauthor noted that "...not only does the amount [of moneylaundered] lie somewhere between $500 billion and $1 trillion,but that half is being laundered through U.S. banks." Anda recent report issued by one of the top fraud recovery firmsin Europe estimates that the United States is the source of nearly50 percent of the world's dirty money. The same study revealsthat there is only one so-called tax haven among the top 10 jurisdictionswhere dirty money is invested.
High-tax nations, like their low-tax counterparts,do have laws against money laundering. Unfortunately, they arenot very successful. The U.S. Treasury Department estimates that99.9 percent of the criminal money in the United States is launderedsuccessfully. Other OECD nations have equally poor records. Dirtymoney in Germany almost always escapes detection, while the UnitedKingdom admits that more than 99 percent of criminal money inthe City of London is successfully laundered.
High-Tax Nations VersusLow-Tax Nations
None of the government bodies that ratemoney-laundering vulnerability include representation from low-taxjurisdictions. Three are agencies of the U.S. government and thefourth - the FATF - is part of the OECD, which is notorious forits anti-tax haven initiative. Yet these four groups independentlyhave concluded that low-tax jurisdictions do not attract a disproportionateshare of dirty money.
Indeed, they almost surely have better trackrecords than high-tax nations.
Consider, for example, the CIA's list ofmoney laundering centers. According to the agency, only four outof the 41 OECD-identified "tax havens" fall into thiscategory. This is considerably less than the 11 non-tax havensthat received this label from the CIA - including the United Statesand the United Kingdom. Even if the list is expanded to jurisdictionsthat merely are considered "vulnerable" to money laundering,there are only five more "tax havens" on that list comparedto another six high-tax nations.
The State Department's list is much biggerthan the CIA list, but the results do not change. The diplomatsestimate that 14 tax havens are a primary concern for money launderingvulnerability. That may sound like a lot, but it is insignificantcompared to the 38 non-haven jurisdictions that are on the list.Once again, the United States and United Kingdom receive the lowestpossible grade.
Looking at the State Department's list of"secondary" jurisdictions, the pattern remains. Sixteenlow-tax jurisdictions are listed, but this is less than one-halfthe number of high-tax countries that are in this category.
Even the Financial Action Task Force (FATF)list contains a number of surprises. There are eight "taxhavens" on the FATF blacklist, but this is fewer than the11 non-havens that are on the list. The FATF list is especiallyinteresting because the organization is an adjunct body of theOECD. As such, the FATF list is widely viewed as being politicallytainted by a desire to target low-tax jurisdictions.
Yet even with this biased perspective, FATF branded more high-taxnations than low-tax nations as being "non-cooperative"in the battle against money laundering. The balance would havebeen even more weighted toward high-tax countries if FATF waswilling to list its own members as "non-cooperative."According to the organization's recent self-assessment survey,only 10 of 29 members met all of FATF's criteria, and four members- the United States, Canada, Japan, and Mexico - received failinggrades.
Last but not least, the Internal RevenueService determines whether a jurisdiction has effective know-your-customerlaws when deciding to grant "qualified intermediary"status to foreign financial institutions. Of all the agencies,the IRS would be most likely to be hard-nosed, yet 19 of the OECD'ssupposed tax havens have received the agency's blessing, withanother two awaiting approval (most, if not all, of the othershave not bothered to apply). Every major financial center hasreceived QI status, including the Cayman Islands, the Bahamas,the Channel Islands, Panama, Liechtenstein, the British VirginIslands, Monaco, Gibraltar, Barbados, and the Netherlands Antilles.
Conclusion
The International Monetary Fund recentlyannounced that it wants to help a country upgrade its money-launderinglaws. But the nation the IMF is targeting is not Liechtenstein,Panama, or the Bahamas. It is the United States. This does notmean, of course, that anything is wrong with American laws. Thebureaucracies that review money-laundering laws, after all, seemoblivious to cost-benefit analyses. They also seem to completelydisregard the value of personal privacy and legal protectionsagainst unreasonable search and seizure. And perhaps most important,they apparently do not assess whether new laws will help catchcriminals. A former Treasury Department official recently admitted,for instance, that the money-laundering provisions in the newPATRIOT legislation in the United States would not have detectedthe September 11 terrorists.
Punishing criminals and deterring futurecrime is a core responsibility of government. To properly carryout this function, however, lawmakers should make reasoned decisionsusing the best data. Several U.S. government agencies and oneinternational bureaucracy have analyzed the problem of money launderingand these groups have unambiguously concluded that low-tax jurisdictionsare neither the source nor the destination for a disproportionateshare of the world's dirty money. It remains to be seen, however,whether this reduces the amount of demagoguery against tax havens.
Daniel J. Mitchell is the McKenna SeniorFellow in Political Economy at The Heritage Foundation.
The Center for Freedomand Prosperity Foundation is a U.S. based public policy, research,and educational organization operating under Section 501(C)(3).It is privately supported, and receives no funds from any governmentat any level, nor does it perform any government or other contractwork.