October 16, 2001 | Executive Summary on Taxes
The despicable attacks on September 11 in New York and Washington have underscored the importance of international cooperation in the fight against crime and terrorism. Regrettably, however, some politicians are using this effort as an excuse to attack low-tax countries. Claiming that financial privacy laws in "tax havens" hinder worldwide law enforcement, they want to restrict America's economic relationships with these low-tax jurisdictions. Money-laundering bills moving through the House and Senate, for instance, would allow the Secretary of the Treasury to label any jurisdiction a "primary money laundering concern" merely because it has a low-tax economy.
This is the wrong approach. The United States should seek to punish nations that harbor terrorists and their money, not nations with low taxes and financial privacy. Contrary to popular perception, bank secrecy laws do not prevent governments from obtaining information when investigating crime. This is true in America and in "tax haven" jurisdictions. Low-tax nations will collect and provide information that can be used to investigate and prosecute illegal activity in cases involving universally recognized crimes such as terrorism, murder, and drug running.
The proposed legislation assumes that tax havens attract a disproportionate amount of dirty money. There is no evidence for this. Criminals rarely venture "offshore" because of the added risk. Shifting money across borders--and then back again when the funds are needed--dramatically increases the probability of detection. The United Nations has acknowledged that criminals avoid so-called tax havens since they are a "red flag" for law enforcement.
Most criminal money is obtained in the United States and Europe--and that is where it is laundered. The Organisation for Economic Co-operation and Development's Financial Action Task Force acknowledges that criminal "funds are usually processed relatively close to the under-lying activity; often...in the country where the funds originate." According to an article in Government Executive, "The International Monetary Fund estimates that about $600 billion is laundered each year globally. Estimates of U.S. money-laundering traffic hover at $300 billion, including about $60 billion in drug money alone."
Punish America's Enemies
Law enforcement and intelligence agencies should track down terrorists and their funds, regardless of whether this leads them to high-tax nations or low-tax nations. Investigators have put together a mountain of evidence on the September 11 attacks, and these data should satisfy any legitimate "probable cause" tests that other nations require before waiving financial privacy laws.
The short-term goal for Washington should be the identification and punishment of the terrorists and all those who gave them aid. The long-term goal should be implementing policies that make it much more difficult for terrorists and other criminals to operate across national borders. Laws focused on criminal activity--combined with good police work and intelligence gathering--are the right approach. Sweeping new regulations on the financial services sector and unwarranted attacks on low-tax nations are not.
Daniel J. Mitchell, Ph.D., is McKenna Senior Fellow in Political Economy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.