Today, the Tax Justice Network, an independent international network, released its sixth and latest edition of the biennial Financial Secrecy Index. Despite pronouncements to improve financial transparency, the United States remained in the same position as in 2018, ranking as the second biggest enabler of financial secrecy in the world.
Despite there being no change in the U.S. ranking, there were other noteworthy developments. The Cayman Islands jumped from third place to first place, surpassing Switzerland as the top secrecy jurisdiction. Switzerland, on the other hand, made marked regulatory and legal improvements and therefore reduced its ranking as the top secrecy jurisdiction moving from first to third position on the Index. Among its efforts, Switzerland increased the number of countries with which it automatically exchanges information under the Common Reporting Standard (CRS), to which the U.S. is not a signatory, and reduced the volume of financial activity conducted in the country by non-residents.
Launched in 2003, the Tax Justice network focuses on research, analysis, and advocacy in the area of international tax and financial regulation, including the role of tax havens. The Financial Secrecy Index ranks jurisdictions based on their secrecy and the scale of their offshore financial activities. It does this by assessing how intensely the jurisdiction’s legal and financial system permits wealthy individuals and criminals to hide and launder money. Financial secrecy has wide-reaching and detrimental effects on society as a whole. It enables crimes such as human trafficking, tax evasion, money laundering and corruption both locally and internationally.
The index grades each country’s legal and financial system with a secrecy score out of 100 where a zero is full transparency and 100 is full secrecy. Compare this to Transparency International's Corruption Perceptions Index (CPI), which ranks countries and regions based on perceptions of public sector corruption. (See blog post on Transparency International's latest CPI rankings here). The Financial Secrecy Index is a politically neutral ranking intended to serve as a tool for understanding global financial secrecy, tax havens/secrecy jurisdictions, and illicit financial flows/capital flight. Businesses, scholars and researchers, and sometimes even government agencies, use the Financial Secrecy Index in much the same way as the CPI.
According to the 2020 Index, the top ten enablers of financial secrecy in the world are:
British Virgin Islands
United Arab Emirates
Although notably not listed in the top ten, the UK increased its secrecy rank far more than any other country, jumping from 23rd place on the prior index to 12th place on the current index. Interestingly, this is despite the fact that the UK was the first country to adopt a public beneficial ownership registry. The low secrecy score may be due in part to the fact that the UK outsources some of its financial secrecy activity to its Overseas Territories and Crown Dependencies, which rank among the poorest on the Index. If the UK and its network of Overseas Territories and Crown Dependencies were treated as a single entity, it would rank first on the index.
The Financial Secrecy Index reveals that the world's greatest contributors to financial secrecy are some of the world’s biggest and wealthiest countries. However, the Tax Justice Network's analysis also found that global financial secrecy has started to improve overall as a result of exposure of the problem and recent activism. At the core of tackling this issue is the accurate identification of the jurisdictions that are the biggest contributors to and enablers of financial secrecy.
Finally, in addition to bringing awareness, the Tax Justice Network is recommending the following three immediate actions:
Counter-measures. Governments are increasingly recognizing the harmful consequences of financial secrecy, and have begun to take action to reduce it. To truly stamp out financial secrecy, meaningful counter-measures are now needed against jurisdictions and their economic actors that refuse to cooperate – regardless of their economic power.16
Corporate tax transparency. As the OECD reviews its standard for country by country reporting this year, they must address the major technical flaws of current standards and converge towards the new Global Reporting Initiative (GRI) tax standard. Governments, including those of the EU which have repeatedly delayed, must follow the lead of major companies that are now voluntarily reporting such data, and make publication mandatory.
Anonymous ownership. The Financial Action Task Force17 must add public registration of beneficial owners and legal owners of all legal vehicles to its binding recommendations.
The U.S. initiated legislation in the last year, which, if passed, would produce significant changes regarding corporate transparency in the U.S. as well as contribute to overall improvements in financial secrecy globally due to the leading role of the U.S. in the world economy. (See blog posts here and here). Mounting global pressure along with increased domestic and international attention to this issue will create a greater likelihood that the legislation will pass.
To view the full results of the Financial Secrecy Index 2020 rankings, see here: https://fsi.taxjustice.net/en/introduction/fsi-results
Information for this blog post was obtained from the Tax Justice Network's website and can be accessed here: https://www.taxjustice.net/2020/02/18/financial-secrecy-index-2020-reports-progress-on-global-transparency-but-backsliding-from-us-cayman-and-uk-prompts-call-for-sanctions/