His speech was reported by newspapers around the world, not only because Gurría is secretary general of the OECD, but also because the problem of how information is shared by the world's offshore centers has entered the mainstream.
When the subprime mortgage crisis sunk Lehman Brothers in 2008, entire economies were dragged down with it. The news was as bad as the story was big, and as the press started to unpick the complex causes of what became known as the financial crisis, arcane jargon that was normally the preserve of academics and bankers needed to be explained to the general public.
One phrase stood out from all others, because it best captured the malign and impenetrable nature of the crisis: shadow banking, and when presidents and prime ministers needed to explain the causes of the crisis to angry citizens, along with possible cures, shadow banking was the phrase they used.
It was easier than referring to hedge funds, money market funds, structured investment vehicles and the like. In some ways it was more accurate too, because the phrase "shadow banking system", which was coined by Friedrich Hayek in 1935, does not describe these financial instruments in and of themselves. It is instead a placeholder for any transaction that occurs off the balance sheet of a bank - or an institution that functions like a bank - and, as a result, falls beyond the reach of government monitoring and regulation.
Gurría's speech marked the high point of over a decade of work by his organization, but it was the presidents and prime ministers in his audience - and especially Nicholas Sarkozy, his host - that deserved much of the credit. They were, by and large, the same presidents and prime ministers who had narrowed in on shadow banking in the moral drama of the unfolding crisis and made it antagonist number one. In the process, they put enough political will behind the OECD for it to finish a job that it started in 2000: regulating offshore centers which, with their favorable tax policies, low regulatory requirements and strict privacy rules, were identified as the nexus of shadow banking.
An example from the lead up to the crisis proper illustrates the point. The American brokerage and investment bank Bear Stearns, which was saved from bankruptcy in 2008 by a JP Morgan buyout - at a fraction of its pre-crisis value - bet heavily on mortgage-backed securities in the years leading up to its collapse. It bundled some of these into two hedge funds registered on the Cayman Islands, where an estimated 37 percent of all hedge funds are domiciled. When the US housing market nosedived in 2007, and investor losses piled up, Bear Stearns scrambled to assess the damage. It wasn't easy. According to an account in House of Cards, a description of the company's last days written by William Cohen, it took three weeks of working around the clock before a clear picture emerged: the firm had overestimated the liquidity of the $1.5 billion of funds by an astonishing $1 billion. If fund managers were themselves so thoroughly in the dark, the case for more checks and balances was clear, but it had in fact already been made.
In 2000, the OECD set up the Global Forum on Transparency and Exchange of Information for Tax Purposes. Normally referred to as the much simpler Global Forum, it was tasked with building an international framework to tackle money laundering and tax evasion, as well as regulating how offshore financial centers operated and what tax information exchange and double taxation agreements should look like. Although it made some progress, especially against money laundering, it was not until 2009 that the Global Forum really started to make headway with transparency, its key mandate. Mike Grover, a tax specialist at Labuan IBFC, says that progress in implementing a standards for the exchange of tax information was especially slow until 2008. "Then with high standards of transparency and the eradication of tax mischief high on the global political agenda, the G20 met in April 2009 to discuss the financial crisis in the banking sector. They put their considerable political will behind the Global Forum since, as a separate concern, government revenues were coming under threat from aggressive tax planning and tax evasion."
Ahead of the G20's April meeting, the Global Forum prepared a list, dividing jurisdictions into three groups: those that had substantially implemented its internationally agreed tax standard, those that had committed to implementing it and those that had, as yet, made no commitment. It was the latest version of a list that was first drawn up in 2000, in which jurisdictions that had not committed to the OECD's reforms were identified as uncooperative tax havens. By May 2009 - just a month after the G20 meeting - the last of these had agreed to toe the line and were removed from what is loosely called the OECD's "blacklist". The Global Forum was also fundamentally restructured later that year. Membership was opened up to all jurisdictions included on its list, in an effort to ensure stakeholders participated on an equal footing. The measure proved effective: in the period since then, the Global Forum has grown to include 105 countries as well as nine observer organizations, including the United Nations, the World Bank and the International Monetary Fund. "With the continued support of the G20 countries," says Mike Grover, "the Global Forum has made remarkable progress in helping governments fight tax fraud, particularly in areas where it relies on banking secrecy."
Not everybody is as pleased. In a statement made at the G20 conference, Swiss president Hans-Rudolf Merz called the OECD list regrettable. His ire was understandable: bank secrecy originated in Switzerland, where it is long been viewed through a substantially different lens.
In 1934, a French member of parliament publicly named and shamed compatriots who held Swiss bank accounts, calling them "men of a particularly ticklish patriotism" because the funds they deposited flowed out into Nazi Germany. The Swiss were quick to react: they passed the Banking Act, which gave solid legal protection to account holders, guaranteeing that their identities would only be revealed if there was proof of a serious crime like tax fraud or terrorism, but not - importantly - tax evasion, which is viewed benignly, as a legitimate game of cat and mouse between the individual and the state, and is only considered a misdemeanor under Swiss law. When offshore centers proliferated in the second half of the twentieth century, the model was copied to varying extents in places as far apart as Singapore and the British Virgin Islands. It is only being unpicked by the Global Forum now.
Plainly put, the OECD wants countries to exchange tax information on upon request. A statement posted to its website goes into more detail, explaining that "exchange of information upon request describes a situation where a competent authority of one country asks the competent authority of another country for specific information, generally under the authority of a bilateral exchange arrangement between the two countries." The bilateral exchange agreements referred to in the statement are either double tax conventions or tax information exchange agreements, and to comply with the OECD's internationally agreed tax standard - the same standard it used to draw up its G20 list - jurisdictions must have at least twelve of these in place. There is one caveat: existing bilateral exchange agreements undergo a peer review and often have to be redrawn and renegotiated, to comply with international norms.
In and of itself, the OECD does not have the ability to enforce these standards, but Mike Grover says that with the G20 behind it, the Global Forum does have strong persuasive powers. "Based upon an analysis of a country's progress in implementing the agreed standard, prepared by the OECD and the Global Forum, the G20 may impose sanctions against countries that fall short." For the moment, with the black list empty, sanctions and other punitive actions seem unlikely. "There is no advantage to staying outside the process," says Grover, "since it will happen whether or not a country subscribes to the agreed standard." Everybody has climbed on board - some reluctantly, others eagerly - and together, the members of the Global Forum are reshaping the offshore industry, giving it a new rule book that will, says the OECD, level the global playing field.
Over the past two years, reforms have helped governments in twenty countries net an additional $19 billion in revenues, according to figures provided by the OECD. Among the largest beneficiaries are the US and UK, which have used improved information sharing arrangements to tax the earnings that citizens hold offshore, while by an absolute count, Switzerland has been hardest hit. It has agreed to collapse the distinction between tax fraud and tax evasion for foreign account holders and is emerging as the crucible of the Global Forum's new standards. Swiss-held offshore assets have declined by about a quarter since 2007 and there is worse to come: in 2013, new double taxation agreements with the UK and Germany will come into place, by which time the consulting firm Booz & Co expects the exodus of undeclared deposited by citizens of both countries - an estimated $51 billion - to be complete. Critics say that even these agreements don't go far enough, suggesting that the additional revenue is a carrot Switzerland has dangled in front of Germany and the UK to push through treaties that have left too many of the old loopholes still open.
The Task Force on Financial Integrity, an umbrella group for the most strident of offshore finance's critics, says that further reform is needed in not just Switzerland, but every offshore center. It highlights the following five areas:
- Profits that multinationals shift to jurisdictions with lower tax rates account for up to half the monetary flows out of developing countries. The problem could be reduced, and maybe eliminated, if tougher accounting rules were put in place.
- Under existing accounting rules, companies can choose to hide profits taxed offshore by only reporting consolidated results. The group thinks they should be forced to break down sales, profits and tax payments by jurisdiction.
- Laws do not guarantee that tax authorities and law enforcement officials can find out who actually controls trusts and foundations.
- Greater co-operation between countries is needed on the exchange of tax information, including automatic, rather than on-request, reporting.
- Country's policies on money laundering should be more closely aligned, with the inclusion of tax evasion in the list of predicate offences that can lead to laundering charges.
A valid counter argument exists. Its premise is that offshore centers give their onshore counterparts healthy, much needed competition, preventing countries from over-taxing and over-regulating their economies. The argument's adherents say that the focus on offshore centers is unfair as well as misguided, and that reforms should start at home, with adjustments to the regulations that encourage individuals and companies to move their money offshore. Whatever its merits, there is very little patience for the argument at the moment. The image of the financial industry is at a low ebb, and it is the target of protests across Europe and North America - like Occupy Wall Street - that want to see more regulation, not less.
There is a middle ground that both the proponents and opponents of tax haves can, perhaps, agree on. A recent report by academics at the University of California's Haas School of Business, with the provocative title Offshore Financial Centers: Parasites or Symbionts, concluded that close relationships with offshore centers were a net positive for larger jurisdictions with wider regulatory concerns. "By every measure," said the report, "credit is more freely available in countries which have close relationships with offshore centers." Another report, by Luisa Blanco and Cynthia Rogers at Pepperdine University, drew similar conclusions. It established that proximity to an offshore financial center, and the investment tools and security they provide, increased investment in less developed countries.
The ongoing, heated debate is a sign of just how far there is to go before the dust settles and a clear picture of what role offshore financial centers will play in the post-financial crisis era emerges. Mike Grover says that is it becoming increasingly clear that not all financial centers are created equal. Investors are re-assessing traditional offshore centers in light of the new conditions, he explains, and are choosing jurisdictions that can help them navigate in the new tax landscape.
A few precursors of the new order have already emerged. The combined effects of the Global Forum-led reforms and a surge in Asian-owned wealth have transformed Singapore into arguably the fastest growing center for wealth management in the world. Price Waterhouse Coopers has estimated that it will eclipse Switzerland by 2013, at exactly the same time as the latter's treaties with the UK and Germany come into effect. Mauritius is another. Its position on the Indian Ocean's fast-growing trade routes as well as its close relationships with African countries, including membership in the regional trade blocs COMESA and the SADC, have made it a sensible stopover for investors on their way into the continent just to its west.
Central to the pull of these jurisdictions are regional strengths, supported by a network of double taxation agreements, as well as solid infrastructure and a skilled, affordable workforce. "Nowadays international tax planning only succeeds by ensuring that an appropriate level of substance is incorporated," says Grover, which means that offshore centers with more than just paper companies and favorable tax rates to offer are most likely to thrive.
