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Africa/Global: Charting Where They Hide the Money, 1
AfricaFocus Bulletin
March 12, 2018 (180312)
(Reposted from sources cited below)
Editor's Note
"Switzerland, the United States and the Cayman Islands are the world’s biggest
contributors to financial secrecy, according to the latest edition of the Tax Justice
Network’s Financial Secrecy Index (FSI). ... Kenya, which this year set up its own
tax haven in the form of the Nairobi International Financial Centre, is an example of
how interests of western financial service lobbyists have successfully lured
governments into a race to the bottom. Kenya, which has been assessed for the first
time in the 2018 FSI, has an extremely high secrecy score of 80/100." - Tax Justice
Network
The FSI for 2018, released by the Tax Justice Network on January 31, is far more than
a simple index. It is an in-depth survey as well as ranking of the countries most
deeply involved in concealing wealth through offshore financial services. Based on a
quantitative measure of the share of such cross-border financial services based in
each country, and an in-depth qualitative evaluation of national laws and regulations
affecting transparency and secrecy, the FSI provides the indispensable context for
investigative journalism exposes of specific cases and advocacy by civil society
groups at both national and international levels.
In striking contrast to Transparency International "Corruption Perceptions Index
(CPI) (https://www.transparency.org/), which rates countries on the basis of
observers' perceptions of the extent of corruption, the FSI focuses on the mechanisms
which permit the fruits of corruption and other hidden assets to be concealed.
Ironically, Switzerland, Luxembourg, and the Netherlands are ranked as among the
least corrupt on the CPI, but they also lead on the FSI as the best places to hide
the fruits of corruption, tax evasion, and other crimes.
The system that allows this to happen is in fact global, and its distribution by
country, by intention, is hard to track. This two-part AfricaFocus contains
substantive excerpts from the Financial Secrecy Index reports. This first part (sent
out by email and available on-line at http://www.africafocus.org/docs18/fsi1803a.php)
excerpts overview analyses from the authors covering the global picture and the
African continent. The second part, not sent out by email but available at
http://www.africafocus.org/docs18/fsi1803b.php) , provides excerpts from country
reports on the United Kingdom, the United States, Kenya, Liberia, South Africa, and
Mauritius.
Much more extensive data in narrative, database, and graphic formats, is available at
http://www.financialsecrecyindex.com
For previous AfricaFocus Bulletins on illicit financial flows, tax evasion, and
related topics, visit
http://www.africafocus.org/intro-iff.php
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Financial Secrecy Index 2018
Introduction
https://www.financialsecrecyindex.com/
The Financial Secrecy Index ranks jurisdictions according to their secrecy and the
scale of their offshore financial activities. A politically neutral ranking, it is a
tool for understanding global financial secrecy, tax havens or secrecy jurisdictions,
and illicit financial flows or capital flight.
An estimated $21 to $32 trillion of private financial wealth is located, untaxed or
lightly taxed, in secrecy jurisdictions around the world. Secrecy jurisdictions - a
term we often use as an alternative to the more widely used term tax havens - use
secrecy to attract illicit and illegitimate or abusive financial flows.
Illicit cross-border financial flows have been estimated at $1-1.6 trillion per year:
dwarfing the US$135 billion or so in global foreign aid. Since the 1970s African
countries alone have lost over $1 trillion in capital flight, while combined external
debts are less than $200 billion. So Africa is a major net creditor to the world -
but its assets are in the hands of a wealthy élite, protected by offshore secrecy;
while the debts are shouldered by broad African populations.
Yet all rich countries suffer too. For example, European countries like Greece, Italy
and Portugal have been brought to their knees partly by decades of tax evasion and
state looting via offshore secrecy.
A global industry has developed involving the world's biggest banks, law practices,
accounting firms and specialist providers who design and market secretive offshore
structures for their tax- and law-dodging clients. 'Competition' between
jurisdictions to provide secrecy facilities has, particularly since the era of
financial globalisation really took off in the 1980s, become a central feature of
global financial markets.
The problems go far beyond tax. In providing secrecy, the offshore world corrupts and
distorts markets and investments, shaping them in ways that have nothing to do with
efficiency. The secrecy world creates a criminogenic hothouse for multiple evils
including fraud, tax cheating, escape from financial regulations, embezzlement,
insider dealing, bribery, money laundering, and plenty more. It provides multiple
ways for insiders to extract wealth at the expense of societies, creating political
impunity and undermining the healthy 'no taxation without representation' bargain
that has underpinned the growth of accountable modern nation states. Many poorer
countries, deprived of tax and haemorrhaging capital into secrecy jurisdictions, rely
on foreign aid handouts.
This hurts citizens of rich and poor countries alike.
Switzerland, USA and Cayman top the 2018 Financial Secrecy Index
by George Turner
Tax Justice Network, January 30, 2018
https://www.taxjustice.net/2018/01/30/2018fsi/
Switzerland, the United States and the Cayman Islands are the world’s biggest
contributors to financial secrecy, according to the latest edition of the Tax Justice
Network’s Financial Secrecy Index (FSI).
The full financial secrecy index can be found online at
http://www.financialsecrecyindex.com. There you can find interactive tables and maps
of the FSI, as well as download reports on specific countries. A direct link to the
table of rankings by country is at http://tinyurl.com/yblxx27e.
Financial secrecy is a key facilitator of financial crime, and illicit financial
flows including money laundering, corruption and tax evasion. Jurisdictions who fail
to contain it deny citizens elsewhere their human rights and exacerbate global
inequality.
The table below shows the top-ranked 54 countries on the FSI.
The full interactive table is available
here.
Switzerland, the global capital of bank secrecy, retains the worst ranking, and the
US has moved up to second. With Bahrain and Lebanon dropping out of the top ten,
Guernsey and a new entry in Taiwan has replaced them.
The US’ rise in the FSI 2018 rankings is part of a worrying trend. This is the second
time in succession that the USA has risen up the Financial Secrecy Index. In 2013 the
States was in 6th place, and in 2015 it took 3rd. In 2015 the country was one of the
few to increase its secrecy score. This time the increase in ranking is driven by a
huge rise in their share of the market in offshore financial services that wasn’t
neutralised by a significant reduction in their secrecy. In total, the share of
global offshore financial services taken by the United States rose by 14% between the
2015 and 2018 index from 19.6% to 22.3%.
The United States remains a secrecy jurisdiction as it refuses to take part in
international initiatives to share tax information with other countries, and has
failed to end anonymous companies and trusts aggressively marketed by some US states.
There is now real concern about the damage this promotion of illicit financial flows
is doing to the global economy.
Slow progress in the global fight against financial secrecy
The 2015 Index noted several improvements towards global financial transparency
following the 2008 financial crisis and the huge budget deficits that it created,
where governments around the world sought to reign in tax abuse by its citizens, and
by multinational corporations.
Some of those efforts are now starting to bear fruit. Most importantly, countries
have now started to exchange information on bank accounts held by foreign citizens in
their jurisdictions on an automatic basis.
But this Financial Secrecy Index demonstrates how ten years on from the financial
crisis all countries still have a long road ahead of them to improve their
performance on financial secrecy. The most transparent country – Slovenia – has a
secrecy score of 41.8, out of a total possible score of 100. A score of 0 would
represent ideal, competition and market friendly transparency. In other words, if the
Financial Secrecy Index were a school exam, Slovenia (the best student) would have
barely passed, with less than 60% of the correct “transparency” answers. The worst
countries only got close to 10% of the “transparency” questions right (a secrecy
score close to 90). Following this analogy, practically all countries would have to
repeat the school year.
The top two countries in this year’s FSI are the two that have been most resistant to
the key policy of automatic information exchange between tax authorities. The US
refuses to take part altogether. Instead, it has set up its own parallel system
(FATCA) which seeks information on US citizens abroad, but provides little, if any,
data to foreign countries.
The global capital of banking secrecy, Switzerland has delayed the implementation of
automatic information exchange, and in 2017 lawmakers attempted to stop it altogether
with countries they deemed ‘corrupt’. As the FSI demonstrates, countries like
Switzerland are fundamental to the flow of illicit financial funds, such as the
proceeds of corruption. Switzerland’s attempts to stop transparency for funds they
receive from countries with perceived high levels of corruption will simply make
tackling corruption in those countries harder.
After the financial crash further scandals have led to a greater push for more
transparency, such as the demand for public registers of company owners. Yet this
progress has been difficult, as powerful vested interests working with friendly
governments seek to frustrate change. The UK government for example continues to
insist on the right of its satellite tax havens to maintain the secrecy of company
ownership, and the German government, with others, have sought to impede attempts to
make progress on the beneficial ownership issue within the European Union.
Financial secrecy’s impact on human rights
Six out of the Top 10 FSI 2018 countries are either members of the OECD or their
dependencies. Another three are Asian tax havens, demonstrating how major economies
are driving the market for financial secrecy.
Secrecy jurisdictions are found all over the world.
On this map the top ten are shown in blue. An interactive version
of the map is available here.
Kenya, which this year set up its own tax haven in the form of the Nairobi
International Financial Centre, is an example of how interests of western financial
service lobbyists have successfully lured governments into a race to the bottom.
Kenya, which has been assessed for the first time in the 2018 FSI, has an extremely
high secrecy score of 80/100.
By harboring the ill-gotten gains of kleptocrats and tax evaders, secrecy
jurisdictions deprive governments of the resources needed to provide basic social
protection, and encourage the looting of natural resources.
This impact of financial secrecy on the abuse of human rights is increasingly
recognised globally. Switzerland has been sharply criticised by the United Nations
for the damage that its financial secrecy causes to human rights around the world,
while a recent statement by the UN Special Rapporteur on Extreme Poverty and Human
Rights, highlighted the poverty and inequality suffered by citizens of the United
States, in part driven by their government’s desire to become a tax haven. This
statement comes at a time when our index shows the country undermining rights
elsewhere through its promotion of financial secrecy.
How we created the world’s leading study of financial secrecy
The Financial Secrecy Index is the world’s most comprehensive assessment of the
secrecy of financial centres and the impact of that secrecy on global financial
flows. The European Commission’s Joint Research Centre provided methodological
support for the construction of the index. The study is published every two years and
is founded on published, independently verifiable data. In contrast to some so called
‘blacklists’ of tax havens, inclusion in the FSI is not based on political decision
making.
Countries are assessed against criteria which include whether companies, trusts and
foundations are required to reveal their true owners, whether annual accounts are
made available online in open data format, or the extent to which jurisdictions’
rules comply with anti-money laundering standards (FATF’s 40 recommendations).
This year several new indicators have been added to the FSI and existing indicators
have been substantially revised to drill deeper into questions around ownership
registration and disclosure. A total of 20 Key Financial Secrecy Indicators (KFSI) is
used for the measurement of the secrecy score.
In order to create the index, a secrecy score is combined with a figure representing
the size of the offshore financial services industry in each country. This is
expressed as a percentage of global exports of financial services. The bigger player
you are, the more responsibility you have to be transparent.
Beyond of what has been achieved so far by academic or regulatory institutions, the
new FSI is the most comprehensive and rigorous assessment of financial secrecy
worldwide.
New criteria include checking if a jurisdiction provides for
A public register of ownership and annual accounts of limited partnerships (KFSI 5);
A public register of ownership of real estate and a central register of users of
freeports for the storage of high value assets (KFSI 4);
Banking secrecy rules protected by criminal law (risk of prison terms for banking
whistleblowers; KFSI 1);
Public access to tax court verdicts and proceedings, both in criminal and civil tax
matters (KFSI 14);
Mandatory Legal Entity Identifiers for companies created in its territory (KFSI 10);
Harmful tax residency and citizenship rules (KFSI 12);
Public access to unilateral tax rulings and robust local filing requirements for
Country-By-Country Reports (KFSI 9);
Unregistered bearer shares for companies & large banknotes (KFSI 15);
Public statistics on its cross-border financial and economic activities (KFSI 16);
Mandatory reporting obligations of tax avoidance schemes (KFSI 11).
Africa’s battle against financial secrecy: Financial Secrecy Index
by Rachel Etter-Phoya
Tax Justice Network, February 14, 2018
https://www.taxjustice.net/ - direct URL: http://tinyurl.com/yb7s2txa
How are Switzerland, the United States, and the Caymans working against African
efforts to stem the tide of illicit financial flows? They’re among the worst
offenders in the Tax Justice Network’s 2018 Financial Secrecy Index.
The index was launched at the end of January 2018 and weights a country’s secrecy
score against its global share of financial services. This means that countries that
top the rankings have a far higher risk for illicit financial flows running through
their systems than countries that may have a higher level of secrecy, but have much
smaller-scale financial services. 20 key indicators are used to assess secrecy
levels, including banking and tax court secrecy, country-by-country reporting
compliance, ownership disclosure rules, and tax administration capacity.
The problem for Africa
Africa remains a net creditor to the world because of illicit financial flows. These
flows include money from criminal activity and corruption, tax evasion, avoidance and
planning, as well as hidden wealth. So-called foreign aid is dwarfed by the amounts
that are leaving the continent. Sub-Saharan African countries lost over USD 1
trillion in capital flight between the 1970s and 2010; external debt was less than
one-fifth of this. Financial secrecy is the enabler.
The Paradise Papers was a disturbing reminder of the scale of the problem. 13.4
million documents were leaked from Appleby, a leading British offshore law firm, and
Asiaciti, a family-owned trust company, which were investigated by over 90 media
partners with the International Consortium of Investigative Journalists.
We learned that Namibians lost potential tax revenues from its fishery resources
through a complex corporate arrangement that exploited a double tax treaty signed
with Mauritius. Angolans’ sovereign wealth fund was tapped into by a financier who
incorporated companies in secrecy jurisdictions for investment projects in which he
had a stake. And mining giant Glencore’s nefarious practices in the Democratic
Republic of the Congo and in Burkina Faso have also likely reduced the revenue these
governments have to spend on vital public services.
South Africa has also had its fair share of challenges with secrecy jurisdictions.
The notorious Gupta family along with their politically-exposed associates have been
able to hide behind opaque companies to gain questionable access to government
contracts. For example, the family is reported to have used shell companies in the
United Arab Emirates to move ‘the dubious proceeds of state tenders in South Africa
to their collection of shell companies in and around Dubai’. The United Arab Emirates
is ranked number nine in the Financial Secrecy Index 2018, with an ‘”ask-noquestions,
see-no-evil” approach to commercial transactions, financial regulation and
crimes’.
African secrecy jurisdictions on the rise
Financial secrecy has also reared its ugly head on the continent itself. Nine African
countries are included in this year’s Financial Secrecy Index:
Kenya found itself in the top 30 countries worldwide with a very high secrecy score
(80 out of 100). This may not come as a surprise. The country’s Vision 2030 includes
the establishment of the Nairobi International Financial Centre as one of its
commitments. Legislation entered into force in September last year to encourage
foreign direct investment to be channelled through the East African nation to other
countries in the region. Kenya has adopted a model similar to the City of London (the
UK having experienced the Finance Curse phenomenon as a result) and continues to
increase its network of double tax agreements.
Double tax agreements aim to prevent income being taxed twice. Yet a number of
associated risks undermine the collection of tax. The treaties restrict the rights of
states to tax foreign investors and owned companies and often do not include adequate
automatic exchange of information provisions. Multinationals and sometimes domestic
companies may set up an entity in an intermediary country, even when they have no
substantive economic activities, to exploit tax treaties in place. This ‘treaty
shopping’ enables companies and individuals to pay lower taxes in conduit countries
and avoid taxes all together in the countries where activities are taking place.
However, with just 15 tax treaties in force, Kenya has some way to go if it is to
compete with one of Africa’s oldest secrecy jurisdictions, Mauritius. In a bid to
reduce its reliance on sugar back in the 1970s, this island nation started offering
preferential tax terms and exemptions to foreign investors, and similar ones exist
today. The country has entered double tax agreements with 43 nations, 16 of which are
with African states. Zero-percent capital gains tax has lured many companies to set
up shop – with no genuine economic activity – on the island, significantly reducing
their tax burden at the expense of other countries, often not paying capital gains
tax anywhere. South Africa and India have successfully renegotiated their agreements
with Mauritius to be able to collect capital gains and withholding tax. Other African
nations, including Lesotho and Zambia, are following suit and renegotiating treaties.
Ghana toyed with setting up an International Financial Services Centre (IFSC) and
went as far as granting Barclays Bank Ghana Limited an offshore banking licence in
the early 2000s although President John Atta Mills revoked the licence in 2011 to
avoid OECD blacklisting. Worringly, it appears the country has plans to revive the
IFSC.
Much more can be said about secrecy on the continent. We have prepared narrative
reports for eight of the nine African countries included in the Index. Take a look
here. Our partner Tax Justice Network Africa also has a blog series on financial
secrecy. Part 1 is available here.
Global solutions
Some changes have been made to the global infrastructure to tackle secrecy since TJN
launched the first Index in 2009. For example, the OECD is mandated by the G20 to
roll out the automatic exchange of information on taxation, but coverage is patchy
and some countries, particularly African ones, are missing from the arrangement.
Reform is needed now. Besides individual countries addressing laws and regulations to
improve transparency, TJN has identified three major policy responses considering the
latest Financial Secrecy Index:
- Take counter-measures against tax haven USA: the USA ranks second in the Index
this year because it has not improved transparency while other countries have acted.
The global scale of its financial services has also increased. The USA needs to make
it illegal to establish anonymous companies within its borders and it must comply
with the standard for automatic exchange of tax information. We have a policy
proposal for how to incentive the USA, here.
- Adopt the Tax Justice Network’s ABCs of tax transparency: all countries must be
included in the Automatic exchange of information and aggregate statistics published,
all entities must disclose their Beneficial owners and data should be online, free
and in open data format for companies, trusts and foundations, and all multinational
companies must comply with public Country-by-country reporting.
- Introduce a UN global convention on tax transparency: ambitious standards should
be set, with the ABCs of tax transparency at a minimum, through a global, inclusive
process that outlines meaningful sanctions for non-cooperation.
AfricaFocus Bulletin is an independent electronic publication providing reposted
commentary and analysis on African issues, with a particular focus on U.S. and
international policies. AfricaFocus Bulletin is edited by William Minter.
AfricaFocus Bulletin can be reached at africafocus@igc.org. Please write to this
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