Financial+Secrecy+Index


 * Financial secrecy **

Financial secrecy, also known as banking secrecy, means that a financial institution will not share any information about its customer’s financial affairs to authorities nor to anyone else. Plombeck defines banking secrecy as the act where “financial institutions must keep information received about their clients in the course of business secret and confidential. Problems with financial secrecy occur when financial institutions will not share information with legitimate authorities that need information to tax citizens appropriately, or to enforce criminal laws. Secrecy jurisdictions offer secrecy to attract customers who most often want to avoid taxes or launder money. Many internet advertisements for banks highlight the jurisdiction’s secrecy and assure the customers that neither the bank nor the government will ever give bank data to another government. The general belief is often that the biggest providers of financial secrecy are small islands, but in reality it is some of the world’s wealthiest countries such as Switzerland, Luxemburg and Hong Kong. According to the Government Accountability Office of the US the biggest users of secrecy jurisdictions are in fact the biggest corporations in the world. Tax havens or secrecy jurisdictions become attractive because of the secrecy provided and they can be characterized by “a minimum of transparency and a maximum of autonomy of private action”. Apart from tax avoidance, financial secrecy makes financing of terrorist activity possible and other criminal activity such as money laundering.

** Causes **

Probably the most common criminal causes that financial secrecy contribute to are tax avoidance and money laundering. Financial Secrecy Index lists further drug trafficking, illegal arms trading, and human trafficking as crimes that might hide behind the benefits that banking secrecy provides. The European Commission estimates that tax money up to 1 trillion € are lost due to tax avoidance and evasion.

These illegal causes are of course in interest of governments and authorities. From a corporate social responsibility perspective to taxation it is every citizens obligation to pay taxes if we want to maintain or achieve a welfare state. According to Sikka “All creation of wealth requires co-operation of a variety of competing capitals”. Shareholders provide finance capital, employees provide human capital and the state on behalf of society provides social capital in form of education, healthcare, security etc. and all these expect a requisite return on their investment. Shareholders get in in form of dividends, employees get their salaries and the state in form of taxes.

Financial secrecy has also affected the market economies. The global financial markets make it possible for capital flood around the globe, however the necessary information about the capital is blocked. According to the FSI “free and fair market capitalism requires the free flow of information to reduce risk and strengthen efficiency”. Further, the FSI claims that secrecy distorts markets, shifting investments and financial flows where the owners of capital can extract the greatest gains from secrecy, instead of going where they will be most productive.

The latest financial crisis was powerfully contributed by tax havens according to the Tax Justice Network. Tax havens did not cause it per se, but they contributed in ways such as offering “get out of regulation free” card to financial businesses and these escape routes then helped U.S. and other firms to grow much faster. This in turn gave the businesses political and regulatory “capture” and contributed to the “too big to fail” and “too big to jail” banking problems.

** OECD’s actions **

The organisation for economic co-operation and development have been fighting bank secrecy for years, and they have prepared new tax rules which intend to end bank secrecy. Recently Switzerland among other countries have signed the agreement. Since the economic crisis in 2008, Switzerland and other countries have faced mounting pressure to open up the bank accounts and tax foreign assets. The purpose of the agreement is to promote international co-operation in tax matters through exchange of information. Liechtenstein, Andorra, Monaco and British Crown dependencies like Jersey and Isle of Man have not signed the convention yet.

According to Tax Justice Network since the banking secrecy came under attack by the OECD in 2009 the banks have come up with new ways of achieving factual banking secrecy. Ways of doing this is e.g. not properly checking the identity of the account holder, or having nominees as custodians, trustees, or foundation council members to be acceptable as the only names on bank records.

** Financial Secrecy Index **

The Financial Secrecy Index (FSI), provided by the Tax Justice Network (TJN), highlights ranks jurisdictions according to their secrecy and the scale of their activities. It is a politically neutral ranking system, that is a tool for understanding global financial secrecy, tax havens or secrecy jurisdictions, and illicit financial flows.

The findings that the FSI provide reveal that the traditional stereotype of tax havens is misconceived. The index shows that illicit financial flows that keep developing nations poor are predominantly enabled by OECD countries and their satellites (tax havens like some Caribbean islands or Britain’s Crown Dependencies), which are the main recipients of or conduits for these illicit flows.

//Figure 1: Secrecy jurisdiction ranking 2013, FIS
 * ** Financial Secrecy Index 2013 ** ||  ||   ||
 * ** Rank ** |||| ** Secrecy Jurisdiction ** ||  ||   ||
 * 1 |||| Switzerland ||   ||   ||
 * 2 |||| Luxembourgh ||   ||   ||
 * 3 || Hong Kong ||   ||   ||   ||
 * 4 |||| Cayman Islands* ||   ||   ||
 * 5 || Singapore ||   ||   ||   ||
 * 6 || USA ||   ||   ||   ||
 * 7 || Lebanon ||   ||   ||   ||
 * 8 || Germany ||   ||   ||   ||
 * 9 || Jersey* ||   ||   ||   ||
 * 10 || Japan ||   ||   ||   ||
 * 11 || Panama ||   ||   ||   ||
 * 12 || Malaysia ||   ||   ||   ||
 * 13 || Bahrain ||   ||   ||   ||
 * 14 || Bermuda* ||   ||   ||   ||
 * 15 || Guernsey* ||   ||   ||   ||
 * * British overseas territory or crown dependency. ||  ||
 * If Britain's network were assessed together, it would be at the top. ||
 * * British overseas territory or crown dependency. ||  ||
 * If Britain's network were assessed together, it would be at the top. ||
 * If Britain's network were assessed together, it would be at the top. ||

** **