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Common ground for Obama and Putin is offshore

U.S. President Barack Obama (L) meets with Russian President Vladimir Putin during the G8 Summit at Lough Erne in Enniskillen, Northern Irel
U.S. President Barack Obama (L) meets with Russian President Vladimir Putin during the G8 Summit at Lough Erne in Enniskillen, Northern Irel

By William E. Pomeranz

Low expectations surround the G20 meeting in St. Petersburg on Sept. 5-6.

President Barack Obama's decision to cancel the pre-G20 summit with Russian President Vladimir Putin means the big photo op will likely be the two leaders awkwardly trying to avoid each other. The other headline-making issues in U.S.-Russian relations — Syria, nuclear weapons reduction, missile defense — also appear off the table now. There is one timely matter, however, that resonates with Washington, Moscow, and the entire G20 — the continuing fight against offshore tax havens.

The Cyprus financial collapse in March focused world attention on the outsized role played by offshore banking zones in international tax avoidance and money laundering. Though Russian depositors were the primary victims here, Moscow appeared indifferent to this unprecedented expropriation by Cyprus of the assets of Russian citizens. Putin proved unwilling to help those he viewed as tax-evading oligarchs and corrupt bureaucrats — as well as a few legitimate businesses.

Putin has made the fight against offshore tax havens a key plank of his foreign policy. Other world leaders — including British Prime Minister David Cameron and French President Francoise Hollande — have also issued strong statements criticizing sophisticated legal strategies that allow companies to skirt the domestic treasury, depriving the state of critical revenues in this time of economic recession.

The United States supports the global effort to rein in offshore tax havens and has gone one step further by passing the Foreign Account Tax Compliance Act (FATCA). This bill obliges foreign financial institutions to report on bank accounts of U.S. citizens abroad, with a threat of substantial withholding assessments for failing to do so.

This bold assertion of extraterritorial jurisdiction has surprisingly been welcomed by several European Union countries, which see it as a model for their own efforts to fight offshore banking. Russia also has begun negotiations with the United States to ensure that its financial institutions are FATCA compliant.

A future international law that allows for the automatic exchange of information for all bank accounts — including those in offshore zones — would represent a major blow to offshore banking. The Organisation for Economic Co-operation and Development has specific recommendations that would strike at the heart of offshore banks, sharply limiting multinational corporations' ability to move their profits — and tax liabilities — offshore.

The OECD plan is expected to be formally adopted in St. Petersburg by the G20 leaders, to serve as the road map in the fight against offshore banking. Russia will undoubtedly be one of the primary beneficiaries of such actions, since it still suffers from disastrous capital flight. Some $67 billion left Russia during just the first three months of 2013 — with the British Virgin Islands replacing Cyprus as the preferred offshore destination.

For Russia to work with the United States and the international community, however, it will have to reconsider several components of its foreign policy. To a certain extent, the demand that Russian money stay onshore corresponds to Putin's persistent emphasis on sovereignty — that no country has the right to interfere with a country's internal affairs. Yet for the struggle against offshore tax havens to succeed, every country, including Russia, will have to sacrifice some degree of sovereignty so that critical information can be shared and international tax loopholes closed.

Russia will also have to re-think its Customs Union with Kazakhstan and Belarus. Belarus, in particular, has turned out to be a black hole in terms of helping capital flight from Russia. An estimated $15 billion left Russia via Belarus in 2012, through fake transactions and other schemes, because of the Customs Union's weak regulations. The Customs Union — and larger Eurasian Union — may be Putin's pet project, but as now constituted it serves as a major conduit for funneling money out of the country toward various foreign destinations.

Important doubts do remain about other countries involved in this fight against offshore banking. The United Kingdom will have to convince its overseas territories and crown dependencies — including the British Virgin Islands, the Cayman Islands and the Isle of Man — to participate in any international regulatory schemes. In addition, Washington will have to ensure that domestic tax havens, such as Delaware, are compliant as well, which is a huge political hurdle.

Only a truly international effort committed to closing all loopholes can address the problem of offshore tax havens. Otherwise, the attempt will inevitably fail. Russia is clearly interested, and Putin has already announced that he will use Russia's G8 leadership as a platform to fight offshore tax havens.

At a time where U.S.-Russian relations are on pause, the struggle against offshore tax havens stands out as the one of the few issues where a positive consensus has arisen between Moscow and Washington — and also among the entire international community.

Progress will be incremental, not immediate. Nonetheless, a rare win-win scenario may be within reach — if all involved can rise to the challenge.

(William E. Pomeranz is the acting director of the Kennan Institute at the Woodrow Wilson Center for Scholars in Washington.) (Any opinions expressed here are the author’s own.)