Center for Freedom and Prosperity Strategic Memorandum

From:  Dan Mitchell, Heritage Foundation Senior Fellow
Date:  October 28, 2001
Re:      Victory (of sorts) on Money Laundering Legislation
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The U.S. Congress recently approved anti-money laundering legislation. This legislation will increase regulatory burdens on financial institutions and hinder legitimate international commerce, yet it is very unlikely that the new law will hinder terrorists and other criminals. That is the bad news. The good news is that advocates of tax competition were able to remove language that could have been used to sanction jurisdictions for the supposed transgression of having attractive tax laws. This is a big victory – one that would not have been possible without unrelenting effort by a handful of people willing to battle against overwhelming odds.

Background

Following the barbaric attacks on September 11, politicians in Washington wanted to demonstrate their willingness to fight terrorism. Because of the perceived pressure to act quickly, lawmakers decided to move legislation that already had been introduced. Unfortunately, this proposal was based on an old Clinton Administration initiative, and in the section describing criteria that the Treasury Secretary should use when identifying jurisdictions of "primary money laundering concern" the following provisions were listed: 

"the extent to which that jurisdiction or financial institutions operating therein offer bank secrecy or special tax or regulatory advantages to nonresidents or nondomiciliaries of such jurisdiction"

"the extent to which that jurisdiction is characterized as a tax haven or offshore banking or secrecy haven by credible international organizations or multilateral expert groups"

The Problem

 The two sections listed above would have given an ideological Treasury Secretary broad powers to sanction a jurisdiction for no reason other than the presence of an attractive tax system. Supporters of the legislation offered no evidence to suggest that market-based tax systems are associated with money laundering. The reason for this – as readers of my recent Heritage Foundation backgrounder (available at http://www.heritage.org/library/backgrounder/bg1492.html) already understand – is that there is no relationship. So-called tax havens do not attract a disproportionate amount of the world's dirty money.

 Removing these preposterous provisions therefore was critically important. After all, just imagine how an extremist like Larry Summers would misuse the new law.

The Solution

 Led by the Heritage Foundation and the Center for Freedom and Prosperity, free-market organizations launched an intensive effort to explain why pro-growth tax policy has nothing to do with money laundering. Working with allies in the policymaking community, we were able to remove references to tax in both of the passages listed above (the words "tax or" in the first passage and "tax haven or" in the second passage).

 This is a critical victory, one that is especially impressive considering the overwhelming odds we faced. Our success means that a future Treasury Secretary, no matter how left-wing in orientation, will not be able to propose sanction on a jurisdiction because of its tax system. Indeed, the fact that the misguided language was in the original legislative text and then removed actually works to our advantage since it now is unambiguously clear that Congress does not want tax policy to be a criterion.

Not the Ideal Result

 Now for some bad news: Even with the tax references removed, some of the remaining criteria are senseless and could be used to attack low-tax jurisdictions. In particular, the references to "secrecy" are a recipe for mischief. Every nation in the world has bank secrecy laws, of course, so these provisions provide no real guidance and could be misused. Lawmakers could have substantially improved the legislation by changing the language so that a jurisdiction only could be punished if it "refused to waive bank secrecy when presented with credible evidence of a serious offense."

 Unfortunately, the lack of time and the political circumstances meant that there was not an opportunity to fix every problem in the bill. Supporters of tax competition at least can take comfort, however, in the fact that the worst elements of the legislation were deleted.

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