News Release

October 2, 2003

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The Flawed Attack on Money Laundering
New report says financial privacy in danger as countries purport to fight terror

WASHINGTON -- Using the war on terror and corresponding efforts to stop money laundering as a front, international organizations and high-tax nations are attacking financial privacy and attempting to stifle international tax competition to increase revenues, a new Cato study reports. In "Threats to Financial Privacy and Tax Competition," Cato's Richard W. Rahn and Veronique de Rugy explain the economic dangers of reducing tax competition and the risks associated with increased international sharing of private financial data.

In the 1990s, threats to financial privacy came from international efforts to squelch tax competition between countries. In 1998, the Paris-based Organization for Economic Cooperation and Development launched its "harmful tax competition" initiative, to pressure low-tax countries, such as Switzerland and Luxembourg, to weaken their financial privacy laws. Soon after, the European Union launched a Savings Tax Directive with similar goals of undermining privacy through the use of sophisticated information sharing systems between governments. And the United Nations has its own plan to create a global tax dragnet by proposing a new International Tax Organization that would allow governments to share data.

Yet as Rahn and de Rugy explain: "Such initiatives are often marketed as efforts to combat money laundering. But the true and troubling purpose of information sharing initiatives is extra-territorial tax enforcement by high-tax nations aimed at suppressing tax competition between countries."

The war on terrorism has unfortunately given governments a green light to toughen and expand intrusive laws at the expense of individual financial freedom. For example, America's PATRIOT Act expands requirements for banks to report on their customers. Government officials argue that bank privacy laws are obstacles to efforts to prevent money laundering.

Rahn and de Rugy argue ending the ability of terrorists to launder money is an important strategy for combating national threats, but full frontal assaults on financial privacy have not been shown to aid law enforcement. Indeed, casting a government information net too wide results in reduced focus on individuals engaging in criminal activities, while permanently undermining the freedoms of law-abiding citizens.