Nick Shaxson ■ Now Luxembourg, Switzerland are working to bolster Tax Haven USA
Update: making clear that the Swiss text we cited is a provisional test.
As we’ve often said before, it is counterproductive (and an analytical error) to see the fight against tax havens in purely geographical terms. When the U.S. Justice Department started taking action against Swiss bankers, this was not a battle between Switzerland and the United States: it was a battle pitting wealthy, unaccountable élites against their own societies, which just happened to be played out on this particular U.S-Swiss terrain — just as it is played out on many other terrains, day after day.
Indeed, the U.S. has been fairly successful against the Swiss because it targeted Swiss banks, rather than Switzerland: the latter (geographical) approach would have been far less successful and would have resulted in the Swiss coming together in a defensive huddle to defend against Big Bully USA. For those keen on tackling tax havens, this is an important insight.
Anyway, this context is important if we want to understand Luxembourg’s latest gambit, apparently to support the cause of Tax Haven USA, which is continuing to emerge as a secrecy jurisdiction of extreme concern. More recently, Switzerland seems to be following Luxembourg and also collaborating with the U.S. secrecy machine.
Why would these mucky European tax havens want to support an apparent ‘competitor’ on secrecy? What’s happening now is an extremely worrying development, and the OECD needs to summon the courage to step in with an outbreak of honesty – and urgently.
This is about the Common Reporting Standard (CRS), the OECD’s system for multilateral automatic information exchange of banking information, which will start operation for some countries next year, with more to follow in 2018. (As we recently noted, the CRS is one of a couple or more of global schemes and concepts that are needed, to crack down on financial crimes and abuses.)
Now one thing that we have repeatedly stressed is that the United States is not a ‘participating jurisdiction’ in the CRS. Basically, the bilateral Intergovernmental Agreements or IGAs with which the U.S. is supposed in theory to be hooking up with the CRS, are vague promises but not firm commitments to exchange information, and even then it rests on appallingly lax requirements, as our Loophole USA blog explains.)
But in March, Luxembourg published a “Règlement grand-ducal” (or regulation) in which it classified the United States as a participating jurisdiction (and if you want to get really detailed, this helps explain some terms like “NCD” in the Luxembourg text.) Not to be outdone, as reported on the Best of Both Worlds site, Switzerland followed suit, also proposing recognising the United States as a participating jurisdiction.
So what is this all about?
Well, under the CRS, it is not just banks and insurance companies that have to report the relevant banking information; it is also “Investment Entities” – which means trusts, foundations, and certain kinds of companies. Let’s take the example of a U.S.-based investment entity, beneficially owned by a wealthy Spanish taxpayer, which maintains accounts with a Luxembourg insurance company or a Swiss bank.
The CRS rules state that if the investment entity is in a non-participating jurisdiction (that is, not participating in the CRS), then the Swiss or Luxembourg financial institution is required to ‘look through’ the entity and identify its true beneficial owner(s). That Spanish taxpayer will have those accounts reported to the Spanish tax authorities under automatic exchange of information.
But if now, by the stroke of a pen, Luxembourg and Switzerland have decreed (however erroneously) that the United States is a participating jurisdiction, then that requirement to “look through” the US-based investment entity to its controlling person is waived. So those Spanish assets will remain secret to the Spanish tax authorities. KPMG give a slightly wonkish interpretation confirming this:
“In order to prevent a circumvention of the AEoI, the CRS nonetheless foresees that the banks maintaining the accounts treat Investment Entities in Non-Participating Jurisdictions as Passive NFEs and therefore must report the relevant Controlling Persons.
According to the Article 1 of the AEoI Ordinance, Participating Jurisdictions for this purpose are deemed to be not only the countries with which Switzerland has concluded AEoI agreements, but also all of the about 100 countries which have agreed to implement AEoI, as well as the USA. Therefore, a Swiss bank, which, for instance, keeps accounts for an Investment Entity domiciled in the USA but where the Controlling Person is resident in Germany, does not have to report this person under AEoI to Germany, even though the USA does not implement the AEoI and under FATCA only transmits limited data.”
All this clearly helps U.S. financial institutions willing to play the tax evasion game; and their privileged access to the U.S. secrecy machine also gives Luxembourg and Swiss financial institutions a competitive advantage over financial institutions in other jurisdictions, whose governments may have taken a more societally responsible stance and do not officially pretend that the United States isn’t a gigantic tax haven. So, once again, don’t get blinded by geography: we have a conspiracy here by Swiss, U.S. and Luxembourg financial institutions, against whole societies elsewhere.
Tax Haven USA is one thing. Aiding and abetting the ensuing crimes are likely to prove very lucrative for the Swiss, Luxembourgish and doubtless other financial players who get into this game – at great cost to societies around the world.
Switzerland and Luxembourg have long been claiming that their murky and secretive financial sectors have been cleaned up. Here is yet more evidence that these leopards have hardly changed their spots.
Endnote 1: the Swiss pretence is even more egregious than Luxembourg’s, because Switzerland has signed a “Model 2” IGA with the United States – and under these models, information exchange is a one-way street: from Switzerland to the U.S., but not in the other direction.
Endnote 2: There’s a very easy way to stop all this nonsense. The OECD can simply state that the United States is not a participating jurisdiction in the CRS. Which it demonstrably isn’t.
Will the OECD summon up the political derring-do to do the decent thing?
We want your feedback on our Financial Secrecy Index
New free book: Combating Fiscal Fraud and Empowering Regulators
Buffet of tax-evading secrecy revealed by US settlement with Swiss bank Rahn+Bodmer
Chinese Engagement in Africa: Beyond the Caricature
Capital flight from Africa: Resource Plunder and the Poisoned Paradises in Tax Havens
Beneficial ownership verification: exploring Belgium’s sophisticated system
Some things never change: the use of Swiss banks by crooks
New study and tool for assessing risks of illicit financial flows in Latin America
Vulnerability and exposure to illicit financial flows risk in Latin America
28 January 2021