Targeting offshore: America in the lead and Europe taking the cue

Foreign Account Tax Compliance Act

By Anil Gujadhur

We need to safeguard our reputation against criminals, not least white collar criminals

Tracking of persons having got into vast amounts of unlawfully gained wealth has long been a social concern. In 1963 in Britain, the train called Royal Mail was despoiled of £2.6 million (equivalent to £41 million today). The act was so daring and spectacular that it became known as ‘The Great Train Robbery’. I wonder if a movie was not made on the story later on, the effect of which would have been to glorify a criminal act. The thieves involved in this case escaped and the stolen money was thereafter untraceable. A concern arose that even if a thief were seized and sentenced to several years in jail, he would still be able to serve his term in prison and quietly enjoy the fruits of his mischief thereafter.

In the light of cases like this, it was considered as socially unacceptable that those who came into ill-gotten gains by unlawful and devious means should be free to hide away their spoils and be able to retrieve them later on and live the rest of their life in great comfort thanks to the ill-gotten gains. The idea was that the spoils of theft should be confiscated so that the incentive to spend a few years in prison for the sake of enjoying the comfort of wealth for a longer number of years was taken away by this means.

How to develop effective crime monitoring systems

This is where law-abiding countries set up specialized official bodies whose job it was to prevent the thieves from benefiting from the crimes committed at the expense of society and honest citizens. Typically, offices like the Serious Fraud Office and the Asset Recovery Unit of the UK, working in liaison with the Internal Revenue Service, will identify those who appear to be living beyond their known and/or declared means, track them and secure for the state their accumulated wealth from all sorts of crimes, including white collar crimes. It remains to be seen whether companies involved in Ponzi schemes in Mauritius, the activities of which have recently come to light, have not hidden without a lot of trace part of the money they have recovered from their unsuspecting clients. The further the investigation probes into the acts of financial defalcation committed by them, the better the chances are that a good part of the money can be recuperated.

Those involved in physical and financial crimes as a means of enriching themselves should not be thought of as being ingenuous. They employ a bag of tricks to escape from law enforcers. The arsenal they deploy consists of a well-known kit, the objective being to leave no trail about their presence or involvement in shady deals. They clothe their transactions in complexity (mixing up money from legitimate and illegitimate sources such as from banking, property and tourism in one bag with money from arms sales, energy deals, etc.), anonymity (keeping assets in offshore companies and trusts in numerous jurisdictions and preferably under diverse names to hide away the name of the real owner), and secrecy (they go to places which are paragons in the art of discretion, e.g., Switzerland, Dubai, Shanghai, etc., backed by an army of lawyers who will trace out libel at the least accusation levied by the authorities against their “clients”. To top it all, they will even conspire to ensure that those who get into power have no incentive to sue them; they may even arrange to involve potential adversaries into similar unlawful dealings with a view to their rapid enrichment.

Public bodies set up in the UK to recover the proceeds of crime have established a good track record in combating crime and deterring criminals from enjoying the fruits of their mischiefs. Not only have the UK bodies become self-financing, i.e., they don’t depend on the Treasury for funding their budgets, they even contribute to the Exchequer from the money and assets they have confiscated from wrong-doers. They’ve been operating at this level of efficiency for several decades now. That however is not true of various other developing countries the law enforcement institutions of which are so entangled in multiple “missions” that not only do they produce paltry results in terms of the objectives they’ve set themselves. These also end up engulfing substantial budgetary allocations while hardly acting as deterrents to the proliferation of certain typical crimes such as bribery, drug trafficking, corruption and money laundering.

Criminals who loot their own states

At a scale higher than ordinary thieves, we see a history of notorious state rulers who have not only indulged in crimes and social repression but also amassed huge personal fortunes buying up villas, luxury houses and chateaux overseas with misappropriated money belonging to the state. Dictatorial regimes have been the most prone to this kind of malpractice and theft from the public treasury.  It is amazing how hopes of setting back the clock in this regard have failed in several developing countries. Haiti, Philippines and Zaire nearer home have been victims of corrupt political leaders who were bent on enriching themselves, their families and their cronies at the states’ expense.

The Economist (May 11th) has reproduced results of reports from Edwards Wildman, International Centre for Asset Recovery, Transparency International and media reports in this context. Accordingly, it is stated that Jean Claude Duvalier would have looted between $0.3 and 0.8 billion dollars from Haiti; Ferdinand Marcos would have taken away between $5 and $10 billion dollars from Philippines while Mobutu Sese Seko of Zaire would have got into $5 billion of this rich but ill-fated country’s money. These amounts would be far higher translated in current dollars.

In the case of Duvalier, nothing has been returned to the country; all that they’ve been able to do is to have a sum of $6 million out of the former Haiti dictator’s money frozen in Switzerland. Mobutu’s lawyers offered to return only $2 million dollars but even that was refused by Zaire’s government. Again, nothing came back. An amount of $683 million was returned in the case of Marcos from Switzerland, $24 million from Singapore and $50 million pursuant to civil cases from the US. Suharto of Indonesia is said to have whisked away between $15 billion and $35 billion from which nothing has come back to Indonesia although $36 million out of his money is frozen in Guernsey. Nigeria was able to get back $160 million from Jersey, $700 million from Switzerland and $198 million from out of $2 to 5 billion siphoned off by Sani Abacha.

In the case of more recent dictators, Muammar Gaddafi is believed to have looted away between $30 billion and $80 billion from Libya of which $3.6 billion was returned and $25 billion frozen. Hosni Mubarak of Egypt is believed to have stacked away between $1 billion and $70 billion dollars abroad; Egypt has managed to have $800 million out of this treasure trove frozen. Tunisia’s former ruler Zine el-Abidine Ben Ali would have taken away between $3-5 billion out of the country; of this, $29 million was returned from Lebanon and $69 million frozen. It may be recalled that there were instances here where close relatives were caught trying to leave the country with cash-filled suitcases.

Most of these high profile thieves, also called PEPs (politically exposed persons) led extravagant lives in private both at home and abroad, indulging in a life of luxury, while making the most to appear as if they were leading ordinary lives in the eyes of their peoples. It is only when the deceit came in full view after popular uprisings that all those extravagances came as a shock to their unbelieving peoples.

A sterner look at what is going on in offshore centres

In the face of the numerous devices employed by those who have been enriching themselves illegally, both the domestic economies and the international community have developed safeguards. This is one reason why G8 and G20 have recently targeted tax havens to deal with the aiding and abetting of crime, including financial crimes.

America has come up with a legislation called the Foreign Account Tax Compliance Act (FATCA). It requires foreign financial institutions to report, as from 1st January 2013, directly to the Internal Revenue Service of America all their substantive clients who are US persons. This is a breach in the matter of confidentiality for which offshores centres are reputed and prized by some who would enrich themselves by circumventing the law. If foreign financial institutions refuse to comply with this requirement for reasons of secrecy, the US has taken it upon itself to unilaterally impose a 30% withholding tax on all such financial institutions. Along with a directive issued recently by the EU to require EU countries to report deposits placed in their institutions to each other, another breach appears to be made in the defence armoury of offshore centres. Luxembourg has decided to exchange deposit information with other European countries; so has Switzerland though not being a EU member. This shows the mounting pressure to disclose. With the G8 and the G20 going in this very direction, the time may be coming when offshore jurisdictions will have to stand up to a higher standard of proof as regards their “clean-ness” at the risk of finding themselves in dire straits. One has to recall that for the smaller jurisdictions like Mauritius, it takes much more effort and time to build up a good reputation; it takes a single bad example to destroy years of painstaking work to build up an offshore centre of substance however. One has to be guarded and take pre-emptive action not to fall in the bad lot.

* Published in print edition on 17 May 2013