Tuesday, July 28, 2009

While the OECD Cranks up the Heat on Switzerland… Off-the-Radar Havens pick up the Slack

Maybe not, but the folks in Labuan, the official island tax haven enclave of the country of Malaysia, know enough about what's happening in America to be concerned…

Malaysia is a pleasant, hassle free county in Southeast Asia, a little over 9,000 miles from New York City. It's wealthy and has a pluralist culture based on a fusion of Malay, Chinese, Indian and indigenous cultures and customs.

Malaysia's love of Western-style industrialization can be seen in its big cities but aside from the gleaming glass towers of the 21st Century, Malaysia has some of the best beaches, mountains and national parks in all of Asia.

It is also home to an officially planned and promoted offshore financial center (yes, a tax haven) in Sahbah province, called "Labuan," which seeks to become the world’s Islamic financial center. This tax haven really is "offshore" – on a series if islands off the northeast Malaysian mainland

The Word Is Out…

Why should Americans care about Labuan?

Well, because it's not just smart Americans that are worried about the trillions of newly created/borrowed U.S. dollars flooding the world from Obama's Washington. The Chinese, and now the Malaysians are wondering if they should keep dealing in U.S. greenbacks, once the unquestioned reserve currency of the world…

“We can consider whether we can use local currencies to facilitate trade financing between our two countries," Malaysian Prime Minister Najib Abdul Razak told reporters at a briefing Wednesday after meeting with China’s premier, Wen Jiabao. (left)

"What worries us is that the [U.S.] deficit is being financed by printing more money," Mr. Najib said.

Tax Havens of the World

Right now I'm putting the final touches on the second edition of Where to Stash Your Cash Legally: Tax Havens of the World, itself a successor to several previous tax haven books I've authored over the last ten years including The Offshore Money Manual, and Forbidden Knowledge, both no longer in print.

In my latest book, Labuan is described and explained, as one of scores of offshore tax havens I've brought up to date in a year that is witnessing many changes in the offshore financial world. For your own purposes of wise investing, stronger asset protection and private banking, obscure places such as Labuan might be just what you're looking for.

Last month Forbes magazine called Labuan (pop. 84,000), a "hot tax haven" – "hot" in the sense that it has a lot to offer. Said Forbes: "As Western authorities close in on the Cayman Islands and Switzerland, overlooked offshore havens are taking up the slack."

Labuan, designated as a federal territory of Malaysia, is located five miles off the northwest coast of the island of Borneo and faces the South China Sea.

It comprises Pulau (a Malay word meaning "island"), Labuan and six smaller islands, with a population of 80,000. Bahasa Melayu (Malay) is the national language, but English is widely spoken, as well as Chinese dialects and Tamil.

Islamic Financial Center

Labuan joined the offshore financial game in 1990, but it became a serious player in 2002, when it ran promotional road shows in China and Hong Kong.Labuan has since become a gateway for Islamic funds investing in Asia and has lots of business from western companies.

Labuan offers many services, including banking, insurance, trust creation, international business corporations and investment fund management. Since 2000 growth has speeded up, especially after the opening of the Labuan Financial Exchange (LFX).

The main advantage that Labuan enjoys is its role as a center for developing Islamic financial law. It now has a leading role in the issuance of sukuks (Islamic sharia law compliant bonds).

The amount of wealth estimated to be under professional management in this world Islamic financial sector is about $200 to $300 billion, a fairly small quantity in comparison with the global capital market, but still a significant and growing niche that Labuan seeks to serve.

No Taxes, Off the Gray List

Labuan does not tax offshore holding companies, and it's been a struggle for foreign tax authorities to learn about businesses registered there.

Of course that meant that after the April G-20 conference in London, the Organization for Economic Cooperation & Development (OECD) put Malaysia-Labuan on its gray list of "uncooperative" tax havens. As did many other OECD-accused tax havens, Malaysia instantly agreed to cooperate in exchanging tax information and was removed from the OECD bad list.

But don't think that these promised changes will make a major difference in Labuan's bank secrecy.

The OECD program requires that evidence of tax or other wrongdoing be solid and specific before Labuan's government will consider releasing information. Indeed, that's the "probable cause" standard other tax havens, from Switzerland to Hong Kong, say they will follow.

Offshore Whak-a-Mole

Indeed, at the same time Labuan and Malaysia signed their OECD cooperation agreement, they increased Labuan's appeal.

Labuan holding companies can now be registered in and managed from Kuala Lumpur, Malaysia's capital. Legal physical presence in the remote Labuan islands is no longer required.

Forbes suggests an international game of Whak-a-Mole. "Push down hard on the likes of Switzerland and the Cayman Islands, and postboxes are likely to pop up in havens like Labuan," they say.

Keep an eye on the Sovereign Society web site Bookstore for pre-publication sales of Where to Stash Your Cash Legally: Tax Havens of the World, and the 7th edition of The Passport Book.

Yours in Liberty,

Robert Bauman, JD
Sovereign Society Legal Counsel