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In our new mini-series we’ll delve into the issue of financial secrecy – what it is, who enables it, how does it affect economies, which are the big culprits, and what role does corruption play? The series is based on two reports released by the Tax Justice Network (TJN) – the biennial Financial Secrecy Index, whose latest edition was launched in 2020, and the Corporate Tax Haven Index, released at the end of March 2021. The two indices complement each other because financial secrecy is what enables tax havens to thrive and play such a significant role in the industry of illicit financial flows, tax evasion, and secrecy jurisdictions.

In part 1 we look at the definition of and information on secrecy jurisdictions and financial secrecy, part 2 focuses on the Financial Secrecy Index (FSI), and part 3 covers the Corporate Tax Haven Index.

What, then, is financial secrecy? It is the practice of withholding financial information from relevant authorities, such as tax authorities and police services. It is important to note that financial secraecy is not the same as confidentiality, which is a legitimate practise. Financial secrecy has a more sinister undertone, because the secrecy is deliberately aimed at covering wrongdoing or non-compliance with laws and regulations.

A financial secrecy jurisdiction, therefore, is one that “provides facilities that enable people or entities escape or undermine the laws, rules and regulations of other jurisdictions elsewhere, using secrecy as a prime tool”, according to TJN’s definition. The organisation points out that there are many different aspects of tax havens or secrecy jurisdictions which cannot be distilled into a single definition, but its own definition serves its particular purpose.

The term ‘secrecy jurisdiction’ is also sometimes used interchangeably with ‘tax haven’ because the line between them can be blurred – but their use will depend on which aspect is being emphasised.

It is important to remember that the same entities offering financial secrecy – that is, safety from disclosure – offer the same safety in terms of tax, financial regulation, criminal laws, corporate governance rules, inheritance rules, and more, says TJN. “The offshore system is an interconnected ecosystem of different jurisdictions offering different mixes of these escape facilities and the various different flavours of secrecy.”

These themes, or flavours as TJN describes them, are as follows:

Banking SecrecyTax Administration Capacity
Trusts and Foundations RegisterConsistent Personal Income Tax
Recorded Company OwnershipAvoids Promoting Tax Evasion
Other Wealth OwnershipTax Court Secrecy
Limited Partnership TransparencyHarmful Structures
Public Company OwnershipPublic Statistics
Public Company AccountsAnti-Money Laundering
Country-by-Country ReportingAutomatic Information Exchange
Corporate Tax DisclosureBilateral Treaties
Legal Entity IdentifierInternational Legal Co-operation

Corruption Watch’s Transparency in Corporate Reporting series of reports takes a similar approach, but on a smaller scale, using three themes – anti-corruption programmes, organisational transparency, and country-by-country reporting. The report focuses on South African companies rather than global jurisdictions, but the premise is the same – transparency is essential to enhance good governance and successfully tackle corruption, whether in the public or private sector.

Meanwhile, countries such as the US, UK, and various European and Asian havens continue to enable the nefarious practices that allow wealthy individuals or companies to extract the most benefit from their secret stashes. TJN has determined five loose groupings which are particularly troublesome. They are:

  • The US is a major secrecy jurisdiction in its own right, as well as territories such as the US Virgin Islands and Puerto Rico.
  • The UK, says TJN, is arguably the most important player of all because it oversees many of the biggest satellite secrecy jurisdictions, including the Cayman Islands, Jersey, the British Virgin Islands, and Bermuda.
  • Continental European countries such as Luxembourg, Belgium, Austria, Cyprus, and Gibraltar (EU), as well as the likes of Switzerland, Liechtenstein, Monaco, and Andorra (non-EU).
  • Asian havens – notably Singapore and Hong Kong but also Macao and Malaysia/Labuan – are another fast-rising aspect of the problem, says TJN.
  • Others such as Dubai and Mauritius, neither of which are associated with any specific geographical group.

Financial secrecy affects global trade and economy

The top six secrecy jurisdictions in the FSI account for just over half of the global trade in offshore financial services, says TJN. They are, in descending order, Cayman Islands, US, Switzerland, Hong Kong, Singapore, and Luxembourg.

What’s more, it is estimated that between US$21-trillion and $32-trillion of private financial assets is held in offshore structures worldwide. Because these offshore structures rely on secrecy, the immense wealth they hold escapes taxes, criminal laws, financial regulation, and disclosure. And secrecy jurisdictions are used by virtually every major multinational company “for a variety of unspecified purposes”.

This results in investments and financial flows moving away from where they will be most productive, in developing countries for instance, and towards where the owners of capital can maximise the gains from secrecy. Furthermore, says TJN, secrecy hinders effective regulation and law-making, and enables rent-seeking, as insiders reap the gains from global markets while shifting the costs and risks on to the shoulders of others.

“The result of this distortion and corruption of markets is a world of steepening inequality, rampant financial crime, and impunity for elites in rich and poor countries alike.”

Illicit financial flows (IFFs) cost developing countries dearly, and completely negate any foreign aid that might trickle in. It is estimated that IFFs amount to $1-1.6-trillion per year, while global foreign aid adds up to a relatively paltry $135-billion or so. Since the 1970s, says TJN, African countries alone have lost over $1-trillion in capital flight, though their combined external debt is less than $200-billion. “So Africa is a major net creditor to the world – but its assets are in the hands of a wealthy elite, protected by offshore secrecy; while its debts are shouldered by broad African populations.”

The players in this unprincipled and deceitful global industry include banks, law practices, accounting firms, and specialist providers who design and market secretive offshore structures for their tax- and law-dodging clients. Jurisdictions compete with other to provide the most secretive facilities, enabling fraud, tax cheating, embezzlement, bribery, money laundering, and more. Perpetrators extract wealth at the expense of societies, leaving many poorer countries, deprived of tax and unable to stop the siphoning of capital into secrecy jurisdictions, reliant on foreign aid handouts.

Cross-border secrecy and corruption

Financial secrecy is a key facilitator of corruption because without it, there would be no opportunity for corrupt deals. But the culprits, although well-known, continue to operate with few, if any consequences, while the victims continue to suffer the fallout related to unchecked illegal activities.

TJN singles out Transparency International’s Corruption Perceptions Index (CPI) as perpetuating a somewhat skewed perception of global corruption, as it ranks poor countries in Africa and elsewhere as the ‘most corrupt’. But such countries, argues TJN, are victims of IFFs amounting to some $1-trillion, as mentioned above – and all this money has to go somewhere. The FSI, therefore, shines a light on the enablers.

And the result? “What you see is that many countries perceived to be the least corrupt by their citizens are actually among the worst offenders in enabling corruption and illicit financial flows in other countries.”

The key solution, argues TJN, is to stop those top countries from enabling corruption everywhere else in the world.

The FSI ranking reveals what the CPI conceals. It exposes the hypocrisy that lies behind some of the finger-pointing at ‘highly corrupt’ developing countries, and provides a basis for a new wave of understandings about corruption in a global context.

Don’t miss part 2 of this mini-series, in which we take a closer look at the Financial Secrecy Index.