Reference no: EM132897268

There is growing hostility to the tiny states and islands around the world that harbour an estimated $6,000 billion (£3,895 billion, €4,725 billion) of offshore assets. After months of financial crisis and banking scandals that rocked Liechtenstein and Switzerland, the world's most powerful countries have lost patience. In Washington in November 2008, finance ministers from the Group of 20 leading industrial and developing nations concluded that tax secrecy 'should be vigorously addressed'. In December 2008 it was the turn of the developing countries. Ata United Nations meeting on development in Doha, tax havens came under fire for fuelling capital flight. 'The political climate on the issue of tax havens has changed dramatically over the past three months,' says Jeffrey Owens of the Paris-based Organisation for Economic Co-operation and Development. As the official who has driven the international crackdown on secrecy for more than a decade, he says the new climate could turn the reform promises extracted from many offshore centres into a reality. The financial crisis has intensified the attack on havens. The near-collapse of the West's banking industry has drastically increased governments' need to raise funds, brutally exposed the risks inherent in small countries with large financial sectors, and raised questions about the role of offshore centres in destabilising the system. Some European finance ministers claim that the 'opaque environment' of off shore finance - particularly hedge funds - contributed to reckless behaviour and, ultimately, the current crisis. President Nicolas Sarkozy of France is among those questioning whether, at a time of taxpayer-funded bail-outs, banks should even be allowed to operate in tax havens. Onshore businesses in London and New York exploit the offshore benefits offered by the likes of Jersey and the Cayman Islands to optimise the tax efficiency of certain deals, such as the repackaging of debt and cross-border lending. The havens themselves reject claims that they fuelled the crisis. 'It is like blaming a car manufacturer for road crashes,' says an official in one of Britain's overseas territories. The arrival of Barack Obama in the White House provokes even more anxiety for the havens. As well as launching last year's Stop Tax Haven Abuse Act, the president-elect helped this year to launch the Incorporation Transparency and Law Enforcement Assistance Act. This aims to make it easier for investigators to 'see through opaque corporate ownership structures' and stop the flow of offshore funds to the US from hedge funds and private equity that are 'of unknown origin' but do not have to pass money-laundering checks. On the campaign trail, Mr Obama also laid bare his hostility to the corporate use of offshore jurisdictions for international tax planning, which analysts estimate accounts for between one-third and a half of the revenues that Washington loses through off shore evasion and avoidance. 'There is a building in the Cayman Islands that house supposedly 12,000 US-based corporations,' he said. 'That's either the biggest building in the world or the biggest tax scam in the world, and we know which one it is. 'The dangers of focusing solely on small players while ignoring similar shortcomings in some industrialised countries was one lesson of an OECD crackdown on secrecy launched in 1996. Tax havens have exploited this evident hypocrisy to stall reforms pending the introduction of a 'level playing field'. Delaware is a state in the US which is infamous for allowing corporate financial secrecy of the kind that Barack Obama and many others are seeking to shatter in offshore financial centres. Arguments over Delaware - whose more than 600,000registered companies compare with an estimated 865,000 inhabitants - are part of broader fight over what many havens see as rich-country double standards in international action to tackle money laundering and tax evasion. 'The reality of Delaware is not lost on anybody,' says one official involved in efforts to improve financial transparency. Delaware's corporations are under no obligation to file names of shareholders or beneficial owners, according to a 2006 report by the intergovernmental Financial Action Task Force on money laundering. The state offers a structure known as a limited liability company, which can be registered with not much more than a name and address. The report says Delaware company agents advertise the state as allowing even greater secrecy than offshore tax havens. 'The Delaware LLC provides the anonymity that most international jurisdictions do not offer,' claims one agent web site quoted by the task force. Carl Levin, the senator with whom Mr Obama has campaigned on tax haven reform, is critical of the US failure to heed the task force's calls to lift the confidentiality surrounding companies in Delaware and states such as Nevada and Wyoming. Source: Houlder, V. and Peel, M., 'Harbours of resentment', Financial Times, 1 December 2008, p. 11. *

Question: Examine the costs and benefits that might result from government policies to remove 'tax havens'.