The Nassau Institute
Workshop "Bermuda's Tax Information Exchange Agreement (TIEA)", 15 February 2002
How did we get into this mess? When in a hole, stop digging!
Good morning, Ladies and Gentlemen,
After the events of September 11, people get more used than ever to play to the tune of the latter-day Piper of Hamelin. I emphasize: more than ever. For the drive to get
lex americana universalis adopted world-wide is all but new: in fact it has been with us already for several decades. But those who early on rung the alarm against this kind of legal, economic and political aggression where up against gullible but powerful forces - mostly in their own camps. So it may be in order to take a look back and seek inspiration from past events and failures to properly and timely respond to benign-sounding yet real challenges to such time-tested principles as fiscal sovereignty, tax competition and financial privacy.Let me begin with some questions I had prepared last year for an audience each of you could easily recognize as the Mecca of the Anti-Money-Laundering disciples, i.e. at the 19th annual
Cambridge International Symposium on Economic Crime. There, two days after the watershed 9/11 events, Gilbert Morris, Richard Rahn, Dan Mitchell and I had our workshop on financial privacy, with only Dan failing to make it from the States. Being as relevant today as they appeared to me before 9/11, I may repeat these still unchanged questions here as food for thought:I take it you, too characterize our Western civilization with the recognition and respect of individual human rights. And if you were to make an inventory of its key achievements, you would probably also proudly think of the right to life, the right to due process, the right to the presumption of innocence, the right to private property, the right to privacy, the right to undisclosed private property, the freedom of expression, association & movement, etc.
These ideas are seen to be fully in line with the
principles of state formulated centuries ago not least by Adam Smith and Whately, namely: the state may legitimately impose financial or blood sacrifices on its citizens and foreigners, which may seek refuge on its territory for themselves and/or for their wealth, only - and I quote - "in return for the protection afforded by the Sovereign." (as quoted in The Oxford English Dictionary, Second Edition, vol. XVII, 1989, p.679)? Adopted to our time, the same ideas can again be found in "The Saint Louis Declaration" of June 2001, which spells out - and I quote - "the fundamental human right for individuals" "to flee political and economic oppression ... and ... to move themselves and their property to nations of other political jurisdictions with levels of taxation and public services compatible with their individual tastes and preferences" (World Taxpayers Association, National Taxpayers Union & 31 US + foreign taxpayer organizations, http://www.ntu.org).To be sure, in the presence of an increasingly complex society and ever-more capital-hungry administrations, respect for the principles I just mentioned has required first of all an informed, active and self-asserting citizenry. But more than ever, a free society deserving its name also must provide for its Citizens to have effective recourse to competent, principled and reliable specialists, allies and representatives with privileged client relations. Thus, since time immemorial, lawyers in particular have enjoyed special protection from the law. And they have routinely been called upon to defend alleged wrong-doers, without being stigmatized for doing also that.
Another example is the domain of our spiritual well-being, where religious freedoms, tolerance and rights have come to characterize advanced societies. Even non-catholics have grown accustomed to the sanctity of such institutions as the confessional, with priests being our undisputed and protected, even legally immunized confidants.
In the domain of our physical health, already the Hippocratic Code explicitly provided for a patient's conditions to be treated as "sacred secrets". And modern medicine and its practicioners still follow this time-tested and generally beneficial principle with full coverage of the laws everywhere.
Finally and since many generations now - and this is certainly not the least achievement of civil society - in the domain of our social and economic conditions, the rights of individuals have been afforded legal, even privileged protection vis-à-vis the ever-growing claims of society on the individual. Until recently, this has been the case in both civil and penal matters. In other words, in many democratic countries the Citizen enjoyed the legally protected presumption of innocence not only in penal but also in fiscal matters.
Reflecting these fundamental principles, the Swiss Civil Code, for one, puts the burden of proof on the taxman for what the Citizen legally owes to the state. But in practice, Swiss employees, too are obliged to file their salary certificate in support of their tax declaration - to the dismay of those who have looked for genuine alternatives to the growing criminalization of socially reprehensible behavior, and of those who think to have found a possible answer to society's growing ills in the form of a re-responsibalization and re-empowering of the Citizen and the concurrent strengthening of his position vis-à-vis the state.
Now, think of the time before some ill-informed and myopic bounty-hunters and greenhorns were allowed to successfully distort the image of money managers. Like lawyers, bankers then have equally been appreciated and protected for their discretion and active asset-protection role. Generally, they have been obliged by law to protect the confidentiality of their clients. And, traditionally, they have fulfilled key functions on both the micro- and the macro-economic scale. As an example, Swiss bankers alone continue to invest in the US economy to the recession-relevant tune of an estimated 700 billion dollars overall. Naturally, that money consists mostly of funds entrusted to these wealth gardians by Citizens from around the globe seeking effective protection for the fruits of their labors, be it against excessive taxation or against modern versions of Nazi Germany's "Law on the confiscation of property belonging to the enemies of the German people and the German government" of 14 July 1933 and its "Law on the sell-out of the German economy" of 12 June 1933.
There are, of course, those who drew inspiration from one facet of the otherwise devastating, for socially counter-productive experiment the American society went through with what is remembered as the Prohibition. True, Al Capone was a tough character to be nailed down with the ordinary criminal code. And so would be Omar bin Laden and other current "bad guys". So back in the thirties, US politicians and law enforcement agencies looked for and discovered the fiscal law as an effective substitute for painstaking but solid ordinary police work. Since then, many have let themselves be steam-rolled into anti-privacy legislative actions purportedly in response to real, semi-real and make-believe dangers, such as drug traffic, Y2K and now global terrorism. More or less knowlingly and willingly, they thus lent a hand for lifting constitutionally protected rights and liberties. In the early thirties, new drug laws took the place of the abandoned anti-alcohol legislation. And after World War II, the pursuit of American taxpayers beyond the territorial jurisdiction of the US Internal Revenue Service increasingly made a mockery of such time-tested and mutually beneficial principles as respect of other countries' sovereign rights, protection of foreign investors against foreign economic harassment and taxation, and prevention of double taxation - meaning protection against double-taxation for the taxpayers concerned rather than, as is mostly the case today, for the prime if not exclusive purpose of promoting the involved tax authorities' narrow interests.
By now, we have already some 2600 banks around the world who found themselves compelled to abandon their traditional role and to become Qualified Intermediaries in the service of the IRS. As such, these banks are now all subject to precedent-taking US laws. They must have their books audited by US-approved fiduciaries, including those factual monopoly holders who helped such apparent success stories as Enron, Global Crossing and Swissair to be milked and mis-managed so badly that they hit the dust. Among all of their clients, these banks now must identify US persons and collect from them US taxes. This includes a new withholding tax which confiscates 31% of the capital thus invested and on which the US constitutional lawmakers have not even been consulted, not to speak of their exclusive tax writing powers.
What are the ramifications of this extraordinary case of bureaucratic lawmaking on our system of democratic institutions, Rule of Law, sovereignty and national economies? What consequences are to be drawn from the fact that this witch-hunt for US tax dodgers has not only been a dismal fiscal failure but is about to turn into an economic and political disaster as well? For in the QI case, almost all timely-informed US persons declined the opportunity to identify themselves to the IRS. And in the case of the world-sweeping anti-terrorist measures - as Richard Rahn has foremost reminded us in some of his writings - the also very real and lasting victims are individual liberties and less investor confidence in the US market by foreign investors. So with active - but, hélas, not cost-free - prodding by our allied ground-stampers on the Hill in Washington, US lawmakers have started to wake up to the fact that this piece of fiscal aberration has already caused a capital flight from the US economy of the order of several hundred billion dollars - at the very moment when a recession is under way and every foreign investment is thus that more welcome.
On the slippery way to this current situation, in the early eighties, an Orwellian scheme was hatched by taxmen from the IRS and their foreign colleagues. They went to work behind closed doors at the Western world's pro-market, pro-sovereignty and pro-privacy Holy Grail, i.e. the Paris-based 30 nation
Organisation for Economic Cooperation and Development OECD. Equipped with a self-serving mandate for "combating tax avoidance", these dedicated public servants set out to provide for effective international tax data exchanges ... and they almost got there before any constitutional lawmaker anywhere had taken notice of what, in fact, they were up to and what would be the consequences for their own national economies. But when, on 25 January 1988, the fruit of their labors, i.e. the INTERFIPOL or OECD Convention on Mutual Administrative Assistance in Tax Matters was opened for signature, not a single government showed up. 21 months of global campaigning among businessmen, lawmakers and finance ministers had brought this bureaucratic juggernaut to a standstill.But the reprieve was short-lived. Drawing on the expertise thus gained, the Financial Action Task Force FATF was brought into being, initially - but only initially - with a less attackable focus on drug money, followed by the OECD's manifestly anti-fiscal sovereignty harmful tax competition initiatives.
So much for how we had gotten into this mess already before the events of last September came as a godsend for the international fraternity of taxmen and other bureaucrats who were thus handed a general purpose fig-leaf and blanco-check for both trespassing fiscal sovereignty and lifting financial privacy and bank secrecy under the guise of fighting terrorism. However, for all those who haven't skipped or forgotten their history classes, as the saying goes, it is urgent to be patient! And, as the title of my remarks suggests: When in a hole, stop digging! Indeed, in the absence of a magntic field, the mere shaking and purportedly knowledgable reading of a magnetic compass constitutes ill-guided and ill-guiding activism which is at best useless, time-and energy-wasting self-delusion.
So what, besides leaning back, are we to do? One answer that comes to mind is: try to look beyond the surface of things, look out for the hidden links, develop and follow your instinct, and fine-tune your natural curiosity towards developing, asking and following up on unorthodox questions. And: Don't get caught snoring while on the watch!
Translation (let's take again the most illustrative fiscal example): Now, fiscal sovereignty is an important integral part of any country's national sovereignty. It can be seen, on the international level, as the equivalent of an individual's human rights. If it is not to be lost by default, incompetence, fear or what have you, it must also be steadily and competently asserted, practised and, if need be, vigorously defended. Within the bounds set by international law, it can, and ought to be put to the best use in the national interest by way of the constitutional lawmaker and the corresponding national authorities. And unless our family of nations system is, and is to remain based on equal sovereignty, no other state, and certainly no international organization is seen legitimized to erect international pilories, to "name and shame" sovereign countries into actions against their will, to threaten them with sanctions and stampede them into adopting rules and regulations not reflecting their own interests, rights and intentions. Beware of what, to me, looks like a new, unchartered and ill-considered form of conquest and colonialism purportedly serving some make-belief higher interests but gravely damaging time-tested customs, rights and values! Or is anybody here who wants to take corresponding responsibility for wrecking further havoc on our societies and international relations?
In the face of all this, I think there is reason to pause. We may want to ask, and insist on answers to some hard questions. E.g. can we accept our cherished democratic principles, Rule of Law, international law and human rights to be compromised by way of any of the national and international tax initiatives I have just mentioned? Can we accept and afford to let self-elected international bureaucratic lawmakers at the United Nations, the OECD, the FATF, the European Union and elsewhere dictate rules and laws and otherwise run roughshod on nominatively free and sovereign countries? Are we prepared to abdicate our own individual and national responsibilities in favor of IRS-promoted and IRS-enforced lex americana universalis? Before going that road, should we not seriously inquire where we want our society to evolve to, what we want it to look like for our children, and what, individually, we are capable and willing to contribute to that end?
We may want to draw inspiration from both our own and our forefathers' experiences. And - not last - we may want to remember that the Berlinwall fell in our direction ... it did not fall eastwards, in favor of some discredited ideas, ideologies and structures. So we need more clear-sightedness and pierce through and reject the money-laundering arguments and other smoke-screens and fig-leaves which have been thrown up all around us. Indeed, what is there to hide? My bet is that at least some US lawmakers have smelled blood. Not unlike in the case of the UN, we may thus live to see them utilize their power of the purse in order to bring about the overdue house-cleaning at the US-dependent OECD - in as much as this useful international service organization has been hijacked and turned into an anti-competition, anti-sovereignty and anti-privacy instruments.
And what can you do to significantly increase the chances for at least some of that to really happen? To begin with, don't even try to fight hardball-players with softball; they'd only - and rightly so - despise you for that! Get to know your sovereign rights well! Ask your Government, your Parliamentarian and your professional association unmistakably to draw the line against and to fight, tooth and nail, any and every transgression of your country's sovereignty, regardless of the pretenses offered for the intended setting aside or violation of traditional principles governing the relations among sovereign nations. And don't take no for an answer! Most importantly: Don't expect your adversaries to respect what you are not capable or willing to fight for. So don't abandon your rights, and instead miss no opportunity to seriously, and if need be, visibly fight for their preservation, for their respect by others, and for their imaginative legitimate use! In sum: Stand up and be counted! And, not least, sign on the dotted lines of both suitably formulated and addressed letters and checks. In order to make sure the related political guerilla forces at work for you will continue to produce the miracles for which they have become notorious but have neither a secret nor a monopoly, yet need and deserve your meaningful support.