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Critics say tax haven crackdown falls short

business Updated: Aug 16, 2009 11:24 IST

Last month the Organization for Economic Cooperation and Development in Paris removed the last holdouts Andorra, Lichtenstein and Monaco from its blacklist of "uncooperative" tax havens. With every OECD-targeted tax haven across the globe now committed to tax "transparency and exchange of information," according to the organization's Committee on Fiscal Affairs, the world seems to have entered a new era.

April's G-20 meeting in London does indeed suggest there is growing political will to penalize foot-dragging tax havens. A recent status report presented to the American Bar Association Tax Section predicted "increasing convergence and prosecution" of "tax evasion and other white-collar crime" and "more pressure on a macro level on offshore centers and large international banks."

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Yahoo! BuzzBut there are also an increasing number of experts who argue the OECD's process, the main vehicle to enact change so far, falls considerably short of a serious attack on the global financial system's many black holes.

"The OECD program is incredibly ineffective," says John Christensen, a British economist who is the director of the Tax Justice Network's International Secretariat, a lobbying group, supported by charities like Oxfam and Christian Aid, that is agitating to close tax loopholes and reform bank and trust "secrecy" rules around the globe.

The core problem? The OECD's prescribed information exchanges are based on a "by request" process that involves submitting a country's evidence of a citizen's tax evasion to the tax haven where the evader is suspected of keeping his bank accounts.

"The evidence request requirements are very high. You have to have a smoking gun. And then there is tremendous discretion within the tax haven's courts as to whether they will comply," says Christensen.

The E.U. tax haven, Jersey, is an island in the channel waters between the U.K. and France. In December, 2008, Jersey Finance, the marketing arm of the offshore financial center in Saint Helier, used its website to reassure banking clients from overseas that Jersey's treaty with the U.S. wasn't much threat to its bank secrecy.

It was "not generally" possible, stated the official website, to compel the disclosure of information "by Jersey subsidiaries and/or branches of UK institutions ... A high threshold therefore exists before the Jersey authorities will accede to a request under a TIEA [Tax Information Exchange Agreement.] For example in the past year, there have been just four requests from the US under the terms of the TIEA. There is no automatic exchange of information under any circumstances and no ‘fishing expeditions' for information."

Jersey quickly removed this revealing paragraph from its Web site, but Washington's so far unsuccessful attempt to force Bern to get UBS ( UBS - news - people ) to release details on 52,000 "John Doe" accounts in Switzerland also seems to support the TJN's critique.

"Switzerland and other tax havens will make huge political noise against the OECD's tax information exchange, but they are quite happy to sign up because they know in practice they don't work," says Christensen.

Hence the TJN's position: Running after tax dodgers and their enablers after the fact is a fool's errand. Genuine transparency and automatic exchange of tax-related information between nation states is the only way to seriously tackle the tax evasion that impoverishes all countries.

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