The tranquility of tax havens has been shattered. Under intense international pressure and scrutiny to lift banking secrecy, tax havens are ceding ground. Are they an outdated vehicle? Switzerland, reported to have one third of the cross-border wealth, is the most heavily assaulted. The Swiss do not consider tax evasion a crime; they believe in the rights of privacy as part of their culture and consider any money received to have been laundered prior to arrival. Compared with the other “offshore” centers it also has the most at stake. This is partly because they set the rules and have the off shore business commingled with the totality of the banking and financial center. With their leading and systemic banks as an important part of their economy, with large investments on foreign soil, they are most exposed.

In response to the assault of foreign regulations on their principal banks and their own laws and regulations, including huge fines and criminal charges, the Swiss government has taken a lead role in their response. It is reported that they are negotiating with the US government to pay a fine in the many billions of dollars to settle all claims and charges against the leading 17 banks from Switzerland without admitting guilt or singling out individual banks. They are hoping such a macro deal will allow their banking system to move on under the new rules without constantly looking over their shoulders. They are signing direct deals with England and Germany as well.

The Swiss banks themselves, for their part have set an informal rule that prohibits members of their senior and wealth management business to travel to the United States, even to change planes or go to Disney World on holiday. They are closing offices in the US as fast as they can and doing everything they can to reduce their footprint. They have set up a barrier to spying and reportedly will not issue a working permit to an American to work in Switzerland for a Swiss bank. The banks are refusing to take accounts of US citizens anywhere in the world, even those who have very legitimate reasons for needing an account. Not only are the Swiss banks taking protective measures, it is almost impossible for an American to open an account with any bank, in any jurisdiction, outside the US.

Clients that consider absolute secrecy essential to their financial transactions are seeking safer jurisdictions. Given the mobility of money, strong competition is developing for funds in Singapore and Mauritius in Asia and Dubai in the Middle East. Eighty percent of US dollars held outside of the United States are held in Asia. Luxembourg and Jersey still have a foothold in Europe and Panama is growing in the Americas. There are other wealth centers as well, such as Andorra, but they are feeling the heat too. Still Switzerland is the center of attention. All these centers, and more, until just a couple of years ago seemed impenetrable. That has changed.

What has changed is that it is not only a US government tax issue. Other governments, citizens and shareholders are questioning the rationale behind the offshore centers. Does it prevent fair dividends to shareholders, who are asking lots more questions, and why should some companies be allowed to compete on a non level playing field? Why don’t people pay their taxes and how can governments fund the welfare of its citizens if the wealthiest of them and many corporate citizens don’t pay their fair share of taxes. Slight of hand accounting? Is it a game – let’s see what we can get away with? Some say it is a corporate duty to avoid taxes. Two thirds of the money that go to these havens is tax avoidance and tax planning. A good chunk of the remaining third is tax evasion, criminal or corrupt money. The pool of cash is enormous, estimated at nine trillion dollars. There are certainly some justifications for maintaining confidentiality, such as corrupt governments, and physical danger to the wealthy in the home country. But the days of carte blanche are gone and the rationale is under scrutiny. Not deserted islands yet but the rules have changed.

This entry was posted on Wednesday, February 15th, 2012 at 2:24 pm and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.