Tax sleuths target hidden wealth

Tax havens: Are they worth the risk?

The flight of funds to lax offshore jurisdictions favoured by criminals may soon turn into a trickle.

Greg Williams has a simple message for anyone using a tax haven to avoid paying tax, or for anyone helping them do so: “It’s not worth the risk. If you think you’re smarter than we are, then you’re not.”

Williams, deputy commissioner serious non-compliance at the Australian Taxation Office (ATO), says it is turning its efforts to the lawyers and accountants who promote the offshore tax schemes.

“People don’t step into the shower in the morning and have an epiphany and say to themselves, ‘you know what, I think I’m going to move all my funds over to blah-blah to do X, Y and Z’,” Williams says. “It’s a notion that is put in front of them by financial advisers or service providers who then enable this to happen.”

In May the ATO revealed it had received substantial data detailing the extensive use of complex offshore structures to conceal assets by wealthy individuals and companies in jurisdictions such as Singapore, British Virgin Islands, Cayman ­Islands and Cook Islands. The data identifies the owners of the hidden assets, as well as the accountants and lawyers who represent them. 

Following its analysis of the data, the ATO has identified more than 100 taxpayers who are involved in “suspicious offshore arrangements”, which Williams says is just a starting point in the latest phase of its Project Wickenby investigation into the illegal use of tax havens. 

The secretive world of tax havens was laid bare earlier this year after the International Consortium of Investigative Journalists (ICIJ) in Washington ­received a cache of 2.5 million files detailing the secrets of more than 120,000 offshore companies and trusts, exposing the hidden dealings of politicians, con men and the mega-rich from all around the world. Users of the schemes ­included US doctors and dentists, the families of Third World despots, ­billionaires from Eastern Europe and Indonesia, international arms dealers and Wall Street swindlers.

James S. Henry, a senior adviser to the Tax Justice Network, describes the amount of money secreted away in tax havens as the “economic equivalent of an astrophysical black hole”.

As of 2010 there was up to US$32 trillion invested, effectively tax-free, in more than 80 offshore tax jurisdictions, Henry estimated in a report last year, The Price of Offshore Revisited. He notes there is also real estate, yachts, racehorses, gold bullion and many other physical assets that count as non-financial wealth stashed away in these locations. The owners include some of the world’s wealthiest individuals and companies, as well as its worst villains.

“On this scale, this offshore economy is large enough to have a major ­impact on estimates of inequality of wealth and income; on estimates of national ­income and debt ratios; and – most importantly – to have very significant negative impacts on the domestic tax bases of key source countries,” Henry says.

Certainly, this is a concern for Australia, with Assistant Treasurer David Bradbury warning in a speech earlier this year: “Left unchecked, profit-­shifting and international tax avoidance is a threat to Australia’s sovereignty. It is a threat to our sovereign right to tax and to raise the revenue necessary to provide the public goods and services our society requires.”

Taking advantage of a tax haven is relatively simple, says John McLaren, a University of Wollongong academic who researches tax havens and has 15 years’ private practice experience in commercial and taxation law.

Front up to the local branch of a Swiss bank, open an account and deposit your money. It’s a bit like opening a regular account at an Australian bank, but with a couple of key differences. First, all forms you’ve filled out and the documents you’ve signed are packaged and put on a plane out of the country that same night, transporting them out of reach of local authorities and any attempts to subpoena them.

Left unchecked, profit-­shifting and international tax avoidance is a threat to Australia’s sovereignty. It is a threat to our sovereign right to tax and to raise revenue.– David Bradbury, Assistant Treasurer
Second, your money can then be transferred out of the country mixed in with the bank’s other transactions. This means that AUSTRAC – the Australian Government agency that monitors the movement of large amounts of money – won’t be able to trace the transaction back to you.

Swiss investment bank UBS, which has offices in Australia and whose name is often associated with offshore accounts, declined to comment. However, its representatives have previously insisted it is helping in the global fight against money laundering.

Once the money is out of the country, you can send it to any tax haven around the world. Bank ­secrecy laws and a lack of information-sharing agreements with other jurisdictions can make it hard for authorities to identify the account holders.

A key tactic is to set up a company or trust in one of the offshore havens, where money or ­assets can be held while the beneficial owner’s identity is kept secret. “I would bury that money so deep there would probably be four or five layers before there would be any record of me being its beneficial ­owner,” McLaren says.

In his report, Henry points out that while most people think of “offshore” as a location, it really refers to a set of capabilities. 

“The term offshore refers not so much to the actual physical location of private assets or liabilities, but to nominal, hyper-portable, multi-jurisdictional, often quite temporary locations of networks of legal and quasi-legal entities and arrangements that manage and control private wealth – always in the interests of those who manage it, supposedly in the interests of its beneficial owners, and often in indifference or outright defiance of the interests and laws of multiple nation states,” he writes.

While a bank account, for example, might be opened in one jurisdiction, the company that owns the bank account could be based in another jurisdiction, the ­trustees in another jurisdiction again, and so on and so on until a web of companies and trusts makes discovering the real owner ­almost impossible.

There’s little point hiding money from the taxman if people can’t get the cash back into the country to spend it.

There’s little point hiding money from the taxman if people can’t get the cash back into the country to spend it.

The names of the nominee, or sham ­directors appear on company documents, but the real owners’ names do not, almost guaranteeing them anonymity. An analysis led by the ICIJ found that 28 sham directors between them served as the on-paper representatives of more than 21,000 companies, with some directors representing as many as 4000 companies.

Promoting these schemes can be a lucrative business, with an industry of middlemen, accountants, lawyers and banks that help clients set up financial structures and shuffle assets around the globe. Some firms have set up tens of thousands of offshore companies and bank accounts.

It is the facilitators that the ATO is targeting. The promoters of the schemes range from the specialists in offshore tax arrangements to those who might just put one or two clients into a scheme, perhaps relying on other professionals’ expertise.

“This isn’t normal advice that an accountant or tax agent would be involved in,” says Paul Drum, head of policy at CPA Australia. Drum says it’s important to stamp out the promotion of tax avoidance through tax havens to stop it becoming normal behaviour for taxpayers. “These are matters that should be investigated. If it’s a commercial arrangement within the law, not a problem, but if it’s unlawful then people should be pursued.”

The ATO says it has names of promoters and that apart from its own ­resources, it will use Australian Crime Commission coercive examination powers, the Australian Federal Police investigation and prosecution powers, plus AUSTRAC and Australian Securities and Investments Commission resources. “We have the names of some of the people and we are going to come knocking on their doors,” Williams says.

The ATO has already had some luck with identifying and prosecuting promoters as part of the cross-agency Project Wickenby tax avoidance operation – most notably Robert Agius, who was sentenced to nearly nine years in jail last year for conspiring to defraud the Australian Government and conspiracy to dishonestly cause a loss. Agius, a senior partner at accounting firm PKF Vanuatu, operated a round robin to allow participants to evade tax in Australia. It involved sending money offshore to Vanuatu disguised as expenses, including consulting fees, before returning it to Australia in the form of a loan.

Other high-profile targets include showbiz manager Glenn Wheatley, who served time in jail, and comedian Paul Hogan, who settled his protracted ­dispute with the ATO last year.

These are matters that should be investigated. If it’s a commercial arrangement within the law, not a problem.– Paul Drum, CPA Australia
The ATO is coy on where its latest haul of data came from, saying only that it came from its own and other agencies’ international contacts and counterparts, as well as from exchange of information agreements with other jurisdictions. Williams says he isn’t sure if the data is the same as that obtained by the ICIJ, but agrees there are some striking similarities.

Tax avoidance is now a predicate offence for money laundering. Even if the profits a business or individual tries to secrete ­offshore are the proceeds of legitimate business dealings and not crime, the courts have demonstrated they are willing nonetheless to consider it money laundering.

In some cases it can identify the beneficial owners of the schemes, but where it can’t the ATO expects to get to the owners through the promoters.

Users of these schemes have to be wealthy enough to benefit from the expense – and indeed, the risk – of setting them up. They typically have a net worth of A$5 million or more. They range from business people cashing out of their comp­anies and wanting to hide their gains to high-profile sports people and ­entertainers, says the ATO. In particular, users of havens ­include business people who make profits offshore, usually from ­importing and exporting, and leave some of the profits hidden away in tax havens.

There’s little point hiding money from the taxman if people can’t get the cash back into the country to spend it. But this can be difficult – AUSTRAC will spot any large transactions and the ATO will want to know where the cash came from.

One common approach is a fake loan, when the money is repatriated as a “loan” from an offshore entity – but the ATO pays close attention to precisely these transactions.

“There would be people out there who have money offshore who are now petrified as to how to bring it back,” says McLaren.

Detection techniques have improved in recent years and anyone hoping to avoid tax by using offshore structures risks being caught, he says. “These days you’d have to be totally stupid as an individual to do it.” McLaren also says he has a simple message for a potential client who wants him to hide money offshore for him: “Sorry, I’m not going to share a jail cell with you.”

Along with its success in achieving high-profile convictions for offshore tax evasion, the ATO likes to point out that less money is going to tax havens and more is coming back. It says that from 2007 to 2011 there has been a A$17 billion turnaround, with A$12 billion less leaving the country and A$5 ­billion more coming back.

Australian tax authorities received a boost in their fight against tax evasion in May when Bradbury said the government was poised to sign a revised tax treaty with Switzerland that would overcome long-standing bank secrecy provisions. 

Havens can be home, too

Tax havens usually hit the headlines when they’re being used for nefarious purposes.

But the Australian Taxation Office (ATO) says there are legitimate reasons to send money offshore. “We accept there are certain havens that provide business services, whether it be some that focus

on reinsurance – there’s all sorts of legitimate reasons,” says Greg Williams, deputy commissioner serious non-compliance at the ATO.

“But obviously wrapped up inside those legitimate reasons are some we’re not so happy about.

“Living in a global world of multinational corporations, you do have some of the head offices or subsidiaries located in some of those jurisdictions and money flows through those areas to other destinations.”

The ATO might be brave enough to acknowledge this, but such is the stench around the phrase “tax havens” that none of the professional services firms or investment banks contacted by INTHEBLACK wanted to comment on their legitimate uses.

But the Australian Taxpayers Association notes there can be legitimate reasons to conduct business in a tax haven. The most obvious is that an Australian might be working there and putting their savings into a tax haven’s bank.

“Some tax havens, including those that have large-value dealings with Australian taxpayers, have developed particular niche markets,” the association adds.

“Others are regarded as offshore financial centres and can be attractive to international businesses involved in portfolio management, such as insurance companies, self-insurers, hedge and mutual funds and offshore investment funds.”

This article is from the July 2013 issue of INTHEBLACK magazine.

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