The EconomistJuly 27th 2019 Finance & economics 611A
merica haslaunched brutal assaults
over the past decade on countries, such
as Switzerland and Liechtenstein, where
banks have helped American citizens hide
money and thereby evade tax. Forced to
clean up, these erstwhile havens have seen
much tainted capital flow elsewhere—not
least to America itself. Now it is the former
aggressor’s turn to be on the defensive.
Other countries are using similar tools to
those America once employed to reveal un-
taxed money stashed by their own citizens
in the world’s largest economy.
As well as fining and prosecuting the
enablers of tax-dodging—Swiss banks
alone coughed up at least $5.5bn—America
passed a law in 2010 known as fatcathat
required foreign financial firms to spill the
beans on American clients. Stung into ac-
tion, more than 100 other countries signed
up to the “Common Reporting Standard”
(crs), and now swap tax-relevant financial
information with each other.
America, however, did not join the crs.
Instead it shares information on the for-
eign clients of American banks under
fatca’s reciprocal provisions. But sharing
is patchy; a lot of countries get nothing.
Combine that with the high level of anon-
ymity offered by American shell compa-
nies, and it is hardly surprising that Ameri-
ca has become the destination of choice for
many tax evaders. One tax expert reckons
that “over 90% of assets avoiding the crs
have been herded into the usa”.
America does not have to worry about
the sort of bludgeoning that it doled out to
Switzerland—no other country has any-
thing like the same extra-territorial finan-
cial power. But other countries are finding
that there are legal tools at their disposal,
all the same. One is the so-called John Doe
summons. This American provision as-
sists tax authorities going after “a particu-
lar person or ascertainable group or class of
persons” whom they suspect of financial
wrongdoing, but whose identities are un-
known. If approved by a court, the sum-
mons forces banks to hand over names.
Until now the biggest user of such sum-
monses in tax cases has been America,
which, for instance, used the procedure in
2008 to prise open Swiss bank secrecy. That
resulted in ubshanding over the names of
around 4,500 account-holders. In April the
tables were turned when a request from
Finland prompted America’s Internal Rev-
enue Service to petition a federal court in
North Carolina for leave to serve John Doe
summonses on three banks in America.
Heavy use at Finnish atms of payment
cards issued by the banks, and linked to
American accounts, had led the Finnish tax
authority to conclude that they were being
used by Finnish taxpayers who had hidden
untaxed income across the Atlantic. The
court has since granted approval.
Other countries suffering tax leakage
will be looking more closely at this proce-
dure. Any of the 90 with a ratified bilateral
tax treaty with America can use it, though
some seem unaware of the option. (By con-
trast, America has agreed to exchange in-
formation with only 47 countries under
fatca.) Experts say it could help to break
open not only dodgy bank accounts but
also trusts and insurance policies, which
are also commonly used to hide capital.
There could still be obstacles, for in-
stance if an account is owned by an entity
rather than an individual. But banks issued
with a summons are required to investi-
gate who stands behind account-holding
shell companies. Due-diligence rules de-
signed to curb money-laundering and the
financing of terrorism, issued by Fincen, a
federal agency, already require banks to
know the identity of such “beneficial”
owners (though not all seem to do so). A
shell-cracking bill picking up momentum
as it passes through Congress would also
help improve corporate transparency.
If more countries take the John Doe
route, it would help balance the unequal
relationship America enjoys in matters of
financial transparency. For too long it has
got away with demanding much while of-
fering little in return. Tax dodgers stashing
cash in America, says Mark Morris, an in-
ternational tax consultant, should “pre-
pare to be smacked open like a piñata”. 7Will America go from hunter to hunted
in cross-border tax evasion?
Financial crime
Land of the
tax-free
T
hose savingfor retirement face plenty
of quandaries. Spending today is more
fun than waiting to spend tomorrow. Once
savings have been amassed you must de-
cide what to do with them. The possibili-
ties are many and complex. And people are
prone to error, buying when asset values
are high and panic-selling when they dip.
The promise of robo-advisers, which offer
computer-generated financial advice, is to
assist savers with these problems far more
cheaply than human ones.
Rock-bottom fees, usually just 0.25% of
assets, have helped them grow fast. Better-
ment, a robo-adviser based in New York
that was founded in 2008, manages $16bn-
worth of assets. Wealthfront, a rival from
San Francisco, manages $11bn. But skimpy
fees mean they need hefty assets to survive.
In a report in March hsbc claimed that
robo-advisers need to oversee $11bn-21bn
of assets to break even. Jon Stein, Better-
ment’s boss, says that the company is prof-
itable, helped by low costs for running the
accounts. But it is probably a close-run
thing. Betterment has launched some pric-
ier, fancier products—but its business
model would suggest that revenues of just
$40m must pay for nearly 300 employees,
swanky midtown Manhattan offices and
advertising blitzes.
Competition in robo-advice is fierce, as
established asset managers have muscled
in. Vanguard, which manages $5.3trn of as-
sets, mostly in index funds, has a robo-ad-
visory product, with $115bn. So does
Charles Schwab, a bank in San Francisco,
which manages $37bn in its “intelligent
portfolio” product. Some smaller robo-ad-
visers have paired up with industry giants
to survive. Aviva, a British pension fund,
bought a majority stake in Wealthify, a
robo-adviser based in Cardiff, in 2017. But
Betterment is taking a different route. On
July 23rd Mr Stein announced that it was
launching savings and current (checking)
accounts, with the aim of becoming a “one-
stop shop” for money management.
Betterment will not become a bank. In-
stead it has agreements with regional
banks, which will hold deposits. This, says
Mr Stein, allows it to offer generous terms.
Rather than leaving deposits with one
bank, Betterment will place them wherever
rates are highest. It can split customer de-
posits between banks, meaning greater
federal-insurance coverage. Less con-
cerned about the stickiness of deposits, itNEW YORK
Betterment wants to manage both your
bank account and your investmentsRobo-advisersLooking after the
pennies