Tax Justice Network Study of Financial Secrecy with U.S. Third Most Opaque (11/14/15)

The Tax Justice Network, an independent network providing "high-level research, analysis and advocacy in the area of international tax and the international aspects of financial regulation."  The Tax Justice Network's description of itself from the web site is here.  The Tax Justice Network has a "financial secrecy index," here, which "ranks jurisdictions according to their secrecy and the scale of their offshore finanical 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."

The index seeks to analyze features moving and hiding money offshore, with distortion in tax and economic systems.  The index general conclusions from the Introduction are summarized here :

Shining light into dark places 

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 élites, 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 partly knees 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.  

What is the significance of this index?

In identifying the most important providers of international financial secrecy, the Financial Secrecy Index reveals that traditional stereotypes of tax havens are misconceived. The world’s most important providers of financial secrecy harbouring looted assets are mostly not small, palm-fringed islands as many suppose, but some of the world’s biggest and wealthiest countries. Rich OECD member countries and their satellites are the main recipients of or conduits for these illicit flows. 

The implications for global power politics are clearly enormous, and help explain why for so many years international efforts to crack down on tax havens and financial secrecy were so ineffective, it is the recipients of these gigantic inflows that set the rules of the game. 

Yet our analysis also reveals that recently things have genuinely started to improve. The global financial crisis and ensuing economic crisis, combined with recent activism and exposure of these problems by civil society actors and the media, and rising concerns about inequality in many countries, have created a set of political conditions unparalleled in history. The world's politicians have been forced to take notice of tax havens. For the first time since we first created our index in 2009, we can say that something of a sea change is underway.    

World leaders are now routinely talking about the scourges of financial secrecy and tax havens, and putting into place new mechanisms to tackle the problem. For the first time the G20 countries have mandated the OECD to put together a new global system of automatic information exchange to help countries find out about the cross-border holdings of their taxpayers and criminals. This scheme is now being rolled out, with first information due to be exchanged in 2017.  

Yet of course these schemes are full of loopholes and shortcomings: many countries are planning to pay only lip service to them, if that -- and many are actively seeking ways to undermine progress, with the help of a professional infrastructure of secrecy enablers. The edifice of global financial secrecy has been weakened - but it remains fully alive and hugely destructive. Despite what you may have read in the media, Swiss banking secrecy is far from dead. Without sustained political pressure from millions of people, the momentum could be lost.  

The only realistic way to address these problems comprehensively is to tackle them at root: by directly confronting offshore secrecy and the global infrastructure that creates it. A first step towards this goal is to identify as accurately as possible the jurisdictions that make it their business to provide offshore secrecy. 

This is what the FSI does. It is the product of years of detailed research by a dedicated team, and there is nothing else like it out there. We also have a set of unique reports outlining detailed offshore histories of the biggest players in the game. 

The rankings here are interesting.  Switzerland is on top.  But, the United States is third.

A summary of commentary on the findings about the U.S. is found on the Tax Justice Network's blog:  José P. Martínez, How the U.S. Became a Top Secrecy Jurisdiction (Tax Justice Blog 11/3/15), here.  Some excerpts:

The U.S. ranks as the third biggest offender – just after Switzerland and Hong Kong – on the Tax Justice Network’s 2015 Financial Secrecy Index when it comes to facilitating financial secrecy and tax evasion, or, in other words, enabling individuals to hide their assets.  

The largest drivers for the United States’ high ranking are its financial secrecy laws and that it has the largest share of the global market for offshore financial services.
How did the United States become such an important offshore financial center? It began with the passage of the Revenue Act of 1921, which exempted the interest income of non-U.S. residents from tax. The combination of this tax break and weak financial disclosure rules made U.S. banks ideal places for foreign individuals looking to hide their assets. 

The United States does not require financial institutions to collect basic ownership information from corporations. This allows entities to create illicit shell corporations, which criminals can use to commit crimes such as money laundering and tax evasion without much fear of being identified. Because incorporation is a function of state governments, many states, including Delaware, Nevada and Wyoming, have facilitated the proliferation of shell corporations as a way to raise revenue by collecting fees for each corporation created. 

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The United States’ lack of transparency on information about non-resident investments also aides those seeking to hide assets. Over the years, lawmakers have made several attempts to create a more transparent legal framework, but the only hopeful moment came during the 1990s when the Clinton administration proposed that banks in the United States be required to inform the U.S. Internal Revenue Service (IRS) about all bank interest paid to non-resident individuals. This regulation never went into effect.
The United States should end its protection of potential criminals by allowing more reciprocal exchange information between it and other countries. Steps are already being taken in this direction with the enactment of the Foreign Account Tax Compliance Act (FATCA) in 2010. Unfortunately, FATCA relies on an array of bilateral agreements instead of a broader multilateral agreement, making the exchange of information less streamlined. There are also numerous examples where bilateral agreements require U.S. access to information from foreign institutions, but they fail to provide that same information to other countries. Rather than being an impediment to progress, the United States should take a leadership role in combatting tax evasion by fighting for financial transparency around the world.

The U.S. should be more transparent.  Although FATCA and CRS and the complex considerations of global transparency are beyond my area of expertise, it does seem that fairness should demand the U.S. be as transparent as it expects and demands that other countries be.  Just an application of the golden rule.