Financial Secrecy Index Shedding light on global financial secrecy

2016 Annual Meeting of Community of Practice on Composite Indicators and Scoreboards

29 September 2016

Markus Meinzer, TJN, Director

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Overview

1. Motivation & Conceptual Issues

2. Index structure – FSI qualitative component: Secrecy score

– FSI quantitative component: Global scale weight

– Combination Secrecy score * Global scale weight

3. Results FSI 2015

4. Outlook – FSI Review 2016

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• FSI published by Tax Justice Network. Identifies and ranks secrecy jurisdictions (‘tax havens’) by their contribution to opacity in international finance

• Long-term project: 60 jurisdictions (2009), 73 (2011), 82 (2013) and 102 (2015)

• Two broad objectives:

1. Research: by collecting data and providing an analytical framework for (facilitation of) illicit financial flows

2. Impact: initiate, support and monitor policy changes globally towards more financial transparency by engaging the media, policy makers & academia

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1. Motivation & Conceptual Issues

“America, the country that has arm-twisted so many others to join the transparency revolution, is dragging its feet.”

FINANCIAL SECRECY INDEX OECD’s GLOBAL FORUM

“Ready to Move to Phase 2”

“No longer subject to monitoring” “One of the most reliable predictors of a country’s dealings with Mossack Fonseca is how it scores on the Financial Secrecy Index”

FSI: “Panama # 13”

All Countries

1. Motivation & Conceptual Issues

Panama Papers

• Concern for harm caused by „tax havens“ and „illicit financial flows“

• Yet no agreed definitions of “tax havens“, “offshore financial centres“ or even “offshore finance“ (Cobham/Jansky/Meinzer 2015)

• “you know it when you see it“ approach (Gordon/IRS 1981)

Inconsistent listings and policies towards “tax havens“

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1. Motivation & Conceptual Issues

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Graph 2: Jurisdictions’ incidence on international tax haven listings How many of the 84 jurisdictions are listed on how many international tax

lists (out of 8)?

𝑁𝑗𝑢𝑟𝑖𝑠𝑑𝑖𝑐𝑡𝑖𝑜𝑛𝑠 𝑜𝑛 1 𝑙𝑖𝑠𝑡

𝑁𝑗𝑢𝑟𝑖𝑠𝑑𝑖𝑐𝑡𝑖𝑜𝑛𝑠 𝑜𝑛 𝑎𝑙𝑙 8 𝑙𝑖𝑠𝑡𝑠 = 3.4

𝑁𝑗𝑢𝑟𝑖𝑠𝑑𝑖𝑐𝑡𝑖𝑜𝑛𝑠 𝑜𝑛 1 𝑙𝑖𝑠𝑡

𝑁𝑗𝑢𝑟𝑖𝑠𝑑𝑖𝑐𝑡𝑖𝑜𝑛𝑠 𝑜𝑛 𝑎𝑙𝑙 8 𝑙𝑖𝑠𝑡𝑠 = 2.2

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Quelle: http://www.ft.com/cms/s/0/23f1cffa-1696-11e5-9883-00144feabdc0.html#axzz3pmCAGFhp; 27.10.2015.

Quelle: http://www.volksblatt.li/nachricht.aspx?p1=fl&id=97599&src=vb; 27.10.2015.

Quelle: http://bernews.com/2015/06/bermuda-blacklisted-latvia/; 27.10.2015.

22 June 2015: 29 June 2015: 12 Oct 2015

1. Motivation & Conceptual Issues

Why is there no consistent definition and identification of ‘tax havens‘, and why have attempts to address problems associated with them failed? • Blacklist approaches are difficult to insulate from political influence.

• ‘Tax havenry‘ is a matter of degree, not a binary variable (Wójcik 2012: 7); “virtually any country might be a `haven’ in relation to another” (Picciotto 1992: 132).

• Tax is not the crucial element for problems created by ‘tax havenry‘ – rather, secrecy is (Murphy 2008).

‘Secrecy jurisdiction‘ is a potentially more useful and accurate concept (broadly defined and explored first by Murphy 2008).

• Definition: A secrecy jurisdiction 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.

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1. Motivation & Conceptual Issues

2. Index Structure

SECRECY SCORE GLOBAL SCALE WEIGHT

COMBINATION

FSI measures contribution to global financial secrecy via two components: (Secrecy Score) How much opacity each jurisdiction offers to non-residents (to allow them to escape/undermine laws, rules, taxes elsewhere) WEIGHTED BY (Global Scale Weight) The jurisdiction’s market share of financial services for non-residents (based on IMF’s Zoromé 2007)

• Secrecy Score fed by 15 equally weighted Key Financial Secrecy Indicators (KFSIs)

• All data feeding the KFSIs is publicly available in database reports, fully referenced to public data sources

• A maximum of 46 variables feeds the KFSIs, and the database reports contain up to 204 variables for each of the 102 countries

• Principle of data analysis: lowest available transparency denominator is decisive

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2. Index Structure

Lowest available

transparency denominator!

2. Index Structure

Global Scale Weight for jurisdiction i is defined as:

𝐸𝑥𝑝𝑜𝑟𝑡𝑠 𝑜𝑓𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑠𝑒𝑟𝑣𝑖𝑐𝑒𝑠 (𝑡𝑟𝑢𝑒 𝑜𝑟 𝑒𝑥𝑡𝑟𝑎𝑝𝑜𝑙𝑎𝑡𝑒𝑑)𝑖

𝑆𝑢𝑚 𝑜𝑓 𝑎𝑙𝑙 𝑤𝑜𝑟𝑙𝑑 𝑒𝑥𝑝𝑜𝑟𝑡𝑠 𝑜𝑓𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑠𝑒𝑟𝑣𝑖𝑐𝑒𝑠 (𝑡𝑟𝑢𝑒 & 𝑒𝑥𝑡𝑟𝑎𝑝𝑜𝑙𝑎𝑡𝑒𝑑)

Data FSI All

‘True‘ data (BOPS) 66/102 125/247

Extrapolations - asset data (IIP/CIPS) 10/102 25/247

Extrapolations - liability data (CIPS) 25/102 71/247

No data 1/102 24/247

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2. Index Structure

• Both components are combined in the following way in order to attribute an FSI value to each jurisdiction i:

• An example to illustrate reason for combination:

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𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑆𝑒𝑐𝑟𝑒𝑐𝑦 𝐼𝑛𝑑𝑒𝑥𝑖

= 𝑆𝑒𝑐𝑟𝑒𝑐𝑦 𝑆𝑐𝑜𝑟𝑒𝑖3 ∗ 𝐺𝑙𝑜𝑏𝑎𝑙 𝑆𝑐𝑎𝑙𝑒 𝑊𝑒𝑖𝑔ℎ𝑡𝑖

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2. Index Structure

Whose secrecy provisions pose a bigger risk?

2. Index Structure

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2. Index Structure

Ranking FSI

1 Switzerland

2 Hong Kong

3 USA

4 Singapore

5 Cayman Islands

6 Luxembourg

7 Lebanon

8 Germany

9 Bahrein

10 Dubai / UAE

Average of SS 68.0

Sum of GSW 56.5%

Secrecy Score Global Scale Weight

Vanuatu United States

Samoa United Kingdom

Liberia Luxembourg

St. Lucia Germany

Brunei Darussalam Switzerland

Antigua & Barbuda Cayman Islands

Lebanon Singapore

Marshall Islands Hong Kong S.A.R.

Bahamas France

Belize Ireland

81.9 57.4

0.5% 78.7%

FSI TAX HAVEN LISTS

3. Results FSI 2015

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RANK Jurisdiction FSI Value4 Secrecy Score5 Global Scale Weight6

1 Switzerland2 1.466,1 73 5,625

2 Hong Kong2 1.259,4 72 3,842

3 USA2 1.254,8 60 19,603

4 Singapore2 1.147,1 69 4,280

5 Cayman Islands1,2 1.013,2 65 4,857

6 Luxembourg2 817,0 55 11,630

7 Lebanon2 760,2 79 0,377

8 Germany2 701,9 56 6,026

9 Bahrain2 471,4 74 0,164

10 United Arab Emirates (Dubai)2,3 440,8 77 0,085

11 Macao 420,2 70 0,188

12 Japan2 418,4 58 1,062

13 Panama2 415,7 72 0,132

14 Marshall Islands 405,6 79 0,053

15 United Kingdom1,2 380,2 41 17,394

16 Jersey2 354,0 65 0,216

17 Guernsey 339,4 64 0,231

18 Malaysia (Labuan)3 338,7 75 0,050

19 Turkey 320,9 64 0,182

20 China 312,2 54 0,743

21 British Virgin Islands1,2 307,7 60 0,281

FSI 2015 - FINAL RESULTS

3. Results FSI 2015

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1. Independent Statistical Audit by JRC, ongoing

2. FSI expert stakeholder survey, January to March 2016 – Collecting feedback and suggestions for

improvement

– Testing support for suggested changes

– 86-136 respondents

– economics, accounting, law and political science

– experts within civil society; international institutions; rating agencies; tax authority officials

3. Reform proposal, ongoing (end 2016)

4. Outlook – FSI Review 2016

Literature • Cobham, Alex/Janský, Petr/Meinzer, Markus 2015: The Financial Secrecy Index: Shedding New Light on

the Geography of Secrecy, in: Economic Geography 91: 3, 281–303.

• Gordon, Richard/Internal Revenue Service - US Treasury 1981: Tax Havens and Their Use by United States Taxpayers - an Overview (13.1.1981), Washington, DC.

• Hines, James R./Rice, Eric M. 1994: Fiscal Paradise: Foreign Tax Havens and American Business, in: Quarterly Journal of Economics 109: 1, 149-182.

• Johannesen, Niels/Zucman, Gabriel 2014: The End of Bank Secrecy? An Evaluation of the G20 Tax Haven Crackdown, in: American Economic Journal: Economic Policy 6: 1, 65-91.

• Meinzer, Markus 2016: Towards a Common Yardstick to Identify Tax Havens and to Facilitate Reform, in: Rixen, Thomas/Dietsch, Peter (Eds.): Global Tax Governance – What is Wrong with it, and How to Fix it, Colchester, 255-288.

• Murphy, Richard 2008: Finding the Secrecy World. Rethinking the language of ‘offshore’, in: http://www.taxresearch.org.uk/Blog/2008/08/27/finding-the-secrecy-world/; 8.9.2008.

• Murphy, Richard 2009: Where are the World’s Secrecy Jurisdictions? , Downham Market, in: http://www.secrecyjurisdictions.com/PDF/SJ_Mapping.pdf; 18.07.2013.

• Palan, Ronen/Murphy, Richard/Chavagneux, Christian 2010: Tax Havens. How Globalization Really Works, London.

• Picciotto, Sol 1992: International Business Taxation. A Study in the Internationalization of Business Regulation, London.

• United States Senate - Committee on Finance 2002: Grassley Works to Stop Abusive Tax Shelters, Corporate Flight (May 10, 2002), Washington, DC, in: http://www.finance.senate.gov/newsroom/ranking/release/?id=770c61f8-32ad-4ca9-b447-0c22ea0b7df7; 30.9.2013.

• Wojcik, Dariusz 2012: Where Governance Fails: Advanced Business Services and the Offshore World, in: Progress in Human Geography, 1-18.

• Zoromé, Ahmed 2007: Concept of Offshore Financial Centers: In Search of an Operational Definition (IMF Working Paper), Washington D.C., in: http://www.imf.org/external/pubs/ft/wp/2007/wp0787.pdf; 26.9.2011.

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Thank you!

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More Information: http://www.financialsecrecyindex.com

http://www.taxjustice.net

http://www.treasureislands.org/