<B>Money laundering: food for thought</B>

Manuel Romera. Technical Director of the Financial Department. Instituto de Empresa

25 April 2005

The ‘White Whale’ operation in Marbella has fuelled the debate concerning financial webs hidden in tax shelters.

Tax shelters are located in geographical areas where hardly any taxes are paid. They enable non-transparency in information and great operative flexibility. They are nothing new. Back in the 1920s, the Isle of Man, Switzerland, the Bahamas, Liechtenstein and Luxembourg all drew large fortunes of the rich seeking to evade taxes at home.

Money laundering is, as we know, illegal. It is also a huge international problem. Temptation to pay lower taxes exists in all citizens and companies, but the problem does not lie merely in tax fraud. Obtaining money through illegal activities, such as drugs, arms smuggling and the white slave trade, is the true crux of the matter.

Spanish legislation includes anti-laundering and anti-shelter provisions. This year will see application of the Prevention of Money Laundering Act. This will require notaries, lawyers and financial entities to reinforce internal control through committees for monitoring new clients. It will hopefully discover, prevent and stop any money laundering these clients might undertake, and report it to Spain’s Tax Office.

This regulation is demagogical and not easy to apply. Any lawyer’s first job is to defend the interests of his or her clients and respect the concept of professional secrecy. For the notary, bearing witness to transactions and recognizing the parties does not imply any awareness of their finances and assets. Consequently, getting a lawyer, notary or bank to control its clients with premises as ambiguous as those in the regulation (“report indications of money laundering”), cannot be used to establish a true basis for detecting fraud.

The great White Whale

It would be more logical to act like the State’s security corps and equip international organizations (Europol, the Finance Action Force and the Forum for Financial Stability) with greater means.

We know the volume of money laundered in Marbella reached around €250 million. But tax shelters make the figures involved in White Whale look small. Grand Cayman island, for example, despite a size of only 700 square kilometres and a population of a mere 35,000, boasts over 40,000 blanket companies, 584 banks and some $700 billion in investment and pension funds – an amount on a par with Spain’s GDP. Furthermore, we still remember cases of international money laundering, such as in 1999, when $15 billion from Russia was traced going through New York banks.

The level of sophistication of these tax shelters is growing, and development of technologies is an unquestionable benefit for illegal networks. Accordingly, a wide variety of possibilities for laundering money exists in any tax paradise. Establishing base and instrumental companies in the names of front men or trustees who are undetectable is one. Acquiring citizenship in destinations such as Belize or Granada is another. Sophisticated investments, such as subscribing to APT (Asset Protection Trust) deposits is a third. Escape clauses, like automatic transfer of funds to another tax haven, in the event of investigation by the public prosecutor’s department, exist in a country such as ours. Techniques used to get money to the tax shelter in the first place include “smurfing,” or “multiple transfers”; this is where money is transferred to various destinations until all traces are lost, and the sum ends up in a numbered account in a tax paradise under the name of a blanket company. “Collusion,” or “hawala,” means simply using an intermediary to act as a channel for the money.

We might question whether the developed countries are doing everything in their power to eliminate tax shelters. We should be aware that money laundering and the management of undeclared cash from illegal activities is contrary to a fairer, safer world - one with a better redistribution of wealth.

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