The wealth management industry has reacted in measured terms after the bien pensant of the world economic community put its collective weight behind steps to deal a fatal blow to the world's tax havens, those morally contentious financial hideaways that shield even the largest sums from the harsh and fastidious glare of the local taxman.

These conduits of financial chicanery which offer secrecy, feather-light regulation and potentially colossal tax advantages to the rich, both corporate and individual alike, have long been eyed with deep suspicion by certain members of the global economic community, and with the world financial sector still in a tail spin they have seized their moment.

The efforts of the great and the good were driven forward by the Organization for Economic Cooperation and Development (OECD), a Paris-based consultative assembly.

Though the OECD represents 30 developed economies, it has no real independent power, but France and Germany had been lobbying forcefully in the run up to the G20 summit for world leaders to implement its recommendations and to cut a swathe through the offshore banking community.

The summit was, among other things, an attempt to rebrand the public face of capitalism, to put a velvet glove on the invisible hand in the hope of making its machinations a little more tangible and its touch a little less abrasive.

For those who seek to rejuvenate contemporary capitalism with a salutary dose of regulatory control, there are few targets as tempting as the opaque and obdurate offshore financial centers which together make up the ethereal world of shadow banking.

The OECD has accused the offshore financial centers of squirreling away between US$5 trillion and US$7 trillion of domestically taxable income.

The fact that these offshore accounts are protected by a highly developed system of secrecy laws does of course beg the question as to how the OECD arrived at these figures, but nonetheless it is widely acknowledged that offshore banks have a serious amount of money under management.

Playing havoc

Except for those that have money secreted offshore, tax havens are generally regarded to be a bad thing.

They play havoc with the tax revenues of developing economies costing them billions of dollars each year in lost tax earnings and, in more mature economies, they help transfer the weight of taxation from rich corporations and individuals to poor and middle income families.

On top of this, offshore financial centers are twilight zones of unregulated transactions which, some argue, have helped to undermine global economic stability by camouflaging the real value of global assets.

The last time the OECD took a shot at these tax havens was in 1998, but their power was ultimately dampened by the ever swelling tide of the Washington Consensus that favored more, not less, tax competition. As this consensus evaporates and is replaced with a more left-of-center philosophical underpinning, some market observers believe that the time is now ripe for root and branch reform of the offshore banking system.

Tax havens are rushing to sign bilateral Tax Information Exchange Agreements, model agreements developed by the OECD. These agreements provide a legal instrument to facilitate the transfer of information between jurisdictions, but are they fit for the purpose?

While it could be argued that signatories are paying lip service to the aims of the OECD by gladly entering into such bilateral agreements with other centers, this enthusiasm should be seen as a barometer of their perceived effectiveness. It is not often one sees the fox running knowingly towards the hounds.

The nub of the problem is that the agreements themselves make it very difficult to extract information from the respective parties and, ultimately, either signatory can simply refuse to provide the requested information. The recent case involving UBS indicated the limits of the scheme. The bank, to settle a charge that it promoted tax fraud, agreed to turn over the names of some 300 clients to the US Treasury, but it has balked at turning over another 47,000 names of US account holders suspected of tax evasion and has recently instructed US lawyers to defend its position.

In practical terms, these agreements only call for cooperation with foreign authorities - which effectively means disclosure of account information - if there is a sound and justifiable case to answer.

In essence, the agreements only deal with cases where there is evidence of tax evasion, not tax avoidance. This is all very well and good, but it means that requesting authorities should at least show a prima facia case backed up with evidence, and it is not hard to imagine situations in which the necessary evidence is contained within the offshore accounts themselves.

(The author is counsel of AllBright Law Offices in Shanghai. The views are his own. His e-mail: sbmaguire@allbrightlaw.com.)

(Shanghai Daily April 20, 2009)