Tax havens are typically assumed to be islands in warm climates offering low tax rates for organizations looking for a lucrative loophole. But these “havens” are also sought after for opaque financial laws that can allow organizations to get away with illegal activity, like money laundering.
Now, a new report from advocacy group the Tax Justice Network (TJN) is also shedding light against misconceptions about tax havens, warning that the biggest source of “financial secrecy” services for European Union firms can be found within the U.S. and the EU itself.
The group published its Bilateral Financial Secrecy Index on Sunday (Sept. 23), concluding that the U.S. and EU are indeed the largest sources of services that organizations need for “financial secrecy,” which the TJN defines as “services like shell companies and banking secrecy laws [that] enable money laundering, corruption, tax abuse and the financing of terrorism.”
One of the most recent scandals to hit Europe is the case of Danske Bank, accused of laundering $235 million in payments via its Estonia branch. The case is currently under investigation by U.K., Danish and Estonian authorities.
The U.S. holds the top spot in the report’s list of suppliers of financial secrecy services, providing 4.7 percent of those services to EU organizations, while four EU member states – the Netherlands, Luxembourg, Germany and France – made the top 10. Switzerland, Hong Kong and Taiwan are also high on the list, researchers noted.
The report criticizes EU policy, which blacklisted 17 “non-cooperative tax jurisdictions,” otherwise known as tax havens, outside of the EU. As of this week, reports in Delano said, there are seven jurisdictions on that blacklist, none of which are on the TJN’s top 10 list of suppliers of financial secrecy services to EU organizations.
Earlier this year, EU finance officials removed the Bahamas and Saint Kitts and Nevis, both in the Caribbean, from its blacklist.
“Having fewer jurisdictions on the list is a measure of the success of the listing process,” said Bulgaria’s Minister of Finance Vladislav Goranov in a statement at the time. Reuters reports noted that critics of this blacklist have previously warned that “renowned tax avoidance” jurisdictions remain off the EU’s blacklist.
Other critics note that the EU has not established sanctions for blacklisted jurisdictions, though reports noted that ending up on the blacklist could cause “reputational damage and stricter controls on their financial transactions with the EU.”
The TJN is now calling on the EU to do away with its blacklist strategy altogether.
“The Tax Justice Network is calling on the EU to shift away from its reliance on a tax haven blacklist that misses all major targets, and instead to impose a 30 percent withholding tax on jurisdictions [that] have not signed up [for] automatic exchange of information treaties,” the TJN stated in its announcement.
In an interview with Reuters on Sunday, TJN Director of Financial Secrecy Markus Meinzer said the EU’s tax haven blacklist “fails to detect 99 percent of the financial secrecy threatening member states.”
Data Exchange
Failure to exchange data across jurisdictions is at the heart of the issue, the advocacy group said, particularly when it comes to the U.S.
“While EU member states have treaties in place among each other and with other countries, not a single EU member state has secured a sufficiently reciprocal automatic exchange of information treaty with the U.S.,” the report said, adding that the U.S. accounts for the 22 percent of financial secrecy targeting the EU that is not covered by a treaty facilitating automatic information exchange.
This makes the U.S. “the EU’s greatest enabler of financial secrecy, which in turn enables tax abuse, corruption, money laundering and the financing of terrorism,” the TJN said.
“Our research shows that automatic exchange of information treaties are astronomically more effective at guarding against financial secrecy than the EU’s blacklist,” said Meinzer in a statement.
Previous research from economists Thomas Wright and Gabriel Zucman, published earlier this month, concluded that U.S. companies are the largest users of tax havens, with about half of foreign profits from U.S. firms held in tax havens. Ireland was found to be the most common haven for those companies, according to Phys.org reports.
In response to the report, a spokesperson for the European Commission told Reuters that all EU member states are in compliance with blacklist criteria and surpass what is required by international standards on financial secrecy.
“That is not to say that we claim everything is perfect for the EU,” the spokesperson said. “There is always room for improvement, and the Commission is busy addressing this through a mix of hard law, soft law and state aid cases.”