WORLD'S RICHEST NATIONS MEET TO CONSIDER FATE OF OFFSHORE BANKING HAVENS

Miami Herald

By Mimi Whitefield and Gregg Fields

Western economic powers, trying to pressure offshore banking centers to join their fight against money launderers and tax cheats, meet this week in what could be a watershed event for small countries that depend on bank secrecy as their competitive edge.

Last year the 30-nation Organization for Economic Cooperation and Development's Financial Action Task Force compiled a list of 15 jurisdictions -- including six in the Caribbean Basin -- it considers uncooperative in the fight against money laundering.

Being blacklisted carries with it the implicit threat of economic sanctions, and during the past year a number of Caribbean countries have worked hard -- passing laws and closing down rogue banks -- in hopes of working their way off the list.

On Friday, the task force will release an updated report on the "non-cooperatives."

This week's meetings, however, come at a time when there are chinks in the united front against offshore banking centers, and its efforts are buffeted by mixed messages from Washington.

Last summer the OECD, whose members are the world's richest democracies, also issued a list of 35 jurisdictions -- 17 in the Caribbean -- it considered unfair tax havens, contending that low-tax or no-tax banking centers are little more than secretive fronts where foreigners can park assets and evade taxes.

The Internal Revenue Service estimates it loses $ 70 billion in taxes annually because Americans have hidden their income offshore, and the Clinton administration was a staunch supporter of the organization's efforts.

But when U.S. Treasury Secretary Paul O'Neill expressed misgivings about the direction of the unfair tax haven initiative last month, it appeared to be in jeopardy.

However, in the wake of last week's meeting of the OECD's Forum on Harmful Tax Practices at its Paris headquarters, there appears to be some room for a meeting of the minds between the European countries and the United States.

High-tax European nations want higher taxes in offshore havens, but O'Neill says the U.S. has no interest in stifling competition and telling other countries what their tax rates should be. The U.S. doesn't, however, object to OECD efforts to set up at information exchanges that help track down offshore tax cheats.

"I am troubled by the underlying premise that low tax rates are somehow suspect and by the notion that any country, or group of countries, should interfere in any other country's decision about how to structure its own tax system," O'Neill said.

But he quickly added, "We cannot turn a blind eye toward tax cheating in any form. That means pursuing those who illegally evade taxes by hiding income in offshore accounts."

A Treasury spokesman said that was the policy that U.S. representatives put on the table in Paris.

"We welcome the U.S.'s ongoing concerns about OECD attempts to dictate other countries' tax systems" as well as its "continuing opposition to criminal tax evasion," said Lynette Eastmond, director of the International Tax and Investment Organization, whose members are many of the small, developing countries targeted by the OECD.

"It seems the OECD is now beginning to take U.S. concerns seriously," she said.

The new U.S. position on unfair tax havens also is provoking controversy at home.

Twenty-two members of the U.S. House of Representatives sent a letter to President Bush supporting O'Neill and saying they opposed any effort to force low-tax countries to raise their rates and retool their tax systems.

Then more than 200 economists, including Milton Friedman, wrote Bush, urging him to reject the OECD initiative.

On the eve of the Paris meeting, seven former IRS commissioners joined the chorus, but they asked O'Neill to withdraw his opposition to the proposed OECD crackdown.

The group of former IRS commissioners, which included Republicans as well as Democrats, said the United States would have more potential to achieve success within the OECD framework.

"With increasing globalization and the use of the Internet, U.S. taxpayers seeking to evade U.S. taxes will have an increasing ability to transfer assets to tax havens further afield," the letter said. "These tax havens are even less likely to bend to U.S. unilateral pressure. Conversely, they may well cooperate when 30 OECD countries, some of which have close historical ties in addition to geographical proximity, act in concert."

A group of House members, 12 Democrats and one Independent, also wrote to O'Neill prior to the meeting of the Forum on Harmful Tax Practices expressing concern over the Bush administration's opposition to the initiative.

"We urge the administration to participate constructively in the OECD tax project and help shape it as part of an overall effort to see that the American economy is appropriately integrated into the world economy," the House members said in their letter.

All the debate and the Bush administration's skepticism will serve to slow momentum toward cracking down on offshore money centers, said Andrew Quinlan, who heads the Center for Freedom and Prosperity, a Washington group that opposes efforts of the OECD.

Meanwhile, some Caribbean countries have pledged far more cooperation in the task force's fight against money laundering.

Several countries, including the Bahamas, have passed tough anti-laundering legislation in the past year, and the Bahamas and other island nations have revoked the licenses of banks suspected of illicit activities.

But Patrick O'Brien, a lawyer with Greenberg Traurig who helped write Antigua's money laundering laws in 1998, says offshore jurisdictions may have trouble working their way off the task force list.

On the implementation of the laws resulted in closure of 44 of Antigua' 64 offshore banks, he said, "I think we did a good job, but I think FATF [Financial Action Task Force] makes the mistake of saying [reform] must be the U.S. or the U.K. way. The focus is on how things get done rather than just getting them done," he said.

Many offshore money centers, meanwhile, make a clear distinction between their willingness to cooperate with efforts to crack down on money launderers versus tax evaders, who in many cases aren't breaking any of their laws.

Wendy Warren, executive director of the Bahamas Financial Services Board, said the unfair tax haven initiative is much more of a "moving target.'

She points out the Bahamas never had income, inheritance or capital gains tax for its own citizens -- let alone foreign depositors. "To criticize us because we have that clearly requires us to change our system, and we're not prepared to do that," she said.

"They're asking for changes in our tax systems, and they aren't actually defining terms and giving information," said Ben Coleman, a spokesman for the International Tax and Investment Organization. "We've been saying for a long time, 'you're not answering our questions.' "

Some of the reforms that tax haven countries have made have been spurred on by being placed on the OECD list, he acknowledged. But Coleman said, "There's no future for an offshore financial center that doesn't reach for high international standards."

Charles Intriago, who publishes the newsletter Money Laundering Alert, said the same "impenetrable laws" of bank secrecy that allow money launderers to operate also lend themselves to tax evasion.

"What Secretary O'Neill's position seemed to overlook is that all money laundering is tax evasion, and most tax evasion is money laundering; and it's hard to separate the two," he said. "They draw a line between criminal activity and tax evasion and ultimately you can't really separate them."

Intriago also pointed out that the mere enactment of a spate of laws doesn't always result in enforcement. Many times, he said, there is a lack of personnel and procedures to carry out the laws and put teeth into them.

Warren, however, said the Bahamas has not only passed new laws, but allocated funding for enforcement and additional personnel. If the Bahamas isn't removed from the task force list, "it would be very disappointing and would put in question the FATF process itself," she said.

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