The Heritage Foundation

News Releases on Taxes

October 16, 2001

October 16, 2001 | News Releases on Taxes

Money-Laundering Legislation An Unfair Attack On Low-Tax Nations, Analyst Says

WASHINGTON, Oct. 16, 2001-Some federal lawmakers are using the Sept. 11 terrorist attacks as an excuse to target so-called "tax havens," even though there is no evidence these nations launder criminal funds more frequently than ones with higher tax rates, says a new paper from The Heritage Foundation.

Legislation now moving through the Senate and the House of Representatives would allow the U.S. government to label any jurisdiction a "primary money laundering concern" for no other reason than the fact that its tax rates are low, writes Daniel Mitchell, Heritage's McKenna senior fellow in political economy.

"Ironically, the terrorists who launched the Sept. 11 attacks didn't move their money through Switzerland, the Cayman Islands or the Bahamas," Mitchell says. "They used banking systems based in the United States, England, Germany and various Middle Eastern states. But you'll notice that no one has suggested trying to punish these countries." Tax havens exist all over the world, Mitchell says. According to the United Nations Offshore Forum, between 60 and 90 nations and territories participate in the offshore market. The State Department lists 52 regimes, including the United States.

"U.S. lawmakers criticize these nations for having financial privacy laws, under the mistaken assumption that they somehow impede criminal investigations," says Mitchell. "But every country allows that secrecy to be pierced for criminal investigations. Many tax havens have legal-assistance treaties with the United States that obligate them to cooperate in the investigation and prosecution of universally recognized crimes."

What's needed, Mitchell says, is to identify and target known criminals, not low-tax jurisdictions. "It's certainly more practical," he says. "Every day there are 700,000 electronic money transactions, involving about $2 trillion. We can't expect law enforcement officials to sort through this raw data and decide which transfers are criminal in nature and which ones aren't."

A better way to choke off the terrorist money flow would be to improve our legal relationships with other nations, Mitchell says. Lawmakers should sanction financial institutions in jurisdictions that refuse to cooperate by providing evidence of terrorist activity. They also should expand the U.S. network of legal-assistance treaties and oppose international proposals to hinder tax competition.

"Laws focused on criminal activity-combined with good police work and intelligence gathering-are the right approach," he says. "Sweeping new regulations on the financial services sector and unwarranted attacks on low-tax nations are not."

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