3 - Overall compliance, tax havens, OECD and developing countries

Summary

As discussed in Chapter 1, to the extent that untraceable shell companies are easily available, law enforcement authorities will find it very difficult to make progress apprehending money launderers, tax evaders, corrupt officials, and a wide range of other criminals. At the most general level, what do the overall descriptive findings from the field study tell us about how well or how badly global rules actually work in practice when they mandate that shell companies be traceable back to the real people in control? This chapter presents the broad-brush results from the 7,456 solicitations made to the corporate service providers, compares them to what might have been expected, and seeks to explain the patterns that emerged. The broad finding that almost half (48.2 percent) of the replies received did not require certified identity documents, and more than a fifth (22.1 percent) did not require any photo identity documents at all, provides evidence for a significant compliance problem. But is this result a surprise? Though based mainly on reading laws rather than assessing actual practice, FATF reports have long indicated that both member and non-member countries have had trouble meeting the standard whereby authorities must be able to identify companies’ real owners. On this basis, perhaps non-compliance rates might have been expected to be even worse.

The next step is to break the results down to allow comparisons of compliance rates between rich developed countries, poor developing nations, and offshore tax havens. Unlike the overall level of compliance, this move reveals some definite surprises. Perhaps the greatest is that tax havens, long reviled as scofflaws of the global financial regulatory regimes, have an outstanding level of compliance far ahead of the average, and far above major OECD countries in particular. Also intriguing and running directly counter to expectations is the fact that poorer developing countries sometimes prove more compliant than developed nations (though not as compliant as tax havens). Given how wide of the mark it has proved to be, why has the conventional wisdom been that developed countries should have had much higher compliance rates than poor countries and tax havens? After describing the logic of these expectations, we explain the counter-intuitive results in terms of a campaign of international pressure against tax havens since the late 1990s.