What is Mapping Financial Secrecy?
The Mapping Financial Secrecy project is the database that lies behind the Financial Secrecy Index. It should also be considered a major research project in its own right, with extensive and varied findings. Like its predecessor in 2009, entitled Mapping the Faultlines, this is the largest single research project into global financial secrecy in world history.
Our main purpose is to identify the jurisdictions and mechanisms used to facilitate illicit financial flows worldwide. Estimates by Global Financial Integrity in January 2011 suggest that developing countries alone lost over US$1.2 trillion in illicit financial outflows in 2008 – that is, for every dollar of foreign aid that rich countries have pumped into developing countries, ten dollars has flowed out under the table. Most of this has disappeared through secrecy jurisdictions into the global financial system.
Why study financial secrecy?
Secrecy jurisdictions, or tax havens, facilitate a wide range of crimes such as tax evasion, the hiding of looted assets, money laundering, terrorist financing, evasion of financial regulations, drug trafficking, illegal arms trading, counterfeiting, insider-dealing, embezzlement, all sorts of fraud, non-payment of alimonies, and much more.
The financial secrecy they provide undermines the rule of law and destroys trust in societies and in markets. This seriously damages efficiency, raising the cost of capital and wrecking confidence in democracy. It undermines development. The secrecy space created by these jurisdictions constitutes a criminogenic environment and a global hothouse for crime.
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 hidden behind a veil of offshore secrecy.
Or imagine that you are a citizen campaigner in an African country with expensive telephone services, under a mobile telephone duopoly which refuses to cut prices. Both companies are owned offshore, and it is impossible to identify the shareholders. You cannot prove collusion between the phone operators, so your campaign runs into a brick wall.
And so on. This project, and our associated Financial Secrecy Index, shine a powerful light on the problem and help identify the prime culprits in supplying financial secrecy.
What is financial transparency?
This project aims to promote financial transparency. We also seek to define and explain what this means. See our report What is Financial Transparency?
What are secrecy jurisdictions, and where are they?
There is no general agreement as to what a secrecy jurisdiction is. We often prefer to use the term instead of the more popular term ‘tax haven,’ depending on the context.
In our 2009 report we identified 60 secrecy jurisdictions, based on published lists. This year, we added 13 new jurisdictions, including some of the world’s largest financial centres that are not traditionally regarded as tax havens.
We now prefer to talk in terms of a ‘secrecy spectrum’ in which jurisdictions are rated according to how ‘secretive’ they are, and to de-emphasise the term ‘secrecy jurisdiction.’ The question of whether or not a location is a ‘secrecy jurisdiction’ is, according to this analysis, partly a matter of scale. We leave it to others to decide where to draw the line.
See our short two-pager What is a Secrecy Jurisdiction? For more details, see our long paper Finding the Secrecy World.
The data, and a glossary
The core data underpinning this research can be found in the detailed database reports. These involved surveying more than 200 variables for each jurisdiction and add up to nearly 1,500 pages of data. Our sources are clearly referenced, with appropriate links.
At the date of publication (4 October 2011), full database reports were available for 27 countries, while for the remaining 46 countries abbreviated database reports are published, focusing on providing the data relevant for the Financial Secrecy Index. The full database reports for all 73 jurisdictions will be published by the end of 2011.
We have given jurisdictions a secrecy score based on 15 indicators, called Key Financial Secrecy Indicators (KFSIs) (Click here for the full list; each has its own detailed report explaining the indicator).
We have also prepared an extensive glossary available either as a pdf or in a searchable online version.
If you disagree with or have comments about our project and the underlying data, please let us know.
Findings and implications: seeing the elephants
Our project and the associated Financial Secrecy Index reveal a world in which some of the most important suppliers of financial secrecy and recipients of illicit financial flows are big powerful countries like the United Kingdom (and its dependencies like the Cayman Islands), the United States, Hong Kong, Switzerland and, perhaps surprisingly, Germany and Japan. Others have found similar results.
We reveal an enormous gulf between the rhetoric – encapsulated in a statement by G20 leaders in April 2009 that “the era of banking secrecy is over” – and the reality: a world where financial secrecy, in all its different varieties, is alive and well, and the structures that foster and facilitate gargantuan illicit financial flows are as entrenched as ever.
Our project also uncovers a massive mismatch between the main public policy emphasis – which is heavily skewed towards tackling terrorist financing and certain types of money laundering – and a much bigger picture, involving other kinds of financial flows.
For example, the 9/11 terrorist attacks on the United States are estimated to have cost under US$1 million to orchestrate: less than a millionth of total annual illicit financial flows. Yet international agencies have put vast time and resources into tackling it. This is not to say we should curb our efforts in cracking down terrorist financing; rather, because it uses exactly the same mechanisms and subterfuges of international financial secrecy that foster and encourage these much larger illicit flows, we cannot tackle it, or any of the other financial scourges we describe, without bringing the entire criminogenic superstructure of global financial secrecy into view.
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. And solving these much bigger issues means tackling the secrecy jurisdictions head on.
We must also challenge and tackle an entire pinstripe infrastructure of secrecy providers: lawyers, bankers, accountants and corporate and trust administrators who make the whole system of financial secrecy function.
We must also change the very language involved. For example, the term 'capital flight' points the finger countries that are victims of illicit outflows to change their policies. The more neutral term 'illicit financial flows' covers the whole spectrum, and includes the recipients of dirty money (see more about language in our paper Finding the Secrecy World).
To combat international financial secrecy, we must first understand what is going on. Mapping Financial Secrecy aims to help create that understanding.