From Panama to the Bahamas

The Bahamas leaks, with the names of many Pakistani businessmen, officials and offspring of politicians allegedly doing clandestine/suspicious businesses or hiding untaxed and/or dirty money in a notorious tax haven, have once again proved the ineffectiveness of institutions that have been established to check tax evasion, illegal flight of capital and corruption.

The money and assets stashed abroad in tax havens could possibly represent funds generated through illegal activities, tax evasion (including aggressive tax planning), and plundering of the national exchequer by politicians, state functionaries and other influentials.

According to the Tax Justice Network, an independent international network launched in 2003 to conduct research, analysis and advocacy in the area of international tax and financial regulation, there is no generally-agreed to definition of what a tax haven is. Interestingly, all tax haves deny such a status – though a list of such centres was issued in 2013 by the Organisation for Economic Cogeneration and Development (OECD) and is being updated every year.

According to the Tax Justice Network, the OECD has “a long and very patchy record of misidentifying tax havens: usually the criteria are tweaked, and funny exceptions made, and the end result is that mostly only small, weak islands make the list while the giants in the game – the United States, Britain, not to mention the more traditional places like Switzerland and Luxembourg – somehow manage to skip free”.

It is alleged by the Tax Justice Network that “contrary to many people’s perceptions, the offshore world of tax havens includes some of the world’s biggest economies. Beyond the usual suspects of Switzerland, the Cayman Islands or Panama are jurisdictions that are less often identified as tax havens – such as the United States, United Kingdom and even, on some measures, Germany. Given that some of the world’s most powerful and influential nations are important players in the offshore system, it is hardly surprising that several lists of tax havens prepared by the IMF, the OECD and other international bodies are modified for political reasons”.

The offshore world is a complex, constantly shifting system, with different players providing different offerings. Some focus largely on secrecy alone: these tend to be smaller and more obscure jurisdictions and include certain US states such as Delaware, Nevada or Wyoming. Some are not particularly secretive but specialise in offering corporate tax avoidance facilities, for example, Ireland or the Netherlands or Bermuda or Luxembourg.

Some specialise in offering lax financial regulations, for example, Luxembourg, or the UK. Some are ‘all-singing, all-dancing tax havens’, such as the UK, Switzerland, Luxembourg and Singapore. Some specialise in certain sectors: Bermuda, for insurance, or the Cayman Islands for hedge funds or private equity.

Tax havens offer not only low or zero taxes, but also provide facilities for people or entities to get around the rules, laws and regulations of other jurisdictions, using secrecy as their prime tool. Therefore, the Tax Justice Network prefers the term ‘secrecy jurisdiction’ instead of the more popular ‘tax haven’ and highlights the following serious consequences of their existence:

Tax havens help rich people hide money that should be spent on schools, hospitals, roads and other public services. Tax havens force poor people to pay taxes due from the rich. Tax havens help criminals hide their loot. Tax havens help dictators and their cronies plunder resources of developing countries. Tax havens allow banks to dodge financial rules and regulations. Tax havens corrupt markets, concealing insider dealing and supporting aggressive tax dodging by multinational companies.

Tax havens also create a private world of secrecy, impunity and power for the elite. Tax havens widen the gap between the rich and the poor. Tax havens make laws in secret. Tax havens shake our faith in democracy.

In Pakistan, the debate on the Bahamas and Panama leaks or Swiss accounts or investment in the Gulf and elsewhere by Pakistanis should take place from the above perspective. If any of the above is found to be true, the guilty should be taken to task.

Illegal transfer of funds, without paying taxes or disclosing their source, should not go unnoticed nor unpunished. For every wrong there is a remedy and if existing laws are inadequate, new ones can be enacted. There should be no excuse whatsoever for inaction by the government as the victims are the people of Pakistan.

In the meantime, it is important for citizens to know that it is a wrong assertion that outward transfer of funds from foreign currency cannot be probed under section 5 of Protection of Economic Reforms Act, 1992. This law was amended in 1999 through Ordinance No XXI of 1999, providing that “immunity shall not be available to citizens of Pakistan residing in Pakistan and to firms, companies and other bodies registered or incorporated in Pakistan in respect of any new foreign currency account opened or deposits created on or after the 16th day of December, 1999 or to any incremental deposits thereafter in an existing foreign currency account”.

Parliament later validated the amendment in Protection of Economic Reforms Act, 1992, made through Ordinance No. XXI OF 1999, vide Article 270AA of Constitution of Pakistan. Thus refuge under this law is not possible.

Any act of money sent from Pakistan through hawala and hundi by those whose names are in the Bahamas and Panama leaks is a crime. And if it was transferred through banks, the source can be probed by the relevant agencies (NAB, FIA, FBR, ANF etc) in light of the legal position explained above. Legal remedy is available, but the will to take action has been missing so far.

The writer is an advocate of the Supreme Court and adjunct faculty at LUMS.

Email: ikram@huzaimaikram.com

Twitter: @drikramulhaq