Understanding International Tax Havens

MS. DIANE REHM

10:06:55
Thanks for joining us. I'm Diane Rehm. The banking crisis in Cyprus has drawn attention to the cryptic world of international tax havens. Here in the studio to look at how they work and why they're used, James Henry. He's author of a Tax Justice Network report titled, "The Price of Offshore Revisited."

MS. DIANE REHM

10:07:20
And Richard Rahn of the Cato Institute, he's chairman of the Institute for Global Economic Growth. Joining us from the NPR studio in New York, Lee Sheppard, a contributing editor of the journal Tax Notes. I'm sure many of you would like to join in. Give us a call, 800-433-8850. Send us an email to drshow@wamu.org. Follow us on Facebook or Twitter. Good morning to all of you.

MR. JAMES HENRY

10:07:58
Good morning.

MR. RICHARD RAHN

10:07:58
Good morning.

MS. LEE SHEPPARD

10:07:59
Hi.

REHM

10:08:00
Good to have you with us. James, I'll start with you. Will the banks in Cyprus be open tomorrow?

HENRY

10:08:08
Well, that's what they're promising. But right now, they have a lot of work to do, so we're not quite sure. Under the requirements of the E.U. deal, in order to get the 7.5 -- $13 billion of aid from the E.U. for bailing out the remaining banks, they have to close some banks. They also have implemented -- trying to implement capital controls and design a way of protecting against the remaining deposits leaving.

HENRY

10:08:38
And, you know, they're also struggling with an economy that suddenly waked up to find out, you know, it was heavily dependent on a very dodgy set of banks. So, you know, this is a big problem for the tiny Cyprus government, and they're struggling to solve all of these problems at once.

REHM

10:08:56
So what does the IMF, the E.U. deal mean for the future of Cyprus as a tax haven?

HENRY

10:09:07
I think Cypriots are waking up to find out what many of us in the United States already know, is that if you have a dodgy banking system and it has basically been unregulated, it affects everybody in the economy. So they've got their work cut out for them to design, basically, a new model for their economy. They have gas reserves they've just discovered off the coast. That may lead to what we call a resource curse.

HENRY

10:09:36
But right now, they're suffering from the finance curse, which is to have this outsized, very dodgy banking system. And so I think many people in the short run are going to be losing their jobs in the banking system. There's about 25,000 Cypriots out of the population of 860,000 that work in banks, and so many of them are going to be trying to find new employment. That's the important thing for them.

REHM

10:10:02
And to you, Richard, how unique is Cyprus in this whole area of offshore tax havens?

RAHN

10:10:15
Well, Cyprus is quite unique. Each one of these, the offshore centers, has a different product line. They do different things. Some are very well managed like Cayman. Switzerland, of course, is the gold standard of banking soundness. Then you have others like we've seen here in Cyprus which were the banks, the two big banks, bought themselves many Greek bonds which, of course, are worth now a fraction of what they previously were. And so people who were depositors -- and for a lot of Russians who are depositors in these banks -- are going to suffer some loss.

REHM

10:11:01
How much loss?

RAHN

10:11:03
Well, could be up to 40 percent. We don't know precisely yet.

REHM

10:11:06
Now has that deal included a level above which funds would be withdrawn?

RAHN

10:11:15
It appears that the people who have less than 100,000, which should be probably most the local citizens, will not really be hit by this. But for people who have very large accounts, and I think that is probably a primary Russian population, will get hit.

REHM

10:11:33
Why did Cyprus fail? Was it simply because of investing in places like Greece with bad bonds?

RAHN

10:11:44
You know something that you had -- banks that were not well-managed and not prudently managed, and a prudently managed bank does not expose itself to inordinate risk by particularly buying government bonds which are not sound. Part of the trouble, though, goes back to we call the Basel Accord. There's an -- the bank for international settlements is in Basel.

RAHN

10:12:07
And they set sort of the world standards. And if you have sovereign government bonds on your balance sheet, you normally don't have to hold reserves against them under the myth that government debt will always be paid. Of course, we know that's not true.

REHM

10:12:27
So what do governments like Cyprus do with the money that gets deposited? They, as you've said, invest in some good, some not so good or risky investments, but they don't have to hold reserves equivalent to that which they've invested.

RAHN

10:12:51
Yeah. Remember, it was private banks. It wasn't the government of Cyprus.

REHM

10:12:55
Right.

RAHN

10:12:56
It was the private banks.

REHM

10:12:57
Right.

RAHN

10:12:58
And without knowing exact details there, they probably did not hold much in the way of reserves against these government bonds because, according to international standards, they wouldn't really have to. That was a major mistake. And if they had been a bit more astute and had been reading the stuff, I expect, both James and I had written over the years, they wouldn't have done that.

REHM

10:13:21
All right. And turning to you, Lee Sheppard, what makes a particular country attractive as a tax haven to either an individual or corporation?

SHEPPARD

10:13:37
Oh. For individuals, you need bank secrecy. For a corporation, you need a network of treaties so the corporations can get the money in and out of the country because the difference between the way corporations use havens and the way individuals use havens is individuals store money there. Corporations do not.

SHEPPARD

10:14:02
Corporations basically wash money through there so they can take it out of the country, usually a developed country where they earned it, and then get it back to another developed country to either pay it as dividends to their shareholders or use it in some other business venture in some other country. Cyprus is kind of funny. It's got a little of both. It's got a lot of treaties. But then it's got a lot of things to offer individuals too.

REHM

10:14:33
But in offering these special things to individuals or to corporations, is the primary reason for these tax havens to avoid or completely evade taxes, Lee?

SHEPPARD

10:14:53
Well, it's the primary purpose of the users, yes. Now -- but what you have to think about here is when individuals do what we are frequently talking about, behavior that their home country wouldn't like even if it's not criminal, OK, when corporations do it, like big American corporations, which don't use Cyprus so much -- they use other havens.

SHEPPARD

10:15:19
When big corporations do it, they have to have domestic laws and laws of the countries they do business in. And treaties all help an amount to do it because their accountants won't sign off on it if it isn't legal. So the point is tax havens don't act all by themselves. There have to be laws in place that let the corporations use them.

RAHN

10:15:47
I wan to clarify something here.

REHM

10:15:48
Sure. Go ahead, Richard.

RAHN

10:15:49
The international financial centers, they serve many different purposes for many different clients, and a lot of it is regulatory efficiency having very little or nothing to do with taxes. For instance, Cayman has the great majority of hedge funds registered in Cayman. That has to do with regulatory efficiency, and its main competition are some U.S. states like Vermont and South Carolina, Delaware and other places.

RAHN

10:16:17
And also, Cayman has a lot of what we call captive insurance. Captive insurance is where a company or industry association owns their own insurance companies. Bermuda has the bulk of the insurance. But those have to do with certain regulatory structures, much more so than taxes.

HENRY

10:16:40
I think we have to -- we can't really let that go unchallenged.

SHEPPARD

10:16:44
Yeah. May I talk?

REHM

10:16:45
Hold on, Lee. Go ahead, James.

HENRY

10:16:47
I mean, the Cayman Islands has, you know, basically specialized in undermining other countries' laws on a whole host of fronts. He mentioned hedge funds. You know, we've had the Axiom problem. Bear Stearns was an example of a Cayman Islands-registered hedge fund. There are hedge fund based in the Cayman Islands that allow local directors on the boards of hedge funds to the tune of several hundred companies per director. And so that's one the reasons they like the Cayman Islands for hedge funds is because of these lax regulations, so...

RAHN

10:17:25
That's not true. Excuse me.

HENRY

10:17:26
I mean, we have Enron.

REHM

10:17:27
Hold on.

HENRY

10:17:27
We have a long list of examples of Cayman Islands -- not only mutual funds and hedge funds, but also individual banks where the regulatory mining and the tax evasion is phenomenal. So Cayman is not an exception to the Cyprus...

SHEPPARD

10:17:43
May I talk?

RAHN

10:17:44
No. I just fully disagree with that.

REHM

10:17:45
Excuse me, please, Richard.

RAHN

10:17:47
OK.

REHM

10:17:48
Lee, go right ahead.

SHEPPARD

10:17:49
Yes. OK. Look, none of the regulatory arbitrage with the banking laws, with the insurance laws, with the securities laws -- I shouldn't be hitting the desk here -- none of these regulatory arbitrage is possible without the tolerance of the home governments of these, you know, insurance companies, hedge funds what have you and the protection of either the United States government or the British government and the admission of these countries into the bank clearing system, which is protected by the developed country governments.

REHM

10:18:24
Lee Sheppard, she is a contributing editor at the journal Tax Notes. And we're going to take a short break here. When we come back, we'll talk about this issue of secrecy and whose secrets are being kept from whom and where all this tax money is going. Stay with us.

REHM

10:20:05
And welcome back. We're talking about the current state of tax havens around the world. We have been reading specifically of late about Cyprus. And it has served as a tax haven for many wealthy individuals and corporations, primarily in the case of Cyprus, the Russians. Here with me, James Henry. He's an economist, an attorney, an investigative journalist and author of the Tax Justice Network's report, "The Price of Offshore Revisited."

REHM

10:20:51
Richard Rahn is senior fellow at the Cato Institute. He served from 2002 through 2008 on the Cayman Islands Monetary Authority, which regulates the world's largest offshore financial center. And at the NPR bureau in New York: Lee Sheppard, she is a contributing editor at the journal Tax Notes. And we're going to open the phones shortly. But do give us a call, 800-433-8850. Richard Rahn, I know you wanted to get in on the last part of that conversation.

RAHN

10:21:36
Yes. The problems that Bear Stearns and others had had nothing to do with their Cayman-registered funds. Their problems were mistakes they made. And to the extent there was any illegality, that was all under New York law, their New York companies or U.S. companies. In terms of directors, very large hedge funds have well-paid independent directors. But most hedge funds are tiny organizations, and so what you have are basically corporate directors, companies that serve as directors for these.

RAHN

10:22:18
So you may have a list of a lot of individual names. Well, I mean, one name, a lot of different funds. But it's actually a corporate entity which is serving as the director and enables them to have efficiencies of -- with their own experts to review all these where no one individual could possibly do this. And for a small fee, they get a couple of thousand dollars, couldn't spend the time actually looking at this because these things are too small.

REHM

10:22:48
All right. James, you've estimated that the total wealth in tax havens is somewhere between 21 and $35 trillion in 2010. First, how did you come up with those numbers?

HENRY

10:23:06
Well, this is like estimating the size of a black hole, Diane. I think, you know, there's no direct estimates, but what we used were three different methods. We looked at outflows from developing countries and did detailed models of those. We also looked at the Bank for International Settlements data on cross-border deposits and tried to estimate how large the portfolios associated with those were.

HENRY

10:23:36
And then we also, as another check, just looked individually at the top 50 private banks involved in helping wealthy people move their money offshore and hide it from tax authorities. And those 50 banks alone, including the largest banks in the world, had a total of about 12 trillion just among those 50 in assets under management, cross-border deposits and unmanaged brokerage assets. So that gave us confidence in the larger number.

REHM

10:23:58
I'd be fascinated to know about corporations and the individuals in this country who use offshore tax shelters and whether there had been any estimates as to exactly how much in the way of taxes this country loses because of those offshore.

HENRY

10:24:26
Well, there are two different categories of behavior. As Lee noted, corporations are engaged in moving intellectual property and other assets offshore. There's an article today in The Washington Post about that. We estimate there that the losses per year in terms of tax revenue to the U.S. Treasury are on the order of $90 billion. And then on the individual side where you have wealthy Americans parking their money in Switzerland or like we have in the UBS case, you know, that's on the order of $100 billion a year, the IRS estimates.

HENRY

10:24:57
So, you know, this is a substantial amount of money. We're talking about a sequestration project right now to cut the federal budget deficit by, you know, $85 billion in terms of federal spending. So I think ordinary taxpayers are increasingly upset about the fact that the wealthiest companies and individuals on the planet are able to use these dodgy havens of which Cyprus is only one of 60 to 70.

HENRY

10:25:22
You know, it's one the smallest on the Tax Justice Network's secrecy jurisdiction index. They're number 20. You know, you have Switzerland, you have the U.K., Luxembourg, Cayman Islands, Bermuda. All of these are much bigger players in this essentially, you know, sort of parasitic industry that's undermining the rule of law.

REHM

10:25:44
Richard Rahn.

RAHN

10:25:45
Well, parasitic industry is a highly emotive term for actually doing the best allocation of capital at its highest and best use around the world. One of the problems we have is the U.S. corporate tax rate is the highest in the world at 35 percent. The non-partisan tax foundation just estimated that the revenue maximizing tax rate for the U.S. government for corporations would be about 15 percent.

RAHN

10:26:13
Canada has a 15 percent corporate rate. So the U.S. is highly non-competitive. For U.S. corporations to compete around the world, they keep a lot of their overseas earnings offshore. The ideal world would be for us to reduce our corporate tax rate to that of -- to be competitive. Then this money would flow back in.

REHM

10:26:38
Let me inject a question there, which I'm sure is on the minds of many of our listeners, which is, if this truly a burden for corporations that is this 35 percent tax rate, why is it that corporations are taking in such huge profits?

HENRY

10:27:09
If I could respond to that, I mean, corporations in the United States had their best quarter ever in history in the fourth quarter of 2012. They don't pay 35 percent. The actual effective rate is much lower. As the article in The Post said today, you know, most major companies on the Dow 30, for example, are paying close to zero percent tax rates.

HENRY

10:27:31
General Electric in 2010 had a zero tax rate because they're using these offshore games to move intellectual property, brands, software, you know, other lines of business to low tax havens, paying themselves royalties to Bermuda where they have no real business and essentially saving hundreds of billions of dollars in taxes.

REHM

10:27:54
Lee Sheppard, do you want to comment?

SHEPPARD

10:27:55
May I talk?

REHM

10:27:56
Yes.

SHEPPARD

10:27:56
Yes. Like I was saying before, you can't just use the tax havens, like Jim Henry is talking about there, by yourself if you're a big corporation. You have to have the U.S. law on your side. We have a bunch of rules. Chief among which is the one called the check-the-box rule that enable those U.S. companies to run money through the tax havens and to park intellectual property offshore and pay themselves royalties without paying immediate tax on it to the United States.

SHEPPARD

10:28:33
You know, you don't need to get technical about it here. But it's -- in the last 20 years because of some of our rule changes, chief among which was this check-the-box thing, it's gotten very easy to do this, to zero out, especially if you have intellectual property that you can move. It's very easy to have a zero tax rate all over the world.

SHEPPARD

10:28:55
Then when you want to bring the money back to your -- to the United States to pay dividends to your shareholders, you're going to have to pay the full 35 percent, OK? Now, if you want to re-invest the money in the United States, there's other ways to get it back to the United States without paying that full 35 percent. So when we're -- so when they're complaining about the 35 percent, it is a dividend question. It is not oh-I-wanted-to-build-a-factory-here question.

RAHN

10:29:28
Well, I disagree with some of that. But the more fundamental question is who owns corporations when people talk about the terrible greedy corporations? Most big corporations are largely owned by pension funds. I expect the NPR pension fund has investments in GE or Exxon or a lot of these others -- most people do -- these owned by a lot of individual shareholders who have saved the money for retirement, for college tuitions. And so there's not -- we somehow think there's some big, one greedy rich person out there that owns all these things. There are a few of those, but not very many.

RAHN

10:30:06
Most companies are owned very widely and primarily by, again, pension investment funds, college endowments and so forth. So those who want to increase taxes on them really want to go ahead and diminish the rate of return for college endowments, for people's pension funds and make them poor. The corporation income tax, most good tax economists will say, is one of the worst taxes of all time. What you want to do is tax what people take out of the economy, not what they put in.

REHM

10:30:41
All right. I don't want...

SHEPPARD

10:30:42
I'd like...

REHM

10:30:42
...to have this divert into a discussion of whether we ought to lower the corporate taxes. I want to understand how these tax havens get created...

HENRY

10:31:01
Let me...

REHM

10:31:01
...what the rules are, and how they're used and who's using them. Go ahead.

HENRY

10:31:04
Diane, could I respond to Lee's point here? I think she's absolutely right that these tax havens don't do this alone. There's a global industry.

REHM

10:31:14
Of course.

HENRY

10:31:14
But those regulations she's talking about that were relaxed in the Clinton years, like, check the box and other technicalities...

REHM

10:31:21
What does check the box actually mean?

SHEPPARD

10:31:24
It means you can make income that you pay yourself disappear from your U.S. tax return. It shows...

REHM

10:31:32
That's pretty simple, isn't it?

SHEPPARD

10:31:34
Yeah, it's pretty simple.

HENRY

10:31:35
But the idea is that these...

SHEPPARD

10:31:36
It says you can treat the entity that pays it and the entity that receives it as nonexistent.

REHM

10:31:41
Nonexistent.

SHEPPARD

10:31:42
The income doesn't show up on the U.S. tax return, but you can make it show up places where you want it to show up. Like, if you want it to show up as a deduction in Europe, you can do that.

REHM

10:31:52
OK. How does...

SHEPPARD

10:31:53
It makes it very easy.

REHM

10:31:54
How does an individual put his or her money offshore? How does that happen?

SHEPPARD

10:32:04
An individual goes and gets a bank account. And what the U.S. scandal was about was that the -- the UBS scandal, but there -- actually, there's other banks that were doing things like this, too.

REHM

10:32:16
Sure. Sure.

SHEPPARD

10:32:17
What they were accused of doing was sending the bankers to the United States to get people, OK, because in the old days it was hard. You had to get on a plane and fly to Switzerland and meet with the guys and see if they would take you on as a client.

REHM

10:32:30
Right, right.

SHEPPARD

10:32:31
When they started, you know, shopping in the United States and making it easy for people, that got to be a mess, but it's actually fairly easy for people to set up some of those bank accounts.

REHM

10:32:41
And is there a minimum amount, James, that people have to have?

HENRY

10:32:46
Well, I mean, the global private banking industry allows it if you have more than $5 million, but there's only about 10 million target clients on the -- in the offshore industry that are worth anything like that. So it's a fairly tiny group. Point one four percent of the world's population owns all of these offshore assets.

REHM

10:33:06
And you're listening to "The Diane Rehm Show." Lee, at what point does financial confidentiality stop and secrecy actually begin?

SHEPPARD

10:33:25
They're both names for the same thing. But I think what you're talking about, I guess, is distinguishing clients who come in with criminally gotten funds and clients who come in with legal funds. I mean, there really are two types of clients for these things. There's your basic crooks and your politically exposed persons who may have got bribes and things. And then there's your sort of bog standard, well-off person who earned the income legally in their home country, paid tax on it there and wants to stick it in a haven somewhere so they can either not pay taxes on the income...

REHM

10:34:06
Right.

SHEPPARD

10:34:07
...or not pay alimony to their ex-wife or, you know, something like that.

REHM

10:34:10
Got you. All right. Richard Rahn.

RAHN

10:34:13
First of all, there is full information sharing with most of the large offshore centers, like Cayman, with the U.S. government, with the British government. You would be a fool to set up a bank account in a place like Cayman and not report the interest earnings, the income on it.

REHM

10:34:33
So you're saying nobody has...

SHEPPARD

10:34:34
I need to talk.

RAHN

10:34:36
No.

SHEPPARD

10:34:37
No, I need to talk...

REHM

10:34:38
Hold on, Lee.

RAHN

10:34:38
I've been involved in this, and I know that that information sharing -- there's the tax information agreements.

REHM

10:34:49
You're saying it's totally aboveboard.

HENRY

10:34:51
But that's not true.

SHEPPARD

10:34:52
No, that's not true.

HENRY

10:34:53
Absolutely not. There's no automatic information exchange.

SHEPPARD

10:34:55
Not true. No.

REHM

10:34:56
You know...

RAHN

10:34:57
There is information exchange on request...

SHEPPARD

10:35:00
No.

RAHN

10:35:00
...and it's following the rule of law. If there's a suspicion that any one of us has an account elsewhere, it goes through the normal judicial process in both countries. And if you talk to the people at Treasury and the IRS, they have no problems with places like Cayman.

REHM

10:35:15
All right. James.

RAHN

10:35:16
Just one -- OK.

SHEPPARD

10:35:16
May I talk?

REHM

10:35:18
James.

HENRY

10:35:20
Well, the information request process that he's describing is an arduous one that requires you to practically know the person has evaded taxes before you ask for that information. What we really need to have is an automatic information exchange like we have with Canada. But, you know, most developed...

REHM

10:35:38
What kind of -- explain what's going on with Canada.

SHEPPARD

10:35:41
Can I talk?

REHM

10:35:42
Hold on, Lee.

HENRY

10:35:43
Lee, do you want to -- you want to jump in here?

SHEPPARD

10:35:44
Yes.

REHM

10:35:44
All right. Go ahead.

SHEPPARD

10:35:44
Yes. OK. OK.

REHM

10:35:46
What goes on with Canada?

SHEPPARD

10:35:48
What goes on with Canada is we automatically exchange bank account interest information and, you know, who's Canadian, who's getting interest from the bank account...

REHM

10:36:00
Got you.

SHEPPARD

10:36:01
...in the United States. OK. Now...

REHM

10:36:02
Yeah.

SHEPPARD

10:36:02
...what goes on with these tax information sharing agreements is they are treaties, OK? And they are, as James is saying, very difficult to use because the mechanism is that you have to know absolutely everything about this person on their account. And what you're really doing is you're going to the haven for confirmation that they own the account.

SHEPPARD

10:36:27
You only do that in a heavily well-developed criminal case. So what's going on is that mechanism is not helpful in my more common standard case where I have a person with legal sourced income that's been previously taxed who is just hiding it. It's really not very useful there. It's also not useful upfront, which is where you want the information.

SHEPPARD

10:36:52
You want to know, before you start cases and before you start chasing people around, who's got deposits elsewhere. Now, they're supposed to be reporting that. If they're Americans, they're supposed to be reporting that on their own tax returns. But we've had quite a scandal in the last few years that they haven't been doing that.

REHM

10:37:11
Lee Sheppard, she is contributing editor at the journal Tax Notes. Richard Rahn is with the Cato Institute. James Henry is author of the Tax Justice Network's Report, "The Price of Offshore Revisited." When we come back, it's time to open the phones. Remember, we're not just talking about Cyprus.

REHM

10:40:05
And we've just had a news report from Geneva. The AP is reporting that Swiss media say that U.S. prosecutors are poised to step up their probes of wealthy U.S. tax evaders using the tiny principality of Liechtenstein, which I gather, James, Switzerland supposedly the gold standard of tax havens is now going to be looked at a little more closely.

HENRY

10:40:44
Well, we've been looking at Switzerland closely. We've had several big scandals with banks like UBS and HSBC, the second largest bank based in London, but with a big Geneva office. Last year, the -- a whistleblower released the names or reportedly gave the names of 120,000 offshore clients of HSBC. The U.S. Treasury is also investigating 13 Swiss banks that were involved in calling on wealthy Americans.

HENRY

10:41:18
So, you know, this activity, I think, is exploding in terms of investigative attention. What we need to do, I think, is to generalize it just from the U.S. Treasury trying to prevent U.S. taxpayers from taking their money out to, you know, all of the wealthy Brazilians and Latin Americans, people from developing countries. That's where it's really hurting, this industry. About 9 trillion of our 21 trillion is from developing countries, and they can't afford to have their wealthiest people moving their capital offshore beyond the reach of taxation.

REHM

10:41:51
Richard Rahn.

RAHN

10:41:52
Well, with a lot of these countries, they violate human rights all the time, let's say, like, Venezuela. Venezuelans, a lot of them put money into U.S. banks in Florida and elsewhere. And if you go to these automatic information exchanges and start providing these basically corrupt and criminal governments with this kind of information, we're going to have major problems.

RAHN

10:42:15
Now, the Swiss, they have a different system. What they do is do tax withholding and remit it back to the governments in order to keep their financial privacy. That's their law. They're a sovereign state. They have a right to do it the way they want to. Now, if we name -- we have these huge number of American accounts. Well, most of these accounts, the people do pay the tax required on it. They do report...

REHM

10:42:44
To the U.S. government?

RAHN

10:42:45
To the U.S. government, yes. There are many reasons you'd want a Swiss bank account and/or an offshore account. One is the kind of returns you get. Right now in this country, you open a bank account. You get less than 1 percent on your money. Inflation is more than 2 percent. We have capital expropriation by the U.S. government. It's an unlegislated tax, so people seek higher returns. They want to protect their money against inflation, and that's one reason they go elsewhere.

REHM

10:43:16
All right. I'm going to open the phones first to Dallas, Texas. Good morning, Gary. You're on the air.

GARY

10:43:24
Good morning. I happen to be a Canadian who's lived in Dallas for 30 years. I have a Canadian credit card. And recently, just because my family members -- some of them live in Canada still. I wanted to open up a Canadian bank account with Canadian funds and do it remotely without having to go back to Canada.

GARY

10:43:46
I was told, even though I have a Canadian passport, valid, I cannot do that. I, of course, have a social insurance number as well. I cannot do that unless I am physically present in the country and show a proper ID. And that should tell you a whole lot about what is going on in the rest of the world compared to the Canadian relationship with Canada and transparency.

REHM

10:44:11
All right. Thanks for your call. Lee, I gather that's rarely a requirement for other offshore havens.

SHEPPARD

10:44:22
That is the way it used to be, and, you know, that's up to Canada and their banking laws that they're doing that. But lately, you know, in order to get a smaller customer who needs access to their money, you have to give it to him remotely, and you have to give him a credit card attached to the account. A few years ago, we had in the United -- with Americans banking in the islands, we had a whole amnesty for people who had credit cards attached to island bank accounts...

REHM

10:44:53
I see.

SHEPPARD

10:44:54
...and they weren't big hitters. You know, this was sort of a...

RAHN

10:44:56
Lee -- I have a question for Lee. I don't know any place where you can do that any longer. I know it's almost impossible for an American to get a bank account in Cayman if they don't live there.

SHEPPARD

10:45:09
Yes.

RAHN

10:45:09
The days of getting off cruise ships and open a bank account, getting a credit card, are -- had been gone for many years.

REHM

10:45:16
OK. I want to ask...

SHEPPARD

10:45:17
Yeah, though we're -- that is being cleaned up.

REHM

10:45:20
OK.

SHEPPARD

10:45:20
We're just trying to contrast what Canada's doing to this guy...

REHM

10:45:24
Right.

SHEPPARD

10:45:24
...and how easy it was, you know, previously to do this stuff.

REHM

10:45:27
Lee, can you talk briefly about the Foreign Account Tax Compliance Act...

SHEPPARD

10:45:35
Yes.

REHM

10:45:35
...and how far it will go to addressing the problems of tax havens?

SHEPPARD

10:45:43
What it is about? It is about making foreign banks and other foreign financial intermediaries -- but for our purposes, we're mostly talking banks -- report U.S. clients to the United States government or to their own governments under special agreements.

REHM

10:46:05
To their own government. I see.

SHEPPARD

10:46:06
OK. Now, what Richard Rahn is saying is becoming increasingly the case that foreign banks are refusing to do business with people with American passports because they regard this reporting as a great, big pain. The problem is, for them, they are going to have to do this reporting if they have investments in the United States, which a lot of them do because a lot of them are managing money for people all over the world.

SHEPPARD

10:46:35
Also, the other thing that has happened with FATCA, which is very interesting and none of us expected, is that other developed country governments like the European governments have said, oh, well, gee, we like this idea. We'll sign on to that because, proportionately, they have a much bigger problem of individual tax cheating than the United States does.

REHM

10:46:58
Hmm, interesting. Are there, in the United States, states that are considered tax havens? And can someone living in another state use that state as a banking depositor?

RAHN

10:47:20
Well, now have...

HENRY

10:47:20
No.

SHEPPARD

10:47:21
Yes and no.

HENRY

10:47:22
OK, James.

SHEPPARD

10:47:24
OK. You...

HENRY

10:47:24
We now have 13 states that have developed asset-protection trusts that are on the same model as the co-pilots.

REHM

10:47:33
So what does that mean? Explain that.

HENRY

10:47:37
Well, asset-protection trust is a fancy way of saying we can set up a trust to hold your assets and...

REHM

10:47:44
To hold or hide?

HENRY

10:47:46
Well, to -- they come to be in the same thing in practice in any case.

REHM

10:47:51
That's what I'm worried about. Are you telling me that the tax rate -- give me two states that do that.

HENRY

10:47:59
Nevada, Delaware, Alaska, South Dakota.

REHM

10:48:00
OK. All right.

HENRY

10:48:02
It's become a big business.

REHM

10:48:03
Now, does that mean that that person's wealth is protected from federal taxes?

RAHN

10:48:13
No.

HENRY

10:48:13
No, it doesn't. It should not be, but it can be used to protect it from creditors, for example. And so states like Nevada have just a two-year look-back rule that, you know, is being abused. I mean, the point is that there are also LLCs that are now available since the '90s. Every -- practically, I think 49 of the 50 states allow you to set up a limited liability company.

REHM

10:48:35
Corporation.

HENRY

10:48:37
So a place like Delaware, which we don't ordinarily think of as a tax haven -- when I asked a leading attorney in Panama where he hides his money, he said, oh, I go to Delaware. There's no beneficial ownership registration. There is no, you know, it's pretty good financial secrecy as a holding vehicle. You know, we're not talking about the money actually going to Delaware, but he'll use that as an intermediate holding vehicle.

REHM

10:49:03
And what is Delaware doing with that money?

HENRY

10:49:06
Well, they're making big business in the corporate services area. They have 900,000 companies registered in Delaware. And so, you know, this is just an example of where the onshore and offshore haven business is merging.

REHM

10:49:20
Richard Rahn.

RAHN

10:49:21
I want to go back just briefly to FATCA because it shows unintended consequences of something that people thought would be a good idea. It's not only that U.S. citizens living abroad can no longer get many foreign bank accounts, but these foreign banks have ceased investing in the U.S. And we're going to see an increased capital flow out of the U.S. which will hurt us in jobs.

RAHN

10:49:46
And it's not more of -- it's much more than a pain because FATCA has both civil and criminal penalties on it, and it's also an impossible law for many foreign banks to comply with. Let's say with a bank in Austria, somebody walks in, they've got a Greek name, they speak Greek, they talk about a business they have in Greece, so they think they're opening an account for somebody who's Greek.

RAHN

10:50:12
But they don't know that person may also have a U.S. passport. These days of dual citizenship, it's almost impossible for these financial institutions to know this with certainty. And to hold them criminally liable for things they cannot possibly know is very scary. And as result, they ceased investing in the U.S.

REHM

10:50:31
All right. Let's go to Advance, Mo. Good morning, Ryan.

RYAN

10:50:36
Hi, Diane. How are you?

REHM

10:50:38
I'm fine. Thank you, sir. Go right ahead.

RYAN

10:50:41
Alrighty. Well, my kind of statement question was, you know, one guy said earlier that corporations are made up of, you know, retirement investment people and all this. Well, I don't really think they are the ones that are capitalizing on this offshore investment. I think that the few, the handful of the rich that he referred to, are the ones that are capitalizing on it.

RYAN

10:51:08
But, you know, if they spent less money trying to hire the politicians that would make the laws that make it possible and friendly for them to do this and use that money to pay their taxes, wouldn't that decrease the rate that was required to try to run a country?

REHM

10:51:25
James.

HENRY

10:51:26
I think what you've seen is this -- for the last 30 years, the growth of so-called tax competition around the world under the influence of this very powerful private banking and corporate lobby that's succeeded in creating a lot of loopholes that Lee has talked about and I've mentioned as well. I think, you know, this is a vicious cycle where you have people who are basically not paying taxes having excessive representation.

HENRY

10:51:54
You know, there are -- now, as we speak, about 1,825 registered lobbyists in Washington, D.C. just focusing on tax issues. And they're not working for ordinary Americans. They're working for the largest companies. It's not just true, by the way, that the pension funds and other, you know, non-profit investors account for a majority of share ownership. Share ownership in this country is increasingly concentrated in the hands of the top 1 percent of the population.

REHM

10:52:27
All right.

HENRY

10:52:27
That's why we've had wealth and equality going.

REHM

10:52:29
Lee Sheppard, I have a question for you.

SHEPPARD

10:52:30
Yes.

REHM

10:52:32
Why were questions raised in Secretary of the Treasury Lew's confirmation hearings about an investment in a venture capital fund based in the Cayman Islands?

SHEPPARD

10:52:50
We have allowed investment funds -- that would be hedge funds, venture capital funds, private equity funds -- to register themselves in the Cayman Islands. And my understanding is it's mostly so you can keep your investor list a secret while being run out of New York, Greenwich, Chicago, places in the United States. And U.S. law says -- U.S. tax law says this, that, you know, the place where you're organized -- you don't have to be run there, you don't have to any people there -- is where you are a tax resident.

SHEPPARD

10:53:25
Now, if this thing has U.S. owners then those U.S. owners have to pay tax on their investment income to the United States government. But when the managers of these funds are going all over the world looking for investors, some of the investors do not want to tell their own governments that they have this investment.

REHM

10:53:47
So what did Secretary Lew do, James?

HENRY

10:53:52
Well, as I understand it, he had participated in one of these Cayman Island investments, a hedge fund.

REHM

10:53:57
And then -- and...

HENRY

10:53:59
And he was also running -- by the way, he was in charge for two years of Citibank's global private banking business. So some of us are concerned about how aggressive he's really going to be...

REHM

10:54:08
About these...

HENRY

10:54:09
...about this -- all of these issues they we're talking about.

REHM

10:54:11
And you're listening to "The Diane Rehm Show." Let's take a call from Fort Smith, Va. Good morning, Robert. You're on the air.

ROBERT

10:54:23
Good morning, Diane. I'm believing -- if somebody can answer my question -- that the banks have been staffed when we witnessed the banking crisis fault go about. And now what we're seeing in Cyprus is the (unintelligible) here because I think these -- they're just trying to protect their jobs. And so they won't open the banks. They're keeping them closed, so their jobs stay there. But they need to give everybody their money back and just go ahead and fall because -- the book of Revelations says something about three kings will fall. Seven will stand. These banks are kings.

REHM

10:55:00
All right. Thanks for your call. I think lots of folks are worried about the money and where it's going and whether small people, small investors are going to lose lots of money. Or is it just going to be the wealthy Russians, James?

HENRY

10:55:22
I think that the Cyprus situation calls into focus, I think, the fact that, you know, taxpayers -- in this case, the E.U. taxpayers -- are sick and tired of bailing out dodgy banks and lousy banking systems that are unregulated. This is partly the E.U.'s fault. They should have put in banking regulation. But Cyprus, at the end of the day, is one of the smallest havens on the planet. We have 73 such havens on our lists, and they are just number 20 in terms of secrecy and abusive regulation.

HENRY

10:55:56
So, you know, there are a lot of other havens that are -- actually, this was very good for -- a good week for private bankers from Switzerland, from Singapore, from the U.K., which also have very attractive laws from the standpoint of parking your money there. And they have been going to Cyprus and recruiting those Russian deposits there.

REHM

10:56:19
But with this latest news flash that the U.S. is going to take a much closer look at banks in Switzerland, including that in Liechtenstein, are we going to see more attention focus on exactly this problem? Richard Rahn, very briefly, please.

RAHN

10:56:45
Well, we're going to see a lot more attention. But remember that you got private banks in Switzerland, have been around -- some of them have been two or 300 years.

REHM

10:56:53
Sure. Right.

RAHN

10:56:55
These are some of the safest banks in the world. And for people who want to preserve their money, I think the real lesson out of Cyprus is, first of all, you want to pay attention...

REHM

10:57:05
I got to cut you short, please. Thank you. Richard Rahn, he's senior fellow at the Cato Institute. James Henry, he's an investigative journalist, author of The Tax Justice Network's report, "The Price of Offshore Revisited." And Lee Sheppard, contributing editor at the journal Tax Notes, thank you all so much, and thanks for listening. I'm Diane Rehm.
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