How does secrecy affect market economies?

Fair international trade has the potential to generate tremendous economic growth and spread benefits widely – but it has failed to live up to its promise. Cross-border finance in particular has been revealed, especially since the latest crisis, to be especially problematic. Secrecy is a key reason for this failure.

Secrecy jurisdictions are not a peripheral issue but one of the most important facets of globalised financial markets.

The top six jurisdictions in the FSI account for half of the global trade in offshore financial services. According to some measures, over half of banking assets and liabilities are routed through secrecy jurisdictions; more than half of world trade passes (on paper) through them; virtually every major multinational company uses secrecy jurisdictions for a variety of unspecified purposes, and at least US$21 trillion of private financial assets are held in offshore structures worldwide, largely escaping taxes, criminal laws, financial regulation and disclosure.

Tides of capital now flood around the globe - but the necessary information about that capital is blocked. Free and fair market capitalism requires the free flow of information to reduce risk and strengthen efficiency. Investors, regulators, tax authorities, economists, civil society, and many other groups and classes of people require this information for markets to work effectively. The FSI, however, suggests that cross-border secrecy is at the heart of contemporary global financial capitalism.

Secrecy distorts markets, shifting investments and financial flows away from where they will be most productive and towards where the owners of capital can extract the greatest gains from secrecy. It hinders effective regulation and law-making, and enables rent-seeking, as insiders reap the gains from global markets while shifting the costs and risks on to the shoulders of others. The result of this distortion and corruption of markets is a world of steepening inequality, rampant crime and impunity for élites in rich and poor countries alike.

By identifying the providers of secrecy, the FSI turns the spotlight on the jurisdictions which prevent international trade and markets from benefiting the majority of the world’s population.

Secrecy jurisdictions also played a central role in fostering the conditions for the latest global financial crisis, and served as the main cross-border transmission belts for shocks and contagion during the various stages of crisis. Read more on all this here.