Tackling Capital Flight and Tax Evasion

TRANSNATIONAL INSTITUTE Amsterdam, Netherlands

April 2007

THE LONG AND WINDING ROAD: TACKLING CAPITAL FLIGHT AND TAX EVASION

1. Introduction

Financial liberalisation in the late 1970s and 80s greatly increased the opportunities for capital flight and tax evasion. It led to a rapid growth in the volume of personal assets held offshore and largely untaxed, and stimulated a massive increase in the volume of cross-border trade routed via tax havens for tax minimisation purposes. Despite the plethora of international initiatives ostensibly targeted against the use of tax havens, almost all expert opinion agrees that the scale of activities conducted through tax havens and offshore financial centres2 continues to grow.

A major feature of tax havens and offshore financial centres is the secrecy space they provide, either in the form of banking secrecy laws, or through de facto judicial arrangements and

1 John Christensen directs the International Secretariat of the Tax Justice Network - www.taxjustice.net 2 An offshore financial centre is defined by the IMF as a country or jurisdiction that provides financial services to non-residents on a scale that is incommensurate with the size and financing of its domestic economy. Source: Zoromé, A., (2007) Concept of Offshore Financial Centers: In Search of an Operational Definition, IMF Working Paper WP/07/87

1 banking practices. This ‘secrecy space’3 provides an enabling environment for illicit and illegal activities, facilitating fraud, embezzlement, bribery, insider-trading, market-rigging, and tax evasion, amongst other crimes. The World Bank cites estimates of the volume of cross-border dirty money4 flows ranging between one and $1.6 trillion per year, half of which originates from developing countries and economies in transition.5 The tax losses from the capital illicitly accumulated offshore would more than pay for the funding of the UN Millennium Project’s global poverty alleviation goals. In the case of Africa, which is typically portrayed as being in desperate need of capital resources, the African Union estimates that $148 billion leaves the continent every year.6 Most analysts agree that the outflows of African capital tend to be permanent, indicating that between 80 to 90 per cent of these flows remain outside the Continent.7 Thus despite its massive external debt burden, Sub-Saharan Africa is a net creditor to the rest of the world in the sense that its external assets (the stock of privately held flight capital) exceeds external liabilities (the stock of external debt, largely held by or guaranteed by governments).8

Multilateral and regional initiatives to counter capital flight and tax evasion have been limited in their scope and in some instances fundamentally flawed. This paper provides a rapid tour d’horizon of some of the more prominent initiatives, and also considers recent proposals, including some originating from civil society groups, to tackle the issues.

Section 2 considers the OECD’s process for tackling tax evasion and outlines why, almost a decade after its inception, tax evasion remains a major issue even for OECD countries.

Section 3 considers the European Commission’s anti-tax evasion initiative, which represents a major step forward in that it has introduced the principle of international tax cooperation through automatic exchange of tax information. However, the Savings Tax Directive in the form adopted by the EU in 2003 contains major loopholes which are being widely exploited.

Section 4 explores the case for creating a truly global and representative institutional framework for tax cooperation. It notes the recent UN initiative to elevate the role of its Committee of Experts on International Cooperation in Tax Matters, but also outlines the limitations of that Committee in its current form.

Section 5 looks at the recent work of the Leading Group on Solidarity Levies to Fund Development, which, in the context of the Monterrey Consensus on identifying initiatives to

3 Hampton, M.P. (1996) The Offshore Interface, MacMillan, Basingstoke 4 Dirty money is money that has been obtained, transferred or used in an illicit way. 5 World Bank Unveils Stolen Asset Recovery Initiative accessed 18 April 2007 from: http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:21299829~menuPK:51062075~pageP K:34370~piPK:34424~theSitePK:4607,00.html 6 UK Africa All Party Parliamentary Group (2006) The Other Side of the Coin: The UK and Corruption in Africa (p14) 7 Raymond Baker from the Center for International Policy, Washington, quoted from oral evidence given to the UK Africa All Party Parliamentary Group in January 2006 8 Boyce, J.K. and Ndikumana, L. (2005) Africa’s Debt: Who Owes Whom? In Epstein, G.A.(ed) Capital Flight and Capital Controls in Developing Countries, Edward Elgar, Cheltenham, UK

2 finance development, is bringing together an inter-governmental task force to spearhead new ways to tackle capital flight and tax evasion.

Section 6 considers how the global dialogue on tackling corruption needs to shift towards the role of the enablers –- including the offshore financial centres and tax havens – and explores possible ways in which the UN Convention Against Corruption might be interpreted to support efforts to tackle capital flight and tax evasion. This section also briefly examines the Stop Tax Haven Abuse Act introduced to the US Senate in February 2007.

Section 7 explores a civil society proposal for a new international financial reporting standard for country-by-country reporting by multinational companies. This would greatly improve the quality and transparency of tax reporting, and could radically transform the ability of national tax authorities, especially those in developing countries, to tackle trade mispricing abuses.

2. The OECD process

The publication in 1998 of the Organisation for Economic Cooperation and Development’s seminal report on Harmful Tax Competition: An Emerging Global Issue, sent shock waves through the international tax avoidance industry and the community of small island tax havens. The report stimulated debate about the possibility that tax competition can have adverse macroeconomic impacts, and emphasised how abusive tax practices distort global markets and undermine development. Tax havens had already been criticised by the Financial Action Task Force for facilitating money laundering, and scrutiny intensified in 1999 when the Financial Stability Forum identified the huge volume of private assets held offshore as a potential source of global financial instability. In the 1998 report and its various successors, the OECD outlined its proposals for tackling capital flight and tax evasion by requiring the jurisdictions identified as tax havens to:

• implement measures relating to registration and disclosure of information about beneficial ownership of companies, foundations, trusts and other legal entities;

• agree to cooperate with requests from third party countries to exchange information relevant to criminal and civil tax matters.

The OECD proposals have lost momentum, however, in the face of strong resistance from the tax haven community, from banks in OECD and non-OECD countries, and from US-based organisations9, and from other factors:

First -- and crucially -- the OECD proposals were restricted in geographical scope to tax evasion by corporate and individual residents of OECD countries. The OECD also restricted its list of tax havens to 38 jurisdictions, mostly small island tax havens, and excluded major tax haven jurisdictions like Luxembourg, Switzerland, the United Kingdom and the United States. The smaller (and often relatively poorer) tax havens in the Caribbean and elsewhere raised a storm of protest about this discrimination, and their demands for a more level playing field stalled the process. (The OECD tax havens were quite happy to ally themselves with the 38 identified

9 Most noticeably the Centre for Freedom and Prosperity - www.freedomandprosperity.org

3 tax havens to undermine the whole process.) They were supported by groups in the US, notably the Coalition for Tax Competition, which in 2004 called on Republican members of the US Senate to threaten withdrawal of US funding for the OECD.

Second, the OECD proposals opted not for automatic exchange of information, but for information exchange on request, which is far weaker, more expensive and difficult to operate, and consequently less likely to deter tax evasion. Applications for information must demonstrate a ‘foreseeable relevance’ for tax compliance, which means applicant countries need to provide evidence to back their requests, and cannot simply embark on ‘fishing trips’ for information. OECD officials claim that the ‘on request’ approach involves no compliance costs for participating businesses, while automatic exchange requires some extra cost (in practice this is unlikely to be significant.) OECD documents confirm that the ‘on request’ approach is particularly problematic for developing countries, which have far less capacity to pursue enquiries through unwilling foreign courts10 in tax havens.

By 2005 the OECD’s process was effectively stalled. At the November 2005 meeting of the OECD Global Forum on Taxation in Melbourne the OECD abandoned the time periods it had imposed on tax havens to comply with its transparency and information exchange requirements. This was a major retreat, effectively transforming the OECD proposals into relatively toothless voluntary codes of conduct. Some progress has been recorded with bilateral tax information exchange agreements, however: by mid-2006 the US had concluded 13 agreements, and Australia and the Netherlands one each. A further 40 information exchange negotiations were underway, mostly between OECD member states, but progress has been slower than anticipated. In September 2006, the OECD Forum on Tax Administration meeting in South Korea issued a declaration which explicitly confirmed that international non-compliance “is a significant and growing problem.” The Seoul Declaration emphasized the difficulties in enforcing tax laws in both developed and developing countries, and the significant and growing problem of cross- border non-compliance using sophisticated offshore structures:

• “offshore accounts, offshore trusts or shell companies in offshore financial centres or other countries to conceal taxable assets or income, as well as credit cards held in offshore jurisdictions to provide access to concealed assets, . . shell companies offshore to shift profits abroad often taking recourse to over or undervaluation of traded goods and services for related party transactions and some multinational enterprises (including financial institutions) have used more sophisticated cross-border schemes and / or investment structures involving the mis-use of tax treaties, the manipulation of transfer pricing to artificially shift income into low tax jurisdictions and expenses into high tax jurisdictions which go beyond tax minimisation arrangements;” The Declaration also highlighted the ‘supply-side’ role of financial intermediaries:

• “continued concerns about corporate governance and the role of enablers; tax advisors and financial and other institutions in relation to non-compliance and the promotion of unacceptable tax minimisation arrangements.”

10 Spencer, D. (2007) Ending the Money Drain, International Tax Review, London, January

The Seoul Declaration effectively confirms that international tax evasion and trade mispricing (including mispricing of intra-company transactions) remain major problems for OECD and developing countries. While some positive steps have been taken towards improving tax transparency and setting minimum standards for international cooperation, progress has been patchy and it remains pretty much business as usual for the tax havens.

3. The EU: one step forward, one step back

The OECD is not the only body struggling to tackle these issues. The European Union took well over a decade to negotiate its internal process for tackling international tax evasion, only to find that the measures it finally implemented in 2005 were flawed. The EU’s Savings Tax Directive (STD), adopted in 2003, is both a major step forward and an embarrassing failure.

On the positive side, the STD has established the principle of automatic information exchange between countries -- a crucial advance on the OECD’s approach based on information exchange on request. However, the STD has been hobbled by the non-cooperation of some member states, notably Austria, Belgium and Luxembourg, and of Switzerland -– a non-member -– which have opted for a withholding tax on interest payments. Bank customers in these countries can choose between voluntary disclosure of information, or a withholding tax (whose rate is to be increased incrementally over time to encourage a shift to information disclosure.)

But the flaws of the STD run deeper. Intense lobbying during the negotiations led to a lack of clarity on the scope of the Directive’s application. On implementation, it became clear that the STD applies only to bank accounts held by individuals, but not to accounts held on behalf of trusts and companies. This is a huge loophole: most offshore structures use trusts, companies or foundations, and few high-net worth individuals hold bank accounts in their own names. The STD’s original intent was to cover all these legal entities (like trusts and companies,) but this appears to have been undermined by the United Kingdom government, which failed to advise the European Commission that the Directive’s final wording would allow interest paid to trusts and companies to fall outside the tax deduction provisions. Some allege that this omission on the part of the UK government, leaving this massive loophole, was deliberate.11

These limitations came into focus in the second half of 2006 when the amounts of tax being withheld by Switzerland and other European tax havens fell far short of expectations. European tax evaders appear to have shifted accounts further afield and outside the directive’s scope, for example to tax havens like Dubai, Hong Kong and Singapore. Offshore tax havens on the European periphery, like Jersey, have been offered a massive opportunity to market offshore trusts to European residents. In 2006, for example, the States of Jersey enacted a new law allowing the formation of ‘sham’ trusts which appear purpose-built to enable European residents to circumvent the STD in its current form.

EU officials recognise that the STD has not been effective in its current form. The European Commission is now considering measures to strengthen the STD, including12:

11 Christensen, J. and Murphy, R. (2006) The Tax Avoider’s Chancellor, Red Pepper, August, pp24-26 12 Houlder, V., and Parker, G. (2007) Brussels to tighten savings tax law, Financial Times, 9 April

• enforcing blocks on the routing of interest payments through branches of banks located in jurisdictions not covered by the directive, whose reach also includes several Caribbean islands and the British Crown Dependencies;

• adopting the stronger definition of beneficial ownership (as used for anti-money laundering obligations) for the savings directive. This would bring discretionary trusts and offshore companies, which provide a degree of secrecy that encourages illicit use, within the STD’s scope;

• imposing a new obligation on EU banks to report – or withhold – interest payments made through non-EU branches. Banks can currently help valued customers intent on avoiding the directive by paying interest through other jurisdictions, while providing access to the untaxed income through a credit card.

Adopting a stronger definition of beneficial ownership of trusts and private companies would be a crucial step forward in the battle against tax evasion. There is typically no requirement for public registration of ownership details. The EU’s Third Money Laundering Directive, which member states must introduce into national laws by the end of 2007, requires disclosure on the following terms:

Beneficial owner means the natural person(s) who ultimately owns or controls the customer and / or the natural person on whose behalf a transaction or activity is being conducted. The beneficial owner shall at least include:

. . in the case of legal entities, such as foundations, and legal arrangements, such as trusts, which administer and distribute funds:

(i) where the future beneficiaries have already been determined, the natural person(s) who is the beneficiary of 25 per cent or more of the property of a legal arrangement or entity;

(ii) where the individuals that benefit from the legal arrangement or entity have yet to be determined, the class of person in whose main interest the legal arrangement or entity is set up or operates;

(iii) the natural person(s) who exercise control over 25 per cent or more of the property of a legal arrangement or entity.

This would help professional advisers determine whether and how to disclose the identity and place of residence of beneficial ownership, which is a crucial step towards including foundations, trusts and companies within the provisions of the STD. If this disclosure requirement of the Third Money Laundering Directive is also extended to EU related dependent territories, this disclosure could potentially represent a major opening up of the secrecy space which enables tax evasion.13

13 www.taxresearch.org.uk/Blog/2007/04/13/you-can-trust-a-lawyer/ accessed 16 April 2007

4. Is there a role for a global organisation dedicated to tax cooperation?

The Monterrey Consensus called on developing countries to mobilize domestic resources for development and identified the need to address the problem of capital flight and associated tax evasion. This commitment to domestic resource mobilisation-–and by extension to tackling capital flight and tax evasion-- was reaffirmed by: (1) the special high-level meeting of the ECOSOC with the Bretton Woods institutions, the World Trade Organization and the United Nations Conference on Trade and Developments (New York, April 18, 2005); (2) the High-Level Dialogue on Financing for Development (New York, June 27-28, 2005); and (3) the General Assembly’s 2005 World Summit Outcome, which included the following resolution in its section on domestic resource mobilization: “We therefore resolve… to support efforts to reduce capital flight and measures to curb the illicit transfer of funds” [paragraph 24(e)]

In addition, the 2001 report by the UN High-Level Panel on Financing for Development (generally referred to as the Zedillo Report) stated that:

…globalization has progressively undermined the territoriality principle on which traditional tax codes are based. Developing countries would stand to benefit especially from technical assistance in tax administration [and] tax information sharing that permits the taxation of flight capital…” (emphasis added).

The OECD has historically had the lead role in international tax issues. However, its agenda has largely reflected the interests of its member states, and rising concerns about the role of tax havens, the majority of which are directly or indirectly connected to OECD member states, has identified a need for a more broadly based multilateral forum. Several experts, including former IMF Director of Fiscal Affairs, Vito Tanzi14, and Frances Horner15, have raised this issue, arguing that developing countries should have a stronger role. They have proposed the creation of an international tax organisation (sometimes referred to as a World Tax Authority,) with a more prominent role for developing countries. Another expert, Professor Mike McIntyre, has echoed the case for a more multilateral framework for international cooperation, but instead proposes strengthening the UN’s existing expert body as an alternative to a fully fledged international taxation organisation.

Horner makes a strong case for broadening the tax cooperation agenda, arguing that the interests of OECD countries are not the same as those of developing countries, and in some respects are diametrically opposed. On tax competition, for example, she notes:

14 Tanzi, V. (1999) Is there a need for a World Tax Organisation? in Razin, A. and Sadka, E. (eds) The Economics of Globalization: Policy Perspectives from Public Economics, Cambridge University Press 15 Horner, F. (2003) Do we need an International Tax Organization? Conference paper given to 11th Meeting of the UN Ad Hoc Group of Experts in International Cooperation in Tax Matters, Geneva, December

The OECD project (on Harmful Tax Practices) governs only geographically mobile financial and service income. Developing countries are more concerned with competition for real investment, an issue that OECD hesitates to touch. In fact, recent developments in the OECD project suggest that the developed world, or at least the United States, is losing its taste for any restrictions on the ability of countries to use tax incentives to compete for investment, even of the mobile variety, provided there is adequate exchange of information.

Furthermore, despite the major potential advantages that would accrue to developing countries, the OECD has firmly rejected the idea of formulary apportionment as a method of allocating profits between different branches of multinational enterprises. As Horner notes:

This method, using sales, assets, and payroll in a weighted formula to allocate a group’s total profit, could favor developing countries because of the sales element in the formula. But at the OECD global formula apportionment never had a chance—it was a difficult enough process for OECD countries to accept transaction-based profit methods. How were the interests of developing countries represented in the decision?

The OECD’s Global Forum on Taxation goes nowhere towards providing a genuinely multilateral framework for dialogue between equals, partly because participation is by invitation only, but the agenda is under the control of OECD countries, and decision-taking is generally reserved for OECD countries in closed meetings. Horner concludes that “the United Nations seems to be the best contender for the job of convening an international tax body” though it is essential that developing countries agree between themselves on the basic conditions that could make tax cooperation work in their interests.

During preparations for the International Conference on Financing for Development (generally known as the Monterrey Consensus) Former UN Secretary General Kofi Annan addressed the institutional structure for international tax co-operation, recommending that:

an international organisation for cooperation in tax matters could merge the various international tax-related efforts into a single entity. Such a broad-based international organisation could provide a global forum for the discussion of, and cooperation in, tax matters, including the sharing of national taxation experiences; the development of definitions, standards and norms for tax policy, administration and related matters; the identification of national tax trends and problems; and the provision of technical assistance to national authorities, particularly those of developing and transition economy countries.

Tanzi, Horner, McIntrye and Annan all saw the need to broaden the institutional framework beyond the OECD’s hegemonic role, to allow for greater involvement by, and representation of, developing and transition countries.

The focus has shifted towards the UN, and in particular its Committee of Experts on International Cooperation in Tax Matters (known as the UN Tax Committee, which was created in 2004 by converting the former Ad Hoc Group of Experts into a Committee accountable to ECOSOC.) Two years after its formation, however, neither the composition nor the agenda of the UN Tax Committee has changed significantly. As David Spencer notes, the UN Tax

Committee remains dominated by OECD member states, and some of the non-OECD member states have, or are applying for, OECD observer status.16 Developing countries wishing to pursue an alternative agenda need to act on the Committee with more cohesion, and they need to give tax cooperation a higher political priority. The Tax Justice Network (TJN) has been pursuing this by working with the South Centre, an inter-governmental organisation representing the interests of developing countries, to raise awareness about the work of the UN Tax Committee.

The UN Tax Committee also lacks the resources that a nascent international tax organisation needs. In contrast to the OECD Department of Fiscal Affairs, which is globally renowned for its technical expertise, the UN Tax Committee functions on a minimal secretariat provided by the UN Department of Economic and Social Affairs. As a result, the Committee, which meets once yearly in Geneva, has not shifted away from the technocratic focus of the preceding Ad Hoc Group, and the prospects of its evolving into a politically strong institution able to negotiate frameworks for international tax cooperation remain uncertain. It is essential that this happens.

From a civil society perspective, the UN Tax Committee’s activities have been almost totally submerged, except for the involvement of non-governmental organisations from the other side of the fence, like the International Chamber of Commerce, which has been represented by the head of taxation affairs of Swiss bank UBS and by lawyers in tax practice. Until TJN’s formation in 2003, international tax cooperation was not on the agenda of any major economic justice campaign. It is crucial that this is addressed.

Since 2003, the TJN has participated as an observer at UN Tax Committee meetings, and has been invited to contribute. In 2006 it was asked to submit proposals for tackling capital flight and tax evasion to a fringe meeting at ECOSOC’s annual Substantive Session in Geneva. TJN’s proposals (see Appendix 1) included suggestions that capital flight and tax evasion should be treated as acts of corruption within the scope of the UN Convention Against Corruption (proposal 2), and as offences under money-laundering laws (proposal 4). In addition, TJN proposed that the IMF should extend its Reports on Standards and Codes (ROSCs) to cover whether a tax haven or OFC allows for override of banking secrecy, requires automatic reporting of tax related information, and engages in effective information exchange (proposal 6). TJN also supported Professor Mike McIntyre’s proposed draft resolution from ECOSOC to the UN Tax Committee for the latter to consider developing a Code of Conduct on Cooperation in Combating Capital Flight and International Tax Evasion and Avoidance (see Appendix 2).

5. Closing the Floodgates: GT-7 and the Leading Group on Solidarity Levies to Fund Development

Two high-level reports, commissioned to identify innovative new sources of funding to finance the UN’s Millennium Development Goals, have emphasized the need to tackle capital flight and tax evasion. The Landau Report, prepared on behalf of France’s President Jacques Chirac, and the Lula Report commissioned by Brazilian President Luiz de Silva, have formed the basis

16 Spencer, D (2006) The UN: A Forum for Global Tax Issues? (part 2), The Journal of International Taxation, March 9 for the work of the GT-7 group of technical experts. This group provides technical advice on new financing initiatives and taxes, for example the airline ticketing levy introduced in 2006. At a political level the work of the GT-7 group is being carried forward by the Leading Group on Solidarity Levies to Fund Development, currently consisting of 46 member countries under the Presidency of the Republic of South Korea.

Tackling capital flight and tax evasion is a priority issue for both the GT-7 technical group and the Leading Group. During its Presidency of the Leading Group, which ended in February 2007, Norway commissioned TJN to provide an expert report, titles Closing the Floodgates, to analyse structural faults in the global financial architecture which facilitate capital flight and tax evasion.17 The report identifies over twenty policy measures, plus recommendations (Appendix 3) for technical assistance to developing countries to stem capital flight and tax evasion.

At the Leading Group’s Second Plenary Summit Meeting in Oslo in February 2007, the Norwegian Presidency proposed establishing an international ‘task force’ to identify innovative ways to tackle capital flight and tax evasion, and volunteered to take the lead in identifying the best ways to promote this issue within the Leading Group process. Norway places offshore tax haven abuses firmly within the definition of corruption. Eva Joly, the former French examining magistrate who is now Special Adviser to the Norwegian aid agency Norad, talks of dealing with tax havens as “phase two” of the corruption debate, and is quoted in Development Today saying that tax havens represent: “one of the biggest problems the world faces today.”18

6. Corruption: bringing the enablers into the frame

Economic theory is seriously underdeveloped with respect to corruption, and tends not to consider ways in which economic policies can create criminogenic environments.19 This was illustrated by the rapid growth of tax evasion in the wake of capital account liberalisation in the 1980s, which the International Monetary Fund supported despite evidence that offshore secrecy would make tax evasion virtually undetectable, especially by developing countries with weak capacity to detect tax fraud. Predatory financial intermediaries saw huge profits from selling tax dodging services on an industrial scale, and a culture of ‘crime pays’ became rampant.

Public and political perceptions of what corruption is, and how (and by whom) it is perpetrated, now need a radical overhaul. Many people in developing countries are puzzled that the corruption debate has generally focused on the demand side of corruption: notably bribery of, and fraud and embezzlement by, public officials, while largely ignoring the supply side: the financial infrastructure that encourages and facilitates criminal activity, capital flight and tax evasion. Crucially, this enabling infrastructure is not identified in either of

17 Closing the Floodgates is available for free download from www.taxjustice.net/cms/upload/pdf/Closing_the_Floodgates_-_1-FEB-2007.pdf 18 Development Today, Eva Joly: Transparency’s corruption index should highlight tax havens, 7 March 2007 19 Black, W.K. (2005) When Fragile Becomes Friable: Endemic Control Fraud as a Cause of Economic Stagnation and Collapse paper given at the IDEAS Workshop, New Delhi, India, 19-20 December

Transparency International’s key indices – the Corruption Perceptions Index and the Bribery Perceptions Index. These indices significantly distort public perceptions of corruption, and create a misleading geography of corruption, where developing countries are consistently ranked as most corrupt but countries hosting significant tax havens are included amongst the “cleanest”. This inconsistency of the rich world’s approach is widely recognised in many developing countries, and unsurprisingly is a source of considerable resentment. This distorted geography of corruption may well flow from Transparency International’s definition of corruption as “the misuse of entrusted power for private gain.” Operationally, this has led to an obsessive focus on public officials (politicians and state employees) and a lack of attention to other elites, including company directors or financial intermediaries. Now the focus must shift to the supply side,20 whose enablers21 include:

• governments of jurisdictions (not exclusively those categorised as tax havens) which supply the secrecy spaces where corruption can take place;

• private sector agents, including and especially professional intermediaries such as bankers, lawyers, accountants, company formation agencies and trust companies, whose activities facilitate (or overlook) corrupt financial practices;

• company directors responsible for illicit transactions that contribute to capital flight, tax evasion and tax avoidance. TJN proposes a radical shift in the way in which corruption is perceived, arguing that any definition of corruption needs to encompass “all activities that contribute to undermining the integrity of the rules, systems and institutions which govern societies.”22 Insider-trading, tax evasion and avoidance, market-rigging, non-disclosure of pecuniary involvement, embezzlement, and trade mispricing, for example, as well as the more familiar forms of bribery, would all fall within a definition like this. The UN Convention Against Corruption (UNCAC) offers possible avenues for tackling the enablers of corruption (and therefore for combating capital flight and tax evasion), despite the issues not being explicitly identified in its wording. In Section 2 of its recommendation to ECOSOC (see Appendix 1), TJN proposed that UNCAC should be interpreted to consider capital flight and the associated tax evasion as acts of corruption: 2. TJN recommends that ECOSOC request the UN Committee of Experts on International Cooperation in Tax Matters (“UN Tax Committee”) to consider whether capital flight and the resulting tax evasion should constitute acts of corruption within the scope of the United Nations Convention Against Corruption: (a) Private sector corruption by the person (individual or company) that transfers funds to another jurisdiction and evades taxes. That person is illegally diverting for his/her/its private use, funds, tax revenue, that belong to the public sector.

20 See, for example, The Other Side of the Coin: The UK and Corruption in Africa, a report by the Africa All Party Parliamentary Group, March 2006 21 US Senate (2006) Tax Haven Abuses: The Enablers, the Tools and Secrecy, Permanent SubCommittee on Investigations. 22 Christensen, J. (2007) Mirror, Mirror on the Wall, Who’s the Most Corrupt of All, conference paper given at the World Social Forum in Nairobi, January 2007

(b) Corruption by financial intermediaries that knowingly encourage and facilitate capital flight and the resulting tax evasion. (c) Public sector corruption by the governments in the onshore and offshore financial centers that provide bank secrecy and other confidential treatment in tax matters. Such treatment facilitates and encourages capital flight from other countries, and tax evasion in those other countries. Thus, governments in onshore and offshore financial centers knowingly aid and abet corruption.

Article 14 offers an opportunity to push for greater transparency in domestic regulation and supervision, particularly in respect of disclosure of beneficial ownership: Institute a comprehensive domestic regulatory and supervisory regime for banks and non-bank financial institutions, including natural or legal persons that provide formal or informal services for the transmission of money or value and, where appropriate, other bodies particularly susceptible to money-laundering, within its competence, in order to deter and detect all forms of money-laundering, which regime shall emphasize requirements for customers and, where appropriate, beneficial owner identification, record-keeping and the reporting of suspicious transactions (Art 14, section 1(a)). In many jurisdictions ownership of companies, or the names of those who manage companies, charities, trusts and other entities, need not be disclosed or can be disguised through the use of nominees. This environment of non-disclosure opens up myriad opportunities for corrupt practices, including insider-trading, market rigging and tax evasion. TJN therefore proposes that registers of details of companies, trusts, charities and other legal entities, would be appropriate in all circumstances, and that such registers should be available for free public search, by internet or at public buildings, at any time.23 Banking secrecy has long been a major obstacle to investigating tax evasion. UNCAC Article 40 allows banking secrecy override clauses to be inserted in domestic laws to overcome obstacles to criminal investigations. The OECD has also introduced an override clause in its revised version of Article 26 of its Model Income Tax Treaty, providing that a state party to a bilateral income tax treaty cannot decline to supply information to a requesting state “solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or fiduciary capacity or because it relates to ownership interests in a person.” Crucially, the OECD Model Treaty is based on the principle that requests for information may not be rejected on grounds of dual criminality or the absence of a domestic tax interest. It also requires that related parties must have powers available to collect relevant bank and ownership information. Although, as outlined in Section 2 (above), OECD efforts to curb harmful tax competition have shown patchy results, at best, the OECD Model Treaty is a standard setter, and this article highlights that banking secrecy and other confidentiality arrangements may no longer be used to obstruct investigation into tax and non-tax matters. UNCAC Article 14 also offers the possibility for governments to focus on how trade mispricing is used to move capital illicitly offshore:

23 See Closing the Floodgates, chapter 9, recommendation 3, on Putting transparency onto the domestic agenda, for further details about the TJN proposals for public registers.

“States shall consider implementing feasible measures to detect and monitor the movement of cash and appropriate negotiable instruments across their borders, subject to safeguards to ensure proper use of information and without impeding in any way the movement of legitimate capital. Such measures may include a requirement that individuals and businesses report the cross-border transfer of substantial quantities of cash and appropriate negotiable instruments.” (Art.14, section 2) One such feasible measure has been developed by Professor Simon Pak and his colleagues at Pennsylvania State University, who use computer modelling of customs data to identify abnormally priced exports and imports24. This approach might be used for real-time inspection of cargo and to estimate volumes of over and under-pricing of cross-border trade transactions. Since trade mispricing represents the largest single means for enabling capital flight and associated tax evasion, such a tool could powerfully help developing countries (and could therefore fall within the category of technical assistance raised in UNCAC’s Article 60). Article 23 on laundering the proceeds of crime offers the potential for tackling the enablers of capital flight and tax evasion by making the concealment or disguise of the proceeds of these crimes a criminal offence (section 1(a)(ii)). Furthermore, section 1(b)(ii) requires signatory States to create a criminal offence, when committed intentionally, for: Participation in, association with or conspiracy to commit, attempts to commit and aiding, abetting, facilitating and counselling the commission of any of the offences established in accordance with this article. This clause opens up the possibility for tackling enablers, e.g. legal and accounting offices, trust and company administration businesses, who provide offshore services for re-invoicing, which is a widely used technique for laundering profits to tax havens.25 UNCAC also identifies other measures that impose greater responsibilities on financial intermediaries to help detect corrupt practices, including: enhanced know-your-customer requirements (Article 52); enhanced scrutiny of accounts maintained by prominent persons and their associates (Article 52); concealment of the proceeds of crime (Article 24); obstruction of justice (Article 25); and the liability of legal persons (Article 26). Enforcement of these measures against enablers who knowingly help their clients establish mechanisms for capital flight and tax evasion would go a long way towards overcoming the culture of crime. In August 2006 the US Senate Permanent SubCommittee on Investigations, chaired by Senator Carl Levin, released its report on Tax Haven Abuses: The Enablers, The Tools and Secrecy. The report noted TJN’s estimates that approximately US$11.5 trillion of personal assets are now held offshore and largely untaxed,26 and highlighted the role of tax attorneys, accountants, bankers, brokers, trust administrators and corporate service providers who promote and operate sham trusts, shell corporations, and secret accounts for tax evasion. The report, citing six detailed case studies, concludes that: “the evidence is overwhelming that

24 See, Pak, S., (2007) Capital Flight and Tax Avoidance through Abnormal Pricing in International Trade – the issues and solutions, in Closing the Floodgates (TJN) 25 Re-invoicing involves issuing an invoice to an agent, typically based in a tax haven or OFC, who subsequently sells on the final purchaser. In practice the agent pays part of the mark up to the original vendor or to the purchaser, typically via an offshore account. Re-invoicing is wholly dependent upon offshore secrecy for its success. 26 The Price of Offshore, Tax Justice Network, 2005

13 inaction in combating offshore abuses has resulted in their growing more widespread and in reaching new levels of sophistication.” In February 2007 a bill to the Senate – known as The Stop Tax Haven Abuse Act27 (Appendix 4 summarises some recommendations) – strengthened previous proposals from the Permanent SubCommittee, which has been researching tax evasion and avoidance for almost five years. Among other things, the Act proposes that:

• US tax and law enforcement agencies can presume that offshore entities are under the control of US citizens who formed them or transferred assets, unless the latter can prove otherwise;

• Stronger disclosure requirements be imposed on US taxpayers using tax havens by listing 34 jurisdictions as probable locations for tax evasion;

• The US Treasury be given special authority to take action against foreign jurisdictions and financial institutions which impede US tax enforcement;

• American financial institutions opening accounts for offshore entities controlled by US clients, or creating offshore entities on behalf of US clients, must report their actions to the IRS.

Tax transparency in international accounting

Campaigners for financial transparency are turning their attention to the accounting rules and standards which determine what information multinational corporations (MNCs) provide to national tax authorities. Group consolidated accounts for MNCs do not normally require disclosure of where MNCs trade or the names of their trading entities, and do not properly represent what happens within MNCs on an intra-group basis, especially across borders. This makes it easy for MNCs to engage in transfer mispricing, which is an important mechanism for capital flight and tax evasion. In 2003 the British Association for Accountancy & Business Affairs (an association of financial professionals) published a proposal for a new international accounting standard for reporting on turnover and taxation by location. Authored by TJN senior adviser Richard Murphy, this proposal was subsequently taken up by campaigners for improved transparency in the extractive sectors, and in 2005 was re-issued as a proposal for an International Financial Reporting Standard for the Extractive Industries.28 This was subsequently expanded by Richard Murphy into a proposal for a reporting standard for all companies subject to International Financial Reporting Standards, in all sectors29. This proposed standard has been widely circulated, and calls for the following to be disclosed:

1. A list of the names of all the territories within which the group has subsidiary or associated companies, without exception; 2. The names of all subsidiaries and associates in each territory, without exception;

27 For the full text of the Stop Tax Haven Abuse Act, see www.taxjustice.net/cms/upload/pdf/Levin- Coleman-Obama_Offshore_Tax_Bill__2-17-07Final.pdf 28 Murphy, R., (2006) Extracting Transparency, Global Witness 29 http://www.taxresearch.org.uk/documents/ias14final.pdf

3. The following information on a consolidated country-by-country basis, without exception: a. Turnover in total; b. Third party turnover; c. Third party costs excluding those of employment; d. Interest, royalties and licence fees paid; e. Profit before tax; f. Tax charge on profits split between current and deferred tax; g. Other taxes or equivalent charges due to the government of the territory in respect of local operations; h. The actual payments made to the government of the country and its agencies for tax and equivalent charges in the period; i. The liabilities owing locally for tax and equivalent charges at the beginning and end of each period as shown on the balance sheet at each such date; j. Deferred taxation liabilities for the country at the start and close of the period; k. Gross and net assets employed; l. The number of employees engaged, their gross remuneration and related costs; m. Comparative data where appropriate in each case.

Provision of this information, all of which is readily available to companies, would enable tax authorities and other stakeholders to have a far clearer picture of intra-group transactions. Such disclosure would reveal how offshore vehicles are used to shift profits to low tax jurisdictions.

In September 2006 this standard was proposed to the International Accounting Standards Board (IASB)30 by a coalition led by Publish What You Pay with support from approximately 80 NGOs and other civil society partners. The IASB has subsequently responded that:

The Board will continue to examine the merits for a requirement of country-by- country disclosure as suggested . . . A group of Board members will discuss this issue with other interested organisations.31

TJN is now building wider stakeholder support for this proposal, including from major fund managers who recognise that taxation represents a business risk that requires greater transparency than is currently the case. As has been suggested in Closing the Floodgates:

. . . this standard would radically transform international accounting practices, provide data previously unavailable to governments throughout the world on the activities of groups with operations located within their territories. Implementation of the proposed standard would provide incentive to improve corporate behaviour at the highest level in a way that nothing else could achieve (page 101)

30 http://www.iasb.co.uk/ 31 www.iasb.org/News/Press+Releases/IASB+issues+convergence+standard+on+segment+reporting.htm

Conclusions

The volume of capital held offshore has risen inexorably in recent decades. Tax dodging continues to undermine development in most developing countries. The culture of tax avoidance remains rampant in most business sectors. The international mobility of capital is increasingly switching the tax burden from capital to labour. International initiatives to counter these harmful trends have by and large not been successful in reversing the trends, largely due to a lack of political will to enforce the initiatives. Despite this apparently dismal scenario there are grounds for optimism. Firstly, the gravity of the position in some countries and regions is bringing these issues more to the forefront of international attention. This was acknowledged by the World Bank in its 2006 report on Latin America, which concluded that: “on the tax front, first items on the agenda would be strengthening anti-tax evasion programs and addressing the existing high levels of exemptions.”32 Second, the international anti-corruption drive is shifting its focus from the demand side to the enablers on the supply side. This second phase will highlight the role of largely western institutions -–including governments -– in encouraging and facilitating capital flight and tax evasion. Third, the lack of progress of the OECD process has highlighted the need for a new global institutional framework for international cooperation in taxation matters. Fourth, new political groupings are targeting capital flight and tax evasion as imperatives in the global fight against poverty and pushing these issues onto the Financing for Development agenda. Fifth, new initiatives are being promoted to highlight the role of previously submerged bodies, e.g. the International Accounting Standards Board, in re-designing the global financial architecture to combat capital flight and tax evasion. Finally, and perhaps most significantly, civil society is engaging with these issues and pushing them to the forefront of the development discourse. Until very recently, taxation matters were regarded as a no-go area for the civil society. This situation has changed. As Jeffrey Owens, head of tax at the OECD told the Financial Times in November 2004: “the emergence of non-governmental organisations intent on exposing large-scale tax avoiders could eventually achieve a change in attitude comparable to that achieved on environmental and social issues: tax is where the environment was 10 years ago.”

32 Lopez, J.H. et al (2006) Poverty Reduction and Growth: Virtuous and Vicious Circles, World Bank Latin American and Caribbean Studies 16

Appendix 1: Tax Justice Network’s recommendations to UN ECOSOC, July 2006, prepared by David Spencer, senior adviser to TJN.

(1) Code of Conduct on Cooperation in Combating Capital Flight and International Tax Evasion and Avoidance

The Tax Justice Network (“TJN”) recommends that ECOSOC approve the resolution concerning the development of a Code of Conduct on Cooperation in Combating Capital Flight and International Tax Evasion and Avoidance, presented to this meeting by Professor Michael Mc Intyre, in particular to help developing countries mobilize domestic resources, as emphasized by the United Nations (see appendix 2)

(2) Capital Flight and Tax Evasion as Corruption

TJN recommends that ECOSOC request the UN Committee of Experts on International Cooperation in Tax Matters (“UN Tax Committee”) to consider whether capital flight and the resulting tax evasion should constitute acts of corruption within the scope of the United Nations Convention Against Corruption:

(a) Private sector corruption by the person (individual or company) that transfers funds to another jurisdiction and evades taxes. That person is illegally diverting for his/her/its private use, funds, tax revenue, that belong to the public sector. (b) Corruption by financial intermediaries that knowingly encourage and facilitate capital flight and the resulting tax evasion. (c) Public sector corruption by the governments in the onshore and offshore financial centers that provide bank secrecy and other confidential treatment in tax matters. Such treatment facilitates and encourages capital flight from other countries, and tax evasion in those other countries. Thus, governments in onshore and offshore financial centers knowingly aid and abet corruption.

(3) The Framework For Preventing and Combating Fraud and Corruption Being Developed by the International Financial Institutions

TJN recommends that ECOSOC urge the international financial institutions (African Development Bank, Asian Development Bank, Inter-American Development Bank, European Investment Bank, European Bank for Reconstruction and Development, the International Monetary Fund and the World Bank) that are developing a uniform Framework for Preventing and Combating Fraud and Corruption, as indicated in their joint statement in Washington DC on February 18, 2006, to include capital flight and the resulting tax evasion within the definition of corruption.

(4) Capital Flight and Tax Evasion as Money Laundering

TJN recommends that ECOSOC request the UN Tax Committee to consider whether money laundering laws should include as an offence: (a) assets being transferred cross border in violation of applicable exchange control laws; and (b) assets being transferred cross border and those assets and/or the income thereon not declared for tax purposes in the jurisdiction of residence/citizenship.

(5) Effective Exchange of Information: What constitutes “Effective Exchange of Information?”

TJN recommends that ECOSOC request the UN Tax Committee to prepare a report about what constitutes “effective exchange of information” for purposes of Article 26 of the

UN Model Double Taxation Convention between Developed and Developing Countries (“UN Model Income Tax Treaty”). The UN Tax Committee should report on what information about (a) cross border payments and (b) beneficial ownership of companies and trusts, a jurisdiction should routinely obtain and have available in order to be able to comply with its obligations to exchange information pursuant to Article 26 of the UN Model Income Tax Treaty. TJN is concerned that the tax authorities in many jurisdictions do not routinely obtain domestically the appropriate information (resulting in de facto bank secrecy), and therefore those jurisdictions can not engage in “effective exchange of information”.

(6) Role of International Financial Institutions in Capital Flight and Tax Evasion: Monitoring and Surveillance Responsibilities.

TJN recommends that ECOSOC request that the International Monetary Fund (IMF), in fulfilling its responsibilities of the monitoring and surveillance of onshore and offshore financial centers and the international financial architecture, include in its Reports on Standards and Codes (ROSCs) whether a jurisdiction that is an onshore or offshore financial center (i) overrides bank secrecy in tax matters, (ii) requires the automatic reporting of tax related information and has available tax information to be exchanged, and (iii) engages in effective exchange of information.

(7) Capital Flight and Repatriation of Assets

TJN recommends that ECOSOC request the UN Tax Committee to prepare a report on the legal measures (including pursuant to Chapter V, Asset Recovery, of the United Nations Convention Against Corruption, and also Article 27 of the UN Model Income Tax Treaty) reasonable and necessary for jurisdictions to recover and repatriate assets, and the income thereon, which have been illegally transferred from that jurisdiction to other jurisdictions, and accumulated in other jurisdictions, including (but not limited to) onshore and offshore financial centers.

(8) Issues in International Tax Collection and Tax Enforcement

TJN recommends that ECOSOC request the UN Tax Committee to study what measures, in addition to Article 27 of the UN Model Income Tax Treaty, Assistance in the Collection of Taxes, would be appropriate and reasonable in order to strengthen procedures for international tax collection and international tax enforcement.

(9) Transfer Pricing:

TJN recommends that ECOSOC request the UN Tax Committee to prepare a report on (a) the economic impact (the quantification) of transfer mispricing, in particular the economic impact (loss of tax revenues) on developing countries of transfer mispricing. In view of the recent interest expressed by the European Commission in the possible use of combined reporting with formulary apportionment as a partial solution to transfer pricing issues within the European Union, TJN recommends that ECOSOC request the UN Tax Committee to prepare a report on whether the arm’s – length method or a method of combined reporting with formulary apportionment is the most appropriate method to combat transfer mispricing.

(10) Tax Competition

TJN recommends that ECOSOC request the UN Tax Committee to consider the harmful aspects of tax competition; the depletion of government tax revenues and the reduction of basic government services including health, education and other basic government services.

Appendix 2: Professor Mike McIntyre’s proposal for a Code of Conduct on Cooperation in Combating Capital Flight and International Tax Evasion and Avoidance

Appendix 3: Summary of recommendations from Closing the Floodgates

A. Recommendations that may be adopted unilaterally at a domestic level 1. Use the language of tax justice: tax is a ‘good thing’, but that is not always clear even in the case of many government pronouncements; 2. Redefine corruption to include the supply of ‘corruption services’ that enable those seeking to evade and avoid tax and to arrange capital flight both onshore and offshore; 3. Put transparency onto the domestic agenda by requiring open disclosure of corporate information and the abolition of ‘secrecy spaces’ in domestic economies; 4. Remove tax haven and harmful tax practices from the domestic tax and regulatory agenda, this being a major challenge for some of the principle international financial centres such as the UK, the USA and the Netherlands; 5. Require disclosure of all innovative tax planning by commercial enterprises before such schemes are put into operation; 6. Require companies to disclose their tax accounting to taxation authorities thus revealing what planning they are undertaking; 7. Support the call to the International Accounting Standards Board for an International Financial Reporting Standard requiring country-by-country reporting of trading activities and tax paid by multinational corporations; 8. Protect professional tax intermediaries seeking to promote tax compliance by their clients from legal challenge because they have failed to minimise a client’s tax liability by using aggressive tax avoidance techniques; 9. Encourage the creation of codes of conduct for the management of domestic taxation to which the government, tax intermediaries and taxpayers can subscribe as indication of a commitment to tax compliance;

10. Introduce a general anti-avoidance principle (GANTIP) into taxation law to ensure that those seeking to abuse the spirit of taxation law whilst complying with its letter are denied the benefit they seek from such abusive behaviour;

11. Introduce an equitable basis for the interpretation of tax law so that current injustices resulting from the use of a legal basis of taxation law in many countries of the world are eliminated; 12. Ensure that governments demonstrate a commitment to transparency by producing clear, comprehensive and comprehensible accounts of their activities. These accounts should be published on a timely and consistent basis, and should be subject to audit, preferably by a government funded but independently managed agency; 13. Governments should estimate the size of their ‘tax gaps’ on a regular basis and have a published strategy for reducing them; 14. Redefine the residence basis for individuals so that the remittance basis of tax abused by some is no longer available. Also redefine the residence basis for both corporations and trusts so that those linked in any way with a person resident in a country are assumed resident in that country unless contrary evidence can be supplied by the taxpayer. 15. Banks should be required to disclose the ownership of all foreign entities to which they supply services so that this information might be exchanged with the countries in question.

16. Sanctions should be imposed on tax havens that do not actively cooperate on information exchange including the denial of tax credits for tax paid in those territories and the imposition of withholding taxes on payments made to them;

17. Sequester funds that have been secured by either tax evasion or capital flight transactions as is allowed under money laundering regulations throughout most of the world, and require professional intermediaries to report on all transactions where there is suspicion that tax evasion is a likely outcome;

18. Increase the resources available to tax departments to do their work since the additional yield derived from this investment is always significant at current levels of spending. 19. Develop a trade pricing matrix for each country and make use of it at all ports and airports as goods are presented for checking by tax or other authorities, thus limiting the prospect of capital flight and tax evasion through trade pricing abuse.

B. Recommendations for action at an international level

1. Put strong pressure on UN ECOSOC to address the issues covered by this report, and promote the formation of a World Tax Authority charged with effectively tackling harmful tax practices in association with the need to raise finance for development;

2. Require the IMF to enhance its Reviews of Standards and Codes (ROSCs) to determine which countries are willing to over-rule banking secrecy in cases of suspected tax fraud; which countries and territories actually hold the data required to answer enquiries from other states; and which countries effectively exchange such information in practice; 3. Use OECD and IMF data to create a new list of states unwilling to cooperate to eliminate harmful tax practices.

C. Provision of direct assistance to developing countries This might include: 1. Training of tax officials in developing countries including the payment of salaries sufficient to make corruption or private sector poaching less attractive as options; 2. Provision of appropriate IT systems to developing country tax authorities; 3. Development of locally appropriate accounting systems to enhance tax declaration. These may be quite different from those used in developed countries; 4. Designing taxes suited to local circumstances. This might require abandonment of the current IMF conditionality that has required the abandonment of trade tariffs and the promotion of the idea that VAT and other indirect taxes are the solution to all taxation problems when it is apparent from experience on the ground that this is not the case; 5. Support for identifying financial crime;

6. Assistance for initiatives such as the Extractive Industries Transparency Initiative33, and their expansion to all sectors of the economy; 7. Technical support with developing taxation measures to mitigate the effects of tax avoidance and evasion; 8. Practical assistance in the supply of information where trade mispricing is believed to have taken place at cost to the country in question; 9. The supply of similar information on an automatic basis, i.e. without the need for request, where it is believed that capital flight is taking place;

10. Development of a multilateral automatic information exchange regime between all countries and tax haven territories (i.e. widening and deepening the work of the OECD Fiscal Affairs Department).

33 See http://www.eitransparency.org/section/abouteiti accessed 28-1-07 21

APPENDIX 4: Summary of selected recommendations from the Stop Tax Haven Abuse Act (2007)

• ESTABLISH PRESUMPTIONS TO COMBAT OFFSHORE SECRECY by allowing U.S. tax and securities law enforcement to presume that non-publicly traded, offshore corporations and trusts are controlled by the U.S. taxpayers who formed them or sent them assets, unless the taxpayer proves otherwise;

• IMPOSE TOUGHER REQUIREMENTS ON U.S. TAXPAYERS USING OFFSHORE SECRECY JURISDICTIONS by listing 34 jurisdictions which have already been named in IRS court filings as probable locations for U.S. tax evasion;

• AUTHORIZE SPECIAL MEASURES TO STOP OFFSHORE TAX ABUSES by giving Treasury authority to take special measures against foreign jurisdictions and financial institutions that impede U.S. tax enforcement;

• STRENGTHEN DETECTION OF OFFSHORE ACTIVITIES by requiring U.S. financial institutions that open accounts for foreign entities controlled by U.S. clients, open accounts in offshore secrecy jurisdictions for U.S. clients, or establish entities in offshore secrecy jurisdictions for U.S. clients, to report such actions to the IRS;

• CLOSE OFFSHORE TRUST LOOPHOLES by taxing offshore trust income used to buy real estate, artwork and jewelry for U.S. persons, and treating as trust beneficiaries those persons who actually receive offshore trust assets;

• STRENGTHEN PENALTIES on tax shelter promoters by increasing the maximum fine to 150% of their ill-gotten gains, and on corporate insiders who hide offshore stock holdings by increasing the maximum fine on them to $1 million per violation of U.S. securities laws;

• STOP TAX SHELTER PATENTS by prohibiting the U.S. Patent and Trademark Office from issuing patents for “inventions designed to minimize, avoid, defer, or otherwise affect liability for Federal, State, local, or foreign tax”; and

• REQUIRE HEDGE FUNDS AND COMPANY FORMATION AGENTS TO KNOW THEIR OFFSHORE CLIENTS by requiring them to establish anti-money laundering programs like other U.S. financial institutions, under regulations to be issued by the Treasury Department.