This exercise was not undertaken for curiosity’s sake. The ‘mapping’ in the project’s title required us first to evaluate which places contribute to the secrecy that facilitates illicit financial flows, including flows from developed to developing countries of up to US$1 trillion a year. Second, we needed to say how these jurisdictions contribute to the faultlines that enable those flows.
Elsewhere we define the meaning of the term 'secrecy jurisdiction', and in another paper we explain how we selected the secrecy jurisdictions surveyed in the Mapping the Faultlines project.
A secrecy jurisdiction is not a natural phenomenon that is, or is not, observable. All countries have some attributes of secrecy jurisdictions, ranging on an imagined continuum from highly secretive to perfectly transparent. Therefore, we have selected a set of indicators which allow an assessment to be based on how the legal and regulatory systems of a country or its dependent territories contribute to the secrecy that enables illicit financial flows.
This paper outlines the methodology we used to assess the contribution each location has made to the secrecy that facilitates illicit financial flows.
Methodological Principles
We had three aims in mind when we agreed the methodology for creating the Key Financial Secrecy Indicators (KFSI).
First and foremost, we selected indicators that would most accurately capture a jurisdiction's status as a secrecy jurisdiction ("laws for the primary benefit for those not resident" and "veil of secrecy"). The choice of these indicators has necessarily been subjective, but it must be acknowledged that an objective choice of indicators does not exist, and never will: the issue boils down to whether or not our selected indicators are plausible.
We have attempted to increase the plausibility by relying on expert input and knowledge and by discussing the available choices with other people working in this area. Our aim is to be open and transparent about our choices and not to claim objectivity when all we can hope for is an understanding based on a wide range of different perspectives. If the reader feels uncomfortable with some of the choices made we would welcome suggestions for improving our methodology. In fact, with the database containing data on more than 200 variables we have made publicly available the resources for testing alternative indicators at relatively low cost.
Second, we wanted to be as parsimonious as possible by selecting a relatively small number of indicators. We did this largely to avoid unnecessary complexity and therefore ensure that this work can be carried forward without undue cost or delay caused by data gaps.
Third, we considered it important that the index should be sufficiently simple and transparent to provide clear indication of what steps a secrecy jurisdiction should take to enhance its secrecy ranking. Our approach is based on encouraging secrecy jurisdictions to take positive steps to improve performance.
Chosen indicators
Using these criteria, we chose to base our assessment of the 60 secrecy jurisdictions on the following issues (shown in no particular order):
- The existence of formal banking secrecy;
- Available access to a trust or foundation registry;
- Its FATF rating;
- Whether accounts of companies and other entities registered within it can be accessed by the public;
- Whether information about the beneficial ownership of entities registered in the secrecy jurisdiction are disclosed on public record;
- Whether information on the beneficial ownership of entities registered in the secrecy jurisdiction is recorded by its authorities, even if not made available to the public;
- Whether the secrecy jurisdiction responded to our request for information sent as part of the Mapping the Faultlines survey work;
- Whether the secrecy jurisdiction participates in automatic information exchange;
- Whether the secrecy jurisdiction has shown serious commitment to bilateral information exchange;
- Whether the authorities in the secrecy jurisdiction have effective access to banking information within their domain;
- Whether the secrecy jurisdiction allows redomiciliation of entities;
- Whether the secrecy jurisdiction allows the registration of protected cell companies within their domain.
We consider this range of issues sufficiently broadly based to provide a plausible indication of a jurisdiction’s approach to secrecy.
Assessment process
Having determined the issues to be assessed, it is important to note that the criteria used for awarding a credit for achieving transparency were tough. It is our opinion that both the standards and the assessment procedures used by bodies such as the Organisation for Economic Cooperation Development (OECD) are too lenient. The OECD's Global Forum on Taxation generally assesses on the basis of the "highest available denominator" within a jurisdiction. The Global Forum may commend a jurisdiction for requiring accounts to be filed with a government authority, while writing in footnotes that this requirement does not hold for "non-resident" companies or holds only for certain providers of financial services.
In contrast, we have examined the lowest standard (or denominator) available in each jurisdiction. If a jurisdiction offers three types of companies, two of which are required to file beneficial ownership information, but the third is not required to disclose ownership information if the owner is foreign resident, then we have not awarded a transparency credit on this particular indicator. We have followed this 'lowest common denominator' principle throughout our assessment process.
During the data collection process we erred on the side of caution: where doubt existed on data quality we marked the relevant field as 'unknown' or 'information not available'. However, when applying the 12 indicators to the selected jurisdictions we awarded transparency credits only in cases where we were able to collect the corresponding data. Absence of data received an opacity score.
At the same time, an assessment procedure on the scale of this project cannot be rooted in facts alone, but will involve occasional use of reasoned judgement. Where this was the case, we have tried to be transparent about our criteria and reasons. As a result, in addition to references to all the sources we used, the database also includes a huge amount of supporting information and notes relating to data analysis.
The full document on the methodological background of the twelve Key Financial Secrecy Indicators (KFSIs) can be downloaded here.
The full document on the methodological background of the twelve KFSIs can be downloaded here.
