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Tax havens can survive the G20

By Spear's

The rhetoric of the G20 is just that: empty bluster. William Cash analyses why G20 governments are shooting themselves in the foot when they take aim at tax havens

Perhaps the biggest winner from the G20 is London’s Savile-row suited army of £500 per hour private client tax and trust lawyers.

They must be salivating this weekend at the number of hours they will be charging over the next few months now that Obama, Brown and Sarkozy et cie have decided to make tax havens public enemy number one as they try to find a scapegoat for the catastrophic debacles they have made of governing their own domestic affairs.

It would be amusing – were it not so financially dangerous – that the very countries who have shown themselves so incompetent at regulating their own financial industries, from banking to hedge funds, and are now making such U-turn messes of important issues such as the non-dom issue in the UK, now think they are uniquely qualified to save the world from the evils of tax avoidance by regulating the world of off-shore banking.

They have no more chance of realistically making countries like Switzerland, Singapore and Monaco roll over and hand over all the details of their client bank accounts – with the few exceptions of cases in which they have concrete evidence to suspect tax fraud – than they have of persuading the Swiss to join the Euro.

Brown’s claim at the G20 that the era of banking secrecy is ‘over’ is typical Brown political rhetoric – tax havens have, of course, long been on his Most Hated list of causes that he wants to declare war on.

To read more from Spear’s on the G20 Summit, see Josh Spero’s liveblog from the ExCeL Centre and Vanessa Neumann’s report from the protests.

But if one actually knows anything about the murky world of tax havens, one knows that they have always been a step ahead of the politicians, and this latest bombastic battery on their defences from the Excel Centre in London’s Docklands is a siege that they are very capable of withstanding, albeit cunningly and in ways that may well make it look like the politicians are getting their way.

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The important thing to understand about the tax haven issue is that tax havens are just a small and rather irrelevant pawn in the current financial meltdown and political game.

The tax haven political skirmishing – as a deflection from real economic issues at home – has been going on for well over eighteen months now; that is why so many countries like Switzerland and Luxembourg and Guernsey have been sending over their finance ministry apparatchiks to London – and New York – in order to learn the tax ropes (schemes, tax vehicles, favoured banks and law firms in Cayman, Bermuda, etc) from lawyers and accountants in the private client world.

It has been a form of post 9/11 spying and anybody who thinks that the G20 Summit has much to do with it is just plain naive. This game has been going on for a long while.

Nobody really has a clue about how much money is illegally stashed off-shore in countries like Liechtenstein, Monaco and Luxembourg. It’s certainly in the trillions; always has – and always will be.

The truth is that the actual revenue which will be clawed back from the tax information exchange treaties that are currently being called for is so low that it will make no real difference to the real problems facing economies such as Britain.

These are problems that are to do with out-of-control public spending, throwing money at banks without thinking through the small-print, and essentially trying to spend one’s way of out a recession that has been caused by morally reckless and dangerously inept government thinking that has allowed an unregulated, debt fuelled system to flourish.

This has encouraged the masses, as well as the middle-classes to leverage themselves to the hilt – just as long as the spending boom brought in the VAT and the banks and financial institutions that got away with it for too long (including hedge funds and private equity, who got away with paying very little tax precisely because they had good lawyers who circumvented the tax system) were keeping the masses happy with their credit loans, overdrafts and unsustainable mortgages that were always going to end in tears.

Which is why Brown is so deeply hypocritical in calling for a ‘new moral order’ based on morality. In his speech at St Pauls a few days before he addressed the G20 leaders, he said that a single moral thread runs through all faiths – namely ‘a single powerful modern sense demanding responsibility from all and fairness to all’.

Yet it is – as Spears has argued from the moment Brown came to power – Brown’s own irresponsibility and moral bankruptcy in attempting to get the world to spend itself out of debt that is the root cause of the problem – and why the G20 leaders were so delirious in being able to point the finger at countries like Monaco and Switzerland who were not even invited to the G20.

As stated above, it is precisely because Brown, the host of the G20 summit, is also the chief circus master and architect of the worst financial crisis the world has seen for perhaps a century, that I do not expect much to be achieved in the long term by the G20 meetings – other than to confirm that Brown simply doesn’t get how angry the public are with his financial incompetence.

The real problem is simple to diagnose: an economy fuelled on debt is ultimately unsustainable. Currently there is no real relation existing between the world of banking finance and the real economy.

To read more from Spear’s on the G20 Summit, see Josh Spero’s liveblog from the ExCeL Centre and Vanessa Neumann’s report from the protests.

The huge current account deficits that exist in Britain and America cannot just be spun away in this week’s press conferences. The world-saving fiscal package proposed by Brown simply cannot be implemented because we don’t have the cash to pay for it.

The other form of hypocrisy shown by Brown is that he knows he cant really afford to alienate the asset managers, private client bankers and lawyers of London who are now going to be so busy in the next few mnths.

He has already done them a great favour by putting tax avoidance so high up n the agenda. The better news is that, as tax authority Roderick Balfour, founder of Virtus Trust, emailed me on the day of the G20, Brown ‘knows he needs these as ‘Offshore City of London’ to keep the latter in the forefront of global finance, insurance and the investment industry.

‘He leads a charge against them at his peril and France and Germany can’t have believed their luck that it was the UK doing this against its own interests. I suspect the current attack on these places will be rather like yesterday’s demos in London. There will be a lot of noise, there will be some short term fear and then it will all go quiet but it will certainly have put the wind up the tax-evaders.’

Well put. Another good example of this ‘sound and fury’ argument from the big political leaders, in particular the petulant Sarkozy, amounting to signifying rather little, is the fact that Sarkozy – like Brown – cannot do with alienating his Billionaire Boys Club best friends whose funds he so badly needs to fund his party – and in Brown’s case – the forthcoming election.

Sarkozy’s closest friends and allies – such as Bernard Arnault – are almost all billionaires and he has no intention of making them too uncomfortable, let alone bleeding them to death, or executing them by tax guillotine.

Take his relationship with Monaco, for example, which is right on France’s back-door. Balfour pointed out to me that is no coincidence that Monaco is actually exempt from all EU money laundering legislation.

To read more from Spear’s on the G20 Summit, see Josh Spero’s liveblog from the ExCeL Centre and Vanessa Neumann’s report from the protests.

And why doesn’t Sarkozy push to do something about this with his friends in the EU? Because, as one private banker in France told Balfour recently, ‘it suits the French Government very well’.

The situation is no better with Sarkozy’s murky relationships with Switzerand. In an embarrassing report published the day after G20 met in London to declare the days of ‘banking secrecy’ were dead, Sarkozy faced claims that in his previous job as a lawyer he often helped rich French clients to open tax-friendly bank accounts in Switzerland.

The claims refer back to his time as a (not very well paid) lawyer in the 1980s and 1990s, when, because of hefty state taxes, it was standard practise for rich French individuals (a tribe that Sarkozy has always liked to ingratiate himself with) to seek discreet tax shelters for their money.

The irony of this will not be lost on observers. Like Brown, Sarkozy has been dropping the ‘M’ word recently, saying he wants to ‘put morality back into capitalism’ and crack down on international tax havens.

Sarkozy was the last to arrive at the Downing Street dinner and had threatened to walk out of the G20 summit this week unless his demands for ‘radical reform’ in the shady area of off-shore financial centres and ‘Anglo-Saxon’ business practices.

‘We want lists of financial centres that do not co-operate… and to draw the consequences of that,’ he stated.

Again, this is a lot of rhetoric. The OECD already maintains a ‘blacklist’ – called “The List of Uncooperative Tax Havens” – of countries that do not practise ‘effective exchange of tax information’. In August 2007, OECD specifically blacklisted Andorra, Liechtenstein and Monaco.

The OECD has already – before the G20 – been asked to investigate around 40 new tax havens where suspected illicit revenue is hidden, including bank accounts held by dictators, serial tax avoiders and hedge funds.

Led by France and Germany, the OECD have also been told to look into adding Switzerland to their blacklist of countries which encourage tax fraud. This all makes great political capital – tossing some cake to the masses who remain envious and incensed at how the rich have made themselves even richer during the boom years of the last five or seven years. But don’t expect the Swiss to capitulate any time soon.

Once Obama’s motorcade has been loaded up and sent back to the States, and Sarkozy is back playing tennis with his billionaire and Carla’s celebrity pals, the Swiss  and the Monégasque and the Liechtenstein royal family – will get back to doing what they do best: bending the banking rules to look after themselves and their rich clients.

Far from the era of banking secrecy being over, it is just about to get a whole lot more fun, expensive and sophisticated. Never has it been a better time to become a tax lawyer. To read more from Spear’s on the G20 Summit, see Josh Spero’s liveblog from the ExCeL Centre and Vanessa Neumann’s report from the protests.

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