Proponents argue that companies and individuals have a right to avoid taxes, by setting up offices and accounts in low tax jurisdictions. Particularly those locations which have concluded double-taxation avoidance agreements with the beneficiaries' home countries.
The OECD provides a compendium of the progress made by tax havens in implementing internationally agreed tax standards which require exchange of information on request.
These standards were developed by the OECD and endorsed by G20 Finance Ministers at their Berlin meeting in 2004 and the UN Committee of Experts on International Cooperation in Tax Matters at an October 2008 meeting.
In the current economic downturn, as government finances in G7 countries are under pressure, there is renewed focus on preventing tax havens from promoting and abetting tax evasion.
For instance, in February 2009 UBS decided to pay $780 million to settle the US Internal Revenue Service's charge that it had facilitated tax evasion.
Further, the April 2009 London G20 Summit's 'Declaration on Strengthening the Financial System' mentions that the G20: (a) stands ready to take agreed action against those jurisdictions which do not meet international standards in relation to tax transparency; (b) calls on the Financial Stability Board (FSB) to develop a toolbox of measures to promote adherence to prudential standards and cooperation with jurisdictions; (c) agrees that the Financial Action Task Force (FATF) should revise and reinvigorate the review process for assessing compliance by jurisdictions with Anti-Money Laundering (AML)/Combating Financing of Terrorism (CFT) standards; and (d) calls upon the FSB and the FATF to report to the next G20 Finance Ministers meeting on adoption and implementation of these standards.
In stark contrast, banking secrecy legislation which has helped international banks headquartered in developed and island countries to attract enormous deposits from the kleptocratic elite in developing countries has received less attention.
The IMF defines money laundering as a "process in which the illicit source of assets obtained or generated by criminal activity is concealed to obscure the link between the funds and the original criminal activity".
Since banking secrecy makes it difficult for tax and other investigation agencies to pinpoint the linkages between siphoned funds and illegal activities, it facilitates money laundering. Therefore, the role of banking secrecy laws in promoting flight of capital out of developing countries needs to be examined and addressed.
Since September 11, 2001 countries have become more cautious about sources of funds in an effort to combat financing of terrorism. Unfortunately, however, many major international banks have continued to ignore money laundering hiding behind banking secrecy legislation.
Of course, funds are transferred across borders through elaborate schemes and the corrupt cover their tracks very well. Notwithstanding such subterfuge, it should be obvious to sophisticated banks and wealth management firms that questions need to be asked about sources of funds when there are large deposits from obscure companies and individuals via tax havens.
Consequently, irrespective of the motivations for the G20's agreed action points, developing countries should keep the spotlight on the steps that need to be taken to reduce money laundering in all its manifestations and not just in the context of combating financing of terrorism.
Effectively, it needs to be emphasised that the G20's anti-money laundering efforts will not be successful without concurrent concerted action to repeal banking secrecy laws.
Dictators and the ultra-corrupt in many developing countries have often acquired high value properties in OECD countries and deposited large amounts in countries which have well established traditions of banking secrecy.
For example, Mobutu's bank balances were estimated at around $5 billion in 1989 and it was common knowledge that he had properties in several exclusive European resorts.
Similarly, the Duvaliers and Ferdinand Marcos were reported to be fabulously wealthy with properties in developed countries and their ill-gotten funds were parked in internationally known banks.
Of course, many developing countries overvalue their currencies and set up complex and high tax regimes and thus have only themselves to blame for flight of capital. As the Indian experience shows, since the Indian Rupee exchange rate became more market based there has been less interest in "hawala" transactions.
In the past, India had absurdly high rates of income tax which must have led to large outflows of capital. Currently, India's tax rates are comparable with most developed countries or even lower in some categories e.g. long-term capital gains.
Hence it is time for India to push the G20 to accept that the collective global good has priority over individual need for banking privacy. For example, if the central bank/ministry of finance of any country seeks information about its nationals/companies it should be obligatory for financial firms to provide such information regardless of where the individuals are based or the companies are registered.
In India's case, as for many other countries, the super-corrupt have hedged themselves against country of origin risk by transferring large amounts to foreign jurisdictions. It would be impossible to stop all such leakage in much the same way as it would be to stamp out all corruption.
However, it should be feasible to make the cost of tax evasion or money laundering, if detected, much higher and this can only be done with the support of the international community.
It follows that if Transparency International or anyone else indulges in sententious moralising about corruption in developing countries, they should be requested to check the extent to which pilfered funds invariably end up in banks headquartered in developed countries.
Additionally, it is likely that if there is better information sharing across financial sector regulators there would be less illegal cross-border flows of funds.
The phrase "hypocrisy on steroids" was in the news recently to describe those remedies for the financial sector crisis which extravagantly favour bank shareholders and creditors at the expense of tax-payers. To summarise, the same expression could be used to describe the specious grounds on which banking secrecy laws are sought to be maintained when one of their objectives is to attract illicit funds.
(The author is Ambassador of India to the European Union, Belgium and Luxembourg. Views expressed are personal)