The Economist Asia Edition – July 27, 2019

54 Finance & economics The EconomistJuly 27th 2019

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A

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”. 7

Will 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, it

NEW YORK

Betterment wants to manage both your

bank account and your investments

Robo-advisers

Looking after the

pennies