The Swiss bank UBS agreed Wednesday to reveal the names of American clients suspected by the IRS of tax evasion. For years, Swiss banks have been famous for their secrecy. Where should you go to hide your money now?
Andorra, Liechtenstein, or Monaco. * Those are the three jurisdictions listed as "uncooperative tax havens" by the Organization for Economic Cooperation and Development, an international group that tracks financial transparency. In other words, these are the countries whose banks are least likely to give out information about their clients, even if they're involved in major crimes or terrorism. Dubai and Singapore have high levels of bank secrecy, too. Unlike, say, the United States, those countries allow you to set up accounts that hide the names of the real owners, using trustees as go-betweens.
Less secret but still shady are the 35 jurisdictions that are, according to the OECD, "committed to improving transparency" but that still have a long way to go—including the Bahamas, Belize, Cyprus, Gibraltar, the Isle of Man, Netherlands Antilles, Panama, and the U.S. Virgin Islands. These are "tax havens" where you can stash your money to avoid paying U.S. taxes but can't keep your identity a secret. (In other words, not the best place to hide your blood money.)
The legality of tax havens is tricky: Americans are required to report overseas income, and the United States has taken steps in the past year to crack down on people who open offshore bank accounts to evade taxes. But there are still loopholes. For example, if you start a business with a real physical presence in, say, the Cayman Islands, the United States isn't entitled to tax payments. If, however, the investor ever wants to bring the money back to the United States, he has to pay taxes on it.
Even in shady countries, certain rules apply. Many of countries on the OECD's list, such as Belize and Grenada, have anti-money-laundering laws. Some even have "tax information exchange agreements," or treaties among nations whereby one country can request information about all its taxpayers from the other. For example, the United States has agreements with Guernsey, Jersey, Liechtenstein, the U.S. Virgin Islands, and several others stipulating that if someone violates the partner country's tax code using foreign banks, they will divulge their banking information. (Read the U.S.-Liechtenstein agreement here.)
The most popular "secret banks" tend to be the stable ones—which explains the reputation of Switzerland, with its near-zero inflation rate. But stability comes at a cost, since anyone with money in Swiss banks has to pay Swiss taxes. (Taxes in Switzerland are lower than in the United States, but higher than in, say, the Bahamas.) As for tax havens, insurance companies tend to have accounts in Bermuda, while hedge funds prefer the Cayman Islands—but that's more a question of tradition than practicality.
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Explainer thanks Raymond Baker of the Global Financial Integrity Project, Cornelius Hurley of Boston University, and Adam Rosenzweig of Washington University.
Correction, Feb. 21, 2009: This article originally identified Macao as one of the "uncooperative tax havens." (Return to the corrected sentence.)