Money Laundering Tax Evasion Capital Flight Tax Havens

Money Laundering, Tax Evasion, Capital Flight, Tax Havens, the Rule based and the Risk Based Approach: Keep it Simple by Brigitte Unger Paper prepared for the TNI Seminar on Money Laundering, Tax Evasion and Financial Regulation, 12 th and 13 th June 2007, Amsterdam, organized by Tom Blickman Brigitte Unger TNI 2007 1

Overview: From the old to the new AML regime in Europe 1. 2. 3. 4. 5. 6. 7. Assessment of money laundering and tax policy a. Reporting, blacklisting, endangered groups, compliance to FATF recommendations, crime and proceeds, b. tax evasion c. tax havens d. Assessment and the change from the rule based to the risk based approach 2. Conceptual confusion about money laundering and tax evasion 3. Differen interpretations of actors to fill the gap 4. Possible solutions Brigitte Unger TNI 2007 2

Amazon. com 110$ new 222$ second hand CAIMAN. com Amazon. co. uk 59, 9 £ new 137 £ second hand Amazon. de 92 € new 194 € second hand Brigitte Unger TNI 2007 3

1. a. Assessment of AML through reporting Total numbers of unusual and suspicious transactions in the Netherlands in 2005 Unusual Money Transfer Offices Suspicous 130. 992 29573 Traditional Reporters (Banks, Money Change Offices, Casino's, Credit Card Companies) 36. 165 7511 of which Banks 28700 4036 Traders with goods of high value 3. 767 1086 Government (custom, tax authorities, supervising authority) 472 185 Free professions (lawyers, real estate Brigitte Unger TNI 2007 agents. . ) 227 126 4

IMF list OECD Tax FATF 1. b. 1999 Blacklisting. Havens 2001 2000 FATF 2002 FATF 2005 FATF 2006 72 37 23 10 3 US, CH Lux Hungary Only European country: Nigeria EU-15: Lux A, Ire, NL, UK Russia Ukraine 0 Myanmar Nauru Ukraine Brigitte Unger TNI 2007 5

1. c. Assessment through compliance Source: Arnone and Paoan (2006) Brigitte Unger TNI 2007 6

1. d. Another way of measuring compliance Ferwerda and Bosma 2006 Brigitte Unger TNI 2007 7

1. e. Index of Attractiveness Brigitte Unger TNI 2007 8

1. e. Assessment of tax evasion Brigitte Unger TNI 2007 9

1. f. Assessment of tax havens Number of double tax treaties (greater leverage effect) NL: 80 -100, Belgium has 66, Denmark has 78 and the UK has 110. withholding tax on dividends, royalties and interest Tax exemptions Effective corporate tax and income tax rates Micro and macro calculations Problem of effective tax rates: Netherlands statutory corporate tax from 34% to 31% planned to go down to 25% Netherlands effective corporate tax rage: 1, 7 % (SOMO) – 7% (Sinn) – 20% (de Mooij) – 30% (Report Dutch Min. F. ) Brigitte Unger TNI 2007 10

Special Purpose Entities gross transactions in billion Euro Brigitte Unger TNI 2007 11

Assessment problems will increase when switching from a rule based to a risk based approach Brigitte Unger TNI 2007 12

2. Conceptual Confusion Type of Crime US Germany Austria Penal Code Tax evasion x if US taxes Only business no on crime and criminal if from mix org. Fraud criminal non criminal x Switzer Nether lands no no, misdemeanor, only if fraud Only business x and criminal org Brigitte Unger TNI 2007 x 13

2. Conceptual Confusion 1. With regard to money laundering and tax evasion 2. Third EU AML Directive effort to harmonize ML definition. But not for tax evasion 3. ‘national souvereignty’ Brigitte Unger TNI 2007 14

3. Different interpretations to fill the gap Naylor: don’t question the background of the money. More difficulties to assess AML due to risk based approach is accompanied by simplification trends in implementation and enforcement. More freedom, more efficiency but more arbitrariness and less fairness Increased role of the courts instead of politics Van Waarden’s lawyocracy Eventually risk based approach will become again a rule based approach Brigitte Unger TNI 2007 15

4. Possible solutions • • • Should tax evasion be part of money laundering or of corruption? Keep it simple: A Tobin tax instead For Europe EU law is stronger than UN Convention (enforcement by Commission, Council, Court) UN Convention: problem of finding enough support by member countries New Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism of 2005 signed by 27 countries, ratified so far only by Romania and Albania. Soft law as a first step? Brigitte Unger TNI 2007 16

THANK YOU ! Prof. Dr. Brigitte Unger Utrecht School of Economics Janskerkhof 12 3512 BL Utrecht The Netherlands +31 -(0)30 -253 -9809 B. Unger@econ. uu. nl Brigitte Unger TNI 2007 17