Global Policy Forum

By David Cay Johnston

Tax evasion by Americans using offshore accounts is rising and will increase, Treasury Secretary Paul H. O'Neill testified today as he tried to persuade a skeptical Democratic senator that he was committed to vigorously pursuing tax cheats.

Mr. O'Neill said that decades of efforts to catch money launderers and other tax criminals using offshore accounts had not worked. But he dismissed as meaningless a document, based on government data, presented by the senator, Carl Levin, a Michigan Democrat, indicating that fewer than 6,000 of more than 1.1 million offshore accounts and businesses were properly disclosed and therefore legal. Pressed by Senator Levin about whether the disparity between reported offshore accounts and their actual numbers was significant, Mr. O'Neill replied: "I find it amusing."

His testimony, to the Senate Permanent Subcommittee on Investigations, came before Robert M. Morgenthau, the district attorney in Manhattan, described a scale of bank deposits in tax havens far greater than most experts suspected. Citing previously secret Federal Reserve Bank data, Mr. Morgenthau said that more than $800 billion of American money is on deposit in just one tax haven, the Cayman Islands.

That sum, equal to one-fifth of all the bank deposits in the United States, he said, is so large that it cannot be solely, or even primarily, the fruits of criminal activity like drug dealing. Rather, Mr. Morgenthau said, these funds must be the product of huge and growing tax evasion by wealthy Americans who have little, if any, fear of prosecution.

He said his office's efforts to pursue tax cheats had often been stymied not just by foreign governments, but by the federal government, especially the Justice and State Departments and the intelligence agencies.

The hearing was prompted by Mr. O'Neill's balking in April at a plan by the Organization for Economic Cooperation and Development to pressure the Cayman Islands and other tax havens into cooperating with criminal investigations of tax evasion and money laundering. That plan was thrown into disarray after Mr. O'Neill declared that the project was too broad and "not in line with this administration's priorities."

Mr. O'Neill repeatedly insisted that his remarks had been misconstrued by reporters to suggest laxity. "We ought to pursue every tax cheat to the ends of the earth," Mr. O'Neill testified. He cautioned, however, that "we should not presume to interfere with the internal tax policies of sovereign nations."

Mr. O'Neill promised to return, within a year, with treaties in hand from half, as he put it, of the five biggest offshore tax havens, that will help prosecutors in the United States make cases.

He said the Treasury's inability to estimate reliably how much the government spends investigating money laundering has made him skeptical about existing efforts. He vowed to find more efficient and effective ways to combat money laundering and tax fraud.

Mr. O'Neill and Senator Levin agreed on little except that tax fraud and money laundering were significant issues and a growing problem. Senator Levin said that "for years now, offshore tax havens have damaged U.S. interests by facilitating crime, money laundering and tax evasion."

He said the United States loses $70 billion in taxes annually from such evasion -- "a figure so huge that if even half that amount were collected it would pay for a Medicare prescription drug program without raising anyone's taxes or cutting anyone's budget."

Doubting that Senator Levin's attacks would result in improved enforcement, Mr. O'Neill told him, "You are acting like you are going to do something without really accomplishing anything."

Seven former Internal Revenue Service Commissioners sent Mr. O'Neill a letter in June questioning his stance on the O.E.C.D. effort to make foreign tax havens cooperate with investigations of tax crimes. Mr. O'Neill said today that he was "frankly thunderstruck when I got the letter; they responded to misinterpretations in the press."

The letter came in response to an article, in the May 10 Washington Times, which appeared under Mr. O'Neill's own byline.