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The Bureau of National Affairs

No. 11
Wednesday January 16, 2002 Page G-7 
ISSN 1523-567X
Tax, Budget & Accounting

Money Laundering
CFP Study Indicates Laundering
Prevalent in High-Tax Countries

Tax havens are neither the source nor the destination of a disproportionate share of the world's criminal proceeds, according to a study released Jan. 15 by the Center for Freedom and Prosperity.

"Dirty money is more likely to be laundered in high-tax countries because that is where the illegal activity is most likely to occur," Andrew Quinlan, president of the center, said in a news release.

The U.S. State Department, Central Intelligence Agency, and Internal Revenue Service, as well as the European-based Financial Action Task Force, independently assess the extent to which a jurisdiction attracts or has the potential to attract dirty money, the study said.

Although some low-tax countries, which have been targeted by the Organization for Economic Cooperation and Development and the FATF as tax havens (75 DTR G-2, 4/18/00), appear on the center's list of money-laundering jurisdictions, they are far outnumbered by high-tax countries.

The report, U.S. Government Agencies Confirm That Low-Tax Jurisdictions Are Not Money Laundering Havens, was written by Daniel Mitchell of the Heritage Foundation, a partner in the CFP's efforts against the OECD's and FATF's efforts to increase exchange of financial information among countries.


Results From Study

Data from the study indicates that countries with low tax burdens and financial privacy are not any more likely to be money-laundering centers than high-tax countries, Quinlan said.

"No country with a significant financial services sector is immune to money laundering," Mitchell said.

Figures in the study indicate that the majority of the jurisdictions identified as tax havens or money laundering centers also have entered into the qualified intermediary program with IRS.

Financial institutions participating in the QI program must, among other requirements, determine whether an amount must be withheld, stipulate documentation that a withholding agent may rely upon to determine the status of a payee, and set conditions for payments to intermediaries (249 DTR G-2, 12/28/00).


Tax Havens and Money Laundering

According to the study, while tax havens attract wealth, most of the money is institutional investment. It added that U.S. corporations make extensive use of offshore regimes, "earning almost one-third of their profits in low-tax jurisdictions."

Although individual investors use tax havens, Mitchell said that the majority of the money represents legitimate investment by people seeking asset protection, sound money management, and lower tax bills. Although the last of these has become a contentious topic as high-tax countries ask low-tax nations to help them enforce their tax laws, it does not necessarily indicate criminal intent, the study said.

It is unlikely that criminals would rely on a tax haven to launder money as large sums generally are not deposited into a bank but transferred through a financial institution, Mitchell said.

"If the criminal money is in a bank, the laundering already has taken place," he said, adding that tax havens are also avoided as they have been red-flagged by law enforcement for potential abuse.


Tax Rates and Crime

According to the study, funds are usually processed relatively close to the underlying activity; often in the country of origin. It added that 99.9 percent of the criminal money in the United States is laundered successfully and that 99 percent of the criminal money in London is successfully laundered as well.

"Since most of the world's criminal activity takes place in North America and Europe, it should come as no surprise that tax havens are not major money laundering centers," Mitchell said.

The report pointed out that only high-tax nations and their institutions rate money laundering vulnerability, which points to a potential bias against low-tax jurisdictions as they are not allowed representation in these bodies, Mitchell told BNA.

"I do think there is a bias" in ranking countries' cooperation in combating money laundering, Mitchell said. "FATF does not rank its own members, but according to their requirements, the U.S., Mexico, and Japan would rank" as noncooperative.

Additionally, the report said that FATF branded more high-tax nations as being noncooperative in the battle against money laundering than low-tax nations.

The report concluded that "several U.S. government agencies and one international bureaucracy have analyzed the problem of money laundering and these groups have unambiguously concluded that low-tax jurisdictions are neither the source nor the destination for a disproportionate share of the world's dirty money."

A list of findings from the study is in BNA TaxCore.

Information for the study was gathered from the OECD report Towards Global Tax Cooperation, which is available upon request from the State Department's World Wide Web site at

By Myrna Zelaya-Quesada

Copyright © 2002 by The Bureau of National Affairs, Inc., Washington D.C.


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