Rich Benefit From Offshore Tax Havens

By Lucy Komisar
The Baltimore Sun, June 17, 2001

Money: The wealthy hide a bundle of their dollars in banks that can keep a secret.

The Bush tax cut for the top 1 percent of richest Americans is worth $69 billion, nearly 38 percent of the total. People who protested that are virtually ignoring another Republican policy that saves the rich the same amount. Experts estimate that $70 billion in taxes are lost annually because many wealthy Americans hide money in tax havens, but Republicans in Congress and the White House are blocking efforts to stop this tax evasion.

In some 60 offshore jurisdictions – places such as the Cayman Islands, Liechtenstein, and Jersey – bank account owners are not identified and often use shell companies to hide their ownership. Bankers who give information to other countries’ tax authorities may be fined or jailed.

In 1999, John M. Mathewson of San Antonio, Texas, was sentenced in federal court for helping U.S. citizens evade taxes while running the Guardian Bank and Trust Limited of the Cayman Islands. To avoid jail, he provided records of 1,500 American clients who owed the Internal Revenue Service more than $300 million. The Cayman Islands has 570 banks, and Mathewson said his operation was commonplace. There are 400 tax haven banks in the Pacific island Nauru, 200 in Luxembourg, 413 in the Bahamas and hundreds more worldwide.

People who hide their money in tax havens need a way to bring it back into this country. Last year, the Clinton administration worked with Iowa Republican Jim Leach, chairman of the House Banking Committee, on legislation banning anonymous transfers into U.S. bank correspondent accounts which are used to receive and send money internationally. That measure and companion bills in the Senate were blocked by House Majority Leader Dick Armey and Senate Banking Committee Chairman Phil Gramm, both Republicans from Texas, after the Texas Bankers Association said it would hurt banks’ business with Mexico.

Why should banks’ business be hurt if they have to know who their clients are? Or keep those clients’ names on records law enforcers might see? Americans seeking to bring money in from abroad surreptitiously were not the only targets of the bill; so were drug dealers. A Clinton official told me, If Texas bankers know their customers, they know whom they’re dealing with, and if they’re dealing with Mexican banks, they know there’s dirty money.

The Bush administration is also protecting tax evasion on an international level. Treasury Secretary Paul H. O’Neill has reversed Clinton administration support of an effort by the Organization for Economic Cooperation and Development to make life tougher for tax cheats. The OECD, comprising the major western economies, told 35 notorious tax havens last July that unless they agreed to provide information to countries investigating tax evasion, members would take defensive actions, such as ending double-taxation treaties. In April, O’Neill rebuffed pressure from France, Japan and Italy to reiterate U.S. support for the move. In May, he announced in a newspaper op-ed article that the demands were too broad and withdrew U.S. support.

O’Neill argued that the OECD is trying to scuttle low tax rates. That is disingenuous. Low rates in targeted countries are not offered to local citizens or businesses or even to foreign firms operating there, only to foreigners with no local dealings. O’Neill would suggest that foreigners bank there only if accounts are secret from home tax authorities, although Americans since 1970 must report foreign bank accounts. Congress has followed the problem for years. In 1985, a Senate investigations subcommittee guessed that offshore centers hid $600 billion in unreported income.

On June 8, seven former IRS commissioners urged O’Neill to end his opposition to the OECD initiative.

When the Group of Seven – the U.S. and its major allies — met in Washington in April 1999, French Finance Minister Dominique Strauss-Kahn proposed that it demand that financial institutions identify their customers, report suspicious transactions in poorly regulated jurisdictions, and, as a last resort, ban financial transactions with recalcitrants.

But the issue was not at the top of the agenda for then-Treasury Secretary Robert E. Rubin, now co-chairman of Citigroup. When I saw Strauss-Kahn after the 1999 meeting, he told me that Rubin and other G-7 leaders turned down his proposals. Rubin denied that account, but wouldn’t clarify what he did say.

When Lawrence Summers became treasury secretary, policy changed, largely due to his belief that the offshore system contributed to the 1997 Asian financial crisis and threatened international financial stability.

But now the Bush team is backtracking. The shift in power in the Senate will give Democratic Sen. Carl Levin of Michigan a hearing for his correspondent banking bill. Those who worried about the huge gift the very rich got through the tax bill should show equal interest in the money they hide offshore.

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