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Nauru: Real life Kinakuta
23mcgee writes "Today's washington Post has a story about a small Island in the pacific named Nauru. After exhausting it single natural resource, geographically remote Nauru is reinventing itself as an offshore banking center that provides it's customers the means to hide their transactions -- an offshore haven similar to Kinakuta, the fictional data haven in a Slashdot favorite; Neil Stephenson's Cryptonomicon. "
I've always been confused by hording dollars to offshore (or Swiss) accounts to avoid taxes, etc. How can it work. You're taxed on the money you make from your paycheck.
I'm not an expert on offshore banking, but I'm pretty sure that if you're drawing a paycheck, you're probably not a candidate.
However, if you have a large income strictly in cash (10s, 20, 50s, 100s), once you find a way to get that cash overseas, without federal knowledge (aka money laundering), you can then safely deposit in your offshore bank account.
There are other situations I can imagine. I'll give your company this contract, at this price, but you have to sweeten the pot with a deposit in this foreign account, and for your own sake you better draw it out of a unaccountable fund (hush fund), maybe lots of petty cash withdrawals, some funky depreciation schedules, oddly priced sales of new equipment, etc.
To use the Cryptonomicon example, a Taiwanese clone maker solds thousands of PC's with unlicensed MW software. All the profits were lost apparently (a good accountant can do this, I know a little of accounting practices, and it seems like fiction writing at times), but they could have ended up in an offshore bank.
In short, if you're a working stiff pulling down a weekly or monthly salary, there isn't much advantage to an offshore bank. If you're a drug dealer/smuggler or high placed government or corporate official, you might have need of sucha thing.
George
Offshore accounts are useful in keeping transfers of funds hidden once that money is sitting offshore.
This would be useful for:
- Making payments for questionable activities such as sales/purchases of illegal substances
- Making payments for "consulting services."
Note that transferring funds to and fro between Transparent Jurisdictions like Canada or the US and Opaque Jurisdictions like Lichtenstein or Switzerland or- Significantly inconvenient.
- You don't use one of the "Hidden Accounts" to pay off your MasterCard bill, as that would expose its existence to domestic authorities.
- Note that interest rates on deposits in these foreign places are not likely to be terribly high.
The net result of all of this is that there's probably little point to opening "tax haven" accounts unless you've got at least a few million dollars kicking around, or unless someone who would find it worthwhile to move money to a tax haven owes you payment for significant services.In order for the important transfers to remain secret, you'd need to have a whole pile of accounts, some to be used for the "Opaque Transactions," and others to be used for "Transfers To/From Canada."
One account is most definitely not enough, and the action of shifting money is also not convenient.
Ditto for any other situations where you need to have money in Canada to spend on things.
The tax havens are "capital rich," which means that based on supply+demand, interest rates will be low to nonexistent.
The net effect of this is that you don't actually make money off of having money in the tax haven; all you do is to avoid being taxed at home.
The people that would thus care about this might be:
If you're not part of the solution, you're part of the precipitate.
This is not a data haven in the Kinakuta way at all, its simply a the same kind of anonymous offshore banking that has been done on small island countries for many years now. Nothing actually goes on in the country, but because it can register companies, operating under its flag can be used to overcome all sorts of regulations. Its really not to different from convenience flagging of boats to get around safety regulations. Or cheap domain names (like Nuine, Cocos, and Turkmenistan).
/. is like a steer's horns, a point here, a point there and a lot of bull in between.
In a way its a sad story how this country which overspent its natural resources is now forced to prostitute itself to Russian organized crime in order to fund its budget. Not that I am against offshore banking (I am in principle against taxes), but still...
However, if the article mentions that the country has 190 million dollars in a fund left from its wealthier days. Maybe, if the leaders are willing to play "dirty" against the big guys, doing a Cryptonomicum wouldn't be such a bad idea. How much would putting a good pipe to the island (or a permanent sattelite link) cost?
I am doubtful of the realism of Stephensons vision however. If an offshore datahaven were to succeed with causing an upheaval in the western economies, you can bet your ass America wouldn't think twice before the island had a carrier permanently docked in its harbour. Its funny how much influence that can have over a very small country, huh?
I mean, just look what happens when anything threatens the American oil market...
The true datahaven can't be located in some physical place. It has to be nowhere, and it has to be everywhere. It will not gain its security by mountain vaults but by crypography, and it won't secure its existance by oceans but by being dynamic, distributed, and smart. Lately I have seen a few projects in the open source world aspiring towards solutions in this direction (Freenet, the Eternity system) and they are much better news in this front than the existance of roque island states.
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This isn't designed to avoid the taxes on your paycheck. It's to avoid taxes on "other income".
Example #1, let's say that you run a company worth $500,000,000. Now let's say you want to give yourself a "raise". You hire a "consultant" who happens to bill you to an account fron one of these offshore banks in the amount of $10,000,000. Your company sends the money for "work rendered" and wow, that's odd your company just sent those ten million dollars to YOUR secret account and you've just evaded taxes on $10,000,000.
Example #2: you run a profitable "business" from traditional organized crime, or large-scale drug dealing, or assassinations or even working as $5,000/day call girl. Now you have a whole lot of money and if you legitimize it within the U.S. you'll end up with a lot of taxes on it. But what if this money gets deposited to your offshore account? Well, now suddenly there are no taxes involved. Neat, eh?
As for the laws about foreign income, the IRS even admits it's basically honour system. There's no way to trace this so basically as long as said random rich person reports enough income to be credible, they can hide the rest without fear of the authorities find out. After all, there isn't a real difference in lifestyle between somebody who makes $100,000,000/year and somebody who makes $10,000,000/year, so you hide $90,000,000 and report that you make $10,000,000/year and meanwhile become worth billions without taxation difficulties.