Herald Tribune, Deepa Babington, Reuters

Herald Tribune, Deepa Babington, Reuters

A landlocked tax haven, the world’s oldest republic, is feeling squeezed
International scrutiny and a banking scandal are vexing San Marino

San Marino, the world’s oldest republic, has seen medieval intrigue and papal army invasions in its 1,708-year history, but a modem banking scandal and a crackdown on tax havens have it at risk of being brought to its knees.
From its hilltop perch near the Adriatic coast of Italy, San Marino, a tiny banking center, is battling a combination of crises capped by a money-laundering scandal at its largest bank that has made necessary a frantic rethinking of its financial model.
We’re not going to bide that this is a difficult time for San Marino, Antonella Mularoni, the foreign secretary, said in an office decorated with 19th-century ceiling frescoes. “It’s been a few months of huge difficulties, and we clearly need the crisis to blow over rapidly”.
Blow after blow has rained on the Most Serene Republic of San Marino in recent months, hitting the city-state of 31OOO people harder than its larger financial rival Luxembourg, according to the Fitch ratings agency, which downgraded the republic’s sovereign ratings.
First carne the credit crunch and ensuing downturn, followed by a global crackdown on offshore tax dodging. Arrests of top executives at San Marino’s most important bank, the Cassa di Risparmio della Repubblica di San Marino, and a tax amnesty approved by Italy this month completed the misery.
“A climate of uncertainty and mistrust has been generated – for broader reasons and far reasons specifically related to San Marino – which is certainly weakening the system” said Biagio Bossone, chairman of San Marino’s four-year-old central bank. “Now when one talks of San Marino, it is spoken of badly. It seems as if the world is against us”.
The amount of wealth managed in San Marino slipped to about 13,6 billion, or $19.41 billion, in April from more than 14 billion last August. Unemployment has risen as the number of tourists has fallen. The amount of money paid out to finance temporary layoffs jumped more than sixfold in the period from January through April from the level a year earlier.
After 3 percent annual average growth in gross domestic product from 2000 to 2008 – which easily outpaced Itaiy’s sluggish 1.2 percent average – San Marino’s government expects its economy to contract 10 percent to 12 percent this year.
Legend has it that San Marino was founded ori Mount Titano in the fourth century by a stonemason seeking a refuge for Christians, though lately it has enjoyed a less altruistic image as a haven for Italians hiding from the tax man.
Recent scrutiny of tax havens and the threat of sanctions by Group of 20 nations have made it clear that it can no longer rely on the promise of anonymity to lure capital.
“It was easy for big countries – they didn’t have enough money at home at a time of crisis so they’ve gone to search where they think the money could be,” the foreign secretary said.
Making matters worse, Italian prosecutors investigating money-laundering in May arrested the top five executives of the Cassa di Risparmio della Repubblica di San Marino, which local people often just call Cassa.
Italy’s central bank then placed the bank’s consumer finance group, Delta, in bankruptcy proceedings, further raising tensions within the system of 12 banks and 55 financial groups. Fitch quickly cut the San Marino debt rating to AA-, citing, among other factors, the systemic role played by Cassa in the economy.
All this after the enclave had been shoring up controls and after it had set up a new agency last November to combat money-laundering.
All this attention has come just when our controls are at their highest’ said Nicola Veronesi, director of the Financial Intelligence Agency.
Itali – which accounts for most of the inflows to the banking system – has announced its own war on tax havens, declaring amnesty for those who bring back money stored offshore and ruling that keeping money in such centers is evasion unless proved otherwise.
Now, with the government relying on the banking sector for about 20 percent of tax revenues – about hall of that from the troubled Cassa alone – San Marino is bracing for a budget deficit this year and an even tougher 2010, the foreign secretary said.
An air of foreboding hangs over the state, from its restaurants with checked tablecloths to the dusty vineyards on its slopes.
There’s no doubt this is the most difficult moment we’re facing since World War II , said Renzino Gobbi, who runs the San Marino vintners’ consortium from the state’s only winery.
“There’s real worry here,” he said. There’s a real question out there about the state’s future.
Despite the gloom, some top officials putting on a brave face, bope to reshape the state into a corporate rather than ti- nancial hub by attracting companies with a low 17 percent tax rate and the prospect of a Southern European base.
The foreign secretary is rushing to wrap up by September the agreements needed to get San Marino off the Organization for Economic Cooperation and Development’s “gray list” of tax havens that have yet to sign the necessary tax agreements.
Down the street in a modem steel and glass building, Mr. Bossone is studying how to attract capital without the lure of secrecy. “Sure, it’s a huge challenge”, he said, “But do we have any other alternative?”


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