By Robert M. Morgenthau

FANS of “American Idol” might be surprised to learn that, if sales figures are any indication, the real music capital of the world may not be America, but Luxembourg. Luxembourg is a tax haven, and Apple funnels more than a billion dollars worth of iTunes sales through that tiny country to avoid paying higher taxes.

These tax strategies are nothing new — and, no doubt, Apple has taken advantage of tax rules that allow them. The Senate’s Permanent Subcommittee on Investigations in 2008 estimated that at least $5 trillion to $7 trillion was sheltered in offshore jurisdictions like the British Virgin Islands, the Cayman Islands, Gibraltar, Bermuda and the Bahamas — not just by Americans, but by everyone. These jurisdictions have little or no income tax.

The favorable tax rates encourage corporations to avoid paying American taxes by structuring complicated international transactions, like Apple’s “Double Irish With a Dutch Sandwich,” recently described by The New York Times. But it’s not just the low tax rates that make these jurisdictions attractive to those following the rules. The secrecy of offshore jurisdictions allows some individuals and corporations to engage in outright tax fraud, costing America at least $40 billion each year.

And that secrecy makes offshore tax fraud almost impossible for law enforcement to detect. When I was the Manhattan district attorney, we learned of offshore accounts only through whistle-blowers, cooperators and serendipity.

Legislation shaped by Senators Carl Levin, Kent Conrad and Sheldon Whitehouse that would curb some of these tax abuses by giving the Treasury Department the muscle to respond when foreign governments hampered our tax enforcement was recently passed by the Senate, but awaits House action. Those reforms are long overdue but do not fully address the larger problem: financial secrecy laws in offshore jurisdictions.

The secrecy laws in these tax havens are at the root of serious crimes: fraud, money laundering and international terrorism.

Follow the trail of nearly any major financial scandal and you will enter one or more of these notorious jurisdictions.

Everyone knows that Bernard L. Madoff worked in New York, but the funds that secretly fed his Ponzi scheme favored more exotic offshore locales. These funds looked like independent hedge funds, but were in fact merely conduits that funneled investor money to Mr. Madoff and furnished no information to the United States Treasury or regulatory authorities.

Because the ownership of these funds was such a tightly guarded secret, now not even the Madoff trustee can figure out who should be sued to recover illegal profits — and who are victims entitled to restitution.

Robert Allen Stanford, another Ponzi schemer, inherited a legitimate insurance company in Houston — but when he branched out into banking fraud, he moved to Antigua. Taking advantage of secrecy laws and outright bribery, he cheated investors out of $7 billion by selling phony certificates of deposit.

Not only did the nation of Antigua fail to stop him, but it decorated him with a knighthood.

How much havoc can these offshore schemes wreak? Where there is no transparency, there can be no oversight. Abuses grow literally without limit. Huge bankruptcies like Enron and Parmalat have resulted when corporations faked their balance sheets using offshore secrecy jurisdictions.

Nothing in offshore havens happens on a small scale. Almost any statistic flunks the red-face test. Consider the British Virgin Islands, home to about 30,000 people and 457,000 companies.

In China, it’s said you haven’t made it until you have your own subsidiary in the British Virgin Islands, which holds more assets belonging to Chinese nationals than any foreign location except Hong Kong.

Then there’s Ugland House, a building in the tax haven of the Cayman Islands. At last count more than 19,000 companies were listed there. There’s more money on deposit in the Caymans than in all the banks in New York City combined.

Offshore secrecy jurisdictions provide the perfect cover to funnel money and arms to rogue states and nonstate actors. On April 5, the arms dealer Viktor Bout, the so-called Merchant of Death, was sentenced to 25 years by a federal judge for conspiring to sell antiaircraft missiles to agents posing as foreign revolutionaries. Published reports have linked him to arms sales to Al Qaeda and the Taliban.

Aren’t there international sanctions to prevent the sale of arms to terrorists? Of course there are. That’s why the Merchant of Death found a Bulgarian weapons supplier — based on the offshore haven of Gibraltar.

But it’s not just shadowy fellows like Viktor Bout who evade sanctions to do business with rogue states or terrorists. Many American corporations, including Halliburton, have done business with Iran through their offshore tax haven subsidiaries.

When companies use secrecy jurisdictions to commit fraud or to evade sanctions, legal remedies may come as cold comfort. Once world financial institutions begin to fail, or a rogue regime acquires unconventional weapons, it will be too late for law enforcement to prevent disaster.

What, then, can be done about all this? Plenty — if we act now. Nobody leaves their money offshore forever. The United States can direct its banks and their foreign subsidiaries not to engage in financial transactions in havens that have no transparency and no disclosure of the true parties of interest in financial transactions.

A bill has been proposed in the United States to prevent the use of shell corporations to hide the true ownership of assets owned here. This legislation would provide a model of openness for other nations to follow. Unfortunately, the legislation is bottled up in our own Congress. This should not be. America needs to set an example of financial accountability and insist that the world follow.

Robert M. Morgenthau is a lawyer who was the Manhattan district attorney from 1975 to 2009.

Editor’s Note: At least Mr. Morgenthau didn’t say Ugland House had 15 floors as a similar article said.

http://blogs.reuters.com/taxbreak/2012/05/07/essential-reading-offshore-tax-havens-links-to-crime-budget-choices-and-more/