Surfing all the way to the bank

Time International, Feb 17, 2003 v161 i7 p36+

Surfing All the Way to the Bank: Irked by high taxes, growing numbers of Australians are hiding cash in island boltholes like Vanuatu--and the Internet is helping them do it. (Business) Elizabeth Feizkhah.

Byline: Elizabeth Feizkhah

Tax havens? Aren't they for the super-rich? Don't you need a few million bucks, a Gulfstream and a posse of high-paid financial advisers just to open an account in of these no-tax, high-secrecy countries? Go to Google or Yahoo, type in "tax havens," and the response will be an upbeat, egalitarian NO!!! The site names (and the exuberant typography) say it all: Escape, Endtaxes, SquirrelYourNutsOffshore, Goldhaven. "Run your business TAX FREE," they cry. "$100,000 Tax-free cash from your offshore account." "You don't have to be a millionaire."

At tridentpress.com, Australian accountant turned author Lance Spicer tells visitors they can use the Internet to access "fabulous tax minimized investment opportunities" without leaving home. Spicer, who claims he's sold 150,000 copies of his how-to-get-rich books, says his biggest market is ordinary Aussies: "The people with lots of money have known about this for years. They've been able to afford the accountants and solicitors, people like me, to do it for them. Now the middle-income earners, the people who do have some money to invest but didn't have the knowledge, this is where the interest is coming from."

The Australian Tax Office has also noticed a growing interest in offshore investing, and it's fired up about it too--in a different way. There is nothing wrong with moving money to other countries, provided you report all your income (something Spicer warns his readers to do). But many Australians--bridling, perhaps, at giving the tax man half of any earnings over $A60,000--seem to be falling victim to offshore amnesia. Last month the ATO revealed that the flow of money to tax havens like Bermuda, the Channel Islands and Vanuatu has tripled in six years, to $A5 billion. A surprising amount came from "mums and dads"--and not all of it was mentioned on their tax returns. "We are concerned about the increased use of tax havens by Australians," said Tax Commissioner Michael Carmody, "and attempts to use them to conceal income." The Internet has abetted the cheats, notes an ATO report, by giving "the small to medium-sized business sector and personal taxpayers easier access to tax haven facilities" like offshore accounts.

It's not known how much the ATO is losing in this way, though one tax-haven-based scheme promoted via e-mail yielded $A65 million in "adjustments" when it was busted last year. In the U.S., it's feared that hundreds of thousands of citizens could be involved in such fiddles. The Internal Revenue Service has offered an amnesty to all those who fess up, pay up--and give up the organizers--by April. The tax haven trend is "the modern version of the tradesman hiding cash payments under the bed," says Michael Dirkis, technical director of the Tax Institute of Australia. "Only now people are using the Internet as the conduit and hiding the cash offshore. It's totally illegal. But they may think it's safe because they're doing it on a small scale and it's overseas--out of sight, out of mind."

If Mr. X wants to hide his savings "so no bugger can come and catch them," says author Spicer, "what he'll do is put that money offshore in small amounts that won't be traceable." After buying a shell company in his chosen tax haven, he can invest the funds as he pleases, using blind trusts and secrecy laws to keep out prying eyes. Wealthy taxpayers do this to avoid litigation or palimony suits, Spicer says, but tax evaders might use similar techniques. An easier and cheaper method is to wire untaxed money to a secret offshore account, then use cards to spend it. Last year the ATO nabbed several small businesspeople who'd described payments into such accounts as "service fees," claiming their own income as a business expense.

For the dishonest, the Internet offers low costs and lots of cover. But in the offshore world, cheap usually means nasty, says Anthony van Fossen, an expert on tax havens and money laundering at Griffith University. There are "two different levels," he says: "the bona fide trust companies that will say, If you don't have $500,000 to put here, then it's probably not worth your time," and the "often fraudulent promoters who tell people that they don't need very big incomes and they can get extremely high returns and the ATO will never find out."

The safest offshore firms are also the most pernickety. "We have a reputation," says Laurie Harrison, a partner with Moores Rowland, a financial services firm in Vanuatu (where clients, by law, must answer detailed questions about how they got their money and what they plan to do with it). "So we're pretty serious about checking people out. Vanuatu is a small tax haven but a fairly clean one, so bad publicity doesn't do us any good." People with black money will always find somewhere to stash it; it just might not be very secure. And if one day their money vanishes, along with the financial agents ("We prefer to use EMAIL as primary method of communication!" says one site), tax cheats are unlikely to call the cops. Which tends, says Van Fossen, "to make a lot of these promoters who are engaging in fraud fairly successful."

The Tax Office is targeting tax-haven arrangements for audits this year; "four or five" promoters of suspect schemes are already under investigation. "If you know about the rules and how money is monitored," says the Tax Institute's Dirkis, "you would know that you can't [legally] do a lot of what these people on the Internet are doing. But in some cases people are misinformed about how the law operates. Most people who invest in these offshore schemes haven't gone to their advisers, because they would tell them, Don't do it."

Many nations wish they could say the same to their citizens. Even when tax havens are used legitimately, high-tax countries are not exactly enamored of them--after all, they're competing with them for highly mobile cash. The world's 70 havens won't go away: their banks hold deposits worth $10 trillion. But the OECD is trying to bring them under tighter control, or at least get them to cough up financial data on "persons of interest." Australia is a zealous participant in this effort, but Taxpayers Australia national director Peter McDonald says it should also review its "penal" tax rates. "If there's a growing trend for more and more funds to be going offshore"--legitimately or otherwise--"then we have to look at why this is happening," he says. "Rather than going after people with a big stick and driving tax-haven use underground, we should ask how we can create a better tax system in Australia to encourage these funds back."

When the Internet came along, some feared it would help the tax havens suck in money faster and more secretively, leaving high-taxing nations gasping for revenue. In 1995, a dour ATO report predicted that determined citizens using cybertools could make it "virtually impossible" for authorities to audit their affairs. Yet by exchanging information and tracking funds transfers, governments have held their ground. In fact, says Van Fossen, the Net could ultimately make it simpler to monitor financial traffic. "Almost all the electronic transactions in the world go through a few big clearing houses like SWIFT," he explains. "If there are higher I.D. requirements for transactions and greater reporting requirements for credit cards, this could make financial transactions on the Internet quite a lot easier to track." Then, rich or poor, honest or crooked, there'll be no real tax haven for anyone.