Secrecy Jurisdictions

Background

The Mapping the Faultlines project has an ambitious scope. As a result the project findings are extensive.

The purpose of this project's first stage was to identify the jurisdictions and mechanisms used to facilitate illicit financial flows worldwide, including especially flows from developing countries. Those flows, from developing countries alone, are estimated at $850 billion - US$1 trillion per year. The second stage will recommend policy measures to address the issues identified in this first stage. 

This website's main purpose is to provide a tool for researchers exploring the mechanisms of illicit financial flows. Our research will complement the work of others, such as work by Washington-based Global Financial Integrity on the magnitude of illicit financial flows. 

At the core of this project is the biggest survey of tax havens, or secrecy jurisdictions as we prefer to call them, that has probably ever been undertaken.

Why study secrecy jurisdictions?

Secrecy jurisdictions facilitate illicit financial flows stemming from three overlapping sources: bribery, criminal activity and cross-border trade mispricing. Secrecy jurisdictions and those operating through them undermine development for the poorest countries, and create a criminogenic environment in which all sorts of crimes can thrive and feast on the fruits of law-breaking.

Secrecy jurisdictions facilitate a wide range of crimes such as tax evasion, non-payment of alimonies, money laundering, terrorist financing, drug trafficking, human trafficking, illegal arms trading, counterfeiting, insider-dealing, embezzlement, fleeing of bankruptcy orders, all sorts of fraud, and many more.

Imagine you are a single mother, whose former partner has fled a court order to pay child maintenance. You cannot get the money because the police cannot trace his cars, yacht, and holiday villa, which are shielded behind a veil of offshore secrecy. 

Or imagine you own a small business, and a major debtor announces bankruptcy. You find yourself unable to recover your money through the courts even though you suspect that assets have been shifted to an offshore company. A few months later, the debtor has established a new business under a different name, and you bump into him driving a top-end Porsche, evidently in fine spirits. 

Or, you are a citizen campaigner in an African country with appallingly expensive telephone services, in the grips of a mobile telephone duopoly which refuses to cut prices. One or both of the companies are partly owned offshore, and it is impossible to identify the shareholders. You cannot prove that there is a conflict of interest or collusion between the phone operators, so your campaign runs into a brick wall.

These are rudimentary examples of how secrecy jurisdictions undermine the rule of law around the world. 

Financial opacity undermines the rule of law and destroys trust in markets. Loss of trust seriously damages market efficiency, raising the cost of capital and wrecking confidence in democracy. 

What are secrecy jurisdictions? Refining the language of "offshore"

The meaning of the terms "tax haven" and "offshore financial centre" have been disputed for years. Language is important and we researched extensively to understand and subsequently define this phenomenon. Our results have been presented and well received at a number of academic conferences. The outcome is that we have adopted the term "secrecy jurisdiction" instead of "tax haven" because this more accurately conveys what is going on. 

Our language is new and perhaps surprising, not least because it deliberately avoids referring to tax and financial issues in defining the locations and the issues. This is because secrecy and the abuse of laws and regulations that it permits is at the core of the issue we have been studying. Secrecy is the original problem; tax abuses are an outcome (but not the only outcome) of that secrecy.

So we have replaced the term "tax haven" with "secrecy jurisdiction" in our research. Secrecy jurisdictions are defined as places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. To facilitate its use secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so. 

Where are the world's secrecy jurisdictions?

To identify the appropriate jurisdictions on the most objective basis possible, we undertook a literature review covering a period of more than thirty years. As a result, our study identified 60 jurisdictions, some of which -- such as the Netherlands, Belgium, Austria, the UK and parts of the USA -- are not traditionally considered tax havens / secrecy jurisdictions. Our research reveals that they are. Sometimes the advancement of understanding requires surprising, even radical re-appraisals of existing perceptions. 

A glossary 

Despite our best efforts many of the terms used on this site are, inevitably, technical. So we have prepared an extensive glossary available either as a PDF or in a fully searchable web version. As with other site content, we are happy to receive comments and suggestions on this. 

What is financial transparency?

This project aims to shine light into some very dark places. The objective has been to promote financial transparency. So we need to define that term, which we have now done. Like many of the documents on the site, this is available as a PDF. 

Transparency is essential for markets to operate smoothly. Secrecy jurisdictions undermine market efficiency (as the current world financial crisis makes clear). The issues addressed by this research are, or should be, at the heart of all current policy debates.

Core data

The core data underpinning this research can be found in the detailed secrecy jurisdiction reports. More than 200 variables have been surveyed for each jurisdiction. In every case, the data source is referenced and a link provided.  

Preparing a database of this kind has been an enormous undertaking, especially given the rigorous approach.  On occasion, a decision has had to be taken on how to interpret data. Where possible it has been made clear when and how this has been done. If you disagree with our judgements, please let us know.

Jurisdiction reports

The data we have assembled for 60 jurisdictions amounts to approximately 1,400 printed pages.  So we have highlighted key information on each jurisdiction. This information is collated in individual jurisdiction reports: each includes suggestions for how the jurisdiction might improve its transparency.

Note that these reports do not focus on tax. This is because while tax avoidance and evasion are two abuses that take place in secrecy jurisdictions, they are by no means the only ones. The illicit financial flows that this project seeks to map - which include, but go considerably beyond, tax evasion - could not happen without the veils of secrecy that these places deliberately provide. 

The 12 Key Financial Secrecy Indicators (KFSIs)

Data has been collected on a wide range of variables for each location. Some are clearly more important than others, while some reinforce each other. For example, if a jurisdiction does not require company accounts to be available on public record, it is unlikely to do so for trusts. We have therefore selected 12 key indicators of opacity to assess the contribution each jurisdiction makes towards secrecy in the global financial system. The criteria and methodology we used for selecting the 12 indicators and for assessing compliance are summarised here. Each indicator also has its own assessment report. 

Key findings and their implications

This research shows that secrecy jurisdictions provide financial opacity allowing transactions which have their real economic and social impact elsewhere to be recorded within their domains, while remaining hidden from view. Without the secrecy that these places supply, these huge illicit financial flows that others have documented would be more easily detected. 

Raymond Baker of Global Financial Integrity, in his ground-breaking book Capitalism's Achilles Heel, estimated global illicit flows at $1-1.6 trillion, which has been endorsed by the World Bank. He broke down these numbers as follows:

GLOBAL CROSS-BORDER FLOWS OF GLOBAL DIRTY MONEY, US$ BILLION

Source: Baker, Raymond 2005: Capitalism's Achilles Heel, p. 172

Subsequently, Global Financial Integrity has produced detailed new estimates which suggest that the problem is even bigger: in 2009 GFI identified illicit flows from developing countries alone of between $850-1,050 billion.

The table above illustrates the enormous mismatch in emphasis between the international public policy measures to combat illicit financial flows, and the scale of each part of the problem. For example, the 9/11 terrorist attacks on the United States are estimated to have cost under US$1 million to orchestrate: less than one millionth of total annual illicit financial flows. And yet international agencies have put vast time and resources into tackling this problem. The point here is not that we should reduce our efforts in cracking down on terrorist finance: rather, because terrorist finance uses exactly the same mechanisms and subterfuges of international financial secrecy that foster and encourage these much, much bigger illicit financial flows, we need to look at the whole criminogenic environment. We cannot solve one problem in isolation from the rest. And that means tackling the entire global architecture of financial secrecy. 

We must therefore re-focus our efforts on the elephants in the room: the huge issues which have largely been ignored to date. The big elephants are tax evasion, and the related issue of trade mispricing, which are estimated to account for perhaps two thirds of these illicit financial flows.  Solving these much bigger issues means tackling the secrecy jurisdictions head on.

And in order to combat international financial secrecy, we need to understand first what is going on. Mapping the Faultlines is one of the essential first steps in creating that understanding. 

We refer to illicit financial flows for good reason. The Oxford English Dictionary defines illegal as contrary to or forbidden by law, but illicit as forbidden by law, rules, or custom. The distinction is important. For example, much transfer mispricing undertaken for taxation purposes is illicit: the practice  is contrary to known rules or customs established by international agencies but in many jurisdictions it is not illegal, since the necessary agreements to make it so are not in place and nor is local law. So transfer mispricing may not be illegal in those places, but it is certainly illicit, and the consequences are pernicious. 

Pinstripe army

All these flows are orchestrated by human beings, many of whom operate in secrecy jurisdictions. We call them secrecy providers: a pinstripe army of accountants, lawyers and bankers who sell services that facilitate illicit financial flows, using secrecy jurisdictions. 

As mentioned, those illicit financial flows from developing countries might amount to US$1 trillion a year. The tax lost to poorer countries alone from transfer mispricing has been estimated at UK£160 billion a year. The Tax Justice Network has estimated, conservatively, that total tax evaded on personal wealth in secrecy jurisdictions might amount to US$255bn a year. 

Necessity dictates that these figures are estimates: the very nature of secrecy jurisdictions ensures that accurate data on these issues cannot be obtained. 

Our research shows that secrecy is a significant problem.  Despite recent moves to tackle banking secrecy there is little evidence of real change and as a result the opacity created by at least 60 secrecy jurisdictions remains a massive issue of concern to the rest of the world.

This is only the first stage of this project. The research data has now been assembled. The next stage will be to use it to analyse the data and propose policy measures. Over the coming weeks and months considerable new research and data on these issues will be rolled out on this site.