A senior U.S. Senate staffer and an official of the Cayman Islands Financial Services Association, speaking at a Miami Beach conference on April 27, debated which countries should be classified as tax havens and gave opposing examples of how some alleged tax havens operate and harm the global financial system
Eduardo D'Angelo P. Silva, vice chair of the Cayman Islands Financial Services Association, faulted the United States for allowing some states within its border to accommodate shell corporations without requiring any information about their customers. He said Delaware , Nevada , and Wyoming promote tax evasion and money laundering and qualify the United States as a tax haven. While acknowledging that the United States must crack down on the practices of its own states, Robert L. Roach, counsel and chief investigator for the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations, said the Cayman Islands, Liechtenstein , and Switzerland are the true tax havens. To avoid being labeled as such, they should stop insisting on secrecy, adopt transparent banking operations, and exchange full information in a timely manner, he said. Silva and Roach appeared together on a panel at the seventh annual Offshore Alert Financial Due Diligence Conference.
An Island Jurisdiction's Viewpoint
Silva warned conference participants he was going to open his remarks "with a moment of brutal honesty."
"There are some jurisdictions that are almost criminal in their [lack of] willingness to comply with global regulations on money laundering and tax evasion. And I am prepared to name some of the worst offending jurisdictions right now," he said, "they are Nevada, Delaware, Wyoming, and the United Kingdom." When it comes to secrecy, money laundering, and tax fraud, the greatest offenders are not located high in the Alps or on Caribbean islands, Silva said. "The greatest offenders are the major financial centers of the U.S. and the U.K. ," he said.
Silva described highlights of a March 26, 2009, article titled Haven Hypocrisy1 that appeared on Economist.com. According to the article, Jason Sharman, a political scientist at Australia 's Griffith University , tried to open anonymous bank accounts and shell companies 45 times around the world. "He got a grant of $10,000 and an internet connection" and simply followed advertising and Web sites offering offshore financial services to private individuals, Silva said.
Sharman successfully opened 17 accounts and shell companies, 13 of them in OECD countries. Sharman was able to form a U.K. company that was completely anonymous in 45 minutes on the internet for a fee of £516, but Bermuda and Switzerland would not allow him to form a company without documentation on his identity, according to the article. The Cayman Islands has had the same requirement "for many years," Silva noted.
He criticized the OECD's anti-tax-haven effort, which started in 1998, for excluding participation by financial centers that were not OECD member countries. The OECD report also excluded member countries with substantial offshore banking business, he said.
"As a consequence, traditional offshore financial centers found that clients were migrating elsewhere in anticipation of new requirements," Silva said. "Many clients were moving to take advantage of the more relaxed standards in Switzerland and the United States , the biggest cross-border financial centers within the OECD."
Today, he said, thousands of companies and limited liability corporations are formed every year in the United States with no one knowing who the beneficial owners are. "For anyone who is not a U.S. citizen or resident, the United States is a particularly attractive place to stash cash, as it does not tax capital gains or interest earned here," Silva said. "Thus, with both anonymity and no taxation," the U.S. offers the same essential services as the tax havens, he added. Silva said Nevada 's official state Web site promotes its limited reporting and disclosure requirements and speedy incorporation service. Nevada "alone incorporates 80,000 new firms a year, and now has more than 400,000 companies -- roughly one for every 6 people," he said.
He cited a U.S. Government Accountability Office report2 published in April 2006 that said anonymous, tax-free U.S. companies are used in international criminal activities, adding that it is ironic that people didn't make the connection between that report and "the long-term OECD campaign to stamp out anonymous accounts."
Another major U.S. report released in January 20063 faulted U.S. states for lax company oversight. It said that eastern European and Russian law enforcement agencies have expressed concern that criminal organizations they had investigated used Delaware shell corporations, Silva said. "I'll repeat this to you: Russia is concerned with money laundering in the United States ," he said.
However, Delaware "is not the most pernicious jurisdiction in the United States with regard to company formation," Silva said, adding that Nevada and Wyoming both permit companies to have bearer shares, which Delaware does not. (Bearer shares offer completely anonymous ownership.) Due in part to improved regulation in traditional offshore centers, "many international fiduciaries . . . are replacing their clients' existing offshore companies with Delaware LLCs," he said. "If companies with secret ownership merely migrate [out of the traditional] tax havens into the U.S. , what's the point of the OECD project?"
U.S. Viewpoint
Roach, speaking in his own capacity and not as a staffer for the Senate Permanent Subcommittee on Investigations, acknowledged the validity of Silva's remarks but provided a different view.
"I think the issue here is that it's very critical for governments to perform enforcement and regulatory [functions] not only to combat crime in their own jurisdictions but across the borders to ensure the integrity, efficiency, and effectiveness of the marketplace," Roach said.
The United States loses about $100 billion a year because of tax evasion and other illicit practices, "roughly $40 billion to $70 billion a year in individual tax evasion, and somewhere between $30 billion and $60 billion in corporate offshore evasion," he said. "We're seeing a dramatic shift in profits by corporations from the United States to other offshore jurisdictions."
Roach said his subcommittee's investigations during the past 18 months have revealed "what's really going on." He cited a 2006 study of a very wealthy family in Texas that over a period of 15 years transferred approximately $120 million in untaxed stock options into a series of trusts and corporate-owned trusts in the Isle of Man, converted those into about $700 million worth of assets, and repatriated those assets tax-free through a variety of companies, including a shell corporation in the Cayman Islands. Although many financial institutions have "roundly denied" aiding taxpayers, Roach said, recent investigations showed "that there were major financial institutions in what we call tax havens which were aiding and abetting taxpayers to evade their taxes in other countries."
He said the investigation of Liechtenstein 's LGT Bank "showed a rat's nest of problems," and that LGT Trust actively aided and abetted tax evasion and other crimes such as political corruption. The IRS is "looking at somewhere around 150 to 200 cases of individual taxpayers who utilized the services of LGT Bank," he said. Roach next pointed to UBS, "the flagship institution of Swiss banking," which he said "sent an armada of private bankers to the United States to solicit customers and assist them in evading tax and security laws in this country." UBS directed its clients "as to how to form offshore corporations and skirt U.S. laws regarding the registration of income from U.S.-paying securities and avoid their qualified intermediary agreements," he said.
UBS has admitted that it has been unable to verify that about 46,000 of its U.S. account holders have filed any information with the IRS. Agreeing to resolve the issue through the treaty process, Switzerland produced the names of only 12 individuals out of the approximately 46,000, Roach said. "Well so much for . . . information exchange," he said. "It makes a mockery of the treaty process -- and this from a country that tells us that they're not a tax haven."
Roach acknowledged that in the United States , "our own little tax havens, Delaware , Nevada , go on their own merry way, incorporating entities without having the vaguest idea as to who's behind them." They establish corporations and LLCs for anybody who walks through the door and make no effort to see who's behind them, he said.
However, subcommittee Chair Carl Levin, D-Mich., has introduced a bill -- S. 569, the Incorporation Transparency and Law Enforcement Assistance Act -- that would require those who form corporations in the U.S. to disclose the beneficial owners, Roach said. Levin believes transparency is an issue "that not only must be confronted by other jurisdictions but by the United States as well," he added. (For S. 569, see Doc 2009-5498 .)
Levin has also reintroduced S. 506, the Stop Tax Haven Abuse Act (see Doc 2009-4588 or 2009 WTD 39-25 (1)).
"We're going to make it much more difficult for the citizens in our country to use the laws and practices in foreign jurisdictions to deny the honest taxpayers in this country their fair share," Roach said, "and we're going to make it more difficult for law firms and financial firms to facilitate sham transactions."
Roach said Silva did an excellent job of laying out the problems in the United States . However, he faulted Silva for not seeing that the finger points both ways.
"But that's OK," he said. "I hope that when you come to visit the United States you'll tell people to pass the Incorporation Transparency and Law Enforcement Assistance Act, because we have no desire to protect Delaware , we have no desire to protect Nevada ."