FINANCIAL TRANSPARENCY An International Comparison John Christensen

Financial Times - 26 September 2003 A global network of researchers and practising professionals working with advocacy and campaigning activists to remedy financial market failures, promote just tax policies and tackle the harm caused by tax havens. Launched in March 2003, the network now spans across over 80 countries on 6 continents.

“ And yet the paradox of this open world is that in many ways, it’s still so closed and secretive… We want to use the G8 to drive a more serious debate on tax evasion and avoidance… This is an issue whose time has come.” PM David Cameron addressing the World Economic Forum on 24 th January 2013

“The bad news is that financial secrecy is still very much alive and well.”

 Conceptual issues: what are we dealing with?  Measuring secrecy: constructing a Financial Secrecy Index  FSI qualitative component: Secrecy score  FSI quantitative component: Global scale weight  Applications: what does the FSI reveal?  Contrasting views of the geography of secrecy (lists, indices)  Assessing G8 commitments on tax and transparency  Conclusions 5 Overview

Why is there no consistent definition and identification of ‘tax havens‘, and why has every attempt to date to address problems associated with them failed?  ‘Tax havenry‘ is a matter of degree, not a binary variable (Wójcik 2012: p.7);  Tax is not the crucial element for problems created by ‘tax havenry‘ – rather, secrecy is (Murphy 2008);  Blacklist approaches are hard to insulate from political influence. 6 Conceptual issues

‘Secrecy jurisdiction‘ is a potentially more useful and precise concept Definition: A secrecy jurisdiction is one which provides facilities that enable people or entities escape or undermine the laws, rules and regulations of other jurisdictions elsewhere, using secrecy as a prime tool. Because “virtually any country might be a `haven’ in relation to another” (Picciotto 1992: 132), more nuance needed in order for definition to be operational. 7 Conceptual issues (2)

The Financial Secrecy Index identifies and ranks secrecy jurisdictions according to their contribution to opacity in international finance The index combines qualitative and quantitative data Qualitative data based on secrecy indicators is used to produce a secrecy score for each jurisdiction Quantitative data is used to establish a global scale weight for each jurisdiction based on its share of the global market for cross-border financial services The secrecy score and the weighting is combined arithmetically to produce a ranking Measuring secrecy Moderately secretive Exceptionally secretive Chart 1 - How Secretive? Chart 2 - How Big? tiny large huge small

Knowledge of beneficial ownership Key aspects of corporate transparency regulation Efficiency of tax and financial regulation International standards and cooperation 1Banking secrecy 4Public company ownership 7Fit for information exchange 11Anti-money laundering 2Trust and foundation register 5Public company accounts 8Efficiency of tax administration 12Automatic information exchange 3Recorded company ownership 6Country-by- country reporting 9Avoids promoting tax evasion 13Bilateral treaties 10Harmful legal vehicles 14International transparency commitments 15International judicial cooperation 9 Fifteen financial secrecy indicators

Does not adequately curtail banking secrecy Does not put details of offshore trusts on public record Does not maintain official record of ultimate company ownership Does not put ultimate company ownership details on public record Does not require companies to file annual financial records Does not require listed companies to report on a country-by- country basis Does not require domestic paying agents to report on distributions to non-residents Has refused to engage in automatic information exchange Has a weak information exchange treaty network and a weak commitment to global AML standards Allows the creation and operation of harmful legal vehicles (protected cell companies) OPACITY SCORE: 80 out of a possible 100 Further information here: © Tax Justice Network – example jurisdiction

11 Blacklists: small, marginally more secretive; most < 40% GSW FSI: include larger players; near 100% coverage by GSW. Application: Blacklists vs FSI

Exceptionally secretive Moderately secretive 2013 FSI: Top Twenty Secrecy Jurisdictions by Secrecy Score and Global Scale Weight

“I do not think it is fair any longer to refer to any of the Overseas Territories or Crown Dependencies as tax havens.” Hansard. SEPT-2013

15 Policy implications Importance of major players (G8) cleaning house; Limited benefits from ‘usual suspect’ squeeze; Inclusive steps if dev. countries to benefit. Recap: Two broad goals (how are we doing?)  Goal 1: to contribute to and encourage research by collecting data and providing an analytical framework to show how jurisdictions facilitate illicit financial flows  Goal 2: to focus policy debates, encourage and monitor policy changes globally towards more financial transparency, by engaging the media and public interest groupings Conclusions

The Price of Secrecy  Raise risk premiums  Harm tax systems and public finance  Facilitate economic free-riding and increases inequality  Reduce the efficiency of resource allocation  Increase the profitability of economic crime  Encourage rent-seeking activities  Damage trust and institutional quality

“They say that the ancien regime in France fell in the 18 th century because the richest country in Europe, which had exempted its nobles from taxation, could not pay its debts. France had become... a failed state. In the modern world the nobles don’t have to change the laws to escape their responsibilities: they go offshore.” Questions