Skip to content

The Cyprus experiment and the legitimisation of money laundering

March 18, 2013

Published in ‘New Europe’, online edition

Cyprus_atmSince saving Dexia, the troubled Franco-Belgian bank, cost around 100 bn euro, the benefit from a 10 percent levy on Cyprus banks’ deposits, amounting to less than 6 billion euro, sounds rather limited, compared to the potential risks of destabilizing the whole banking system of Southern European eurozone countries. This leads us to believe that this decision was rather political than economic. On one hand, it sets a precedent, breaking the taboo of bank deposits’ inviolability in a European country; on the other hand, it strikes a decisive blow on Cyprus’ status as a tax haven. The emphasis, for this decision, was put on moral grounds: it was considered unacceptable for an EU member state to be a low-tax jurisdiction and to facilitate tax evasion. But is Cyprus the only case?

As a matter of fact, over the last few years, we are witnessing a hysteric aggressiveness of many OECD and EU institutions against countries considered to be ‘tax havens’, based on the the ‘moral’ grounds of fighting tax evasion and money laundering. If these stated purposes were the only ones, there would be no reason not to support this action. However, there are strong indications that the tax haven ‘holy war’ has a hidden agenda, that of channeling most transactions in a small number of traditional financial centers.

When speaking about tax havens, it is useful to remember that the term is extremely large, and as many as fifty countries, including several EU members and the US, in some ways act as a tax shelter for international money. To give an example, both Ireland and the Netherlands are excellent places to set up a holding structure and to divert profits made from sales in other European countries. For Ireland, going under a bailout didn’t compromise its tax haven status.

Then, comes London, the word’s prime offshore centre. A specialty of London is a structure known as LLP, or Limited Liability Partnership, a tax transparent partnership heavily used in international trade. In fact, it’s a three-stage structure, comprising the LLP itself, its shareholders (usually “pure” offshore companies, such as BVI international business companies), and its subsidiary, for example a Russian or Ukrainian company, depending on the place of trade. These LLP’s are among the main instruments of worldwide transfer pricing, resulting in billions of euro in tax losses for third countries…

If we enlarge the scope of the analysis, and look beyond the EU, we must admit that the United States themselves are in some respect an excellent tax haven. Some States, such as Delaware and Montana made a specialty of setting up quickly and relatively anonymously so-called Limited Liability Companies (LLC’s), which are zero-tax structures if their owners are non-US residents and their activity is exclusively carried outside of the United States. A recent study by Professor Michael Findley of University of Texas at Austin et al. has even concluded: “It is easier to obtain an untraceable shell company from incorporation services (not law firms) in the United States than in any other country save Kenya.”

In this context, isn’t really hypocritical for the Eurogroup to only ‘teach Cyprus a lesson’? Many think it is, and some even relate this ‘lesson’ to the fact that a large part of funds deposited in Cyprus’ banks (around 20 billion euro) are from Russia.

Total funds parked in tax havens are estimated at 20 trillion dollars by ‘The Economist,’ and between 20 and 30 trillion by the non-government organization ‘Tax Justice Network;’ the obvious question is: why is “morality” only applied to Cyprus, which only accounts for one percent of such funds?


From → Views & Opinions

One Comment
  1. ” The Tax Justice Network (TJN), published a report that changes the traditional stereotype of tax havens that are mostly thought of being small exotic islands. On the contrary the report shows that hundreds of billions that come from tax evasion and money laundering find safe haven in major economies that otherwise pretend that they “fight” against these practices.

    Germany is a special case to look at, since according to the “Financial Secrecy Index” , ranks at the 8th place out of 82 countries and is marked as the “Eldorado” for money laundering! In contrast, Cyprus that has suffered a violent collapse of its banking system in the framework of the bailout/bailin program ranks only 41st and appears to be much more transparent than Germany. The punishing treatment of Cyprus by the Eurogroup in March 2013 was based largely on Berlins argument that the island is “washing” funds of Russian oligarchs..

    As mentioned in the report , Germany “cleans” every year 29-57 billion, with much of the money coming from organized crime…”

    November 8, 2013

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: