Corporate scandals have boosted the pressure on offshore havens to open their books. Some have done so - but the global crackdown has a long way to go.
There is nothing subtle about this tax haven. Websites boast how easy it is to create a limited-liability company here in 24 hours, by phone, by fax or online - no need to show up in person. Unlike some other offshore centers that require at least two people to form a corporation, only one is needed here. And for a fee, anonymity is assured. "We have a large database of shelf corporations available so that you can establish a history for your company," touts an ad for one service firm on the territory.
Is it the Cayman Islands? Monaco? The Bahamas? No, it's the U.S. state of Delaware, and the services offered there are entirely legal. No wonder success is so elusive in the growing international effort to crack down on tax fraud: one man's shady haven is another man's low-tax financial-services center.
Tax havens have been around almost as long as taxes. They have mushroomed in size and importance since the 1970s, when large corporations and international banks started developing sophisticated offshore financial markets out of the reach of national regulators. The International Monetary Fund estimates that as much as $7 trillion in financial assets of various kinds are now held offshore. Concerns about money laundering and revelations about the role of tax havens in corporate scandals like Parmalat and Enron - both of which used a complex web of holding companies in places such as the Cayman Islands and, yes, Delaware - are turning up the regulatory heat on territories associated with flighty finance.
Much of the offshore money is legitimate, but it's certainly a tempting political target. The U.S. alone estimates that it loses between $54 billion and $70 billion in tax revenues to tax havens every year. Over the past five years, public pressure and patient behind-the-scenes negotiations by the 30-nation Organization for Economic Cooperation and Development (O.E.C.D.) has led many offshore centers to commit, at least in theory, to close some loopholes and exchange sensitive tax information. Of the more than 30 tax havens originally identified by the O.E.C.D. in 1998, only five have yet to agree to open up their books a bit.
At a tense meeting in Ottawa last October, the havens insisted that the rules they signed up for should apply to all. Among their complaints: two major Asian financial centers, Singapore and Hong Kong, aren't even part of the talks. The Swiss from the beginning refused to have any part in the entire havens initiative; while they cooperate on cases of tax fraud, they don't recognize tax evasion by non-Swiss as an offense. Tax havens, says Richard Hay, a lawyer at Stikeman Elliott in London who represents tax havens and some investor groups, "don't want to commit commercial suicide by moving ahead of international standards." He adds: "We are not willing to jump into the volcano if others are not ready to follow."
Corporations feel the same way: Why give up a legal advantage? The board of Tyco, for example, is recommending to shareholders that they vote at the annual meeting next month for the scandal-ridden firm to remain incorporated in low-tax Bermuda. But some investors and bankers are now focusing on the issue as a result of the recent scandals. While many big investors have been relaxed about companies using offshore holdings to reduce their tax burdens, overuse of havens can raise red flags. Indeed, in December 2002, a year before Parmalat blew up, a Merrill Lynch analyst in London, Joanna Speed, downgraded the company to "sell" from "buy" in part because of its "inefficient, opaque and complex" balance sheet.
Tax avoidance, says Richard Schmalensee, dean of the Massachusetts Institute of Technology Sloan School of Management, "is like graffiti or pollution: if you want to get rid of it completely you'll be disappointed." Drummond from the Cayman Islands concurs. "You can't prevent fraud from happening," she says, "but you need to be judged by what you do when it does happen. This is what gets missed."
By: N. Peter Kramer
