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Journal of Financial Crime

Whither or wither the European Union Savings Tax Directive? A case study in the political economy of taxation
George Peter Gilligan

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George Peter Gilligan, (2004),"Whither or wither the European Union Savings Tax Directive? A case study in the political economy of
taxation", Journal of Financial Crime, Vol. 11 Iss 1 pp. 56 - 72
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Journal of Financial Crime Vol. 11 No. 1

ANALYSIS
Whither or Wither the European Union Savings
Tax Directive? A Case Study in the Political
Economy of Taxation
George Peter Gilligan

INTRODUCTION
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One of the more contentious issues within the


European Union (EU) in recent years has been how
member states should organise their taxation infrastructures. At the time of writing this paper (March
2003), EU member states are negotiating (at
times quite ercely) the proposed European Union
Savings Tax Directive (EUSTD).1 The EUSTD is
the latest in a series of initiatives with a EU-wide
focus on taxation since the issue of global taxation
within the EU was rst crystallised in a specic
form by the European Commission (EC) in 1996.2
The struggles and disagreement that have plagued
these various initiatives since 1996 raise interesting
issues of legitimacy, equity and political economy
of taxation that are the focus of this paper.3
One should not be surprised of course that taxation
issues should stir strong emotions, or indeed stimulate
the vocal contribution of vested interests, because not
only is taxation revenue the lifeblood of governmental, and subsequently, numerous other organisational structures, but also taxation infrastructure is a
key determinant of both micro and macro economic
policy, and of the organisation of commerce itself,
within both the public and private sectors, and also
between them. Most people and organisations will
have a view on taxation: some may perceive it as a
necessary evil to allow society to function; others as
infringing upon the rights and property of the individual or collective; and many will feel that they pay too
much in tax and/or have insucient inuence over
how their taxation monies are spent. Over the years
there have been many comments about the relative
legitimacy and certainty of taxation. For example:
Journal of Financial Crime
Vol. 11, No. 1, 2003, pp. 5672
# Henry Stewart Publications
ISSN 1359-0790

Page 56

`Taxation and representation are inseparable . . .


whatever is a man's own, is absolutely his
own; no man hath a right to take it from him

without his consent either expressed by himself


or representative.'4
`But in this world nothing can be said to be certain,
except death and taxes.'5
Both these statements were made in the mid-18th
century, a time when the American colonies successfully fought for independence from the English
Crown. A catchcry of that struggle for independence
was `taxation without representation is tyranny', epitomised by the Boston Tea Party, when on 16th
December, 1773, American colonial patriots threw
hundreds of crates of tea from three English ships
into Boston Harbour.6 Today in Europe, as elsewhere
in the world, there are conicting views on the relative legitimacy of many contemporary multilateral
regulatory initiatives, some of which are taxationdriven.7 Also, there is much less certainty that taxes
(especially the imposition of taxes upon savings or
income) are indeed as inevitable as Benjamin Franklin
might once have thought. There are a multitude of
reasons for this, but some of the more important
interlinking factors include: the mobility of capital,
people and other resources; the internationalisation
of the nance sector; increasing transnationalisation
of corporate entities and trusts; developments in
information technology; the emergence of oshore
nance centres (OFCs); and the bank secrecy
regimes of various jurisdictions. The belief that some
of their citizens (both natural and legal) have been
avoiding their taxation obligations has prompted
some EU member states, most especially France and
Germany, to become more proactive in recent times
in creating regulatory initiatives that aim to restrict
the capability of their citizens to avoid these taxation
obligations. The EUSTD is a recent culmination of
some of these anti-tax avoidance eorts.

Whither or Wither the European Union Savings Tax Directive?

THE EUSTD: ORIGINS AND


STRATEGIC TENSIONS WITHIN
THE EU

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This section of the paper traces some of the signicant


milestones leading to the EUSTD. Although there
have been attempts amongst member states since
1989 to curb tax evasion, perhaps a more specic,
and for the purposes of this paper at least, more
appropriate starting point in tracing the EUSTD's
evolution is the informal Econ8 meeting at
Verona, Italy in April 1996 when:
` . . . the Commission proposed a new and comprehensive ``global'' view of direct taxation policy.
This was to ensure that taxation policies were
better geared towards achieving important Union
objectives, such as promoting growth and employment and completing the single market, while at the
same time protecting tax bases against harmful tax
competition.
Finance ministers welcomed the Commission
paper ``Taxation in the European Union'' and
agreed on the need to consider these issues in a
high-level discussion group.'9
The core aims of the Econ taxation package were:
stabilisation of member states' tax revenues; smooth
functioning of the Single Market; and promoting
employment.10 The underlying philosophy of the
1996 document which has fed through to the
EUSTD of 2003 is that:
` . . . repeated failure to achieve progress in tax coordination . . . has gradually brought a real loss of
scal sovereignty by each member state in favour
of the markets, through tax erosion.'11
It is this clash between national scal sovereignty
and market power (some critics of the EU and European Commission (EC) might say market choice)
that is the core issue of political economy regarding
EU-wide taxation policy initiatives. Following the
meeting in Verona in April 1996, a high-level
group, to be known as the Taxation Policy Group
(TPG), was formed, chaired by the EC and comprising representatives of EU member states' nance ministers. The TPG met several times to progress the
proposals of the Verona Econ meeting. However,
the TPG experienced diculty because of the signicant dierences that existed (and indeed still exist)
between various member states regarding the
coordination of taxation policy in general, and

notions of harmful tax competition in particular.


These dierences were acknowledged by the EC in
November 1997 when it launched its package to
tackle harmful tax competition:
`Some member states have made it clear that they
looked for a more ambitious package, but extensive debate within the Council and the TPG has
shown that, at present, this is not attainable given
the initial reluctance of others to consider any
move towards tax co-ordination.'12
That some member states (almost denitely
Austria and Luxembourg, and perhaps others) were
reluctant initially to consider any move towards tax
coordination is a clear indication of how dicult a
task faced the EC and prime movers such as France
in pushing for tax coordination reform. The progress
to date regarding the EUSTD indicates how resolute
the latter have been in pursuing this goal in the face of
intense opposition from certain other member states.
The November 1997 package had three core elements: a code of conduct for business taxation;
measures to eliminate distortions to the taxation of
capital income; and measures to eliminate withholding taxes on cross-border interest and royalty payments between companies.13 The EC was pleased
that there was `a widely shared desire on the part of
member states to make signicant progress in the
area of the taxation of capital income from savings',
but noted that `substantial diculties' persisted.14
That there should be disagreement about these
issues is unsurprising because the proposals have
implications for the nancial services sectors of EU
member states. Also, regulatory innovation within
the EU cannot blind itself to the pragmatic realities
of a highly competitive global nancial sector, in
which jurisdictions, nancial institutions and nance
centres continually strive to maintain or increase
their market share. Tax regimes and other systems
of regulation are elements of the competition
between dierent jurisdictions to attract capital.
This economic, and simultaneously, political, imperative is a major driver in the construction of systems
of regulation that are sensitive to the requirements
of investment capital. As such, it is a major
justication for promoting regulatory reform, and
indeed as will be seen below for various EU
member states, for resisting regulatory reform. This
social utility of regulation, or indeed of nonregulation, is acknowledged in the literature on

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Gilligan

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social capital. Social capital can be interpreted as the


norms, networks and typologies of trust that societies
share in order to achieve shared objectives.15 Social
capital has been viewed as the resource of shared
values that a society has.16 Taxation regimes are
merely one or more cogs in the engines that jurisdictions build to generate social capital. Taxation
regimes are especially important cogs though, not
only for the generation of revenue, but also for
their strategic capability to facilitate inward capital
investment and other forms of entrepreneurial activity for the benet of aected individuals, entities and
society in general. Dierent jurisdictions (whether
they are EU member states or not) will seek to
produce social capital for themselves in dierent
ways, and are more than likely to have dierent
views on the types of taxation regimes they want to
adopt in order to achieve these objectives. This is
the core, and sometimes harsh, political and economic reality in which an agency such as the EC
must function.
Nevertheless, the EC proposed that it should:
` . . . prepare a draft proposal for a Directive by
April 1998.'17 The EC did in fact produce a proposal
for a Directive in June 1998.18 The central feature of
the proposal was that:
`A dual approach was suggested; member states in
which the income was earned would have the
choice between either:
 providing information to the other member
states about the investment income of their
resident individuals, or
 applying a ``withholding tax'' at a minimum
rate of 20 per cent to such income arising to
individuals resident in other member states.
The information and withholding tax were to be
collected by the agent in the country paying the
interest.'19
A signicant motivation for this dual model, often
referred to as the coexistence model, was the resistance
(on grounds of national interest) of those member
states with banking secrecy laws, such as Austria
and Luxembourg, to adopting a EU-wide disclosure
of information system and also the strong opposition
of other jurisdictions, most notably the UK, to
a compulsory withholding tax. During 1998 and
1999, there was continuing opposition (again motivated, unsurprisingly, by national self-interest) from
various member states to certain proposals made by

Page 58

the EC. For example, in early 1999 the UK sought


changes to the EU proposals in order to prevent a
mandatory withholding tax and protect London's
Eurobond market.20 The EC had hoped to nalise
the arrangements for a Savings Tax Directive at the
EU Summit in Helsinki in December 1999. This
perhaps ambitious aim (given the scale of the
various dierent national interests aected and intensity of disagreement) was not achieved, although the
Helsinki European Council did agree that:
`All citizens resident in a member state of the
European Union should pay the tax due on all
their savings income . . . It shall also consider the
proposals put forward by the UK, including
exchange of information.'21
From these seemingly agreed policy positions,
various member states continued to lobby strongly
for their preferred position during 2000. For
example, the UK Treasury and Inland Revenue
jointly produced a discussion paper in February
2000 that argued strongly in favour of an exchange
of information approach rather than adoption of a
withholding tax. It claimed that the seven chief
advantages of the exchange of information approach
are that it:
` . . . allows the right amount of tax due on the
income from savings to be collected . . . allows
savings income to be taxed in the right country . . .
encourages compliance with the tax system . . .
helps wider compliance with the tax systems of
member states . . . is easy and ecient . . . is good
for the honest investor . . . produces equity
between member states.'22
The UK argued strongly for its position regarding
the Draft Directive on Savings at the Lisbon European Council in March 2000, where EU member
states agreed on a timeframe to secure political agreement by June 2000 and adoption of the Directive
before 31st December, 2000.23 The discussion of
this paper is testimony to the fact that the latter objective was not achieved. Nevertheless, there was some
progress in 2000, as seen by the agreement reached
by Heads of State at the Santa Maria de Feira
European Council in June 2000 that endorsed
`a step-by-step development towards realisation of
the exchange of information as the basis for the

Whither or Wither the European Union Savings Tax Directive?

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taxation of savings income of non-residents . . . so


as to achieve full agreement on the adoption of the
Directives and the implementation of the tax
package as a whole as soon as possible and no
later than by the end of 2002.'24
It is signicant that the Council pushed out its deadline for adoption of the Directive by a further two
years, from its position of only three months earlier
in Lisbon. In doing so it was acknowledging the difculties of not only securing a common position
amongst EU member states, but also recognising
the complexities associated with competing regulatory regimes (most notably Switzerland and the
USA) outside the EU.25 Also, it is signicant that the
Council should express such a strong preference for
an approach based on exchange of information. This
position was reported widely in the world media as a
victory for the UK in the combative environment
that often is intra-EU politics.26 Indeed, in the UK
House of Commons in the best traditions of enlightened self-interest, Prime Minister Tony Blair trumpeted this aspect of the Feira agreement as `a personal
triumph for the Chancellor. This is a comprehensive
agreement which fully protects the competitiveness
of the City'.27
However, on the very same day that Prime
Minister Blair was glowing in the aftermath of
his self-proclaimed UK triumph, Austrian Finance
Minister Karl-Heinz Grasser, in an interview with
the news agency Reuters, was declaring the agreement as a triumph for Austria, because the EU formally had moved away from its intention to
abolish bank secrecy throughout the EU. Minister
Grasser also expressed doubt as to whether the agreement could work in practice because he felt that
Switzerland and other low-tax countries would not
relax suciently their bank secrecy laws to permit
equivalent exchange of information with EU authorities.28 What Prime Minister Blair and Minister
Grasser did was oer alternative social constructions
of the same sets of political and economic realities,
in order to legitimate their actions to their separate
constituencies. These processes of alternative social
construction are not unusual; they are engaged in
by individuals, groupings and organisations on a
constant basis all around the world and in many
contexts.29 These alternative social constructions of
legitimacy regarding preferred taxation of savings
regimes are a recurring feature (in a variety of
forms) of the evolution of the EUSTD to date, and

in all likelihood will be a continuing feature of any


Savings Tax directive that is actually achieved in
practice in the future.
Certainly, despite the triumphalism of mid-June
2000 in certain quarters there were alternative views
being expressed by other players as 2000 progressed.
For example, Luxembourg's Prime Minister and
Finance Minister Jean Claude Junckers was reported
by Reuters as asserting with regard to the Feira objectives on the proposed Savings Tax Directive that
`there would be blood on the table if certain delegations do not change their point of view'.30 There
were no reports of bloodshed at the Econ Council
meeting in Brussels in November 2000 when
some major compromises and negotiation breakthroughs were announced.31 Political agreement
between member states was achieved on these major
issues:
 ` . . . all member states, except Austria, Belgium
and Luxembourg, will immediately introduce a
system of sending information to the member
state in which the taxpayer is resident and not
charge any withholding tax on foreign residents;
 Austria, Belgium and Luxembourg may apply
withholding taxes for a transitional period of
seven years, at a rate of 15 per cent for the rst
three years and 20 per cent for the last four,
the tax being accounted for by the paying agent;
 during the transitional period, 25 per cent of the
revenue from these withholding taxes will be
kept by the member state of the paying agent
(Austria, Belgium or Luxembourg), the other
75 per cent will be sent to the member state of
residence of the investor;
 the directive will have a broad scope, for
example, it will include interest income obtained
as a result of indirect investment in bonds via
collective investment vehicles; and
 there is to be a ``grandfather clause'' for bonds
issued before 1st March, 2001, which means
that they will be excluded from the scope of
the directive to prevent any risk of triggering
early redemption of bonds.'32
This Econ meeting is a critical circuit breaker in the
evolution of the EUSTD and was recognised as such
in the media. Luxembourg capitulated regarding
seeking exemption for its money market funds but
had a `victory' in that those countries applying the
withholding tax option in the transitional period

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would retain 25 per cent of the revenues and not 10


per cent as under earlier proposals.33 However,
there were provisos surrounding the overall agreement. Austria and Luxembourg's support was dependent upon `a binding decision on the roll-back of the
sixty-six measures within the framework of the Code
of Conduct'.34 Also, there was, and indeed still is, the
very signicant issue that the overall agreement was
built on the understanding that the EU can persuade
the USA, Switzerland and other jurisdictions to
adopt similar measures. As will be seen below, this
latter problem rumbled on throughout 2001 and
beyond, and still threatens the overall viability of
the EUSTD project.
Nevertheless, in July 2001, the EC withdrew its
1998 proposal for a Savings Directive,35 and issued
a new proposed Directive,36 based on the Econ
agreement, hammered out in Brussels in November
2000.37 The EC sought to strengthen their push for
the proposed Directive by issuing supporting publications.38 The EC argued strongly that it was not
seeking tax harmonisation;39 that the proposal would
not cause a shift of business out of the EU;40 and that
member states did not cooperate suciently well in
exchanging information on cross-border interest on
savings.41 However, the optimism of the EC was
jolted at the Econ meeting of December 2001
when it was reported that:
`Talks over a European Union plan to tax nonresidents' savings have collapsed after Luxembourg
and Austria have objected to the plan and insist that
if they have to make amendments to their banking
secrecy rules then so should others . . . such as
Monaco, Liechtenstein and Switzerland.'42
The Prime Minister and Finance Minister of Luxembourg Jean Claude Junckers was quoted as saying that
`Luxembourg's position is not open to change and
will not change'.43 Nevertheless, a week later at its
next meeting Econ did agree to forward to the
European Council a progress report on the taxation
of savings and fudged a common position in these
terms:
`Once member states have assessed the assurance
provided for in the Feira Conclusions concerning
both equivalent measures in third countries and
the same measures in dependent or associated territories, the Council will decide, on the basis of a
report presenting the outcome of the nego-

Page 60

tiations, on a nal text of the Directive no


later than 31 December 2002, and do so by
unanimity.'44
Those member states that have been resisting the
drive towards exchange information as the basis
for the proposed directive Austria, Belgium and
Luxembourg are amongst the smaller EU jurisdictions, and provision of nancial services comprises a
signicant proportion of their GDP. It is an unsurprising comment on how distributions of power relations
will tend to shape cooperative ventures in most contexts, that the preferred position of larger and more
inuential member states such as France, Germany
and the UK should shape the core form of the
EUSTD. There has been persistent criticism over the
years of similar patterns of dominance by certain
nations regarding the decision-making processes of
organisations such as the United Nations and World
Trade Organisation.45 Nevertheless, during 2002
and 2003 the EC has been plodding on, hoping to
broker some sort of deal with relevant external
parties, in particular Switzerland and the USA, that
would appease dissenting or reluctant EU member
states. As will be seen below the process of melding
the EUSTD with relevant external interests has been
a dicult, frustrating and sometimes discordant
process.

EFFECTS OF ACTORS EXTERNAL TO


THE EU ON THE EUSTD

During the same period that the EC has been


trying to promote support for the EUSTD and
its predecessor, there have been increasing eorts by
a number of international organisations such as:
the Organisation for Economic Cooperation and
Development (OECD);46 the Financial Action Task
Force (FATF);47 and the Financial Stability Forum
(FSF),48 and also by a large number of nation states
to counter money laundering, tax evasion and the
nancing of terrorism. These eorts have been
given greater urgency in the aftermath of the terrorist
attacks on New York and Washington DC on 11th
September, 2001. During 2000, 2001 and 2002, the
OECD, FATF and FSF separately have engaged in
specic listing initiatives that have become widely
referred to as blacklists.49 This is because in the
main they have highlighted what the FATF, FSF or
OECD have seen as problematic, or non-cooperative,
jurisdictions that currently are operating in global

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Whither or Wither the European Union Savings Tax Directive?

nancial markets. Of particular relevance for the


EUSTD has been the OECD's Project on Harmful
Tax Practices (OECDPHTP). In May 2000, the
OECD declared that the following 34 jurisdictions
met the OECD's technical criteria as tax havens:
Andorra, Anguilla, Antigua and Barbuda, Aruba,
Bahamas, Bahrain, Barbados, Belize, British
Virgin Islands, Cook Islands, Dominica, Gibraltar,
Grenada, Guernsey/Sark/Alderney, Isle of Man,
Jersey, Liechtenstein, Liberia, Maldives, Marshall
Islands, Monaco, Montserrat, Nauru, Netherlands
Antilles, Nieue, Panama, Samoa, Seychelles, St
Lucia, St Christopher & Nevis, St Vincent and the
Grenadines, Tonga, Turks & Caicos, US Virgin
Islands and Vanuatu.50 In April 2002, the
OECDPHTP published its second blacklist and classied as uncooperative tax havens: Andorra; Liberia;
Liechtenstein; Marshall Islands; Monaco; Nauru; and
Vanuatu.51
It is perhaps of note regarding the progress of the
EUSTD that the OECD should consider Liechtenstein and Monaco so unfavourably. Traditionally
France has exerted strong inuence over Monaco,
especially in the area of Monaco's external aairs.
Similarly, traditionally Liechtenstein has had very
close relations with Switzerland; both favour banking
regimes that oer secrecy and that is signicant in
the context of the EUSTD. It is interesting to
reect on just how dierent Liechtenstein is in
many ways to most EU member states. Obviously
it is very small in terms of area only 160 square
kilometres, and in population terms for example
an electorate of only 17,000 voters. Also noteworthy
is the fact that in March 2003, with debate over
Liechtenstein's relations with the EU in general,
and the EUSTD in particular, a major political
issue, Liechtenstein voted in a referendum (64 per
cent to 36 per cent) to give sweeping powers to its
monarchy. These powers include: a veto over parliamentary decisions; the discretion to dismiss the government; and the right to intervene in the nomination
of judges. The result has been widely interpreted as a
vote for an absolute monarchy by the Liechtenstein
electorate.52 It will be interesting to see not
only what the broader ramications are in terms of
LiechtensteinEU relations, but whether there will
be specic repercussions for the EUSTD as a result
of the referendum.
What is undeniable regarding the progress of the
EUSTD is that factors external to the EU have
been crucial, most especially eorts by the EC to

persuade the USA and Switzerland to adopt similar


positions on exchange of information issues. In
October 2001 Econ authorised the EC to negotiate
with the USA, Switzerland, Liechtenstein, Monaco,
Andorra and San Marino to secure agreement that
these jurisdictions would adopt equivalent measures
to the EUSTD.53 Despite, or perhaps because of,
the eorts of the EC, there has been much uncertainty
surrounding the position of the USA on the EUSTD
in recent times as interest groups seek to inuence the
administration of President Bush. A number of lobby
groups such as the National Taxpayers Union
(NTU),54 and the Center for Freedom and Prosperity
(CFP),55 have contributed to debates on tax competition. The NTU helped to organise international
coalitions to oppose the eorts of the EU and
OECD on harmful tax competition, including the
Saint Louis Declaration, which denounces the
eorts of the EU and OECD in this area as oppressive.56 Like the NTU, the CFP is based in Washington DC, and it has argued ercely against the
OECDPHTP and the EUSTD. Similar to the
NTU, the CFP has portrayed both the EUSTD and
the OECDPHTP as inimical to notions of individual
freedom, harmful to concepts of free trade, damaging
to growth and therefore against the national interest
of the USA.57 The CFP has produced numerous
memoranda to augment its claims that supporting
the EUSTD would damage the US economy by
undermining the competitive advantages held by
the USA in attracting foreign investment. For
example in November 2001 the CFP quoted a US
Department of Commerce Report58 that estimated
the market value of foreign investment in the USA
at the end of 2000 as being US$9.4trn and claimed
that US acquiescence regarding the EUSTD would
be a substantial threat to sustaining and/or increasing
those levels of investment.59 The CFP has tried to
help kill o the EUSTD on numerous occasions
and as long ago as December 2001 referred to the
EUSTD in colourful terms as being
` . . . in disarray. It may not be clinically dead, but it
is in a coma, kept alive only by a respirator, articial heart, and the desperate wails of greedy politicians from high-tax nations . . . Do not let this
proposal climb out of the grave. As sure as the
sun rises in the East and sets in the West, we
can rely on high-tax nations like France to
engage in a vigorous campaign to resuscitate
this anti-growth initiative.'60

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The CFP message on the EUSTD may be strident


and colourful, and indeed open to dispute, but
perhaps most signicantly it has hit home with
many members of the US Congress, some of
whom were implacable in their opposition to the
EUSTD throughout 2002. For example, House
Government Reform Committee Chairman Dan
Burton in a letter to then US Treasury Secretary
Paul O'Neill urged vigorous opposition to Information Exchange Schemes.61 Media reports quoted Congressman Jim DeMint of South Carolina in a letter to
Secretary O'Neill when he described the EU's agenda
on information exchange as `bad tax policy and bad
economic policy' and `a threat to America's competitive position in the world economy'.62 Similarly,
Pennsylvania Senator Rick Santorum, who also
serves as Chairman of the Republican Conference,
asked Secretary O'Neill to be
`sceptical toward the European Union's proposed
Savings Tax Directive . . . As a low-tax country
by industrial world standards, the United States
has little if anything to gain by participating in a
tax cartel designed to help high-tax nations . . . Governments, like private businesses, should be subjected to the discipline of market competition.'63
However, there have been conicting interpretations oered about how the Bush Administration
views the EUSTD. For example media reports in
June 2002 stated that the EU had claimed in a
communique that:
`Contacts at political and technical level have been
held with the United States, Monaco, Andorra,
San Marino and Liechtenstein. These states have
expressed their willingness to cooperate with the
European Union.'64
However, the CFP oers a very dierent interpretation and again seeks to sound the death-knell for the
EUSTD:
`Washington, DC (24th July, 2002) The Center
for Freedom and Prosperity was told Tuesday by
several senior Bush Administration sources that
the United States has rejected any participation in
the European Union (EU) ``savings tax directive''.
According to one highly placed White House
ocial, ``We are not signing the European
Union's `savings tax directive'. There is ZERO

Page 62

support in the Administration for signing'' . . .


This is the deathblow to the EU's proposal since it
is based on unanimous participation of 21 targeted
nations.'65
What is seen here is similar to the situation described
earlier of the agreement reached on the Draft
Directive at the Santa Maria de Feira Council in
June 2000, when UK Prime Minister Tony Blair
and Austrian Finance Minister Karl-Heinz Grasser
oered alternative social constructions of the same
sets of political and economic realities, in order to
legitimate their actions to their separate constituencies. The EU and CFP are engaging in competing
social constructions of the same issue. The CFP
oers an explanation of why its interpretation of
the same events should contrast so sharply with that
of the EU in these somewhat pejorative terms:
`In all likelihood, this confusion may be the result
of struggles inside the Administration. The career
bureaucrats at Treasury and the IRS are ideological
zealots and they fully support the EU ``Savings
Tax Directive''. These people, many of whom
worked on tax harmonization issues for the
Clinton Administration, are the ones that would
have attended the lower-level and mid-level meetings with their EU counterparts. Needless to say, it
is quite likely that these bureaucrats would have
expressed support for the EU scheme . . . Similarly,
it is not surprising that the President's political
appointees and economic advisers vehemently
deny that the US is supporting the EU's proposed
cartel. These men and women generally support
competitive markets . . . '66
The CFP analysis may have been prescient if media
reports in September 2002 and a CFP press release
of October 2002 are to be believed. One senior
White House ocial speaking on condition that he
was not identied told a meeting of conservative
political groups that
`the administration would not support the
European Union's information-sharing directive
. . . ``[The Commission] want to get us to sign
on in order to badger the Swiss into signing, and
get the Swiss to sign on to badger us'' '67
and
`Washington DC (October 29, 2002) Moving
to erase any ambiguity, the Bush Administration

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reiterated its opposition to a European Union proposal that would require nations to collect and
share private nancial information on nonresident
investors. Larry Lindsey, the President's senior
economic advisor and Director of the National
Economic Council, rmly stated that ``the
Administration does not support the EU Savings
Directive there is zero interest in it''.'68
Both these statements are signicant, but for the
purposes of this analysis it is especially important
to note the SwitzerlandUSEC interaction. The
success of the EUSTD is contingent on support
from various quarters including Switzerland, the
USA, Luxembourg and a number of dependent
territories such Jersey, Guernsey and the Cayman
Islands. Throughout 2002 various EU member
states and the EC applied pressure to gain such
support, a pressure that at times was described as
`unacceptable' by Swiss Finance Minister Kaspar
Villiger.69 Mr Villiger is unlikely to have been
impressed by an article that appeared in the Financial
Times in October 2002, when Mr Frits Bolkenstein, the
EU's Internal Market Commissioner, was extremely
critical of the Swiss position on the EUSTD.70 In
September 2002, the leader of government business
in the Cayman Islands, the Hon McKeeva Bush,
echoed Mr Villiger's sentiments when he promised
to oppose the EUSTD in a number of ways including
court action.71 Mr Bush's pledge of September 2002
has been carried out in March 2003 when:
`The Caymanian authorities have launched legal
proceedings in the EU's Court of First Instance in
order to challenge the European Union's decision
not to allow the consultation process over its
savings tax directive requested by the jurisdiction
last October to go ahead.'72
Subsequently it has been reported that the Cayman
government intends to challenge both under EU
law, specically Article 230 of the European Community Treaty, and under English law, arguing that
the UK ` . . . does not enjoy the constitutional
power to impose legislation upon the Cayman
Islands without its consent'.73 This action by the
Cayman Islands is perhaps not so surprising when
one considers that the UK government is quoted as
having taken a `strong-arm' approach to its dependent territories on the EUSTD, with UK Chancellor
Gordon Brown reported as giving a December 2002
Econ meeting his

` . . . ``unequivocal assurance'' that automatic information exchange will be introduced in Caribbean


territories. ``If necessary, we will legislate directly'',
he threatened.'74
There seems to be considerable potential in 2003
and beyond for a `stoush' [all-in brawl] in judicial
arenas between the UK and some of its dependent
territories on these issues. So, progress of the
EUSTD in 2002 with regard to the support of external jurisdictions seems to have been a pretty volatile
mix of grudging acceptance, conict and confusion.
In December 2002, in a report to Econ, the EC
summarised its view on how negotiations with
external jurisdictions were progressing.75 With
regard to Switzerland the EC indicated that the
Swiss `wished to cooperate',76 that the Swiss would
consider some sort of `retention tax' on behalf of
EU member states,77 but importantly:
`Switzerland is not prepared to engage in automatic
exchange of information on savings interest paid
by Swiss paying agents to residents of member
states, neither from 1st January 2004 nor from
the end of the transitional period.'78
The EC described the USA as a strong supporter of
exchange of information through its bilateral tax
treaties, but its reporting regulations were not
consistent with the EUSTD regarding bank deposit
interest and non-US source income and the USA
was ` . . . not prepared at this stage to give a formal
statement in relation to the savings directive'.79
Andorra was prepared to apply the withholding tax
on the paying agent principle but was `not amenable
to providing any information exchange on request'.80
Liechtenstein's position on these issues was similar to
Andorra,81 as was the view of Monaco.82 San Marino
indicated a willingness to apply a withholding tax
and information exchange on request, through
bilateral tax treaties.83 In summary on the exchange
of information issue, the EC felt the USA would
maintain its preference for a bilateral tax treaty
approach and that Andorra, Liechtenstein, Monaco
and San Marino would broadly follow whatever
position Switzerland adopted.84
The zeal with which the EC pursued its dicult
task in selling the EUSTD to strategic parties both
outside and inside the EU needs to be considered in
the context of persistent reports that France and
Germany were leading

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Gilligan

`a push to harmonise European Union tax policies,


challenging the UK government's insistence that
taxation must remain subject to national veto . . .
France and Germany believe that the single
market is distorted by ``unfair tax competition''.'85

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It is against this background that Econ met in


December 2002 and endorsed the approach of the
EC.86 So, unsurprisingly in many ways, 2003
arrived and the EU had missed the 31st December,
2002 deadline for approval of the tax package as a
whole that it had set itself at the Feira European
Council meeting in June 2000. This deadline failure
for the EUSTD was reported gleefully by the CFP
as it trumpeted the death of the EUSTD yet again:
`Notwithstanding a steady stream of misleading
propaganda throughout the year, the EU failed
to achieve its primary tax harmonization goal . . .
importantly, Switzerland held rm a critical
outcome since the EU claimed that the Directive
could move forward if the Swiss capitulated . . .
2003 Prognosis: The EU Directive is dead. Many
EU member nations are secretly relieved that
the proposal failed. The bureaucracy will continue
to make noise, but there is almost no way to
resuscitate the proposed cartel.'87
Time will tell how correct the CFP will be in its
prediction, but 2003 to date (mid-March) has been
a stormy ride for the EUSTD. At its January 2003
meeting Econ stated that it:
` . . . commits itself to formally adopt the Tax
Package before the European Council in March
2003.
With regard to the Directive on the Taxation of
Savings:
The Council sticks to the Feira European Council
conclusions that the exchange of information, on
as wide a basis as possible, is to be the ultimate
objective of the European Union in line with
international developments.'88
On condition of unanimity of member states, Econ
committed to an agreement with Switzerland that
agreed a withholding tax formula but left open for
further negotiation the question of exchange of information. Similar agreements would be sought from

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Andorra, Liechtenstein, Monaco and San Marino.89


Further, EU member states other than Austria,
Belgium and Luxembourg would implement automatic exchange of information from 1st January,
2004. These three member states would adopt a transitional regime based on a withholding tax and
automatic exchange of information once specic
agreements had been achieved with: (1) Switzerland,
Andorra, Liechtenstein, Monaco and San Marino
based on the OECD Agreement on Exchange of
Information on Tax Matters; and (2) when the
Council agreed unanimously that the USA was
`committed' to exchange of information as per that
OECD Agreement.90 Overall, the agreement represented a scaling back from the EUSTD's original
aim for comprehensive exchange of information.
Mr Allan Bell, Treasury Minister for the Isle of
Man, took the view that:
`The whole exercise is not based on fairness, or
common sense, or logic. In many ways it is quite
an irrational political process which we have
ended up with and, perhaps, from our point of
view it is not the best way of going about things
but we have to live in the real world.'91
This is a pretty rational and accurate appraisal of
the EUSTD saga to date. The Econ proposal was
described in the media as:
`a glorious fudge, as had become inevitable given
the determined resistance of Switzerland to any
diminution in its treasured banking secrecy, and
it leaves essentially unresolved the future for
Europe's many low-tax jurisdictions . . . Within
hours of the deal, Swiss bankers were pointing
out that there were plenty of ways to get round
any withholding tax, including booking businesses
through oshore centres where there was no such
tax.'92
Others were more forthright in their criticism:
`All sorts of justications have been put forward
for this tax. They range from a clampdown on
money laundering to the need for eective action
against the nancing of global terrorism. But in
truth the savings tax has been driven by an imperative that is as corrosive of human rights as it is anticompetitive: the determination of high tax jurisdictions in the EU to bully the low tax ones out
of existence.'93

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And:
`Many free-market leaders were surprised by the
EU's wilful misrepresentation of the US position.
According to Grover Norquist of Americans for
Tax Reform, ``The EU admitted last month that
US information-sharing policies are not compatible with the Savings Tax Directive. And since
America does not impose a withholding tax on
most forms of non-resident savings and certainly
doesn't share any revenue with other nations, it
also is clear that US policy is incompatible with
the revised Directive. So why are the bureaucrats
in Brussels misrepresenting the US position? Do
they really think people in Switzerland, Luxembourg, and other nations are too stupid to understand that the Directive is going to drive capital
to non-participating jurisdictions like America,
Panama, and Hong Kong?'' '94
This evaluation is pretty blunt, but perhaps has
more than a ring of truth to it. Remembering that
the original deadline for nalising arrangements on
the issues of taxation of savings within the EU was
the EU Summit in Helsinki in December 1999, the
EUSTD staggers on through 2003 like a dehydrated
and disoriented marathon runner that knows that the
nish lies somewhere up the road, but is not really
sure when they are likely to arrive, if at all, but continues to push on regardless. Unsurprisingly some
jurisdictions are attempting to put a gure on the
likely costs that they might incur if the EUSTD
does cross the nishing line eventually:
`A report conducted on behalf of the Cayman
Islands by Cambridge-based economics expert,
Professor Sir James Mirlees has warned that the
jurisdiction faces a potential economic loss of
around $50 million per year as a result of the
European Union's Savings Tax Directive, which
will directly aect the jurisdiction, as a UK
Crown Dependency.'95
Similarly, a report authored by Oliver Guirdham
and issued by the business information company
Datamonitor96 has warned that:
`UK oshore territories are likely to be among the
worst aected by the directive . . . Datamonitor
forecasts that fully compliant, information swapping territories are likely to lose 58 per cent of

oshore funds and deposits invested by EU citizens


by 2013. This will have a dramatic eect on the
nancial services industries in the oshore territories, such as those in the Channel Islands and
the Caribbean.'97
Obviously it is hard to produce completely reliable
projections of loss that might be incurred as a result
of the EUSTD, but it is likely that other estimates
will emerge as 2003 progresses. Equally pragmatic,
but speaking from a purely technical and administrative perspective was the warning by the European
Banking Federation that with regard to the 1st
January, 2004 deadline it would be `de facto impossible for tax administrations and nancial institutions
to implement the Directive on time'.98 In addition
to resounding criticism from around the world and
the court action instigated by the Cayman Islands,
the proposed EUSTD has encountered even further
diculty as 2003 has progressed. On the eve of
the Econ meeting of 7th March, 2003, reports
emerged that Italy was `threatening to torpedo the
deal'99 because it wanted to link agreement with the
tax package of which the EUSTD is an integral part
with agreement to the energy taxation package.
The Greek ambassador to the EU, Mr Aristides
Agathocles, cautioned that the Italians would `make
their life very dicult if they go beyond a certain
point that is, if they try to mix oranges with
watermelons'.100 Conclusive evidence does not
seem to be available as to whether the Italian delegation did try to mix their fruits at the 7th March
meeting, but allegedly they did demand:
` . . . a menu of unrelated concessions, including
changes to the treatment of cross-border taxes,
revised diesel duties for the Italian trucking industry, and revisions to the taxation of energy
products, as well as to milk quotas.'101
The German Finance Minister Hans Eichel was very
critical of the Italian stance, professing himself `astonished that the Italian delegation brought completely
unrelated issues into the discussion'.102 The Italian
move is typical of the `horse-trading intra EU
politics' for which over the years the EU, and its previous incarnations as the EEC and EC, has become
notorious, as member states exercise and/or threaten
their right of veto to seek concessions over certain
issues that they see as in their own national selfinterest. The Italian action forced Econ to defer

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Gilligan

further discussion of the tax package until its next


meeting of 19th March, 2003.103 In the interim
there was further bad news from the European
Court of Justice (ECJ) for the success prospects of
the tax package when it was reported that:

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`In the preliminary hearing of the Conseil d'Etat v de


Lasteyrie du Saillant case, the ECJ's Advocate
General decided that the French government had
violated the freedom of establishment provisions
contained within EU law by levying a punitive
residential exit tax on an individual who wanted
to transfer his tax residence out of France . . . the
ruling is likely to reignite erce debate over the
harmonisation of tax law, which has been strongly
opposed by several EU member states.'104
Nevertheless, despite the prospect of this additional
looming setback at the ECJ, the Econ meeting of
19th March, 2003 agreed that after they had
engaged in ` . . . deep debate . . . All delegations
but one reached political agreement . . . and reafrmed their commitment to formally adopting the
Tax Package as soon as possible'.105 So, this
seemingly continuingly fuzzy scenario, with its
pervasive sense of being held hostage to a uctuating
cocktail of political fortune and dierent national
self-interests, would seem to be the current state of
play for the tax package and therefore the EUSTD.
What conclusions might be drawn from this potted
chronology of the troubled history to date of the
EUSTD?

CONCLUSION

First it is important to remember why the push began


for the EUSTD or an equivalent, and why it has been
pushed so hard by the EC and certain EU member
states. At its core it is a debate about loss of revenues
to national exchequers in general, and certain national
exchequers in particular. As such the EUSTD is a
mechanism to negate, or at least alleviate, the
negative externalities of that tax revenue slippage.
Many people of dierent countries, cultures and
socio-economic groups around the world regularly
seek to reduce or minimise their taxation burden,
and moving their savings out of their home jurisdiction may be one available strategy. So, it is pertinent to consider the variation that exists between
the taxation demands that dierent jurisdictions
make upon their resident populations. For example,

Page 66

Table 1: Top marginal income tax rates of selected


jurisdictions
Jurisdiction

Top Marginal Rate

France
Netherlands
Germany
Ireland
UK
USA
Hong Kong

53.25%
52%
48.5%
42%
40%
38.6%
15%

consider the variations in the top marginal income


tax rates of the jurisdictions listed in Table 1.106
France, Germany and the Netherlands are hightaxing jurisdictions that have been prime movers
behind the EUSTD, and are also some of the EU
member states who historically have been most consistent in pushing for closer political and economic
integration within the EU. They are more likely to
perceive positive gains from greater harmonisation
of tax regimes both within and outside the EU,
especially given the strong support for the drive
towards a more integrated single market within the
EU, of which the EUSTD is but one piece in the
overall jigsaw. The reluctance and/or opposition
that smaller EU member states such as Austria,
Belgium and Luxembourg have displayed towards
the EUSTD is indicative that in all likelihood they
would just like the whole issue to go away.
However, with two of the EU's juggernauts in
France and Germany promoting the EUSTD with
such fervour its ultimate approval in some form is
perhaps inevitable. Notwithstanding, how legitimate
is it for France and Germany to pressure some of their
smaller partners in the ways that they have done
regarding the EUSTD? The answer, as with many
issues, is that it depends upon whom you are talking
to and what their vested interests are. The EC almost
certainly would say yes, as it extends and deepens
integration within the EU. The response from
Luxembourg might vary depending on whether
they can speak in condence and/or could expect reprisals. The UK might say that it is justied as long as
there is no compulsory withholding tax element.
However, there are also dangers associated with such
bullying/pressure tactics remaining a common structural feature of EU policy-making processes. Bauer

Whither or Wither the European Union Savings Tax Directive?

analyses this dangerous potential in his appraisal of


what he sees as rising levels of resentment and conict
between the EC and regional authorities:

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` . . . persisting patterns of conict among main


actors in EU structural policy-making are real,
and they constitute a theoretical challenge to the
multilevel governance approach of day-to-day
integration and question the sustainability of the
partnership arrangements in EU administrative
practice.'107
The challenges posed by issues such as the
EUSTD are not just theoretical in nature; they
are signicant in political and operational practice
terms as well. The scale of those challenges is
likely to increase given the momentum of the
possible constitutional changes at EU level that
were discussed earlier. Such changes are likely to
be presented as wonderful opportunities by their
supporters and dangerous developments by their
detractors:
`If there is a dark cloud on the horizon, it is probably the project to create a European Constitution.
The EU's high-tax welfare states will seek to use
this opportunity to get rid of the ``national veto''
so that it will be easier to implement tax harmonization policies such as the Savings Tax Directive.
This is an enormous long-term threat, but lowtax nations like Ireland, Luxembourg, Austria
and the United Kingdom may not realise the
danger.'108
It could be suspected that EU member states such as
the UK, who in the past have favoured notions of
subsidiarity within the EU in order to protect what
they see as specic matters of national self-interest,
and who presently are ercely protective of retention
of the national veto over EU decision making in core
areas such as defence, are fully aware of what the CFP
might term `danger'. However, in an era of EU
enlargement, France and Germany, with some key
allies, are committed to further integration, if necessary on multiple levels and at dierent speeds, and
also seem to be moving towards a removal of the
national veto and an EU decision-making infrastructure based upon qualied majority voting.
This is in many ways unsurprising given the EU's
evolution, especially the growth in its administrative and legal reach. In addition to the everyday

widespread perception of a larger and seemingly


more inuential EC, there are numerous econometric
studies that demonstrate that the intensity and extent
of policy making by the EU have increased sharply
over the last 30 years.109 Also, there is a growing
body of research that supports the idea that the
EU is nurturing emerging modes of global governance,110 and also formally engaging in supranational
cultural construction through its systems of secondary laws.111 The EUSTD can be seen as one piece
of the EU's mosaic of supranational cultural construction, as in this case the EU's more powerful
players seek to shape the praxis of regulating taxation of savings by dening not only what should be
its legitimate broader policy norms, but also its specic operational and administrative pathways.
So, have France, Germany and the UK been bullies
regarding the EUSTD? The answer is almost certainly yes, but given political, economic and social
realities what else could one expect?
`In multilateral negotiations countries are no
longer relatively small players guided by the
invisible hand of the market, but rather, their
relative negotiation power is inuenced by many
other factors (including their respective cultural,
diplomatic and army powers).'112
One might add nancial power to Dagan's list with
regard to the EUSTD, especially given the prevailing
history within the EU for `horse-trading at the policy
table' discussed earlier. It is an underlying economic
reality that those who bankroll the larger share of the
common budget might be expected to have their
voice heard in a more active sense, and more often, at
the negotiating table than those whose budgetary
contribution is relatively small. In the nal analysis,
it is this overwhelming political reality that is likely
to propel (however haphazardly) a disoriented and
dehydrated EUSTD over the nishing line.
Setting aside for a moment the troubling question
of the intrinsic legitimacy of the EUSTD, it is worth
pondering the more pragmatic questions: can it
work, and is it worth pursuing? Without regurgitating entirely what has been said above, again it
depends upon whom one asks and what their
agendas are. As mentioned earlier there are many
bankers who feel that the EUSTD could be avoided
easily and would be dicult to administer in practice.
On a broader pragmatic level, are multilateral
taxation initiatives such as the EUSTD likely to

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increase the levels of social capital generated for


society or is greater tax competition between
jurisdictions more desirable? It is terribly dicult to
produce denitive answers on this issue, but there
has been some econometric analysis in the area.
Janeba and Schjelderup found that increasing tax
competition would result in a reduction of public
good supply because rents to governments would
fall, but overall voter welfare would improve.113
Baldwin and Krugman found tax harmonisation to
be an overall negative, but argue the tax competition
game is more dicult to predict because of the positive eects of agglomeration (ie the gains derived
from clustering capital together), as might conceivably be achieved for instance in a fully integrated EU
internal market.114
So, it would seem that as in the political arena, it
might be as hard to produce certainty in the econometric domain when trying to specify the universal
benets of multilateral taxation initiatives such as
the EUSTD. Despite this relative lack of certainty,
multilateral regulatory activity in this area seems set
to increase, and not only in the EU region. The
UN has bought into the debate with its High Level
Panel on Financing for Development recommending
the establishment of a United Nations International
Tax Organisation (UNITO) that would amongst
other aims:
`develop international norms for tax policy and
administration . . . take a lead role in restraining
tax competition designed to attract multinationals
with excessive and unwise incentives . . . develop
procedures for arbitration when frictions develop
between countries on tax questions . . . Sponsor a
mechanism for multilateral sharing of tax information . . . develop and secure international agreement on a formula for the unitary taxation of
multinationals.'115
Will the UNITO become a reality in the near future?
It is unlikely, as in addition to all the potential operational diculties that would face a future UNITO,
the UN has suered substantial blows to its credibility in recent times. While this paper is being written,
Iraq is being bombed and invaded by `the coalition of
the willing', to use President Bush's term. This coalition is comprised overwhelmingly of military forces
from the USA and UK. It seeks to topple the
regime of President Saddam Hussein and destroy

Page 68

any weapons of mass destruction that Iraq may


possess. The invasion follows months of activity
by UN weapons inspection teams in Iraq and
accompanying acrimonious debate within the UN,
as the USA and UK sought further UN Security
Council (UNSC) resolutions which would mandate
military action against Iraq within the time scale
sought by President Bush. France, supported by
Germany and Russia in particular, led international
opposition to the US position and said it would use
its UNSC veto to block such a resolution. There
has been extensive media coverage of the ensuing
bitter diplomatic rows between France and both the
USA and the UK, in which in some quarters the
French were caricatured as `lily-livered wimps' and
the Americans as `cowboy warmongers'.116 There is
a signicant possibility that diplomatic fall-out
from the Iraq invasion may aect both the activities
of the UN, and the development of multilateral
regulatory initiatives in taxation and in other areas
in 2003 and beyond. Whether there will be specic
ramications for the EUSTD is unclear.
The EUSTD is in many ways a sign of the times.
Increasingly in a more integrated world economy
international and multilateral regulatory initiatives
are being utilised to deal with international issues.
Specic economic and cultural factors may be
inuential in initiatives such as the EUSTD, but
overwhelmingly the political context is fundamental
in the construction of international compliance
regimes. That much should be clear with regard to
this case study of the EUSTD. If such regulatory
regimes are to succeed then it is essential that domestic compliance constituencies (which may be regional, national or local) either exist or emerge, and
are subsequently sustained, in order to support
the transnational regulatory infrastructure. The EU
may be able to achieve this on an intra-EU basis,
but to date the case for multilateral tax cooperation
is not proven as a universal good, and the heterogeneity of players in the `international tax game' ensures
that the gains and losses from such cooperation will
vary. So the sceptical will remain just that sceptical. One might reasonably expect to see continuing
and sustained resistance from Switzerland and the
USA to automatic exchange of information as proposed under the EUSTD. There will be further conict in other arenas such as the court action being
taken by the Cayman Islands. Such disagreements
are testimony to the complexities and political
realities of taxation, and even if the European

Whither or Wither the European Union Savings Tax Directive?

Council does eventually approve some form of


EUSTD, its prospects for success in practice are
cloudy.
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(2)

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This paper has sought to take account of relevant events and


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Commission of the European Communities (1996) Taxation
in the European Union, 20th March, Brussels, http://
europa.eu.int/comm/taxation_customs/publications/ocial_
doc/sec/taxation/sec_apr_1996/sec1996en.pdf
The origins and the chronology of the EUSTD are discussed
in more detail below.
Charles Pratt, Lord Camden, House of Lords, 7th March,
1766.
Benjamin Franklin, Letter to Jean Baptiste Le Roy, 13th
November, 1789.
The Boston Tea Party incident was specically a protest
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government to the East India Company (EIC) regarding
how the EIC's tea would be sold within the American
colonies. More importantly, along with the Sugar Act of
1764, Stamp Act of 1765 and the Townshend Acts of
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government of King George III that the American
colonists saw as taxation without representation. For further
information see: http://www.bostonteapartyship.com/
History.htm; and http://odur.let.rug.nl/usa/E/teaparty/
bostonxx.htm
For a discussion of these issues, see Gilligan, G. P. (2002)
`International Trends in the Regulation of the Financial
Services Sector', Australian Journal of Corporate Law, Vol.
14, No. 1, pp. 5773, especially pp. 6573.
Econ is the European Union's Council of Economic and
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eu.int/comm/taxation_customs/taxation/information_notes/
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Commission of the European Communities (1996) Taxation
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publications/ocial_doc/sec/taxation/sec_apr_1996/sec1996en.
pdf
Ibid., p. 10.
Commission of the European Communities (1997) A
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http://europa.eu.int/comm/taxation_customs/publications/
ocial_doc/com/taxation/com_nov1997/en.pdf
Ibid., p. 4.
Ibid., p. 5.
Putnam, R. (1996) `The Strange Disappearance of Civil
America', Policy, Autumn, pp. 315.
Fukuyama, F. (1999) `The Great Disruption', The Atlantic
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Commission of the European Communities (1998) Proposal
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within the Community, 4th June, COM(1998) 295 nal,
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taxation/proposal_savings/ojc-en.pdf

(19)
(20)

(21)
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The European Commission, ref. 9 above, p. 3.


There was widespread media coverage of this issue. For
example, The Economist, `In Bondage', 17th April, 2001,
p. 87; and Jamieson, B. (1999) `Withhold and Wither', The
Weekly Telegraph, 14th20th April, p. 43.
Helsinki European Council, Presidency Conclusions, 10th and
11th December, 1999, p. 6, http://ue.eu.int/Newsroom/LoadDoc.asp?BID=76&DID=59750&from=&LANG=1
HM Treasury and Inland Revenue (2000) Exchange of Information and the Draft Directive on Taxation of Saving: A Paper
by the United Kingdom, London, February, pp. 23, http://
www.hmtreasury.gov.uk/docs/2000/eoi.html.
Commission of the European Communities (2000) Report
from the Commission, Progress on Financial Services, Second
Report, 30th May, COM(2000) 336 nal, p. 22, http://
europa.eu.int/comm/internal_market/en/nances/actionplan/
progress2en.pdf
Santa Maria de Feira European Council: Presidency Conclusions,
19th and 20th June, 2000, p. 7, http://ue.eu.int/Newsroom/
LoadDoc.asp?BID=76&DID=62050&from=&LANG=1
The eects of these international pressures are discussed in
more detail below.
For example: Bagwell, S. (2000) `UK Claims Victory on
Measures to Counter Tax Evasion', Australian Financial
Review, 19th June, p. 10.
Hansard, 21st June, 2000.
http://www.reuters.com/, 21st June, 2000.
For some discussion of how constructions of legitimacy can
play out in international arenas see Franck, T. M. (1988)
`Legitimacy in the International System', American Journal
of International Law, Vol. 82, No. 4, pp. 705759; and
Franck, T. M. (1990) The Power of Legitimacy Among
Nations, Oxford University Press, New York. Also, for a
critical analysis of how social constructions of legitimacy
may aect regulatory developments in a context of
nancial services, especially regarding the UK, see
Gilligan, G. P. (1999) Regulating the Financial Services
Sector, Kluwer Law International, London.
http://www.reuters.com/, 17th July, 2000.
2312 Council Econ (2000) Brussels, 26th November,
Press: 453 No. 13861/00, http://ue.eu.int/Newsroom/LoadDoc.asp?MAX=21&BID=93&DID=64233&LANG=1
The European Commission, ref. 9 above, pp. 45.
The Australian, `EU Tax Hopes Up as ``Mouse'' Demurs',
26th November, 2000, p. 26.
Ref. 31 above, p. 5.
Commission of the European Communities, ref. 18 above.
Commission of the European Communities (2001) Proposal
for a Council Directive to Ensure Eective Taxation of
Savings Income in the Form of Interest Payments within
the Community, 18th July, COM (2001) 400 nal, http://
europa.eu.int/comm/taxation_customs/proposals/taxation/
com2001400/com2001400_en.pdf
Ref. 31 above, p. 5.
Commission of the European Communities (2001) Commission Adopts New Proposal on Taxation of Cross-border Savings
Income, Brussels, 18th July, IP/01/1026, http://europa.eu.int/
comm/taxation_customs/publications/ocial_doc/IP/
ip(011)(026)/ip(011)(026)_en.pdf; and Commission of the
European Communities (2001) Savings Tax Proposal:
Frequently Asked Questions, Brussels, 18th July, MEMO/01/
266, http://europa.eu.int/comm/taxation_customs/publications/ocial_doc/IP/ip(011)(026)/memo(012)(66)_en.pdf
Ibid., Savings Tax Proposal, ref. 38 above, p. 1.
Ibid., p. 2.
Ibid., p. 3.
Lomas, U. (2001) `EU Talks On Savings Tax Directive
Collapse', Tax-News.Com, Brussels, 6th December.

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Gilligan

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Ibid.
2401 Council Econ (2001) Brussels, 13th December,
p. 12, Press: 465 No. 15139/01, http://ue.eu.int/pressData/
en/econ/DOC.69109.pdf.
For some discussion of how these issues play out in the
WTO see: Atik, J. (2001) `Democratizing the WTO',
Loyola-LA Public Law Research Paper No. 20011, http://
papers.ssrn.com/sol3/papers.cfm?abstract_id=250331; and
Guzman, A. T. (2002) `Global Governance and the
WTO', UC Berkeley Public Law Research Paper No. 89,
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=321365
The OECD is based in Paris and comprises 30 member
countries with the European Commission as a member
international organisation. The 30 member countries are:
Australia, Austria, Belgium, Canada, Czech Republic,
Denmark, Finland, France, Germany, Greece, Hungary,
Iceland, Ireland, Italy, Japan, Korea, Luxembourg,
Mexico, Netherlands, New Zealand, Norway, Poland,
Portugal, Slovak Republic, Spain, Sweden, Switzerland,
Turkey, the UK and the USA. All members share a stated
commitment to democratic government and the market
economy. The OECD has active relationships with 70
other countries and seeks to foster good governance in the
public service and in corporate activity. For more information regarding the OECD, see: http://www.oecd.org/EN/
about/0,EN-about-0-nodirectorate-no-no-no-0,00.html
The Financial Action Task Force on Money Laundering
(FATF) is an inter-governmental organisation that seeks to
develop and promote policies at both national and international levels to combat money laundering. The FATF was
established following the G-7 Summit held in Paris in
1989. G-7 members are: Canada, France, Germany, Italy,
Japan, the UK and the USA. Initially, the FATF was
convened from the G-7 member states, The European
Commission (EC) and eight other countries, but it now
has a membership of 29 jurisdictions, with the EC and the
Gulf Cooperation Council as member international organisations. The 29 member jurisdictions are: Argentina,
Australia, Austria, Belgium, Brazil, Canada, Denmark,
Finland, France, Germany, Greece, Hong Kong, Iceland,
Ireland, Italy, Japan, Luxembourg, Mexico, Netherlands,
New Zealand, Norway, Portugal, Singapore, Spain,
Sweden, Switzerland, Turkey, the UK and the USA. The
FATF has a small Secretariat that is housed in the headquarters of the OECD in Paris, but the FATF is a separate
international body and not part of the OECD. For more
background information regarding the FATF, see: http://
www.oecd.org/fatf/AboutFATF_en.htm
The FSF was established following the meetings in October
1998 in Washington DC and in Bonn in February 1999 of
the Finance Ministers and Central Bank Governors of the
G-7 which commissioned (in Washington), and later
accepted (in Bonn), the recommendation of the Tietmeyer
Report, on International Co-operation and Co-ordination in
the Area of Financial Market Supervision and Surveillance, to
establish a Financial Stability Forum. The FSF was
convened on 14th April, 1999 to promote international
nancial stability through international cooperation and
information exchange in nancial supervision and surveillance. The FSF has a total of 40 members comprising:
Chairman (1), representatives of National Authorities (25),
International Financial Institutions (6), International Regulatory and Supervisory Groupings (6) and Committees of
Central Bank Experts (2). Of the National Authority Representatives: the G-7 member countries each supply three
(from their treasury, central bank and nancial supervisory
agency); and Australia, Hong Kong, Netherlands and
Singapore each supply a single representative. Regarding

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the International Financial Institutions, representatives are


drawn from: International Monetary Fund (2), World
Bank (2), Bank for International Settlements (1) and
OECD (1). Representatives of the International Regulatory
and Supervisory Groupings are: BCBS (2), IOSCO (2) and
IAIS (2). The Committee on the Global Payments System
(1) and the Committee on Payment and Settlement
Systems (1) represent the Committees of Central Bank
Experts. The FSF has a small Secretariat housed at the
Bank for International Settlements in Basel, Switzerland.
For more background information regarding the FSF, see:
http://fsforum.org/About/Home.html
For a critical analysis of the listing initiatives, especially as
they apply to oshore nance centres, see Gilligan, G. P.
(forthcoming) `Oshore Finance Centres and Their
Regulation Who Is Coming to the Tea Party?' in D.
Masciandaro, D. (ed.), Terrorism and Organised Crime,
Financial Markets and Oshore Centres: Myths and Reality,
Ashgate, UK.
Organisation for Economic Cooperation and Development
(2000) Towards Global Tax Co-operation, Report to the 2000
Ministerial Council Meeting and Recommendations by the
Committee on Fiscal Aairs, Progress in Identifying and
Eliminating Harmful Tax Practices, Paris.
Organisation for Economic Cooperation and Development (2002) The OECD Issues The List of Unco-operative
Tax Havens, http://www.oecd.org/EN/document/0,,ENdocument-103-nodirectorate-no-12-28534-22,00.html,
18th April, Paris.
Media analysis of the referendum includes Fleck, F. (2003)
`Liechtenstein Hands Prince Total Power', The Age, 18th
March, p. 10; and The Australian, `People Power to the
Prince', 18th March, 2003, p. 9.
2376 Council Econ (2001) Luxembourg, 16th October,
Luxembourg, Press: 364 No. 12831/01, http://ue.eu.int/
Newsroom/LoadDoc.asp?MAX=21&BID=93&DID=
68158&LANG=1
The National Taxpayers Union was founded in the USA in
1969 and has 335,000 members. It is an inuential lobby
group in the USA and is a founding member of the
World Taxpayers Association. The NTU produces regular
newsletters and other information on taxation matters.
See: http://www.ntu.org
The CFP produces regular newsletters and articles on these
issues. See http://www.freedomandprosperity.org
National Taxpayers Union, Taxpayers of the World Unite: 33
Groups across the Globe Denounce EU/OECD Tax Cartel
Scheme, http://www.ntu.org/01conf/PO10615StLouisDec.
html
The CFP regularly publishes on these issues. For example:
CFP Weekly Update May 23 2001 Edition, http://www.freedomandprosperity.org/update/u05-23-01/u05-23-01.shtml;
and Mitchell, D. J. (2001) CFP Strategic Memo, June 16 2001,
To: Leaders of Low-Tax Jurisdictions and Supporters of Tax
Competition, Financial Privacy, and Fiscal Sovereignty, http://
www.freedomandprosperity.org/Papers/m06-16-01/m06-1601.shtml
King, H. W. (2001) `The International Investment
Position of the United States at Yearend 2000', Survey
of Current Business, US Department of Commerce,
Washington, DC.
Mitchell, D. J. (2001) `The Adverse Impact of Tax Harmonization and Information Exchange on the US Economy',
Prosperitas, Vol. 1, No. 4, p. 1, http://www.freedomandprosperity.org/Papers/taxharm/taxharm.shtml
Mitchell, D. (2001) CFP Strategic Memo, December 21 2001,
To: Supporters of Tax Competition, Financial Privacy, and
Fiscal Sovereignty, Re: A Christmas Present from Europe, p. 1,

Whither or Wither the European Union Savings Tax Directive?

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http://www.freedomandprosperity.org/memos/m12-21-01/
m12-21-01.shtml
Center for Freedom and Prosperity Weekly Update, 22 February
2002, House Government Reform Committee Chairman Dan
Burton Urges Vigorous Opposition to Information Exchange
Schemes, http://www.freedomandprosperity.org/ltr/burton/
burton.shtml
Godfrey, M. (2002) `The US Starts To Recognize EU
``Information Exchange'' Problem', Tax-news.com, 20th
June.
Center for Freedom and Prosperity Weekly Update, 12 February
2002, Third Ranking Republican in U.S. Senate Denounces the
EU's Savings Tax Directive, http://www.freedomandprosperity.org/ltr/santorum/santorum.shtml
Godfrey, M. (2002) `EU Claims that US Supports Savings
Tax Directive', Tax-news.com, 27th June.
CFP Press Release, 24th July, 2002, `CFP Hails Death of EU
Savings Tax Directive, Bush Administration Rejects Tax
Cartel', http://www.freedomandprosperity.org/press/p0724-02/p07-24-02.shtml
Mitchell, D. (2002) CFP Strategic Memo, June 26 2002, To:
Supporters of Tax Competition, Financial Privacy, and Fiscal
Sovereignty, Re: Who is in Charge: President Bush or IRS Bureaucrats? http://www.freedomandprosperity.org/memos/m0626-02/m06-26-02.shtml
Alden, E., Guerrera, F. and Shlaes, A. (2002) `US Opposes
Sharing Information on Savings Taxation: White House
Advisers Come out against European Request for Data on
Foreign-held Accounts', Financial Times, 26th September.
CFP Press Release, 29th October, 2002, `White House
Reiterates Opposition to EU Savings Tax Cartel: FreeMarket Leaders Hail Administration Stance', http://
www.freedomandprosperity.org/press/p10-29-02/p10-2902.shtml
Morton, P. (2002) `Kaspar Villiger Hits out at ``Unacceptable'' EU Criticisms', InvestorsOshore.com, 28th June.
Bolkenstein, F. (2002) `Comment and Analysis, I Cannot
Stand Switzerland Cheating on Tax', Financial Times, 7th
October.
Banks, A. (2002) `Cayman Leader Promises to Fight EU Tax
Initiative', Tax-news.com, 17th September.
Banks, A. (2003) `Cayman Takes EU to Court over Savings
Tax Directive', Tax-news.com, 17th March.
Banks, A. (2003) `Cayman Delegation Challenges EU in
Court', Tax-news.com, 21st March.
Banks, A. (2002) `UK Commits Dependent Territories over
Savings Tax', Tax-news.com, 5th December.
The European Commission, Communication from the
Commission to the Council, Report Concerning Negotiations with Third Countries on Taxation of Savings
Income, Brussels, COM(2002).
Ibid., p. 3.
Ibid.
Ibid., p. 5.
Ibid., p. 7.
Ibid., p. 9.
Ibid., p. 10.
Ibid., p. 12.
Ibid., pp. 1314.
Ibid., pp. 1415.
Parker, G. (2002) `France and Germany Call for EU Tax
Accord', New York Times, 1st December.
2471 Council Econ (2002) Brussels, 3rd December,
Press: 361 No. 14368/02, p. 5, http://ue.eu.int/Newsroom/up.
asp?MAX=1&BID=93&DID=73473&File=/pressData/en/
econ/73473.pdf&LANG=1
Mitchell, D. J. (2003) CFP Strategic Memo, 6th January
2003, To: Supporters of Tax Competition, Analysis of 2002

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and Prospects for 2003, pp. 23, http://www.freedomandprosperity.org/memos/m01-06-03/m01-06-03.shtml


2480 Council Econ (2003) Brussels, 21st January, Press:
15 No. 5505/03, p. 25, http://ue.eu.int/Newsroom/up.
asp?MAX=1&BID=93&DID=73473&File=/pressData/
en/econ/73473.pdf&LANG=1
Ibid., pp. 2526.
Ibid., p. 26.
Banks, A. (2003) `Isle of Man Cautiously Welcomes Savings
Tax Agreement Terms', Tax-news.com, 3rd February.
Gorringe, J. (2003) `Low-tax Jurisdictions Puzzle over
Response to EU Savings Tax Deal', Tax-news.com, 24th
January.
Jamison, B. (2003) `Ugly Return of the Unwanted Savings
Tax', Scotland on Sunday, 19th January, http://www.
scotlandonsunday.com/comment.cfm?id=68472003
CFP Press Release, 27th January, 2003, `Free Market Leaders
Denounce New Savings Tax Directive: US Will Not
Support EU Tax Harmonization Scheme, OECD Commitment Letters No Longer Binding', http://www.freedom
andprosperity.org/press/p01-27-03/p01-27-03.shtml
Banks, A. (2003) `Caymans Braces for $50 Million Loss from
Savings Tax Directive', Tax-news.com, 4th February.
http://www.datamonitor.com/9ea24739e9741afa905c330ea6415aa/all/reports/product_summary.asp?pid=
BFFS0199
Banks, A. (2003) `Report Warns over Impact of Savings Tax
Directive on Oshore Centres', Tax-news.com, 5th March.
`European Banks Say Information Exchange Can't Start in
2004', Tax-news.com, 21st February, 2003.
Joshi, J. (2003) `EU Grapples with New Obstacles
to Savings Tax Deal', U Business, 6th March, http://
www.eubusiness.com/cgi-bin/item.cgi?id=104919&d=
101&h=240&f=56&dateformat=%25o%20%25B%20%25Y
Ibid.
Lomas, U. (2003) `Italy Scuppers EU Savings Tax Deal',
Tax-news.com, 11th March.
Ibid.
2493 Council Econ (2003) Brussels, 7th March, Press,
61 No. 6877/03, p. 26, http://ue.eu.int/Newsroom/up.
asp?MAX=1&BID=93&DID=74844&File=/pressData/
en/econ/74844.pdf&LANG=1
Pilgrim, R. (2003) `UK Experts Warn of Corporate Exodus
Following ECJ Ruling', Tax-news.com, 18th March.
2497 Council Econ (2003) Brussels, 19th March, Press,
79 No. 7431/03, p. 4, Provisional Version, http://ue.eu.int/
Newsroom/up.asp?MAX=1&BID=93&DID=74844&
File=/pressData/en/econ/74844.pdf&LANG=1
Charles, E. (2002) `Eat the Rich', Australian CPA, June,
pp. 2833 at p. 28.
Bauer, M. W. (2001) `The EU ``Partnership Principle''
Revisited: A Critical Appraisal of its Integrationist
Potential as a Governance Device Interconnecting Multiple
Administrative Arenas', Max Planck Project Group
Preprint No. 2001/13, p. 14, http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=296376
Mitchell, D. J. (2003) CFP Strategic Memo, 6th January, To:
Supporters of Tax Competition, Analysis of 2002 and Prospects
for 2003, p. 6, http://www.freedomandprosperity.org/
memos/m01-06-03/m01-06-03.shtml.
For example, Alesina, A. F., Angeloni, I. and Schuknecht, L.
(2002) `What Does the European Union Do?', CEPR
Discussion Paper No. 3115, http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=297266.
For example, Majone, G. (1997) `From the Positive to the
Regulatory State: Causes and Consequences in the Mode
of Governance', Journal of Public Policy, Vol. 17,
pp. 139167.

Page 71

Gilligan

(111) Duina, F. and Breznau, N. (2002) `Constructing Common


Cultures: The Ontological and Normative Dimensions of
Law in the European Union and Mercosur', European Law
Journal, Vol. 8, pp. 574595.
(112) Dagan, T. (2002) `The Costs of International Tax Competition', University of Michigan Law, Public Law Research
Paper No. 13, p. 23, http://papers.ssrn.com/sol3/papers.
cfm?abstract_id=315373.
(113) Janeba, E. and Schjelderup, G. (2002) `Why Europe Should
Love Tax Competition and the US Even More So',
NBER Working Paper No. W9334, http://papers.ssrn. com/
sol3/papers.cfm?abstract_id=351426.
(114) Baldwin, R. E. and Krugman, P. R. (2000) `Agglomeration,
Integration and Tax Harmonisation', CEPR Discussion

US Treasury forms new anti-terrorist


and nancial crimes body
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A new Executive Oce for Terrorist Financing


and Financial Crimes (EOTF/FC) has been
announced by the United States Treasury
Department. The Oce will work closely with
other oces within the Treasury and throughout
the US Government to identify, block and dismantle sources of nancial support for terror
and other criminal activities, including money
laundering. In addition, the team will work
with international partners to expand the ght
against terrorist nancing and nancial crimes
in other nations. The Oce will lead and coordinate the Treasury Department's eorts to combat
terrorist nancing and other nancial crimes,
both within the USA as well as abroad. Its
duties include:


Page 72

Developing and implementing US Government strategies to combat terrorist nancing


domestically and internationally (in concert
with the Treasury's International Aairs Task
Force on Terrorist Financing);
Developing and implementing the National
Money Laundering Strategy, as well as other
policies and programmes to ght nancial
crimes;
Participating in the department's development
and implementation of US Government
policies and regulations in support of the

Paper No. 2630, http://papers.ssrn.com/sol3/papers.cfm?


abstract_id=258062.
(115) Report of the UN High Level Panel on Financing for
Development to the General Assembly, 26th June, 2001,
New York, p. 28, http://www.un.org/esa/d/a55-1000.pdf
(116) For example, The Economist, `When Squabbling Turns Too
Dangerous', 15th February, 2003, pp. 2325.

Dr George Peter Gilligan, Logan Senior


Research Fellow, Department of Business Law
and Taxation, Monash University, Australia;
george.gilligan@buseco.monash.edu.au




PATRIOT Act, including outreach to the


private sector;
Joining in representation of the USA at focused
international bodies dedicated to ghting terrorist nancing and nancial crimes;
Developing US Government policies relating
to nancial crimes.

The Oce will be led by Juan Zarate, Deputy


Assistant Secretary for Terrorist Financing and
Financial Crimes, who will report to the Deputy
Secretary of the Treasury. Within the US Treasury,
the new Oce will provide policy guidance for the
Financial Crimes Enforcement Network (FinCEN)
bureau as it works with the nancial sector, the law
enforcement community and foreign nancial
intelligence units to foster cooperation against
domestic and international nancial crimes.
In addition, the EOTF/FC will provide policy
guidance to the Oce of Foreign Asset Control
(OFAC). OFAC administers US trade and economic sanctions, and targets and blocks nancial
transactions and assets of terrorists, narcotics trafckers and foreign countries that are known to
threaten US national security. The new oce will
work side by side with the International Aairs
Task Force on Terrorist Financing (TFTF), led by
Director William C. Murden, which continues to
work with other countries to implement and
improve mechanisms for blocking terrorist assets
globally, and deny them access to formal and
informal nancial systems.

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