World governments chip away at bank secrecy

By Andrew McCathie, Shabtai Gold and Chris Cermak Apr 12, 2010, 15:40 GMT

Berlin/Geneva/Washington - Governments around the world have in recent years stepped up efforts to end bank secrecy, spurred on by the global economic crisis and a slew of dramatic corporate scandals that have raised fresh concerns about tax avoidance and fiscal transparency.

Once a pillar of the financial sector of several nations, bank secrecy was declared dead last year by many commentators as the Group of 20 leading economic powers launched a global campaign threatening sanctions against countries refusing to provide more transparency about accounts held by foreign wealthy clients.

'The old model of relying on secrecy is gone,' said Jeffrey Owens with the Organization for Economic Cooperation and Development (OECD), the government-owned think tank that came up with the international tax standards.

'This is a new world, with better transparency and better cooperation,' he told the German Press Agency dpa.

While ordinary workers are facing increased scrutiny of their accounts by national tax authorities, the scope for the wealthy to stash their money in hidden offshore accounts is also diminishing as governments battle both to shore up their revenue base in the wake of the recession and bolster global market regulation.

'It's not just about raising revenue, it's about making the tax system fairer,' said Owens.

Over the last year, many governments presiding over offshore centres have bowed to the relentless pressure of foreign states and agreed to international tax standards aimed at sharing information as part of efforts aimed at cracking down on tax avoidance and crime in an increasingly borderless world.

The new double taxation deals, most in the process of working their way into the domestic law of countries like Switzerland, Luxembourg and Liechtenstein, will make it more difficult for banks to offer airtight assurances to foreign clients that their offshore accounts are protected from intrusion.

The United States and Italy launched large tax amnesties last year to encourage violators and evaders to bring their assets home and come clean with the authorities. Offshore centres have reported large outflows of capital, owing to the deals, as clients fear the crackdown, this time, is for real.

At the same time, new national laws have also been introduced in parts of the European Union (EU) enabling the authorities to swoop in to check on the money flowing through bank accounts.

In Washington, Congress is considering legislation to make prosecution of evaders easier by shifting the burden of proof in civil courts in the tax authorities' favour.

Still, the moves to open up accounts held in so-called global wealth management centres largely rule out 'fishing expeditions,' with governments first having to produce evidence that the account holder is involved in tax cheating before any information is handed over.

Though the deal is still tied up in local courts and parliament, the Swiss government last summer showed the first major breakthrough, after agreeing to hand over to the US taxman data on thousands of accounts held at UBS AG, which admitted to committing fraud.

Some nations, including EU countries with confidentiality laws, also provide offshore accountholders with a veil of secrecy if they agree to pay a withholding tax.

But having successfully wound back bank secrecy through the crackdown on so-called uncooperative tax havens, the EU is now trying to widen automatic information-sharing agreements, which would further undercut offshore banking services.

That said, the new tax accords agreed to over the last 12 months, also insist that any information from the accounts is purely for authorized purposes.

'OECD countries will not respond to requests from other tax authorities unless they know it will remain confidential,' Owens, who runs the organization's tax division, explained.

Many wealthy people are still able to keep their assets out of sight of the taxman, but the risks of exposure are clearly growing [see SIDEBAR: Banking secrecy is dead - but tax havens live on?].

If nothing else, European governments such as Germany, Belgium and the Netherlands, have indicated a willingness to consider paying big sums of money for CDs containing stolen foreign bank data.

While the methods may have skeptics, after Germany's wealthiest were found out hiding their cash in Liechtenstein, the implications became clear: the bank can only offer as much secrecy as governments are willing to pay informants.

Once governments offer more incentives to data thieves, the vaults of a mountain bank can be opened in an instant, even without an international agreement.