Financial Secrecy Index – the G20’s broken promise
October 4, 2011. Today we launch our 2011 Financial Secrecy Index, the biggest investigation of global financial secrecy in world history. It combines a secrecy score with a weighting to create a ranking of the countries that most aggressively provide secrecy in global finance.
The new FSI, which follows our inaugural index of 60 jurisdictions published in 2009, considers 73 jurisdictions to reveal a world where most of the biggest suppliers of secrecy are either OECD countries, EU members, or their dependencies. Britain plays an especially prominent role.
Secrecy is alive and well
World leaders at a G20 summit meeting in April 2009 promised that “the era of banking secrecy is over” and put the OECD, a club of rich countries, in charge of implementing its wishes. Many people hoped this marked the start of a serious crackdown on tax havens, or secrecy jurisdictions.
But they have let us down. The rhetoric is trillions of dollars away from reality. The Financial Secrecy Index (FSI) reveals that financial secrecy is as entrenched as ever.
On September 9th the Cayman Islands introduced a bill for the establishment of new Special Economic Zones. The most Alice-in-Wonderland part of the bill is this bit, on page 14:
“A special economic zone shall be deemed to be outside of the Islands and not in the Islands.“
Emphasis added. So where will this zone be? It seems that it will, for the relevant purposes, effectively be ‘elsewhere’ – which, in practical terms, means ‘nowhere.’ This ‘it’s elsewhere, don’t-blame-us, we-can’t-regulate-this’ approach is what a lot of the activity of secrecy jurisdictions is designed to do – it’s not so common, however, to see this being made quite so explicit. This is tax havenry, pure and simple.
Who is responsible for this legislation, and who will be implementing it?
The UK has initialed an agreement with Switzerland which we recently wrote up on the Task Force blog. In short, UK tax evaders using banks in Switzerland will have to start paying some tax – but the UK will allow those (criminal) tax evaders to avoid penalties and retain their anonymity. The UK will have to trust that Switzerland will keep its part of the bargain, even though it will be impossible to conduct any comprehensive checks. There are reasonable fears that this model may spread widely to other countries.
We at TJN think this is a thoroughly rotten and corrupt deal. For the following reasons.
By TJN staff and Mark Herkenrath, Alliance Sud
We already blogged about the signing yesterday of the Swiss-German tax deal, and TJN’s opposition to it. This blog goes into a little more detail than before, and outlines some of the salient points of the deal. This is something that matters a great deal – because several other countries are believed to be considering doing something similar. Which, in TJN’s view, would be a grave mistake.
(Our last blog also highlights the strange, even fishy-looking timing of this deal.)
A similar agreement with the UK will follow soon, probably within just days or weeks. It is important that civil society and parliamentarians in the UK and elsewhere understand the treaty and its implications. They will soon be facing a similar deal.
On p28 of the UK edition of Treasure Islands, I write:
Almost no official estimates of the damage exist. The Brussels-based non-governmental organisation Eurodad has a book called Global Development Finance: Illicit flows Report 2009 which seeks to lay out, over a hundred pages, every comprehensive official estimate of global illicit international financial flows.
Every page is blank.
It’s a gimmick, but an important and telling gimmick. (Take a look at the picture: if you’re interested, the book’s cover looks like this). Now, for something I wrote yesterday on the TJN blog:
The Swiss government is about to conclude new tax deals with Germany and the UK. As was reported on the Task Force blog recently, and updated on the Tax Justice Blog, the Swiss withholding tax proposal poses a major threat to the EU’s struggle for tax transparency. In the meantime, reliable Swiss sources have revealed further details of the impending deals.
1. Germany and the UK will no longer require their citizens to declare their Swiss income.
It’s noteworthy that under the bilateral Swiss-EU Savings Tax Agreement, in force since 2005, Switzerland already charges a withholding tax (currently 35%) on savings income of EU citizens and returns the tax anonymously to the respective home country. What’s new about the impending deal is that this extends the withholding tax beyond mere savings income to all kinds of capital income. Also, crucially, Germany and the UK will consider this withholding tax as ‘final’: that is, capital owners will no longer have the legal obligation to declare their Swiss income to the tax authorities in their home country. Unbelievable.
From India’s Tehelka, an interview with Philippe Welti, Switzerland’s ambassador to India, in a section where he talks about the origins of Swiss bank secrecy:
“The banks were comforted with the fact they could say no, we are under legal protection, we are threatened by punishment if we release data. That is the magic of Swiss banking secrecy and my job as an Ambassador, a representative of Swiss society is to remind the world that it risks turning into a dangerous place where the rule of law is abandoned.
The thinking behind it, and the moral value of such a policy of government and a parliament and a people behind is timeless. That’s why I defend it. Because we are talking about values, not commercial benefits.”
We are delighted to see this from Brazil’s respected Instituto de Estudos Socioeconômicos (INESC,) which has launched a Brazilian (Portuguese-language) campaign, as part of our global End Tax Haven Secrecy (ETHS) initiative.
Take a look at these reports, for example:
The European Commission has just published a new study, entitled Transfer Pricing and Developing Countries, which looks particularly at the application of rules with respect to Ghana, Honduras, Kenya and Vietnam.
We have not yet parsed this report in any detail – but we will. From the outset we are discouraged by two things in particular. The first appears on the very first page (and in the top right of every subsequent page), and the accompanying picture shows it:
That should be a red flag, straight away. There is a battle growing in the field of transfer pricing, especially with respect to developing countries. In one camp sit developing countries – which, as David McNair of Christian Aid recently pointed out,
Ten years ago today, the New York Times reported the words of U.S. Treasury Secretary Paul O’Neill who, in testimony:
“dismissed as meaningless a document, based on government data, presented by the senator, Carl Levin, a Michigan Democrat, indicating that fewer than 6,000 of more than 1.1 million offshore accounts and businesses were properly disclosed and therefore legal. Pressed by Senator Levin about whether the disparity between reported offshore accounts and their actual numbers was significant, Mr. O’Neill replied: ”I find it amusing.”
The scale of it was startling, even then:
“His testimony, to the Senate Permanent Subcommittee on Investigations, came before Robert M. Morgenthau, the district attorney in Manhattan, described a scale of bank deposits in tax havens far greater than most experts suspected. Citing previously secret Federal Reserve Bank data, Mr. Morgenthau said that more than $800 billion of American money is on deposit in just one tax haven, the Cayman Islands.
Two years ago an edition of Tax Justice Focus contained a lead article entitled Shadow Regulation and the Shadow Banking System: the role of the Dublin International Financial Services Centre. Written by Jim Stewart, Senior Lecturer in Finance, Trinity College, Dublin, it looked at the role in the global financial crisis played by the tax haven / secrecy jurisdiction of Ireland, and in particular the Dublin International Financial Services Centre (IFSC.) We added this to our Economic Crisis + Offshore webpage.
Now we have just added to that same web page a major new article by Stewart, which is effectively a thorough update, and significant expansion of, Stewart’s article for TJF. Entitled Financial Innovation and the Financial Crisis, it was issued a year ago at a conference in Aalborg, Denmark. We missed it at the time.
The Tax Justice Network has now collected a significant number of documents together in its “Offshore History” page. The latest addition is a history of the emergence of the Cayman Islands as a tax haven / secrecy jurisdiction, which is here.
The full Offshore History page currently reads as below. Comments and suggestions for additional material would be gratefully received.
Offshore History: Articles and online documents
Dec 2010 - Tax Analysts 40th anniversary commemorative book, where 50 tax folk are invited to answer the question: What is one of the most significant changes to tax administration, practice, or policy that you have seen in your professional career? Available free, here.