Don’t Sacrifice Financial Privacy to the War on Terrorism

October 25, 2001 • Commentary

Is there no limit to the crimes of which low‐​tax countries may be accused? For several years prior to the September 11 terrorist attacks, the Paris‐​based Organization for Economic Cooperation and Development, along with a majority of the European Union’s member states, repeatedly pushed initiatives on behalf of high‐​tax nations against so‐​called tax havens, from the Cayman Islands to Luxembourg and Switzerland. At the time, these initiatives were advertised as efforts to combat money laundering, tax evasion, the drug trade and what’s euphemistically called “harmful tax competition.” Fortunately, they were repeatedly defeated or defused, usually by lower tax countries, such as Britain, that are eager (even under a Labour government) to preserve their capital inflows.

But the war on terrorism has given new impetus to the tax attack. In tandem with legislation now making its way through the U.S. Congress, the European Parliament earlier this month passed a resolution calling for “common action to impose adequate controls on the international financial markets and to abolish offshore banking and tax and secrecy havens in order to effectively counter money laundering practices.” European finance ministers are also considering adopting a new U.N. resolution that would toughen sanctions against financial centers failing to comply with transparency and information‐​exchange guidelines. This is in keeping with their desire to end tax competition imposed by offshore jurisdictions. Previously, the U.S. had opposed these moves, but under current circumstances it may be difficult to defend tax havens, and in particular Switzerland.

European Observer

The argument behind the EU resolutions is that bank secrecy laws are an obstacle to law enforcement and lead to money laundering. Taken at face value, this seems logical enough: Combating money laundering is a worthy goal, and nobody wants to lend aid and comfort to Osama bin Laden and his ilk by safekeeping their financial assets. And yet the EU’s arguments do not square with the evidence.

First there is the matter of existing laws. Switzerland and most offshore jurisdictions already have mutual legal assistance treaties, and the Swiss have publicly declared that they will freeze accounts of those suspected of criminal activity and suspend privacy laws when investigating universally recognized crimes like murder, terrorism, and drug‐​running. The Channel Island banks have similarly agreed to meet whatever demands are made of them by the U.S. Meanwhile, the Bahamas has frozen a bank account belonging to a trust whose beneficiaries include one of the names listed by the U.S. and the U.N. as potential terrorist suspects. Many offshore centers have developed a set of “know your customer” rules, which demonstrate their willingness to cooperate in the fight against crime.

Then too, it is simply untrue to imply that the secrecy laws of offshore jurisdictions are protecting drug dealers and terrorists. We know, for example, that $88.4 million of bin Laden assets were frozen in Great Britain‐​not in the Cayman Islands (where so far no financial assets belonging to suspected terrorists have been found or traced). The U.S. government has acknowledged that about half of the world’s money laundering takes place in the U.S. itself. It is also worth noting that the terrorist’s financial empire is reportedly operating out of places like Sudan, Kenya, Malaysia and Middle Eastern nations‐​not the tax havens being targeted by the EU or the OECD. Why? As a U.N. report issued in 1998 explains, criminals avoid low‐​tax countries because they act as a “red flag” for investigators. The sad fact is that money‐​laundering laws are not a very useful tool in the fight against terrorism. In France, financial transactions and bank accounts have been closely monitored for some time now. But that never stopped Algerian terrorists living in France from placing bombs in the subway and killing and injuring innocent people in 1995. In the same way, the United States did not detect the nine SunTrust accounts used in Florida by the terrorists involved in the attack of the World Trade Center.

It is also unlikely that extending the reach of know‐​your‐​customer rules will address the problem of terrorists’ financial support. Bin Laden’s network reportedly uses an underground paperless bank in the Middle East known as Hawala which will not be interrupted by the global know‐​your‐​customer initiatives or by the eradication of financial privacy. Furthermore these terrorists are motivated by fanaticism and not by profit. As such, it is doubtful that they will be drawn to a country because of its low taxes.

Part of the problem is that money‐​laundering laws force banks and governments to spy on everybody. American banks, for example, have filled out more than 77 million “suspicious transactions” reports over the last 10 years with the U.S. Treasury, but only 580 people were convicted. As a result, the U.S. has a very costly system, perhaps $10 billion annually, according to the American Bankers’ Association, that has yielded poor results. Meanwhile, in Great Britain, statistics show that the government has stopped only 0.004% of the criminal money that’s gone through the City of London. This means that law enforcement is forced to look for a needle in a haystack. Making the haystack larger by expanding know‐​your‐​customer and other regulations to the rest of the world is not going to make the search any easier.

Law‐​abiding citizens should have financial privacy, and low‐​tax countries should not have to sacrifice their fiscal sovereignty because the European Union seeks worldwide financial powers. If the high‐​tax European nations want to stop labor and capital from flowing out of their borders they should use the simple expedient of lowering taxes instead of using the fight against terrorism as a prop in their campaign against tax havens. The right of individuals to their privacy is not a way to protect criminals from apprehension and prosecution, but an essential safeguard against the power of abusive governments. If we lose sight of this, we will have succeeded only in ceding ground to the terrorists.

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