Think Bitcoin is Going Through Trouble? This is Just the Tip of the Fraud-berg.

Offshore Tax Evasion Is Alive and Well

Tax evasion amounts to little more than stealing from national coffers. Yet, offshore tax havens such as the British Virgin Islands, Switzerland and Luxembourg provide a conduit for wealthy elites to deprive their less affluent fellow citizens of public dollars. Since 2010, banking crises in Ireland and Cyprus, both offshore banking hubs, have impoverished thousands of people. Apple’s offshore profit-stashing has deprived the US Treasury of tens of billions of dollars in tax revenue.

The rich and powerful would have you believe that you can do nothing to stop offshore tax havens. Some argue that capital always will seek the lowest tax rate and that nations inevitably will compete for assets by creating favorable tax structures. But this behavior can lead to protectionist policies. Others claim that tax evasion has mostly ended. In fact, tax evasion remains alive and well. “Tax avoidance” by US corporations totals $130 billion a year. Tax evasion disproportionally benefits the rich because they hold the greatest volume of equities.

Tax havens are cloaked in secrecy, confounding attempts to measure their financial heft. However, compilations of available country data, such as balance of payments tallies and the reported balance sheets of banks and multinational corporations, allow analyses of tax-haven holdings. Fully 8% of global wealth has been secreted across borders. Switzerland alone held $2.3 trillion in foreign assets in the spring of 2015, a rise of 18% since 2009, defying the G20 assertion that banking secrecy had ended. An estimated 60% of the 2015 foreign assets in Swiss banks belonged to organizations domiciled in the British Virgin Islands and other offshore bastions of corporate shell companies. Europeans, primarily depositors from Germany, France and Italy, own about $1.3 trillion of Swiss banks’ foreign funds. These 2015 estimates debunk the myth that much of the money moving offshore belongs to African despots and Russian oligarchs.

Switzerland: The First Offshore Banking Center

Switzerland is the world’s original tax haven. In the 1920s, as France and Germany raised taxes to pay for World War I, the wealthy moved their money to Switzerland. Swiss assets mushroomed at the rate of 14% a year during the 1920s. Trading on its famous neutrality, Switzerland in 1935 passed a banking secrecy law.

“The money in tax havens doesn’t sleep. It is invested in international financial markets.”

During World War II, the United States froze French assets in Swiss banks. After the war, the United States put the Marshall Plan on hold, demanding assurances that those assets were back in France. Swiss bankers and authorities lied their way out of this trap. They insisted that the French assets in Switzerland were deposited there not by French citizens but by Swiss nationals or by shell companies in Panama. This ploy became standard operating policy for the Swiss, continuing into the early 21st century.

“For a customer, the main reason to deposit securities in a Swiss bank is and always has been for tax evasion.”

Many people believe the myth that Switzerland attracts the world’s money because of the strength of its currency, the stability of its politics and the lack of volatility in its interest rates. But Swiss depositors do not invest in Swiss enterprises. They use their money in Switzerland to buy US stocks or German bonds. Swiss bank customers move their money for just one reason: Swiss banks don’t report that activity to taxing authorities, thereby allowing tax evaders to hide their wealth from tax collectors at home. Government tax schemes ultimately rely on the honesty and transparency of taxpayers, a quaint notion that tax havens exploit.

“The competition of new tax havens is in fact only a façade.”

During the decades following WWII, money poured into Switzerland from all over the world. The Swiss created the wealth management industry. By the mid-1970s, nearly 5% of Europe’s financial assets were in Swiss banks. Beginning with the 1972 oil crisis, the royal families of the Middle East’s oil-producing nations moved their petrodollars to Switzerland. They didn’t make this shift to avoid taxes – which were virtually nonexistent in their home countries – but to put a cloak of anonymity over their assets. Swiss institutions no longer offer their once-notorious numbered accounts. Rules against money laundering ended that practice. But the lettered names of shell companies are still legal, and Swiss account owners’ identities remain secret.

“Large and rising offshore wealth translates to substantial losses in fiscal revenue.”

New Competition?

For decades, Switzerland had the wealth management field to itself. Rivals for offshore deposits began to emerge in the 1980s in the Bahamas, among other places. But viewing these upstarts as competitors to Switzerland isn’t accurate. Swiss banks have branches in the Bahamas and elsewhere, with assets circulating back to and forth from Zurich. However, as the wealth management industry has matured, the players have grabbed their own niches. Mutual funds set up shop in Luxembourg, hedge funds moved to the Cayman Islands and money funds went to Ireland. Indeed, Switzerland couldn’t function as a tax haven without its banks’ offshore branches, because funds’ dividends distributed in Switzerland incur a tax of 35%. In other words, investors use offshore maneuvers to avoid Switzerland’s own taxes.

How does offshore tax fraud work? Here’s an example: Say a US company wants to shelter $10 million from the Internal Revenue Service (IRS). First, the CEO incorporates a shell company in the Cayman Islands to protect the anonymity of the corporation’s officers. Next, the CEO opens a Swiss bank account in the name of the shell company and then buys phantom consulting services from it, rendering payment to the Swiss company account. The benefits are twofold: By making the fictitious services look like a legitimate business expense, the CEO can reduce the taxable profits of the US company. Then the CEO doesn’t report profits from the Swiss shell company account to the IRS, so that the dividends, capital gains and interest in Switzerland accrue tax-free. As a bonus, the CEO can make loans from the Swiss bank, using the shell account as collateral.