Executive Summary: Money-Laundering Bill Should Target Criminals, Not Low Taxes

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Executive Summary: Money-Laundering Bill Should Target Criminals, Not Low Taxes

October 16, 2001 4 min read Download Report
Daniel Mitchell
Former McKenna Senior Fellow in Political Economy
Daniel is a former McKenna Senior Fellow in Political Economy.

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.

Money Laundering
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 effort to stop international crime should be based on three principles:

  1. Identifying likely criminals . Each day, there are 700,000 electronic money transfers involving about $2 trillion. The vast majority represent legitimate commerce. It is impractical to expect law enforcement to take these raw data and somehow identify the transfers that are criminal in nature. The first step, therefore, is to identify suspected terrorists and criminals so that the legal community can target transactions likely to be tied to illegal activities.
  2. Tracking beneficial ownership information . Once likely suspects are identified, their assets also must be identified. Privacy laws can be suspended or waived during investigation and prosecution of universally recognized crimes like terrorism and murder.
  3. Using law enforcement resources wisely . Some governments go to great lengths to tax income earned outside their borders. This is bad policy. Conscripting law enforcement officials and turning them into adjunct tax collectors diverts resources that should be used to identify and catch terrorists and other criminals.

The Right Approach
The United States should build better legal relationships with all civilized nations and punish those who harbor criminals and their funds. Specifically, the United States should:

  • Make clear that a lack of cooperation from other jurisdictions will not be tolerated . Financial institutions in jurisdictions that refuse to cooperate by providing evidence, especially regarding the recent attacks, should be sanctioned. If this behavior continues, they should be denied access to the U.S. economy. Hiding terrorist money and shielding evidence is no different from sheltering terrorists.
  • Expand America's network of mutual legal assistance treaties . MLATs set out rules that permit effective cooperation while respecting national sovereignty and due process. In general, they obligate signatory nations to assist in the investigation and prosecution of actions that are criminal offenses in both nations. This approach also would reveal nations that are unwilling to help the United States, either because they refuse to negotiate an MLAT or because they fail to comply with one that is in force, and thus are deserving of sanctions.
  • Drop the "tax harmonization" agenda put forth by international organizations . The Administration should permanently derail international initiatives to hinder tax competition. The European Union and the OECD are seeking to prop up Europe's welfare states with polices such as "information exchange" that would allow them to tax income earned in low-tax jurisdictions. This is bad tax policy and reduces assistance from low-tax jurisdictions. Needless to say, extraterritorial tax enforcement should not be part of any MLAT. It would deter countries from signing these agreements and undermine cooperation.

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.


Daniel Mitchell

Former McKenna Senior Fellow in Political Economy