March 18, 2009 / 2:29 PM / in 10 years

Offshore blame seen as crisis red herring

LUXEMBOURG (Reuters) - Cash-strapped western governments are firing their ammunition at smaller offshore financial centers in the hope of recovering unpaid tax, but they may be eyeing the wrong target.

The G20 group of old and new world leaders has put the global fight against tax evasion top of its agenda and is pressuring discreet financial centers such as Switzerland, Luxembourg and other smaller ones to cooperate more on tax.

Picking on smallish opaque centers seems to be one of the few issues governments agree on but this will not help solve the financial crisis, said speakers at the Reuters Funds Summit.

“Offshore financial centers have nothing to do with the crisis,” said Avinash Persaud, Chairman of consultancy Intelligence Capital and a member of a U.N. committee on international finance.

“They tend to be small states so they are very easy targets. But this is a red herring.”

Germany, which believes thousands of its citizens have stashed away savings in neighboring bank secrecy strongholds Switzerland, Austria and Luxembourg, is leading the charge against tax havens and has won France and Britain to the cause.

Berlin has successfully bulldozed Liechtenstein into opening up after obtaining confidential client data belonging to LGT, the country’s biggest bank, through an informant.

Switzerland, Austria, Luxembourg and others agreed last week to embrace international standards for tax cooperation drafted by the Organization for Economic Co-operation and Development (OECD) to avoid being blacklisted by the G20.

Any move by Switzerland, whose largest bank UBS UBSN.VX(UBS.N) is at the center of a U.S. tax probe, is watched closely by the offshore community.

But offshore bashing may not be the answer to the crisis.

“There was an enormous failure of domestic regulations. But now we have a number of scapegoats: lack of international cooperation, offshore financial centers, hedge funds, private equity companies,” said Persaud, who was born in Barbados.

“One of the reasons crises repeat themselves is that we get distracted by politicians focusing on easy targets and forgetting what drove the crisis.”


Luxembourg financial practitioners dismissed the wrangle over bank secrecy and tax transparency as a political debate that has no relevance to the country’s financial industry even though the low-tax regime has attracted many savers.

“A number of jurisdictions are starting to reconsider banking secrecy. I don’t see Luxembourg being cast in the same category,” said Noel Fessey, Managing Director at Schroder Investment Management (Luxembourg).

“This is a global funds center, the most successful funds center. Our success was not built at all on secrecy. It’s because we do something really well.”

The speakers said the issue concerned the country’s smallish private banking industry rather than the large funds segment that has allowed the country to become a global financial leader.

“I don’t think (the relaxing of bank secrecy) is going to have very significant impact,” said Yves Francis, a partner with Deloitte in Luxembourg.

“I don’t think the asset management segment has thrived because of banking secrecy. There is going to be a little bit of outflow. In mutual funds, I would see even less outflows.”

The government of Luxembourg has fiercely resisted a dismantling of bank secrecy laws and Treasury Minister Luc Frieden told the Reuters Summit on Tuesday his country would not go beyond OECD tax standards.

“If that is the worldwide standard and if all the countries agree to that, then I think it would be strange if the EU member states that are part of the G20 say something different,” Frieden said.

But the way toward more tax transparency is open and offshore centers may have to accept that

“I don’t think international financial centers have the option to keep bank secrecy. If they do so they will be on black list,” said Persaud.

“I think they should be allowed different tax rates, but they should not be allowed to be a source of tax evasion.”

(Editing by Hans Peters)

For other news from the Reuters Funds Summit, click here For the Hedge Hub blog: For Global Investing: here

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