19 Apr 2016
Willpower needed to wipe out tax haven secrecy
By Simon Norton and Paula Chadderton
Governments should coordinate globally to eliminate tax haven secrecy.
A common argument made in reaction to the unfolding Panama Papers revelations is that tax avoidance activities involving complex legal arrangements and tax havens aren't necessarily illegal. In many cases this is likely to be true.
However, as President Barack Obama has rightly pointed out, "The problem is that a lot of this stuff is legal, not illegal".
Although not currently illegal, these arrangements and havens are used to facilitate illegal activities including money laundering, tax evasion and sanctions dodging. This problem needs to be addressed.
With the assistance of lawyers, accountants and other "professional facilitators", organised crime uses complex legal arrangements including shell (front) companies and trusts, frequently located in tax and secrecy havens. They also use "shadow directors" to hide the true ownership of companies.
As Operation Wickenby – an ATO-led multi-agency taskforce investigating the promotion and use of tax havens and offshore secrecy arrangements – made clear, tax and secrecy havens enable organised crime and others to hide their proceeds of crime from law enforcement and tax authorities.
The secrecy laws found in many tax havens (or "low-tax jurisdictions") have also impeded the investigations of law enforcement, taxation and anti-corruption authorities.
These laws make it difficult to determine the true identity of the ultimate beneficial owners of companies and trusts, and to take action against them. Moreover, by the time access to such information is granted, the funds may have moved elsewhere.
Combating misused and complex legal arrangements, together with abolishing tax and secrecy havens, requires willpower and coordination by governments globally.
But what the Panama Papers reveal is the extent to which influential business people, public officials and politicians – as with organised crime groups – use these arrangements and havens to disguise their wealth, and avoid tax and other obligations.
Consequently, it's unsurprising that few politicians and their financial supporters are willing to tackle this problem. The time has come for political fortitude, and for action.
Recently the OECD and G20 encouraged countries to agree to exchange financial information. So far 96 countries, including Australia, have done so. However, a number of jurisdictions – including Bahrain, Nauru, Panama and Vanuatu – remain reluctant to enter into such agreements. Consequently, political pressure needs to be exerted on those countries yet to agree.
But information exchange is only part of the solution. What's also needed is greater transparency around who ultimately controls and benefits from these arrangements.
Countries, including Australia, should follow the UK's example in creating a central register of ultimate beneficial owners of companies.
The register could be accessed by law enforcement, tax authorities, and companies with customer due-diligence obligations. It would enhance law-enforcement investigations while reducing compliance costs to companies.
Australia, and like-minded countries, should lead the way internationally so this practice becomes accepted worldwide. The involvement of lawyers and accountants in setting up complex legal
arrangements also needs to be addressed in Australia.
The Financial Action Task Force – the global standard setter for anti-money laundering and counter-terrorism financing (AML/CTF) laws –requires that lawyers, accountants and other so-called gatekeeper professions be regulated under domestic AML/CTF laws. In Australia, this occurs in limited circumstances.
When Australia's AML/CTF legislation commenced in 2006, the government intended to capture gatekeeper professions in subsequent legislative amendments. However, a decade later and despite ongoing criticism domestically and internationally, this still hasn't occurred. It needs to.
When politicians and influential business people benefit from tax and secrecy havens, it's not surprising that there's little political will to close loopholes and address these issues holistically and transparently. But that's what is needed to make it harder for criminals to evade the law, and engender greater confidence in the financial system and our political leaders.
Paula Chadderton is a visiting fellow and Simon Norton is an analyst at the Australian Strategic Policy Institute. These are personal views.
Published: Australian Financial Review - 19 April 2016