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FACTDROP: The Cyprus experiment and the legitimisation of money laundering


The Cyprus experiment and the legitimisation of money laundering

Πηγή: New Europe
March 17 2013

Since saving Dexia, the troubled Franco-Belgian bank, costing around €100 billion, the benefit from a 10% levy on Cyprus banks’ deposits, amounting to less than €6 billion, sounds rather limited, compared to the potential risks of destabilising 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 centres.

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 world’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 euros 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 the 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 it 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) are from Russia.

Total funds parked in tax havens are estimated at €20 trillion by ‘The Economist,’ and between €20 and €30 trillion by the non-government organisation ‘Tax Justice Network;’ the obvious question is: why is “morality” only applied to Cyprus, which only accounts for 1% of such funds?

Christos Kissas, PhD

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