March 13 (Bloomberg) -- Switzerland, Luxembourg and Austria said they will soften rules on banking secrecy, responding to growing international pressure to root out tax dodgers.

Switzerland, where banking secrecy has been enshrined in law for 75 years, will renegotiate its agreements with other nations and cooperate on cases of tax evasion as well as fraud, Finance Minister Hans-Rudolf Merz said. The nation doesn’t want to land on the Organization for Economic Cooperation and Development’s “black list” of tax havens, he said.

“This is a softening of absolute bank secrecy” and “it won’t be met with joy at all the banks,” Merz said at a press conference in Bern today. “If Switzerland were to wind up on a black list it wouldn’t only hurt the banking sector,” but also the whole economy, he added.

Nations are being pushed to loosen bank secrecy as the U.S. and Europe seek to protect tax revenue amid the worst financial crisis since the Great Depression. UBS AG, Switzerland’s largest bank, handed over the names of about 300 customers to the U.S. last month, the first time Swiss authorities bypassed secrecy laws introduced in 1934.

UBS rose 1.3 percent by 4:32 p.m. in Swiss trading. Credit Suisse Group AG, the nation’s second-largest bank, advanced 4.8 percent, and Bank Julius Baer Holding AG, Switzerland’s third- biggest wealth manager, climbed 8.5 percent.

End to ‘Criticism’

“This was a necessary step,” said Teodoro Cocca, a professor of wealth management at Johannes Kepler University in Linz, Austria. “It was the minimum they needed to offer in order to alleviate the pressure. They have to hope it’s enough.”

The Swiss banking association said it expects “an end to all improper international criticism of Switzerland and its legal system and also an end to threats to put Switzerland on a so- called ‘black list,’” the group said in a statement. Merz, 66, said he couldn’t say whether Switzerland is still in danger of being put on the OECD’s roster of uncooperative tax havens.

Credit Suisse, based in Zurich, welcomed the move. “This strengthens Switzerland’s position as a leading center for wealth management,” said spokesman Marc Dosch in an e-mail. UBS referred questions to the Swiss banking association.

‘Concrete Proof’

“The business model of wealth management per se is not broken,” said Dirk Hoffmann-Becking, a banking analyst at Sanford C. Bernstein Ltd. in London. “Offshore banking used to be a very profitable business and will be replaced by a business where it’s a bit harder to make money. Success of the banks will depend on how they manage this transition.”

UBS agreed on Feb. 18 to pay $780 million and disclose the 300 account holders to avoid U.S. criminal prosecution on a charge that it helped Americans evade taxes. The U.S. government sued the bank the next day to force disclosure on as many as 52,000 Americans who allegedly hid Swiss accounts.

Liechtenstein and Andorra, which are currently on the list of tax havens, said yesterday they would comply with OECD standards for transparency and information exchange.

Luxembourg will cooperate with foreign tax authorities seeking banking information in specific cases, and will seek bilateral tax agreements with other nations, Budget Minister Luc Frieden said in Luxembourg. The government agreed to “exchange information on request in specific cases and on the basis of concrete proof,” he said.

No ‘Automatic Exchange’

Austria will renegotiate agreements with countries including Germany to help fight tax fraud and evasion, according to Finance Minister Josef Proell. Austria’s laws in the past permitted banking secrecy to be lifted only when there was a criminal investigation on matters such as tax fraud. The government has now agreed to exchange information when there is “compelling suspicion” documented by foreign authorities, Proell said today.

“There won’t be an automatic exchange of information, but we will renegotiate a number of the 80 tax agreements that we have with other countries,” Proell said at the briefing in Vienna. “We have been fighting tax evasion and fraud in the past, and we will continue to do so.”

The nations don’t plan to abandon banking secrecy. Switzerland’s Merz said confidentiality will only be waived in individual cases where there is “concrete information,” including the name of the bank and the assets involved.

“I don’t have the feeling that today is the funeral” of banking secrecy, Merz said. “It’s not an open-door policy. It’s a relaxation to facilitate the contact between the two countries.”

‘Devil’ in Details

Switzerland, which manages 27 percent of the world’s offshore wealth, will still attract clients interested in keeping their assets in a politically stable country with its own currency, Merz said. No Swiss laws will be changed as a result of the plan to extend cooperation with other countries, he said.

The country also intends to negotiate amnesty for clients that currently have their money in Switzerland to allow them a period of time to legalize assets if needed, Merz said.

On Feb. 19, a day after UBS agreed to release the names of 300 clients, the U.S. government sued to force disclosure on as many as 52,000 Americans who allegedly hid Swiss accounts from tax authorities. The following weekend, European leaders said they will crack down on tax havens and threatened sanctions against “uncooperative jurisdictions.”

The nations’ pledge to cooperate may not go far enough for government leaders.

“The devil is in the details,” said French Finance Minister Christine Lagarde in Paris today. “We must go all the way and see if banking secrecy is sufficiently lifted.”

G-20 Meeting

European leaders have said they plan to crack down on tax havens as they prepare for a meeting of the Group of 20 nations. Finance ministers from G-20 nations will meet tomorrow in London, followed by heads on April 2.

The OECD said this week it had prepared a list of countries that don’t fully meet its standards of information disclosure on tax matters, including Austria, Luxembourg and Switzerland. The review was drawn up for the G-20 and presented to the U.K. government, which hosts the next meetings.

Switzerland enacted secrecy legislation in 1934. The law was amended in 1998 to stop banks from shielding the identities of those suspected of money laundering or tax fraud.

Most Swiss support banking secrecy, the Swiss Bankers Association said this week, citing a poll of 1,004 people. About 78 percent of those surveyed want to preserve the current client confidentiality regime, and 91 percent favor protecting their privacy in financial matters.

Offshore accounts in countries such as Switzerland cost the U.S. about $100 billion in taxes annually, according to estimates from Michigan Senator Carl Levin. The U.K. probably loses at least 4 billion pounds ($5.6 billion) a year in revenue, the London-based Trades Union Congress said March 1.

Offshore Banking Centers and Offshore Finance

The rise of the global economy has increased international transactions and enabled money to be moved very quickly. Offshore financial centers are thought to be safe havens for financial assets acquired illegally, but they may also offer some legal financial advantages for multinational companies and wealthy individuals. Most of these financial centers are located in small jurisdictions or microstates particularly in small island countries. This article addresses some specific questions regarding offshore banking; for instance, Do I have to declare income I generate from interest in my offshore bank account?, Are there any government regulations to keep a check on offshore financial transactions?, What is the meaning of the term "the Laffer curve" and what relation does it have with offshore banking?, What does the automatic exchange of information option mean?, and Which countries are affected by The EU Savings Tax Directive 2005?
An offshore bank is a bank located outside the country of residence of a depositor, typically in a low tax jurisdiction or a tax haven that provides financial and legal advantages. These advantages usually include strong privacy laws, less restrictive regulation, easy access to deposits and protection against local political or financial instability. Some offshore banks may operate with a lower cost base. Lower overhead and lack of government intervention enable them to provide higher interest rates than those available in the taxpayer’s home country.

Offshore banking is often associated with the underground economy, organized crime, tax evasion and money laundering. However, offshore banking does not always involve illegal activity and most of the time, banking offshore does not remove assets from the coverage of holder’s domestic income tax laws. For tax purposes, many countries now make no distinction between interest earned in local banks and those earned abroad. Additionally, while most offshore jurisdictions offer high levels of confidentiality, they cannot guarantee absolute secrecy, as financial institutions worldwide are obliged to report suspicions of serious criminal conduct, including, terrorism. In the 21st century, regulation of offshore banking is allegedly improving, although critics maintain it remains largely insufficient. The quality of the regulation is monitored by supra-national bodies such as the International Monetary Fund (IMF). Banks are generally required to maintain capital adequacy in accordance with international standards, and must report at least quarterly to the regulator on the current state of their businesses.

Persons subject to U.S. income tax, for example, are required to declare any offshore bank accounts, including numbered bank accounts. Offshore banks may not be required to report bank account’s income to other tax authorities and may have no legal obligation to do so, as they are protected by their jurisdiction’s bank secrecy laws. Nevertheless, the taxpayer is required to report such income.

In addition to voluntary report of offshore bank accounts, international financial co-operation is increasing. Recently, there have been many calls for more regulation of international finance, in particular, of offshore banks, tax havens, and clearing houses. For example, ClearStream, based in Luxembourg, has been accused of being a crossroads for major illegal money flows.

In an effort to clamp down on tax evasion, in July, 2005, members of the European Union governments agreed to the introduction of a withholding tax, the Savings Tax Directive. A complex measure, it forced EU resident savers depositing money in offshore banks to choose between paying taxes before depositing in offshore banks or allowing notification by the offshore banks to tax authorities in their country of residence. The EU intends to reach offshore banks in an increasing number of jurisdictions. The rate of tax deducted at the source will rise in 2008 and again in 2011, making disclosure increasingly attractive. Savers' choice of action is complex; tax authorities are not prevented from enquiring into accounts previously held by savers which were not then disclosed.



Do I have to declare income I generate from interest in my offshore bank account?
Certain countries in the world require their residents to declare their worldwide income. Tax is then payable on that offshore income as well. The U.K. and the U.S. are two such countries. Most countries have no restrictions on where your business interests, investments or bank accounts are located; it is simply your responsibility to report any income you earn to the appropriate tax authority.

Are there any government regulations to keep a check on offshore financial transactions?
The U.S. introduced the USA PATRIOT Act, which authorizes the U.S. authorities to seize the assets of bank accounts deemed to hold assets from a suspected criminal. Similar measures have been introduced in some other countries. The European Union has introduced sharing of tax information between certain jurisdictions, and enforcement measures regarding certain controlled-centers, such as the UK Offshore Islands.

What is the meaning of the term "the Laffer curve" and what relation does it have with offshore banking?
The Laffer curve is used to illustrate the concept of taxable income elasticity, the idea that government can maximize tax revenue by setting tax rates at an optimum point. The curve, popularized by Arthur Laffer though widely known among economists, is primarily used by advocates who want government to reduce tax rates. For example, consider that offshore banking is usually more accessible to those with higher incomes, because of the costs of establishing and maintaining offshore accounts. The tax burden in developed countries thus falls disproportionately on middle-income groups. Historically, tax cuts have tended to result in a higher proportion of the tax taken being paid by high-income groups, as previously sheltered income is brought back into the mainstream economy.

What does the automatic exchange of information option mean?
The EU Savings Tax Directive 2005 is an agreement between the EU Member States to automatically exchange information about any customers who earn savings income in one EU State but who reside in another EU State. This is known as the ‘automatic exchange of information option’ and it is the ultimate objective of the Directive.

Which countries are affected by The EU Savings Tax Directive 2005?
The countries affected by The EU Savings Tax Directive 2005 are; Andorra, Anguilla, Aruba, Austria, Belgium, British Virgin Islands, Cayman Islands, Channel Islands, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Isle of Man, Italy, Latvia, Lichtenstein, Lithuania, Luxembourg, Malta, Monaco, Montserrat, Netherlands, Netherlands Antilles, Poland, Portugal, San Marino, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turks & Caicos and U.K.

Tricks of the Offshore Trade - tracking the path of dirty money

Financial planners will know by now that the new anti-money laundering (AML) regime takes a risk-based approach, requiring designated service providers to implement their own risk framework for identifying and treating AML risks.



Money laundering tools

Money laundering techniques evolve to avoid detection. Any example that you read about will, self-evidently, be examples of money laundering techniques that have not avoided detection. The most successful techniques are those that have. If I could suggest what they were I am sure that I would be more lucratively engaged at this moment than writing this article – hopefully on the right side of the law.

Some money laundering techniques will be favoured over others by different criminal sectors.

The net result of criminal activity for the criminal is, most usually, money. It follows that if you trace the money trail back you will find the criminal – simple in theory.

Organised criminals therefore go to extraordinary lengths to disconnect the money from the source of the activity.

Their task is made easier by banks in some countries that sell ‘secrecy’.

The Swiss banking system has been most well known for this over the years, but the Caribbean Islands, the Channel Islands, Nauru and other places also offer ‘safe havens’ for the depositor if you don’t want anyone to know whose account it is.

Many of these banks have correspondent relationships with banks in Western countries, like Australia.

Another tool that is commonly used is that of the shell company.

The company may, or may not, have a real function. Whatever its apparent function, its true purpose is as a separate legal entity that can receive proceeds from illegal activity and pay it out, disguised as the proceeds of a legitimate business. The names of the actual criminals will not appear as shareholders or officers. Shareholders may be other companies, friends or associates. Ultimately, however, the controller is organised crime.

Not all countries have the same compliance, accounting and financial reporting requirements that Australia does.

The amount of criminal money in the world economy is enormous and has been estimated by the United Nations at over $500 billion each year.

If we were talking in terms of a country’s gross domestic product and the amount of money from illegal drug activity alone, it would be the world’s third largest economy.

There is, therefore, a lot of money to be made by banks that offer secrecy and for countries that offer lax AML and company financial reporting laws.

Thus, money obtained from criminal activity is deposited into different branches of banks, or through other financial intermediaries, usually in different denominations and by businesses apparently unconnected with the criminal activity.

The money itself may have been physically transported great distances away from the crime before it is divvied up and placed into the financial system.

Once in the system it will typically be transferred to other accounts. It may well end up in an account owned by a shell company with a secret account in an offshore jurisdiction. From there, it could be transferred anywhere else in the world and used to benefit the criminal masterminds behind it – now virtually untraceable.

Verifying the identity of the client and obtaining some basic information about the business structure, or corporate structure, and the transaction are basic steps that can be taken to cut through the anonymity and structures that are such useful tools to the money launderer.

However, this needs to be carried out on a wide scale internationally.

Hence, the Financial Action Task Force’s recommendations and Australia’s response.

As you may know, the key obligations for reporting entities will be:

> verification of client identity (Part 2);

> ongoing risk-based customer due diligence (Part 10, Division 6);

> reporting suspicious matters and specified high value transactions (Part 3);

> ensuring appropriate originator information is provided with domestic and international funds transfer instructions (Part 4);

> keeping records of dealing with clients (Part 10); and

> developing, maintaining and complying with AML/ counter-terrorism financing programs (Part 7).

The reasons for these obligations are evident from the above description of money laundering tools and techniques.

Confidentiality versus secrecy

Of course, there is a legitimate place for confidentiality in lawful personal and commercial activity.

Confidentiality is important and should be protected.

But ultimate secrecy to facilitate criminal activity is another matter altogether. The two should not be confused.

As professionals in the financial services industry our relationships with our clients are based on trust and we must take our obligations of confidentiality seriously.

There is, however, nothing necessarily inconsistent with these obligations and some intelligent prodding can help make an assessment about whether particular transactions or arrangements could suggest criminal activity.



A money laundering example

Drugs are sold on the street for cash. Millions of dollars in cash are collected. First, the money is placed into the financial system by being deposited into bank accounts. There will be several individual deposits made to different branches of different banks.

The amounts deposited would be less than any reportable cash transaction amounts (for example, $10,000 in Australia). If the money can be deposited into banks with lax reporting and identification requirements then so much the better for the criminal.

Second, the funds are layered by transferring the monies, over a period of time, into a number of other accounts held at different banks and in different countries.

Once again, if the transfer is to countries with lax identification and reporting requirements, the chances of being detected are much less.

These accounts may be in the names of fictitious individuals or company shells.

Third, the funds are integrated into the legitimate economy. They are transferred into the accounts of companies that apparently conduct legitimate businesses, just more profitably than most.

In the Jurado case, where Franklin Jurado laundered $50 million for a Colombian drug cartel, these ‘legitimate’ businesses in Europe were restaurants, construction companies, real estate companies and pharmaceutical enterprises.

There was no reason for bankers, lawyers or financial advisers in Europe to query the accounts of those businesses.

There was no apparent connection with the Cali drug cartel or with Colombia.



Examples of suspicious transactions

> Transactions that don’t make economic sense. For example, a customer may have a large number of accounts with the same bank and may have frequent transfers between different accounts. Why?

> Transactions that you wouldn’t expect having regard to the customer’s usual business activity, for example, moving money between countries, where the customer’s usual business is a local business supplying locally manufactured products.

> An account sits dormant for a long period of time and then has large amounts deposited and/or withdrawn without apparent connection to the customer’s other affairs such as, for example, the sale of a house.

> A client of modest means seeks advice on an investment strategy for a large amount of money from an unknown source.

> Buying securities or other investment products with large amounts of cash.

> Payments being made to, or being received from, numbered accounts.

> A customer who normally uses bank cheques to purchase securities or investment products.

Perhaps one of the most helpful things financial intermediaries can do in preparation for designing their risk management system for AML is to think about their client profiles and to obtain an understanding of money laundering risk for their business.

A visit to the AUSTRAC website and reading as many examples of suspicious transactions and money laundering activities as you can will help you in thinking about what type of activities to look for in your business.

Books that you might like to read if you have an interest in the area include: The Laundry men and The Sink by Jeffrey Robinson (Editor, Constable & Robinson) London.



Grant Holley is partner at Holley Nethercote Commercial Lawyers .

Western tax havens slated as corrupt

Duncan Campbell in London

September 5, 2006

BRITAIN, the United States and Switzerland are among the world's most
corrupt countries, a tax expert says.

The failure of these and other developed countries to clamp down on offshore
tax havens is responsible for more hardship than any corrupt acts by Third
World leaders, John Christensen, formerly an adviser to the government of
the Channel island of Jersey and now director of the Tax Justice Network,
told the Economic Geography Research Group conference on Sunday.

"I would place the United Kingdom high on the list of most corrupt
countries," he said, citing its role as a tax haven and a defender of the
tax haven role of its overseas territories and dependencies, as well as its
"dismal role in undermining the effectiveness" of the European Union's
attempts to close tax loopholes.

Mr Christensen said there had been too much emphasis on corruption in the
Third World and not enough on the abuse of offshore tax havens by the
wealthiest nations.

Transparency International, a pressure group campaigning against corruption,
reinforced stereotypes by depicting African nations as the most corrupt, he
said.

By contrast, Mr Christensen said, many of the countries the group identified
as least corrupt were offshore tax havens, including important centres such
as Singapore, Switzerland, Britain, Luxembourg, Hong Kong, the US, and
Belgium.

Tax Havens list Britain as corrupt

Tax havens 'put Britain high on list of corrupt countries'
By Charles Clover

(Filed: 02/09/2006)

Britain is high on a list of the world's most corrupt countries, along
with the United States and Switzerland, because of the refuge it offers to
dirty money in tax havens such as the Channel Isles and the Isle of Man,
researchers said yesterday.

Britain deserves inclusion high on any list of corrupt countries
because of its "pinstripe infrastructure" of financial advisers squirrelling
away money offshore and because of its reluctance to close down its tax
havens, the Royal Geographical Society's annual conference was told.

John Christensen, of the Tax Justice Network, whose research is funded
by the Joseph Rowntree Foundation, criticised the ranking of the world's
most corrupt nations compiled annually by Transparency International, a
not-for-profit organisation, in which African countries come out as the most
corrupt.

He said the index used a too-narrow definition of corruption, mostly
bribery.

He said Britain, Switzerland, America and other countries that provide
tax havens would float to the top if the definition of corruption was
broadened to include other forms of criminal cash transfers and illicit
transactions.

While the amount of corruption in developing countries was reliably
estimated at $20 billion a year, the inclusion of corrupt transactions
across borders lifted that to $539 billion.

Mr Christensen accused Gordon Brown, the Chancellor, of failing to
carry out his promise to go after large scale corporate tax avoiders,
because of a reluctance to alter Britain's perception as a "low tax" nation.

Instead of going after the corrupt super-rich, the Chancellor had
placed the burden of taxation on people of middle and lower incomes.

Mr Christensen said that this had wider consequences than just
starving the Treasury of tax revenue because money from corruption, or
flight capital as it is sometimes known, helped to inflate property prices
and did not lead to genuinely productive economic activity.

Calling for the abolition of tax havens he said: "You cannot move
money in the quantity that has been moved out of Russia without using the
western banking network and they are all deeply implicated in the process."

Prem Sikka, a professor of accounting at Essex University, accused Mr
Brown of losing an estimated

£97-150 billion a year to organised tax avoidance by large
corporations because he was reluctant to tackle the trans-frontier transfer
of money, at preferential rates, between large corporations.

© Copyright of Telegraph Group Limited 2006.
http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2006/09/02/ntax02.xml