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CFP Strategic Memorandum

To:      Supporters of Tax Competition, Financial Privacy, and Fiscal Sovereignty

From:  Dan Mitchell, Heritage Foundation Senior Fellow

Date:    September 20, 2001

Re:      Strategic Memo

Last week's reprehensible attack on innocent men, women, and children quite understandably has pushed all other issues into the background. America is at war, and the war is with an opponent with no honor and no decency. President Bush, with the full support of good people around the world, is appropriately focused on the identification and punishment of the thugs that organized and facilitated the deadly assaults.

In his speech to the nation, the President stated his intention to deal with the terrorists and "those that harbor them." This statement – the highlight of the President's remarks - signifies that rogue nations such as Afghanistan will face well-deserved and overwhelming retribution for their sponsorship and shelter of terrorist groups.

But there may be other guilty parties that deserve U.S. retribution. More specifically, if it turns out that a financial institution knowingly served as a banker to the terrorists, the relevant individuals at that establishment have blood on their hands and should be turned over to the U.S. authorities so they can stand trial for accessory to murder. And if the country harboring those people refuses to comply, it should – at a minimum – face sanctions that make the OECD's proposed "defensive measures" against low-tax jurisdictions seem like child's play by comparison.

America will act alone if necessary to see that justice prevails, but other nations should lend their support. As I wrote in July, "…all countries should cooperate in the investigation and prosecution of universally recognized crimes. If a nation fails to assist in criminal investigations – for example, by acting as a safe harbor for terrorists – then coordinated international pressure is warranted."1 And needless to say, lethal force is the appropriate form of "coordinated international pressure" when dealing with acts of war.

Unfortunately, instead of uniting behind an effort to punish the guilty, there are those who wish to exploit tragedy for political gain. If my conversations with journalists in recent days are any indication, opponents of tax competition are using the terrorist attacks as a reprehensible prop in their campaign against low-tax jurisdictions. While the journalists do not divulge their source(s), I am asked to respond to the accusation that my work indirectly is aiding terrorists by making it possible for people to hide their money.

My first reaction, other than anger, is that this kind of despicable tactic should be ignored. But I fear that a failure to respond will be misinterpreted. My second reaction is to make a principled argument on the need to defend civil liberties and Constitutional freedoms. Is Amnesty International wrong to oppose torture, for example, even though thumbscrews might solve more crimes? Are law professors and judges wrong to support the Fourth Amendment even though unlimited ability to invade private homes and offices might solve more crimes? In a free and just society, the power of government is constrained to protect the rights of individuals, notwithstanding the fact that criminals use those same rights to fight prosecution.

But I realize that this reaction also is misguided, or at least incomplete. It is inadequate for three reasons. First, it does not challenge the assumption that the OECD agenda would have any impact on criminal activities. Second, it diverts attention from the types of mutual legal assistance arrangements that could prove helpful in the battle against crime. And third, it ignores the fact that the OECD scheme would undermine the incentive for nations to cooperate in the pursuit of criminals. More specifically:

  • The OECD agenda is designed to help high-tax nations tax income earned in low-tax jurisdictions, not to identify and catch terrorists – The OECD wants to stop jobs and capital from flowing to low-tax jurisdictions. One way of achieving this goal is to give high-tax nations like France the right to impose French tax rates on any income that residents earn in low-tax jurisdictions. This is why "information exchange," which means requiring low-tax nations to divulge data on the income and assets of foreigners, is the essential feature of the OECD agenda. "Information exchange" is an indirect form of tax harmonization because taxpayers face the same tax rate regardless of where income is earned. French taxpayers will have very little incentive to shift activity to a lower-tax jurisdiction, after all, if they still are subject to confiscatory French tax rates. "Information exchange" is misguided tax policy, but it also is absurd to argue that this type of policy will have any impact on criminals and/or terrorists. When tax authorities collect income data, regardless of whether a taxpayer is reporting income earned in another country or income earned at home, that information has very little value to (non-tax) law enforcement unless the government already had a reason to suspect a taxpayer of wrongdoing. And if a government already suspects someone of wrongdoing, there are international mechanisms for obtaining necessary information on their financial affairs.
  • Turning law enforcement officials into tax collectors diverts resources that should be used by police and intelligence agencies around the world to identify and catch terrorists and other criminals – Law enforcement officials should be able to focus on catching criminals and deterring crime. Conscripting them to act as adjunct tax collectors, particularly in the pursuit of bad tax policy, undermines this core mission. In pursuing this core mission, law enforcement officials generally can count on international cooperation thanks to a series of mutual legal assistance treaties and other international commitments. Nations across the planet traditionally have observed the principle of "dual criminality," which means that they help each other investigate and prosecute actions that are against the law in both nations. Needless to say, murder is universally recognized as a crime, so all jurisdictions should cooperate in the battle to catch and punish the terrorists. This raises the question, of course, of how to respond if a nation does not honor these commitments? To quote from the Center for Freedom and Prosperity's July 17 Strategic Memorandum, "If there were rogue regimes that acted as havens for terrorists, drug dealers, and hit-men, that would justify a coordinated international response."2 This statement applies regardless of whether the haven is a low-tax jurisdiction or a high-tax jurisdiction, though it is worth noting that Osama Bin Laden's financial empire is supposedly operated out of Sudan and Kenya, with dealings in England, Malaysia, and Hong Kong.3 None of these jurisdictions is on the OECD's list of so-called tax havens.
  • Punishing jurisdictions for low-tax policies will undermine incentives for governments to cooperate and could encourage institutions to replace legitimate investments with dirty money – The OECD agenda would not aid law enforcement if implemented. Indeed, it would divert resources and therefore hinder efforts to punish criminals and deter crime. But it also is misguided because of the impact it will have on persecuted jurisdictions. A low-tax government that is being threatened with financial protectionism (the OECD proposes to subject "non-cooperative" jurisdictions to a sweeping financial blockade) is much less likely to help other nations investigate and prosecute criminal activity. Moreover, the financial institutions in those jurisdictions may be tempted to seek dirty money as a way of staving off bankruptcy if the OECD's proposed blockade causes a loss of legitimate activity. This is not a new observation. Last September, in the first article I wrote for the Heritage Foundation on this issue, I stated that the attack on low-tax regimes "…inadvertently could make things worse by driving capital out of well-established financial centers and into less competent and/or unfriendly jurisdictions. An attack on financial privacy, after all, could lead people to shift their funds to rogue operations that have no incentive to cooperate with OECD law enforcement officials. This result would set back progress in cooperation in handling issues of regulation, transparency, accounting standards, and criminal behavior."4

Crises lead to more government power. In some cases, that power is a necessary reaction to a new threat and is completely consistent with the Constitution and Bill of Rights. But in many cases, ideologues use crises to pursue an unrelated agenda. Supporters of the OECD have chosen this dishonorable route. Their tax harmonization agenda has no connection with the fight against crime. Indeed, it likely will hinder genuine law enforcement by diverting resources and undermining cooperation.

At no point, however, should we lose sight of the real issue. A civilized nation has an obligation to protect its citizens from aggression. The terrorist attack on America demands severe retribution and one can only hope that very bad things happen to any nation, institution, or individual that refuses to assist in the investigation and reprisals against the terrorists.


1 "A Tax Competition Primer: Why Tax Harmonization and Information Exchange Undermine America's Competitive Advantage in the Global Economy," Backgrounder No. 1460, The Heritage Foundation, July 20, 2001. Available at






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