The Financial Stability Forum (FSF)

The FSF was established by the G7 countries in 1999 to strengthen financial stability through in­

ternational collaboration on information exchange and the regulation of financial markets. Australia, Hong Kong, the Netherlands, Singapore and Swit­

zerland are also members. FSF meetings are at­

tended by the finance ministries, central banks and regulators in the member countries. In addi­

tion, a number of international institutions and or­

ganisations working on financial stability partici­

pate.

The FSF uses the same OFC term as the IMF.

Its attention has focused on weak information ex­

change and regulatory functions in the OFCs. In this context, the FSF has concentrated largely on work performed by the OECD, the IMF and IO­

SCO. At its meeting of September 2007, the FSF described the status of international collaboration related to OFCs and financial stability. It noted that big strides had been made, but that problems related to information exchange remained.

A meeting was held by the FSF in November 2008 on the international financial crisis. The dec­

laration from this meeting emphasized the lack of transparency in the markets as one cause of the crisis, and an increase in transparency as a coun­

termeasure. In that context, the declaration also contained formulations which can be interpreted as a demand that the tax havens must become more transparent.⁴ The declaration from the G20 meeting in London during April 2009 stated that the FSF is to be replaced by a new institution, the FSB (see section 8.9).

8.6 The OECD

The OECD has worked since 1996 to improve transparency in tax havens and to prevent harmful tax practices. It published a report in 1998 entitled Harmful Tax Competition: an Emerging Global Is­

sue. This defined the problem and what was re­

garded as harmful tax competition. The Towards

4 “Promoting integrity in financial markets: We commit to protect the integrity of the world’s financial markets by bol­

stering investor and consumer protection, avoiding conflicts of interest, preventing illegal market manipulation, fraudu­

lent activities and abuse, and protecting against illicit finance risks arising from non-cooperative jurisdictions. We will also promote information sharing, including with respect to juris­

dictions that have yet to commit to international standards with respect to bank secrecy and transparency.”

Box 8.2 Efforts to combat money laundering – participation by tax havens International collaboration against money laun­

dering is pursued through a number of different bodies, including FATF, the IMF and The Eg­

mont Group. A number of tax havens participate in some or all of these fora. In many cases, they have also implemented recommendations from FATF and others on regulations and systems to combat money laundering. The Commission takes the view that tax havens nevertheless rep­

resent one of the principle obstacles to combat­

ing money laundering.

When criminals receive the proceeds of a crime, they will eventually want to use this mon­

ey for consumption or investment. Perhaps the most crucial stage in the fight against money laundering is the first persons to receive such funds, either as payment for a product, a service or a capital object, or in the form of a manage­

ment assignment on behalf of the owners. One of the key elements in fighting money launder­

ing is an obligation to report suspicious transac­

tions. This obligation rests in most countries on bank staff as well as on employees in the rest of the financial industry and in a number of other sectors.

In practice, reporting a transaction which proves to involve money laundering means that the reporter loses a customer. Ignoring the re­

porter’s moral views, the choice between report­

ing or not will depend on balancing the risk of being caught for failing to report and the penal­

ties that follow against the cost of losing the cus­

tomer and other possible customers involved in money laundering. If one has systems well suit­

ed for concealing funds, they will attract money laundering. At the same time, such systems will often also make it difficult for the country’s own authorities to expose the money laundering and any breaches of the reporting obligation. The business people who manage such systems have, of course, weak economic incentives to re­

port suspicious transactions.

Data on the number of reports concerning suspicious transactions submitted to the rele­

vant authorities have been published in a number of jurisdictions. The number of these re­

ports correlates to the number of inhabitants, but it should also reflect whether the country is a financial centre which manages substantial funds from abroad. In addition, it seems reason­

able to assume that general attitudes towards and the quality of law enforcement should be significant in respect of the number of reports.

The figure below shows the number of re­

ports per USD 1 billion in assets under manage­

ment in the banking system. Such assets are in­

tended to provide an indicator of the scale of fi­

nancing activity registered in the jurisdiction. It might perhaps have been more appropriate to compare the number of reports with the number of customers and include the whole financial sector (including trusts and the like), but such data are not available.

The figure shows very substantial differenc­

es in reporting frequency between the various jurisdictions. There is a tendency for this fre­

quency to be low in tax havens. Of the jurisdic­

tions in the figure, the Commission regards the Cayman Islands, Switzerland, the Bahamas, Mal­

ta, Liechtenstein, Jersey, Guernsey, Mauritius, Bermuda and Panama as secrecy jurisdictions.

The first eight of these have the lowest report­

ing frequency. Bermuda and Panama have re­

porting frequencies on a par with or higher than some of the open jurisdictions (India and Nor­

way). A number of tax havens have fairly exten­

sive inward direct investment, international in­

surance business, and/or trusts and the like (see chapter 6). Had it been possible to take the size of the whole financial industry into account, the differences between the secrecy and open jurisdictions would probably have been even more striking.

Jurisdictions included in the figure have been selected from the participants in the Eg­

mont Group, which is the international organisa­

tion for national institutions responsible for ef­

forts to combat money laundering.

Box 8.2 (cont.)

Figure 8.1 Number of ”Suspicious transaction reports” sent to the authorities per USD 1 billion of bank assets in the economy. Most recent year for selected countries and jurisdictions.

The great majority of the reports on suspicious transactions are shelved without investigation.

Only a small number lead to charges and a court judgement. Numerous tax havens conduct ex­

ceptionally many international transactions rela­

tive to the size of their populations and econo­

mies. In a number of instances, it is virtually in­

conceivable that these jurisdictions have the capacity to control money laundering, and not least to pursue cases through investigation and trial. No systematic studies are available which compare the number of cases related to money laundering which are investigated and brought before the courts in different countries. Where data do exist, they suggest that the tax havens conduct little investigation hold few trials re­

garding such cases. The National Audit Office (2007) report shows that only two judgements

were delivered with regard to money laundering during 2006 in the British Overseas Territories.

Both were in the Cayman Islands. No judge­

ments were recorded for money laundering in the other territories (Bermuda, the Virgin Is­

lands, Gibraltar, the Turks and Caicos Islands, Anguilla and Montserrat), but four cases were awaiting trial. Almost 800 reports in all were submitted on suspicious transactions. A number of the jurisdictions have been criticised by the IMF and FATF for poor capacity to deal with economic crime, but these jurisdictions have a total of 57 employees working in this area.

Viewed in relation to that, two judgements might seem to be a low number. However, investiga­

tors working on economic crime are not only concerned with money laundering.

0,0 20,0 40,0 60,0 80,0 100,0 120,0 140,0

Cayman Islan

d Sveits

Bahamas Malta Lichtenstein

Jersey

Guernsey MauritiusSingapore India

Bermu da

Nor ge

Panama UK

Barbados Brasil

Sør-Afrika

Indonesia USA

Global Tax Cooperation report in 2000 included a longer list of possibly harmful tax regulations in member countries, as well as a list of 35 jurisdic­

tions characterised as tax havens. A number of tax rules in certain OECD member countries were amended after the report appeared. Moreover, a number of countries that were characterised and listed as tax havens made changes that resulted in their removal from the list.

This list shortened rapidly in subsequent years. However, this reduction is unlikely to have solely reflected changes to national regulations. It was also a consequence of reduced support for this work in the OECD following the US election in 2000.⁵

The 2000 list has not been updated and is no longer used by the OECD. A list of non-coopera­

tive jurisdictions existed for a time, but jurisdic­

tions which showed a willingness to enter into agreements on tax-related information exchange were regarded as cooperative. None of the juris­

dictions are now regarded as non-cooperative. In connection with the G20 meeting in April 2009, the OECD drew up a list which categorised coun­

tries and jurisdictions on the basis of their progress in implementing international tax stand­

ards. The principal criterion for this categorisa­

tion was whether the country had actually con­

cluded agreements on tax-related information ex­

change or declared its willingness to enter into such agreements. Four of the countries (Costa Rica, Malaysia, the Philippines and Uruguay) had not declared their willingness to do so, but quick­

ly reversed their positions. By the end of April, the OECD declared that all the countries initially on the list had now expressed their willingness to conclude such agreements.

In 1998, the OECD identified a number of po­

tentially harmful tax rules in member countries.

However, after closer investigation, a number of these were declared to be not harmful. Other countries changed their rules. Only one rule relat­

ing to the taxation of holding companies in Lux­

embourg was characterised as harmful by the OECD in 2006. The European Commission had also concluded that this rule involved illegal state aid. Luxembourg decided to amend the rule in 2007.

Sharman, J. C. (2005): Havens in a Storm – the Struggle for Global Tax Regulation includes an analysis of the OECD’s work in this area. The author indicates that the organisa­

tion’s decision-making structure makes it poorly suited to acting as an arena for exerting strong pressure on member countries.

The OECD plays a central roll in the effort to establish tax treaties (partly in order to avoid dou­

ble taxation) and agreements on exchanging in­

formation relevant to the tax authorities. Recom­

mendations from the OECD on the formulation of agreements in this area have been used as models for treaties and agreements not only between members of the organisation, but also between non-member states. Furthermore, OECD collabo­

ration with the UN means that its recommenda­

tions have also strongly influenced the UN’s rec­

ommendations, and thereby agreements between countries outside the OECD. The tax treaties are intended to contribute to correct taxation. This means avoiding both double taxation and tax eva­

sion. The treaties contain provisions on the way the tax base should be delineated between coun­

tries and on the exchange of information intended to help ensure that countries can achieve an over­

view both of taxable income and assets held in other countries and of tax paid in other countries.

The OECD has also formulated standard agreements particularly on information exchange.

In addition, it has carried out extensive work relat­

ed to tax evasion through the use of manipulated transfer pricing. Outcomes of these efforts in­

clude recommended formulations for prohibiting the manipulation of transfer prices as well as measures against such forms of tax evasion.

Relatively few treaties on double taxation have been signed between a tax haven and a develop­

ing country. Viewed in relation to the Commis­

sion’s mandate, the failure to secure access to data for developing countries represents a weak­

ness of these agreements.

In document Tax havens and development NOU (sider 95-98)