Guest Post: The Financial Secrecy Index Identifies the Countries Most Responsible for the Illicit Financial Flows that Facilitate Global Corruption

Andres Knobel, an analyst at the Tax Justice Network, contributes today’s guest post:

Illicit financial flows have dreadful consequences across the world, not least because they facilitate kleptocracy and other forms of grand corruption. A crucial step toward addressing this issue is identifying those jurisdictions that are the most significant contributors to the problem, and offering specific, concrete recommendations for how they can improve. The Tax Justice Network aims to help do this through its Financial Secrecy Index (FSI), the latest edition of which was published this last January. The 2018 FSI includes a ranking of 112 countries and territories according to their global impact of their financial secrecy, measured by balancing the level of secrecy and the country’s weight in the international financial sector.

The FSI differs from standard “tax haven” lists in that it does not purport to single out a handful of jurisdictions for special opprobrium. Such lists tend to imply that only a few jurisdictions, often small countries, are responsible for all of the world’s illicit financial flows. The 2018 FSI, by contrast, covers 112 jurisdictions, and the next assessment will analyze 130. (The objective is to eventually cover all countries and territories.) Moreover, the FSI ranks countries not solely on the degree of financial secrecy that they allow, but rather on a combination of the degree of financial secrecy (the “Secrecy Score”) and the actual use of a jurisdiction’s financial services (the “Global Scale Weight”), in order to rank countries according to their overall contribution to the problem of illicit financial flows. In other words, the FSI ranking is not necessarily ranking the most secretive countries at the top; rather, the FSI identifies the biggest “problem countries”—those that have financial systems that are both secretive (even if not the most secretive) and that are large and used frequently by non-residents. According to this measure, the ten jurisdictions that make the largest contribution to global financial secrecy are (in order starting with the worst contributors): Switzerland, the United States, the Cayman Islands, Hong Kong, Singapore, Luxembourg, Germany, Taiwan, the United Arab Emirates, and Guernsey. These are the jurisdictions that bear the greatest share of responsibility for enabling global illicit financial flows, including those stemming from corruption and tax evasion, and these are therefore the jurisdictions that most urgently need to become more transparent if we are to see real progress in the fight against illicit global financial flows. While all jurisdictions should act to become transparency, starting with these ten jurisdictions would have the most significant impact in the short term.

Interestingly, and perhaps unsurprisingly for those who follow these issues, a “heat map” of the worst offenders on the FSI looks like the inverse of the more familiar heat map showing the countries perceived to be most corrupt, according to Transparency International’s Corruption Perception Index (CPI). One way to interpret this is the following: public officials and their private-sector cronies in the world’s most corrupt countries according to the CPI (such as Yemen, Sudan, Afghanistan, Venezuela, Libya, etc.) very likely take advantage of financial secrecy to hide the proceeds of corruptions in the countries that most contribute to financial secrecy according to the FSI. Put differently, the worst CPI countries depend on jurisdictions like the FSI’s top ten in order to launder the proceeds of illicit activities.

And what should these (and other) jurisdictions do? On this question, it is important to emphasize that the FSI is not just a ranking system. The FSI report also includes in-depth discussions of all relevant loopholes and sources of information related to financial secrecy in each jurisdiction. This enables researchers, government authorities, activists, and financial institutions to obtain relevant information to be used for risk assessment, policy decisions, or to advocate for specific transparency measures. (All these details are available online, for free and in open data format.) And while every country is different, most jurisdictions would do well to implement what the Tax Justice Network refers to as the “ABC of Fiscal Transparency”:

  • Automatic exchange of bank account information with all other countries, especially developing countries, pursuant to the OECD’s Common Reporting Standard;
  • Beneficial ownership registration in a central public register for companies, partnerships, trusts and foundations (for more specific information, see Tax Justice Network publications here, here, here, and here, as well as this recent paper I published with the Inter-American Development Bank) ; and
  • Country-by-Country reporting, where all multinational companies publish this information online.

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