Money Keeps Hopping Around, Seeking New Tax Havens

April 04, 13 by Edahn Golan

Governments don't like it when people and companies don't pay their taxes. The main problem with this money, at least from the perspective of the tax evader, is that it needs to be hidden from authorities. This means either “laundering” it, making look like legitimate money or hiding it.

Countries have always made an effort to uncover this money, but it wasn't until after the terrorist attacks in the U.S. on September 11, 2001 that a major global effort to crackdown on undeclared funds took place.

Numbered accounts in Swiss banks were no longer the obvious choice for those holding money overseas, as pressure to end Switzerland's famous commitment to secrecy and discretion led tax evaders to seek new destinations.

The American push had mainly to do with blocking money transfers between terrorists and their sponsors. Along the way, many actions took place. In Switzerland and Lichtenstein bank employees, maybe disgruntled workers, exposed bank accounts holding billions of dollars of undeclared money. Diamond traders were among those depositing money at these banks.

In Antwerp, Mumbai and Tel Aviv, law enforcement and tax authorities raided diamond offices suspected of foul activity. New anti-money laundering laws (AML Laws) were drafted and implemented (at least partially) all over the world. Diamonds, small objects with very high value, were often a preferred form of transferring value undetected.

Imagine buying a diamond with cash in one country, pocketing it and selling it in another – no need to use traceable bank transfers or avoiding the fear associated with crossing borders with a suitcase stuffed with cash. Let your imagination loose. Whatever wild idea of hiding and transferring money that you can think of has probably been tested and used by someone somewhere.

This is not a diamond "thing." Diamonds are involved in money transferring just peripherally – or at least we would like to think so, although we have discussed in this column a suspicion that the large import and export of rough diamonds by the U.S. were essentially money laundering activities.

Multi-national companies, which may simply mean a company in one country that owns a company in another, often transfer profits from one to the other because of tax benefits. Some call this legal tax evasion. This form of tax avoidance is maybe legal, but ways of blocking it have also been put in place.

According to one estimate, approximately $2 trillion of U.S. corporate profits are trapped overseas in this way. This is no longer a matter of suffocating terrorism or blocking some tax evasion, these are large enough sums to affect country's economies in a significant way.

Many governments therefore launched semi-amnesties, inviting "trapped profits" to return home at a reduced tax rate and without penalty during a window of opportunity.

Cyprus, with its low 10 percent corporate tax, was a tax haven for many Russians until the recent nationalization of some of the money in the banks. The International Monetary Fund (IMF) estimates that 34 percent of investments from Russia in 2011 were made in Cyprus, which was the source of 28 percent of foreign investment in Russia. Here, Round-tripping is not limited to diamonds. Russia's rich simply send the money out and bring it back in – nice and clean with the fresh scent of a seaside laundermant.

Money may be fleeing Cyprus to other safe haven destinations, but the effort to track and block it is continuing nearly 12 years after 9/11.

European and American authorities are continuing to pressure banks and financial institutions to disclose, act transparently and reveal their clients' secrets, leaving them no choice but to comply and prove they are cleaner than before.

Follow Edahn on Twitter
Get in touch on LinkedIn
Connect on Facebook
Or email edahn at idexonline dot com

Diamond Index

Money Keeps Hopping Around, Seeking New Tax Havens

A Damning Trail of Smuggling, Money Laundering and Kosher KP Certs

Newsletter