MONACO, the city state built over the worlds most exclusive yacht marina, is feeling the heat.
The principality has been hit by an outflow of funds due to Italys tax amnesty, while its authorities try to counter charges that Monte Carlo is a home for tax dodgers and money launderers.
Banks in the haven individuals pay no income tax in Monaco have been hit as Italians repatriate their assets in response to the tax amnesty.
Figures from the Italian Foreign Exchange Office estimate that 2% of the total E16.3bn (pound sterling10.4bn) repatriated so far and E5.6bn (pound sterling3.6bn) disclosed in offshore accounts came from Monaco. The Association for Monaco Banks declined to comment.
Typically, for Italians from the Rome area and in the south, Monaco is the first tax haven, said Luca Valdameri of Studio Pirola, the Italian partner of accountants PricewaterhouseCoopers.
But Monaco has been on the Italian authorities black list of individuals tax havens since 1999, making it more dangerous for Italians to qualify as tax-resident or keep their money in the principality, Pirola said.
Being on the blacklist means Italians have to show the tax authorities that they are truly resident in Monaco and are not just using an address of convenience.
Monaco is becoming increasingly isolated diplomatically. It is one of seven countries deemed to be non-co-operative in the crack-down on tax evasion by the Organisation for Economic Co-operation & Development (OECD).
The list, published in April, has been whittled down from 35 countries named and shamed in June 2000, in an OECD initiative to drive out tax practices which promote unfair competition and deprive countries of tax revenue.
An OECD spokesman said Monaco had failed to commit to transparency in its tax affairs or to an effective exchange of information that would allow foreign authorities to track down tax cheats.
Continued non-co-operation could lead to co-ordinated defensive measures such as ending bilateral tax treaties and applying withholding tax on money transfers.