Don’t Sacrifice Financial Privacy to the War on Terrorism


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, theParis-based Organization for Economic Cooperation and Development, alongwith a majority of the European Union's member states, repeatedly pushedinitiatives on behalf of high-tax nations against so-called tax havens, fromthe Cayman Islands to Luxembourg and Switzerland. At the time, theseinitiatives were advertised as efforts to combat money laundering, taxevasion, the drug trade and what's euphemistically called "harmful taxcompetition." Fortunately, they were repeatedly defeated or defused, usuallyby lower tax countries, such as Britain, that are eager (even under a Labourgovernment) to preserve their capital inflows.

But the war on terrorism has given new impetus to the tax attack. In tandemwith legislation now making its way through the U.S. Congress, the EuropeanParliament earlier this month passed a resolution calling for "common actionto impose adequate controls on the international financial markets and toabolish offshore banking and tax and secrecy havens in order to effectivelycounter money laundering practices." European finance ministers are alsoconsidering adopting a new U.N. resolution that would toughen sanctionsagainst financial centers failing to comply with transparency andinformation-exchange guidelines. This is in keeping with their desire to endtax competition imposed by offshore jurisdictions. Previously, the U.S. hadopposed these moves, but under current circumstances it may be difficult todefend tax havens, and in particular Switzerland.

European Observer

The argument behind the EU resolutions is that bank secrecy laws are anobstacle to law enforcement and lead to money laundering. Taken at facevalue, this seems logical enough: Combating money laundering is a worthygoal, and nobody wants to lend aid and comfort to Osama bin Laden and hisilk by safekeeping their financial assets. And yet the EU's arguments do notsquare with the evidence.

First there is the matter of existing laws. Switzerland and most offshorejurisdictions already have mutual legal assistance treaties, and the Swisshave publicly declared that they will freeze accounts of those suspected ofcriminal activity and suspend privacy laws when investigating universallyrecognized crimes like murder, terrorism, and drug-running. The ChannelIsland banks have similarly agreed to meet whatever demands are made of themby the U.S. Meanwhile, the Bahamas has frozen a bank account belonging to atrust whose beneficiaries include one of the names listed by the U.S. andthe U.N. as potential terrorist suspects. Many offshore centers havedeveloped a set of "know your customer" rules, which demonstrate theirwillingness to cooperate in the fight against crime.

Then too, it is simply untrue to imply that the secrecy laws of offshorejurisdictions are protecting drug dealers and terrorists. We know, forexample, that $88.4 million of bin Laden assets were frozen in GreatBritain-not in the Cayman Islands (where so far no financial assetsbelonging to suspected terrorists have been found or traced). The U.S.government has acknowledged that about half of the world's money launderingtakes place in the U.S. itself. It is also worth noting that the terrorist'sfinancial empire is reportedly operating out of places like Sudan, Kenya,Malaysia and Middle Eastern nations-not the tax havens being targeted by theEU or the OECD. Why? As a U.N. report issued in 1998 explains, criminalsavoid 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 thefight against terrorism. In France, financial transactions and bank accountshave been closely monitored for some time now. But that never stoppedAlgerian terrorists living in France from placing bombs in the subway andkilling and injuring innocent people in 1995. In the same way, the UnitedStates did not detect the nine SunTrust accounts used in Florida by theterrorists involved in the attack of the World Trade Center.

It is also unlikely that extending the reach of know-your-customer ruleswill address the problem of terrorists' financial support. Bin Laden'snetwork reportedly uses an underground paperless bank in the Middle Eastknown as Hawala which will not be interrupted by the globalknow-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 itslow taxes.

Part of the problem is that money-laundering laws force banks andgovernments to spy on everybody. American banks, for example, have filledout more than 77 million "suspicious transactions" reports over the last 10years with the U.S. Treasury, but only 580 people were convicted. As aresult, the U.S. has a very costly system, perhaps $10 billion annually,according to the American Bankers' Association, that has yielded poorresults. Meanwhile, in Great Britain, statistics show that the governmenthas stopped only 0.004% of the criminal money that's gone through the Cityof London. This means that law enforcement is forced to look for a needle ina haystack. Making the haystack larger by expanding know-your-customer andother regulations to the rest of the world is not going to make the searchany easier.

Law-abiding citizens should have financial privacy, and low-tax countriesshould not have to sacrifice their fiscal sovereignty because the EuropeanUnion seeks worldwide financial powers. If the high-tax European nationswant to stop labor and capital from flowing out of their borders they shoulduse the simple expedient of lowering taxes instead of using the fightagainst terrorism as a prop in their campaign against tax havens. The rightof individuals to their privacy is not a way to protect criminals fromapprehension and prosecution, but an essential safeguard against the powerof abusive governments. If we lose sight of this, we will have succeededonly in ceding ground to the terrorists.