ICC Commercial Crime Service

Is the United States Really the World’s Biggest Tax Haven?

Is the United States the world’s biggest tax haven or is this an exaggeration? If so, how do we know?

It depends on what you are measuring and how you measure it. If you are describing ill-gotten gains such as corruption or graft payments or fraudulently obtained proceeds,my experience is that most of those funds are still parked offshore for the most part. However, if you are talking about ostensibly legally earned funds which the owner wants to hold in an opaque vehicle, then I agree with the premise of the article (which was written by a reporter for whom I have a lot of respect) that the United States is becoming - and may already be - one of the largest tax havens in the world.

First, you have to ask yourself who are the largest taxpayers in the world (as measured in total taxes paid, not as a percentage of income? The U.S. still has one of the lowest tax rates of any large progressive Western country. They are right here in the U.S.A. The government collected over $1.3 trillion in taxes in 2013 and 2014. Just in sheer size, I would say that the U.S. must be the largest holder of assets paid for with funds upon which taxes were not properly paid. (As an aside, it always strikes me as incongruous that many of the largest tax cheats in America claim to be the most patriotic when the most patriotic thing you can do is pay your taxes just like the next guy). And that last statement merely applies to U.S. taxpayers. Other taxpayers who avoid taxes in their home countries like to park their funds and to buy property and things in the U.S. with those tainted untaxed funds. When you add those two together it clearly points to the U.S.as having a massive repository of untaxed value – both in the form of accounts and in the form of assets purchased with those untaxed funds.

As to the U.S., the IRS does its best but it will always be behind the curve in catching the tax cheats, because it doesn’t have the resources and it doesn’t farm tax collecting out to the private sector which would be so much more efficient at it. Imagine if the IRS gave a 30% contingency to private lawyers to sue tax cheats. The profit motive is a powerful thing, and perhaps that is why we cling to old and slow hit-and-miss methods – because those with the most to lose like it that way.

Regarding foreign tax cheats who park their untaxed money in the United States, there is very little that foreign governments or the U.S. government can do about it due to an age old legal doctrine called the Revenue Rule. While the IRS and the U.S. Department of Justice can comply with informational requests from foreign governments (which is itself not a very efficient system) the U.S. Courts long ago determined that the United States will not assist a foreign government in the collection of its taxes due to a rift that developed with Great Britain after the Revolutionary War. When the U.S. sought to sue for taxes from loyalists who had income from and property in the United States, but in the former mother country, Great Britain courts said: No. The U.S then responded by refusing to enforce British requests to collect taxes through the U.S. legal system against Brits with property or income in Great Britain,but which had decamped to the former colonies. From that rift – perhaps driven by a mutual fit of pique – the Revenue Rule evolved, and prevents any U.S. court from allowing it to be used to collect foreign tax revenue. Pretty stupid and pretty antiquated, but still it remains the law of the land. Therefore, most foreign tax cheats who hide their untaxed income in the U.S. have little to fear other than discovery back home as they will not be sanctioned by the U.S. or the States for keeping their untaxed funds here. The United States is and has been open for that business for a long time.

Bloomberg sources said that the U.S. has become the top tax haven, because it has so far refused to adopt new global disclosure standards. Why won’t the American government adopt the standards? Is there a downside?

The “U.S.”or the “American Government” doesn’t control corporate formational disclosure standards. Those standards are controlled by each of the 50 states, and each state has their own disclosure standards. The United States is composed of 50 sovereigns and they each ceded a portion of their power to create the federal government which is a limited government – at least from a legal perspective. The federal government only has so much power to “order” a state to conform to international standards, but often resorts to the “power of the purse” to get its way (e.g., for a period of time the federal government promulgated a national maximum highway speed, but if Texas set its maximum highway speed limit at 90 mph it would then not receive funding from the Federal government for highways and road projects). More on this in a moment.

Some states like Delaware have long traded on being a haven jurisdiction for corporate actors in part, because they don’t require the disclosure of the ultimate owner of corporate vehicles formed pursuant to their law. They require the disclosure of a director, of an officer and of an incorporator but many times those are corporate lawyers or formation agents or straw persons designated by the true owner who wants anonymity.

Lately, other states like Wyoming, Nevada and Montana (and others) have sought to obtain a piece of the corporate formation action by promoting their own brand of lack of disclosure standards. In reality much of that is just good marketing by those states as most U.S. states require precious little information to open a corporation and in most cases it can be done over the phone without ever disclosing the identity of the actual owner or beneficial owner of the corporation. Other factors, such as the corporate tax rate and the type of corporate vehicles available influence the choice of incorporation venue. However, what principally drives tax cheats, fraudsters, judgment debtors and corrupt actors is their craving for anonymity and opaqueness. They want to make it hard for you to find out what they own. American states, principally small states that don’t have large tax bases, promulgate these opaque standards, because they are making a lot of money from annual fees from these corporations and they also don’t want to bear the cost of policing the disclosures either at the time of formation or when changes are made. For example, a formation agent or a lawyer could form a corporation with his secretary’s name as a shareholder and then one day later she could “sell” those shares to the firm’s client. Who follows up on this? Who bears the costs of this? What would be the penalty for not updating the disclosure? All of these are both unasked and unanswered questions.

To be fair, there are some U.S. lawmakers who see how unfair, not to mention hypocritical, this makes the U.S. look. Justlast week they re-introduced a bill entitled the Incorporation Transparency and Law Enforcement Assistance Act,which was first introduced in 2013 and never voted on. This bill would seek to use federal power to force states to begin to require the recordation of owners and beneficial owners of corporate structures formed and maintained in the states. While the bill purports to require transparency of beneficial ownership and impose criminal penalties on violators, it contains far too many exemptions. Most significantly, the proposed law would exempt businesses operating within the U.S. with more than $5 million in gross receipts or sales. This low threshold suggests that this may be more election year politicking than an attempt to make real legislative change.

Has Switzerland adopted these standards, and if so has it decreased use of the country as a tax haven?

Swiss bank secrecy has a long history – first codified in 1934. The Swiss Banking Act of 1934 provides strict limits on the information that banks can share with third parties, including governmental authorities. Those limits are enforced by criminal penalties for unauthorized disclosures. Those penalties have not been lifted. In fact, those provisions of the law have been reinforced with stronger penalties. Such harsh penalties are intended to deter any banker who develops a conscience during the course of his or her work, from becoming a whistle blower.

However, Switzerland has now adopted the OECD Tax Convention, which opens the door to an exchange of information among governments. Furthermore, Switzerland and the EU have agreed to an automatic exchange of information about each others’ residents. These measures have caused some tax evaders to seek out other havens. However, Switzerland remains reluctant to thrust its banking industry fully into the sunshine. It’s not as though Switzerland had enacted whistleblower protection laws or done away with numbered bank accounts. Interestingly, these tax treaties may result in the flight of account holders with otherwise “clean” money who are merely passive tax evaders while those whose wealth is derived from more questionable or illegal sources may continue to avail themselves of Swiss bank secrecy.

Money is being moved from exotic locations like the British Virgin Islands to Wyoming, Nevada and South Dakota. Rothschild has offices in Reno, Nevada. Why these locations?

Because those states require the least amount of information about the actual owner to be disclosed and recorded regarding corporations formed in those states. Moreover, many have advanced new types of “corporations” such as Limited Liability Corporations or “LLCs” which don’t have shareholders. They have members instead of shareholders and those members can be other corporations or other offshore LLCs which then create a layered structure that can be used just as easily by a judgment debtor to hide his assets as by a terrorist to hide the source of funds being used to sow mayhem.

Do offshore tax havens also benefit criminals focused on corruption and fraud, and how do they impact the process of international asset recovery for victims of large-scale fraud?

Absolutely, criminals, fraudsters and judgment debtors and other forms of deadbeats all use the same system and many times the same lawyers and accountants to avail themselves of the same system of anonymity. In fact, they even use it to legitimize themselves as they are often joining an exclusive club of anonymous shareholders who are among the rich and famous.

What lessons could the U.S. learn from Switzerland if any?

Switzerland has only now started collecting information that will be disclosed in the future. Until real disclosures are actually made, it’s impossible to tell whether Switzerland has made real change and what the impact of that change will be.

Edward H. Davis, Jr. has practiced law for 28 years, and is a founding shareholder of the Miami international law firm, Astigarraga Davis. As a Certified Fraud Examiner, he heads the firm's Asset Recovery and Financial Fraud group, representing victims of fraud and grand corruption including governments, governmental entities, corporations, hedge funds, insolvency practitioners and individuals by investigating and prosecuting civil fraud and asset recovery actions. He serves as inaugural chair of the International Bar Association’s Anti-Corruption Committee’s Subcommittee on Asset Recovery, and is a leading original member of the London-based International Chamber of Commerce Commercial Crimes Services FraudNet Network. In 2013 Ed was recognized as the first Asset Recovery Lawyer of the Year by Who’s Who Legal. He won that award again in 2014 and 2015.





ICC FraudNet is an international network of independent lawyers, who are leading civil asset recovery specialists in each country. Recognized by Chambers Global as the world’s leading asset recovery legal network, our membership extends to every continent and the world’s major economies, as well as leading offshore wealth havens that have complex bank secrecy laws and institutions where the proceeds of fraud often are hidden. Founded in 2004 by the Paris-based International Chamber of Commerce (ICC), the world’s business organization, FraudNet operates under the auspices of the ICC’s London-based Commercial Crime Services unit.