Fare luce nelle zone oscure

Secrecy is a central feature of the global financial system. Jurisdictions compete with each other to provide it, in order to attract financial flows – with appalling effects elsewhere. It is essential to identify the worst culprits in providing this secrecy. But nobody has ever tried to do this in a systematic, objective way – until now.

The Financial Secrecy Index (FSI) creates a ranking which identifies the jurisdictions that are most aggressive in providing secrecy in international finance, and which most actively shun co-operation with other jurisdictions. It attaches a weighting to each jurisdiction, according to the scale of cross-border financial services activity that it hosts.

The two measures – the opacity score, and the weighting, are combined to create the Financial Secrecy Index. Nothing like this has been done before.

What the Index reveals

Most of the jurisdictions listed in the FSI have been described as tax havens. There is a tendency to think of the secrecy providers as “sunny places for shady people” - palm fringed Caribbean islands filled with shady law firms, luxury yachts and the brass plates of anonymous shell companies.

The FSI reveals a much bigger story. The major global players in the supply of financial secrecy are mostly not tiny, isolated islands, but rich nations operating their own specialised jurisdictions of secrecy, often with links to smaller ‘satellite’ jurisdictions which act as conduits for illicit financial flows into the mainstream capital markets.

Why this matters

The World Bank has endorsed estimates by Washington-based Global Financial Integrity (GFI) in 2005 that illicit financial flows across borders range between 1.0 and $1.6 trillion per year. In 2009, GFI calculated illicit cross-border flows out of developing countries alone at approximately $850 billion - $ 1 trillion. With annual global foreign aid flows currently averaging some $100 billion per year, this led Raymond Baker, GFI's Director, to conclude in testimony before the U.S. House of Representatives that

“for every dollar Western governments have been handing out across the top of the table, crooked Western banks, businesses and middlemen of various descriptions have been taking back up to ten dollars of illicit proceeds under the table.”

International financial secrecy, and the jurisdictions that sell it, are at the heart of the matter. The time has come to identify the culprits.

Which jurisdictions are included in the FSI, and why?

The FSI includes every one of the 60 jurisdictions identified by the Mapping the Faultlines project (see below), our 18 month research programme funded by the Ford Foundation, which started to come online in early October 2009.

We know from our extensive research that the core selling point of what are popularly known as "tax havens" is not tax, but secrecy. Tax considerations, and others, are always secondary to the provision of secrecy.

We therefore use the term "secrecy jurisdiction" instead. What secrecy jurisdictions do, above all, is to provide facilities that enable people or entities to undermine the laws, rules or regulations of other jurisdictions, using secrecy as their prime tool.

Mapping the Faultlines: a journey into the unknown

At the start of 2008 a small team of explorers set out to map the secretive world of illicit financial flows and secrecy jurisdictions. The result is Mapping the Faultlines, the biggest survey of secrecy jurisdictions ever undertaken. With an ambitious scope, and extensive project findings, Mapping the Faultlines is designed to complement the work of GFI and to provide a freely available tool for others to explore the mechanisms of illicit financial flows.

The first stage of Mapping the Faultlines was designed to identify the jurisdictions and mechanisms used to facilitate illicit financial flows worldwide, including especially flows from developing countries. The Financial Secrecy Index is the first of several projects in the second stage, which involves analysis of the data and findings in the first stage. A third stage will recommend policy measures to address the issues identified.

How the Financial Secrecy Index is calculated

The ranking combines two broad measures, one qualitative, and one quantitative. The first, qualitative, measure, is an Opacity Score based on verifiable sources, which looks at laws, regulations, cooperation with information exchange processes and so on. The second, quantitative, measure, attaches a Weighting.

We consider the Opacity score to be the most important of the two components, for it assesses how aggressive a jurisdiction has been in providing secrecy, and it is this score which jurisdictions can change by taking appropriate policy measures to make their financial systems more transparent. It is judged on 12 Key Financial Secrecy Indicators. In our calculations combining the two criteria, we have therefore given it an added emphasis.

The quantitative data, weighting each secrecy jurisdiction according to its scale of cross-border financial services activity, uses either data on cross-border trade in financial services or, where that data is not available, estimates of holdings of foreign portfolio assets.

The quantitative and qualitative datasets are combined arithmetically by simple multiplication to produce a Financial Secrecy Index which ranks secrecy jurisdictions according to their degree of opacity and the scale of their cross-border financial services activity.

What does the ranking tell us about the 60 different jurisdictions covered by the Index?

The Mapping the Faultlines project created Jurisdiction Reports for each of the 60 jurisdictions included in the FSI. These reports reveal the opacity scores for each jurisdiction, and explain how the score can be improved upon.

Financial Secrecy and Corruption

Corruption indices tend to point the finger at African and other impoverished nations as the world’s “most corrupt” countries. Yet there is clearly something badly amiss here, since these countries are generally the victims of illicit financial flows. It is essential to identify the jurisdictions that are most to blame for handling and receiving these gigantic flows. It does not help a Nigerian citizen much to be informed that her country is among the world’s most corrupt. She will want to know where all the oil money has gone to. So it is essential to identify the jurisdictions that are most to blame for handling and receiving these gigantic flows too. The FSI reveals the other side of the coin.

This has enormous significance for questions of corruption, and needs to herald a “second wave” in global understandings and definitions of, and solutions to, that terrible problem.

The OECD blacklist

In April 2009, following the London G-20 summit, the Organisation for Economic Co-operation and Development (OECD) announced a black / grey / white list system for categorising financial centres which fail to co-operate with other jurisdictions on tax and transparency issues. Unfortunately – and despite good intentions – the result has been more of a whitewash than a blacklist.

The British Connection

Over half of the secrecy jurisdictions ranked on the FSI are closely connected to Britain, either through their status as Crown Dependencies or British Overseas Territories, or through membership of the Commonwealth of Nations (formerly the British Commonwealth).

The Economic Crisis

Many economists have asserted that secrecy jurisdictions had little or nothing to do with the financial crisis that emerged in mid-2007. This analysis is based on a flawed understanding of the nature of secrecy jurisdictions: a widespread misconception that these places are only the palm-fringed islands like Cayman.

For example, the Bank for International Settlements, in a report on September 2009 on Special Purpose Entities (which played a major role in the crisis), said that the most common jurisdictions for U.S. securitisations are the Cayman Islands and Delaware, describing Cayman as “offshore” and Delaware as “onshore.” As the Financial Secrecy Index shows, Delaware is a major secrey jurisdiction, and certainly not “onshore.” In fact, Delaware's "offshore" characteristics are the key reasons why the SPEs organised themselves there.

The team behind the Index

The FSI has involved a major research programme using data largely compiled for the Mapping the Faultlines Project. Both projects have been carried out by small teams of dedicated personnel.