March 13 (Reuters) - Switzerland, Austria and Luxembourg all sought ways on Friday to fend off a global crackdown on tax evasion by making concessions on bank secrecy. . .

The three countries agreed to fully adhere to the OECD's Model Tax Convention's Article 26. . .

The changes go some way towards more cooperation with foreign tax authorities, even though they still fall short of the G20's and EU's key demand -- automatically sharing foreigners' account information.

I was just talking about the issue of banking secrecy in my Transborder Flows course on Wednesday. The subject was money laundering, and the issue of tax evasion overlaps. With both money laundering and tax evasion, the perpetrators want to park their gains in someplace safe and private.

I’m assuming that threatened “global crackdown on tax evasion” would be the kind of blacklist that was successful in getting non-compliant countries and territories to become compliant with the anti-money laundering/counter-terrorist financing provisions of the Financial Action Task Force’s Recommendations.

None of the countries that had been placed on the list of Non-Cooperative Countries and Territories (NCCT) remain on that list. No new countries or territories have been added to the list since 2001. Does that mean that we’ve made great strides in international cooperation to fight money laundering and terrorist financing? I don’t think so.

J.C. Sharman (2008) provides an interesting analysis of the way FATF used discursive power to compel compliance: direct coercion (If you don’t comply, we’ll place you on the NCCT list and then you’ll be subject to financial shunning), mimicry (We’ll help you develop institutional practices and expertise to comply just like we do), and competition (You better be even better at complying than that other country because companies will make investment decisions based on who complies best). Sharman finds that “the costs [of complying with FATF rules] substantially outweighed the benefits for each country” (639). Furthermore, “there has been little evidence of [AML] policy effectiveness. This is true whether effectiveness is taken in absolute terms, as success in disrupting criminal finance and the underlying illicit activities, or in terms of cost-effectiveness, that is whether the regulation produces benefits for society greater than the costs of the regulation itself. This latter approach is advanced by the OECD as constituting best international practice in assessing regulation” (641).

So, we have a situation in which compliance is now widespread but effective mechanisms of action are pretty much wholly absent. Just because you cross the t’s and dot the i’s on the legislation doesn’t mean that you’ll have an effective means of combating money laundering and terrorist financing. Instead, and ironically, having the system in place absolves you from the responsibility of it not working: But we’re doing everything you told us to do!

A big part of the problem, I think, is that the prescribed mechanisms for fighting money laundering and terrorist financing don’t work all that well. Sure, they catch incompetent criminals (like Elliott Spitzer) who are too dumb to outwit the fairly predictable computer algorithms that pop up suspicious account activity. But it would not be too hard to get around those rules. And it would be fairly easy for bad guys to coerce or bribe bank tellers, car dealers, and others to not file reports that could trigger police inquiry.

Another problem is that the implementing the recommendations requires a substantial commitment of funds. Though the rules might be on the books, and minimal implementation might have been undertaken, making these flawed rules work probably requires a more sustained allocation of cash than many countries can or are willing to expend.

And finally, the rules may not fit the cultural context in which they are imposed. The mimicry of rules that fit the US and the UK can create a cultural disconnect that undercuts the legitimacy of those rules.

Are there lessons to be learned from the AML/CTF story for the extension of the regime governing secret bank accounts and international collaboration on the prosecution of tax evaders? Perhaps. One huge difference is that with Switzerland, Luxembourg, and Austria as the targets of the OECD efforts, the disparity of power isn’t that great – not at all like what you saw when FATF ganged up on Sao Tome and Principe.

But still, here are the potential problems:

• The tax evasion detection rules simply might not work all that well. There are so many available ways to hide money that requiring banks to give account information might be insufficient for really finding the bad guys.

• Although these three countries certainly have the funds to conduct investigations of suspected tax evaders, the banks themselves might use their resources to litigate and invoke administrative procedures to drag their heels to avoid disclosure.

• This second point might just work because the sympathies of the citizens of these countries may be on the side of the secrecy-seekers. Since these countries, especially Switzerland and Luxembourg, have traditions of bank secrecy, people might simply not believe the new rules are needed, or they might believe that the rules undercut an important national tradition. They may be less willing to be forthcoming about disclosing names and complying with rules that they don’t think are legitimate.

But the extension of a regime on taxation is interesting. The fact that it happens at this time of financial crisis is not surprising. While I don’t like the erosion of privacy – and eliminating this kind of privacy could be said to contribute to that erosion – I don’t really have any sympathy for those people who want to hide their taxable income in offshore, secret accounts. I pay my fair share of taxes. They should too – or be prosecuted. So, good luck to the OECD! I hope that these changes in Switzerland, Luxembourg, and Austria’s policies are not just a sham.

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Sources:
Q+A-Tax havens' moves to avoid blacklist (2009). Reuter’s, March 13, on-line at http://www.reuters.com/articlePrint?articleId=USLD62339020090313

Sharman, JC. 2008. Power and discourse in policy diffusion: Anti-money laundering
in developing states. International Studies Quarterly 52 (3): 635-56