International Tax Havens And Money Laundering Economics Essay


Layering is the process of screening out the capital gained from illegal actions from their beginning utilizing different degrees of composite financial minutess, for case altering hard currency into traveler ‘s cheques, portions, investings, or geting expensive assets, for illustration picture or jewelry. 4


“ In this universe nil can be said to be certain, except decease and revenue enhancements. ”

Benjamin Franklin ( 1789 ) Cited in Sharon ( 2009 ) , p333

International revenue enhancement oasiss and money laundering is going a major issue in the current universe economic system. A revenue enhancement haven state is a topographic point where certain revenue enhancements are levied at a little rate or does non be. Peoples and/or concerns can happen it smart to travel into those topographic points which will make revenue enhancement competition amongst authoritiess which besides include illegal activities such as net incomes gained from unjust trading or frauds in a company ‘s histories and corruptness. Goerke ( 2008 ) survey shows that there is a negative relationship between revenue enhancement oasiss and corruptness. This is because a state with revenue enhancement equivocation policies, the normal revenue enhancement rate has to be high in order to bring forth the same degree of income as a state with no revenue enhancement equivocation policy. High revenue enhancement rate has a inclination to ease corruptness.

In the UK, Her Majesties Royal Court ( HMRC ) is seeking to derive entree to inside informations of abroad histories of UK citizens in revenue enhancement oasiss states ( Riem, 2009 ) . The Financial Times in July 2008, reported the Swiss bank UBS will no keep hold abroad history for U.S. citizens following a jurisprudence suit by the U.S. authorities in May, 2008 ( GFIP, 2009 ) . The US Treasury has lost on an one-year footing around US $ 100 one million millions in gross because of the histories held in revenue enhancement oasis states. The U.S. Congress introduced the Stop Tax Haven Abuse Act ( STHAA ) in March 2009 which includes a list of revenue enhancement oasis states. Companies are be aftering to travel off from the topographic point where the Act is in force. The Italian Finance Minister, Guilio Tremonti had the battle against revenue enhancement oasis states as his chief precedence in the G-8[ 1 ]acme in Aquila in July 2009.

Money laundering is the process to cover the right beginning, ownership, path and usage of capital, mostly gained from illicit actions with the intend of doing appear is was obtained lawfully. There are three chief ways of making this, viz. : arrangement, layering and integrating ( Shehu, 2003 ) .

Placement occurs when an person deposits money gained from illegal activities into fiscal services suppliers such as Bankss.

Layering is the process of screening out the capital gained from illegal actions from their beginning utilizing different degrees of composite financial minutess, for case altering hard currency into traveler ‘s cheques, portions, investings, or geting expensive assets, for illustration picture or jewelry.

Integration is when an single utilizations legal agencies to conceal illicit money, hence go forthing the illegal financess to be distributed back to felons. These can take the signifier of bogus import/export bills.

Advantages and Disadvantages of International Tax Havens and Money Laundering

Offshore fiscal establishment offers entree to steady political and economic affairs. This is advantageous to the occupants who lives in countries of political convulsion who fear their assets may be frozen. Some Bankss operate at a low cost base and supply high involvement rates than what is legal in the place state due to the deficiency of authorities intervention in the personal businesss. Money washing in distant islands and states helps increase the economic system growing. The services of seaward Bankss are advantageous when compared to domestic Bankss, they offer figure of bank histories, hazard is based on high and low rates of investings. Some persons have specific revenue enhancement advantages because these Bankss are linked to other offshore companies, trust or foundations.

However, through money washing the Bankss have been involved to assist terrorist groups, offense packs, and other province and non-state histrions. Money washing encourages revenue enhancement equivocation, by assisting them lodge their concealed income in an attractive topographic point. Access to offshore Bankss are hard as they operate in far distant topographic points. Yet histories can be created by online and other manners, a state such as India finds it hard to cover with the issue of money traveling in and out without limitations. Offshore histories aid this money, and this can do fiscal jobs in the state. The charge to continue these histories is possible by the high earners. The revenue enhancement burden falls for the in-between income group. Besides the people who earn more are left to pay more revenue enhancements to ease the economic system. Acquisition, ownership or usage of belongings, cognizing at the clip of reception that such belongings was derived from condemnable activity or from an act of engagement in such activity ( Lockett, 1999 ) .

Government review financial minutess to do certain the work is carried out decently on the administrative side, prevent public assistance and other benefits fraud, prevent money laundering and to observe any other illicit behaviors ( World Bank Institute, 2008 ) . These advantages, nevertheless, authorities employees deriving entree to these informations and other single might misapply these fiscal informations ( World Bank Institute, 2008 ) . These advantages, nevertheless, authorities employees deriving entree to these informations and other single might misapply these fiscal informations ( World Bank Institute, 2008 ) . Peoples who are involved in seeking to conceal or reassign belongingss that are used for condemnable intents will confront legal countenances ( Lockett, 1999 ) . For case, these belongingss may be used for drugs covering, conceal “ soiled money ” , and any other condemnable activities.

Global Overview

International revenue enhancement oasiss and money laundering is holding a planetary impact. For case, in India, money laundering is become a immense job as money generated from illegal activities, such as offenses, terrorist act and drug-trafficking, is immediately transferred to revenue enhancement oasiss states such as Switzerland. India are made up of revenue enhancement oasiss, Torahs leting secretiveness, cloaked corporations, anon. trust histories, bogus foundations and miscellaneous money laundering mechanisms which are designed to travel money and maintain hidden their beginnings ( Financial Times, 2009 ) .

The local authorities and governments, for case, the Indian Chamber of Commerce and Industry, seems to hold no involvement look intoing into the affair. Even during the G-20 meeting in London ( 2009 ) , the Indian representative though this subject would be “ out of line ” when really revenue enhancement haven states and money laundering was doing the headlines. In February 2009, an Indian newspaper studies that several Indian curates visited Switzerland on private ocean trip. ( Vaidyanathan, 2009 )

Kar and Cartwright-Smith ( 2008 ) in a study for the Global Financial Integrity ( GFI ) that illicit fiscal escape from India for the period 2002-2006 was on an mean depression of US $ 22.7 one million millions and high of US $ 27.3 one million millions per twelvemonth ranking India as the 5th largest escape of illegal money escape in the universe. These come from chiefly 2nd manus goods markets which are non accounted for and mostly processed by a fiscal service provide named Hawala Bank.

Hawala Bank is a fiscal services supplier which is unaccredited and hence under no authorities authorization. The fiscal establishment accept money in all its signifier in one state and pays out in another state but does non happen it of import to maintain proper records of clients and minutess. Their chief trading activity is reassigning money from developed states into the Middle East and North Africa where the house originated. Institution trading frequently goes through Pakistan ; Dubai and Africa states such as Nigeria before making the client as a agency to protect the privateness of clients and that is the chief ground is it usage for money laundering as shown in Appendix 1. No surveies manage to analyze the sum of money traded by the company but it is believed that Hawala bankers are enormously affect for revenue enhancement equivocation and money laundering. Since it has no legal duty, forestalling them from trading is about impossible as it is done in an informal manner. ( van de Bunt, 2008 )

As compared to this, Italy is demoing a great concern in revenue enhancement oasis states and money laundering. Italy has the highest corporate revenue enhancement rate in Europe as shown in Appendix 2 which triggers Italian base companies to direct net incomes in revenue enhancement oasis states. De Mooij & A ; Ederveen and Dharmapala ( 2008 ) argued that company net incomes and income is more antiphonal to revenue enhancements that where the company or person is situated. On 3 October 2009, the Italian authorities granted a grace period for company and persons to return net incomes from revenue enhancement oasis states for a little charge of 5 % of the capital. They expect around US $ 148bn to flux back in the state bring forthing revenue enhancement gross of US $ 7bn largely from Switzerland as in the base on balls, the later was responsible for 58.3 % of influxs of net incomes from abroad. The Finance Minister of Italy, Guilio Tremonti, said in an interview in July 2009:

“ The true benefit of this step is that it will shut Ali Baba ‘s cave and steps are useless if they leave revenue enhancement oasiss open. ”

Fiscal Times ( 16 July, 2009 )

In 2008, Giulio Tremonti made the history of all Italian revenue enhancement remunerators available online which was on of his attack to track incomes of Italian revenue enhancement remunerators. Scherer & A ; Salzano ( 2008 ) discussed that this would non assist the authorities as it could bring on fiscal offense as private inside informations of persons such as income earned and reference were made public and accordingly the web site was closed.

Furthermore, some states enjoy labelling themselves as ‘tax oasis ‘ states such as the Caribbean Islands. However, offshore fiscal services houses prefer to advance themselves as ‘wealth direction Centre ‘ . A recent estimate by the Tax Justice Network ( 2009 ) , show that around a 3rd of the universe ‘s assets is held in these states ( i.e. US $ 11.5 trillion ) . States such as France, UK and Holland have no involvement in to check down these revenue enhancement oasis states as many of them form portion of the settlements. Nevertheless, following the September 11 onslaught, the U.S. authorities wants to extinguish these states revenue enhancement policies as it prompts money washing hence assisting terrorist groups. Their chief marks in the Caribbean are Antigua and Barbuda, Bahamas, Belize, Cayman Islands, Costa Rica, Dominican Republic, Haiti, Guatemala, and Panama. This is because these states have slack fiscal governments which benefit money laundering. Caribbean islands are accordingly fall ining force to set up guidelines to battle money washing chiefly because of universe regulators ( Rosdol, 2007 ) .

Legal Side and Policies

Since the 9/11 incident at that place has been an involvement and turning concern for the regulations and ordinances made against serious offenses including money laundering and revenue enhancement oasiss. The Indian authorities took advantage of the Organisation for Economic Co-operation and Development ( OECD ) countenance menaces against revenue enhancement oasiss and money laundering. They took a difficult expression at the state ‘s Double Tax Avoidance Agreements concentrating on curtailing the escape of clap money and following steps to collar anyone involved within the state. In their impulse to halt black money support growing, the Indian authorities began a dialogue with Switzerland to assist let go of their ill-famed secretiveness Torahs and portion informations on revenue enhancement equivocation instances. Since OECD thrusts against revenue enhancement oasiss, many states have started to subscribe international criterions on transparence and exchange of information.

For case the Cayman Islands have late signed a joint understanding with seven other states, which allows them to interchange information on revenue enhancement affairs one-sidedly. If similar understandings like the one Caymans Island took were taken by India, it would let revenue enhancement governments to track down revenue enhancement evaders and money launderers by deriving entree to fiscal information thatA are hidden. ( Basu, 2009 )

Before the 2008 revenue enhancement oasis and money laundering Torahs caused a batch of struggle with the Caymans and U.S, nevertheless political stableness, rigorous and clear ordinances has helped the state escape the OECD clampdown on revenue enhancement oasiss. Financial services comprise about 40 % of GDP and have made the Caymans the universe ‘s 5th largest fiscal Centre. Strict Torahs against money laundering got the Caymans removed from the Financial Action Task Force black book in 2001 but since so they have maintained a good relationship with the chief hosted Bankss. Regulations in the Cayman Island are provided by the Cayman Islands Monetary Authority, which besides manage their currency. ( Oxford Economic Country Briefings, 2008 )

In the Bahamas the authorities is sing presenting VAT, but this is a challenge for them as the state has built their lucks on their revenue enhancement oasis position. The fiscal sector has undergone a deep transmutation late, since they brought down the repute by presenting all environing anti-money laundering statute laws. ( Oxford Economic Country Briefings, 2008 )

The Financing and Money Services Act was enforced by the British Virgin Islands ( BVI ) in November 2009. The purpose of this act is to do certain BVI Torahs and ordinances are on the same degree with international ordinances and policies to contend money laundering and funding of terrorist. A board will be setup following the act to supervise licensing, ordinance and supervising of fiscal services provided in the BVI, which will besides include reexamining houses which do non follow with the jurisprudence ( Heath, 2009 ) . There are figure of offenses which now these fiscal services suppliers will hold to be line with so as non to interrupt the jurisprudence, otherwise mulcts can travel up to US $ 60,000 applicable for wrongdoers.

U.S. Policies on International Tax Havens and Money Laundering

The attack of U.S. jurisprudence enforcement and regulative bureaus have faced comparatively singular alterations over the past decennary such that money laundering and revenue enhancement oasiss have been now operated as a primary issue. This alteration in attack and focal point has brought betterment sing revenue enhancement oasiss and money laundering. The appraisal of Obama ‘s policies consolidates a enormous sum of information in this position.

In May 2009, president Obama presented a set of proposals concentrating at international revenue enhancement policies. The aim of Obama is to eliminate the benefits for those companies and good off persons that transfer their hard currency in seaward histories. He described the current system as: “ a revenue enhancement codification that says you should pay lower revenue enhancements if you create a occupation in Bangalore, India, than if you create one in Buffalo, New York ” .A The cardinal characteristic of this proposal is to curtail the companies which are exempted of revenue enhancement payments on net incomes earned offshore. The program of disposal is to maintain a rigorous clasp on those companies which are non paying their revenue enhancements in U.S. feigning that they paid a immense sum of foreign revenue enhancements.

During his presidential run Obama ‘s party promise to work on revenue enhancement oasiss and money laundering ACT. In February 2009, he said in a conference:

“ We need to simplify a monstrous revenue enhancement codification that is far excessively complicated for most Americans to understand, but merely complicated plenty for the insiders who know how to game the system, eventually stoping the revenue enhancement interruption for corporations that ship our occupations overseas. ”

U.S. President – Barack Obama

This was his outmost precedences in a address to the Congress that he guarantees to do the revenue enhancement codification more sensible.

Harmonizing to the white house Mr. Obama is seeking to shut the international revenue enhancement spreads. Companies which are puting in foreign states and making occupation chances overseas, will free their revenue enhancement advantages as planned by the U.S. President, companies which are making occupation chances in U.S. will be offered revenue enhancement advantages with inducements.

The President and Treasury Secretary Timothy F. Geithner proposal of revenue enhancement policy could assist in increasing gross over following twelvemonth. The estimated income harmonizing to the surveies carried out is US $ 210 billion. However, this proposal has some drawbacks and has been opposed by several concern communities. Congressional leaders, in March 2009, suggested that this alteration in revenue enhancement codification consequence in doing USA companies less competitory around the concern Earth. About 200 companies and trade associations, including Microsoft Corp. , General Electric Co. and the U.S. Chamber of Commerce, jointly signed a missive saying that the undermentioned alterations to the revenue enhancement codification would put them at a disadvantage with their rivals.

This proposal faced considerable resistance by Democrats who are enormously represented in senate making a bug antonym for President Obama. During his election run Obama criticised the revenue enhancement codification policy as American companies postponing their revenue enhancement liabilities on corporate net incomes. Harmonizing to democrats the net income earning by abroad investing allows American companies to put this money in their foreign subordinates operations.

The loophole which is non covered by Obama ‘s policy is transfer pricing. Transfer pricing is the biggest beginning of revenue enhancement turning away in corporate America. An economic science professor at Rutgers, ( Altshuler, 2009 ) , called transportation pricing “ the elephant in the room ” as it is a major job which was non addressed under Obama ‘s proposal.

Harmonizing to Ernst Young, reforms in Obama ‘s policy for outsourcing have no affect on seaward corporate companies. By making separate concern entity these offshore corporations can contract with entity to outsource the occupation.

Obama revenue enhancement reforms have faced a batch of unfavorable judgment from critics and the leaders in senate but the lone intent of these revenue enhancement reforms is to promote the U.S companies to put locally to make more occupation chances for Americans. The Central Board of Direct Taxes ( CBDT ) said that after measuring the benefits of outsourcing in India, if the cost of gross is lower than the revenue enhancement paid by transnational companies in USA. They would halt investment in foreign subordinates.

To prosecute the dream, Obama ‘s disposal announces their budget policy for the twelvemonth 2011 which is increasing the revenue enhancement on richest persons and diminishing revenue enhancements for the persons gaining lupus erythematosus. Persons gaining more than $ 200,000 have to confront increase of US $ 970billion revenue enhancement on their net incomes. For concerns there is an add-on of US $ 400 billion.


From research a figure of Torahs and ordinances have been put in topographic point to better revenue enhancement oasis and money laundering offenses nevertheless, most of the states still manage to avoid those ordinances and Torahs. In future many states have decided it is best they work together to set together Torahs and ordinances to diminish the offenses in the fiscal system if non like India it could go portion of their economic system and may be hard to decide in the hereafter.

The Caribbean ‘s, India and Italy have undertaken the Torahs and ordinances of the OECD. They undermine the legal economic system because money laundering affects normal competitory conditions of markets which is a menace to the efficiency and stableness of each state ‘s fiscal system. In Italy the bar of money laundering plays a strategic function in contending offense and is based in the Anti-Money Laundering ( AML ) demands which are:

Customer due diligence

Record-keeping demands refering concern relationships and occasional minutess

Adoption of equal organizational processs and internal control steps

Suspicious-transaction coverage.

On the other manus, fiscal privateness is has to be accounted for before make up one’s minding whether to look into a individual ‘s history and income which may stop up on morality issues. With all the step enforced late and future chances, revenue enhancement evaders may desire to see paying the revenue enhancements instead than being sued for fraud for traveling money to revenue enhancement oasis states ( Economist, 2009 ) . Money laundering is a different instance nevertheless as nevertheless strict the Torahs are, authoritiess do no any proper cognition on the sum of illegal paper money go arounding. This capital flows to revenue enhancement oasis states and they are the 1 who have to hold Torahs in topographic point to find the beginning of this money. The Swiss Ambassador in India, H.E. Mr Philippe Welti, said:

“ Switzerland was accused of giving shelter to black money and there has been a batch of influx of such wealth from India and other states of the worldaˆ¦ I would non state it would be stopped 100 % ( under a new jurisprudence ) . But through this step, it would be controlled up to a certain bound. ”

Cited by Vaidyanathan ( 2009, DNA Read the World [ Online ] )

The capita lost in money laundering can be gained back if there if a political will as shown in the instance of Nigeria, Italy, Philippines and Israel ( Vaidyanathan, 2009 ) .

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Appendix 1

Beginning: new wave de Bunt, H. ( 2008 ) . A instance survey on the abuse of Hawala banking. International Journal of Social Economics, 35 ( 9 ) , p691-702.