Winnipeg Free Press - PRINT EDITION

Offshore financial sector feels some heat

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Will 2013 turn out to be an annus horribilis for the offshore financial world?

Less than a month after the humiliation of Cyprus, a popular bolthole for Russia's financial ne'er-do-wells, tax havens have been hit with their own version of the WikiLeaks diplomatic-cables scandal. Armed with a cache of more than two million documents leaked from two offshore service providers, a group of investigative journalists has spent the past week publishing articles that lift the lid on thousands of companies and trusts set up in the British Virgin Islands and Cook Islands.

The vast client list ranges from Asian politicians to Canadian lawyers and no fewer than 4,000 Americans. For an industry that peddles secrecy and likes to operate in the shadows, it is all rather embarrassing.

Opinions vary on the impact of the leaks. Tax campaigners have cheered it as a "game-changer." Offshore operators counter that most of the activity uncovered is legal. So what if President Francois Hollande's former campaign treasurer has a Cayman Islands company? So do thousands of banks and hedge funds.

Nevertheless, the affair will add to international scrutiny of tax havens. The pressure on them has grown as governments scramble to plug fiscal holes and push for the systematic exchange of tax information across borders. Germany's finance minister welcomed the leak, hoping it would provide leverage to force more co-operation from "those who have been more reticent" to rein in the havens.

Faced with an end to the days of easy money, offshore jurisdictions are being forced to rethink their strategies. One of the more proactive has been Liechtenstein, nestled between Switzerland and Austria.

The principality has long been popular with European tax dodgers, but its growth accelerated when Swiss banks hawked Liechtenstein foundations to clients worldwide. This lucrative niche was damaged in 2008 when the former head of Germany's postal service and many others were caught hiding money in the principality.

Under pressure from America and Germany, Liechtenstein buckled, agreeing to dilute bank secrecy and exchange tax information. It has since signed many bilateral tax agreements and clamped down on money-laundering. The local financial industry has paid a high price for this: Liechtenstein banks' client assets declined by almost 30 per cent between 2006 and 2011, to $118 billion.

They are trying to regain the initiative. In a confidential "position paper" seen by The Economist, the banks and the government jointly set out a two-pronged strategy designed to help Liechtenstein thrive again, this time without tainted money.

First, it will sign as many tax treaties as possible, quite a U-turn for a place that once refused to sign any. Second, it will look to market itself as a "triple hub" that benefits from having the stable Swiss franc as its currency, from being a member of the European Economic Area, which gives it access to the European single market without being a member of the EU, and from offering a tempting array of vehicles, including trusts.

The trouble is, clients can go to Switzerland for the franc, and the E.E.A. is not the most alluring of clubs -- Iceland and Norway are the only other members. Use of trusts has boomed, but as an English creation, they work much better in common-law jurisdictions, such as Jersey and Singapore, than in Liechtenstein's civil-law system. So Liechtenstein has its work cut out as it tries to remain an attractive destination while complying with international rules.

Other offshore centres must also attempt to square this circle. Next may be Luxembourg, a leader in offshore banking and tax avoidance. Bowing to greatly intensified pressure from its neighbours since the Cyprus debacle, the Grand Duchy has dropped its long-held opposition to swapping information about non-resident depositors with other EU countries.

Prime Minister Jean-Claude Juncker said the policy shift was about "following a global movement," not caving in to German demands. Whether automatic information exchange can be introduced "without great damage," as he confidently declared, remains to be seen.

Republished from the Winnipeg Free Press print edition April 13, 2013 A15

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