What is financial secrecy?
Financial secrecy is different from legitimate confidentiality. A bank won’t publish your account details on the internet, in the same way that a doctor won’t hammer details of your personal ailments on the surgery door.
Financial secrecy occurs when there is a refusal to share this information with the legitimate bodies that need it - for example to tax citizens appropriately, or to enforce criminal laws. We are exercised with cross-border financial secrecy, of the kind created by tax havens or secrecy jurisdictions.
Cross-border financial secrecy comes in three main "flavours".
The first is the best-known: plain vanilla bank secrecy – such as the famous Swiss banking secrecy. Bankers promise to take their clients’ secrets to the grave, and criminal penalties often apply to those who break the secrecy.
A second flavour involves jurisdictions allowing the creation of entities and arrangements – whether trusts, corporations, foundations, anstalts or others – whose ownership, functioning and/or purpose is kept secret, and sometimes where the very legal basis of ownership becomes muddied. These structures hold assets - which may include, for example, a Swiss bank account, residential property in central London, a racehorse in Monaco, shares in a S&P 500 company, or a yacht - but if you cannot discover the 'beneficial owner' who has the power to control and enjoy those assets and associated income, they may fall outside the tax net (and, more generally, the rules of society.)
Secrecy provided through an offshore trust, for instance, can be even harder to break than bank secrecy (read more about trusts here.) Offshore companies offered by Delaware in the United States, for example, or by the British Virgin Islands, also offer powerful secrecy facilities, as our BVI and USA jurisdiction reports explain. Essentially, you may be able to find out the names of the 'nominee directors' or 'nominee shareholders' or other officers of the offshore company that owns the assets, but you may well not be able to find the genuine beneficial owner. The assets may even be 'ownerless', where there literally is no legal owner or beneficiary (though of course ultimately, someone will benefit from those assets. See here for a brief explanation of this issue.) The tax haven of Jersey estimated in 2013 that there were some UK£400 billion (US$600 billion) held in Jersey trusts alone. That is just one tax haven: it is therefore safe to say that many trillions of dollars’ worth of assets are held in such structures worldwide.
A third flavour of secrecy relies on jurisdictions putting up barriers to co-operation and information exchange. This may be through refusing to exchange information, or deliberately refusing to pursue and collect information held locally: even impeccable information-exchange agreements with other jurisdictions are worthless if the information isn't available to exchange in the first place. Many jurisdictions such as Dubai or Bahamas have also made a business model out of selective non-compliance with their own laws, and also being deliberately lax on enforcement: this example from the UK shows how devastating the consequences can be. The aggressive (and sometimes extra-legal) pursuit of financial whistleblowers is another way to reinforce secrecy, as this case in Switzerland illustrates.
Many jurisdictions provide narrow 'gateways' through these secrecy facilities, for example, in response to judicial requests, but this is a slippery area, and often unexpected obstacles emerge to block or restrict these gateways. What is more, it is typically much harder or even impossible for less politically powerful players - whether those be media investigators, or the governments of developing countries - to obtain useful information from secrecy jurisdictions.
Many of these three main flavours – particularly the second and the third kinds - involve complex, devious subterfuges that are tough to identify. The FSI is the first ever comprehensive global effort to identify such facilities, and weigh them in importance.
Chart 1 strips out the weighting from the FSI and focuses purely on the secrecy score, revealing how the 93 jurisdictions are distributed across the secrecy spectrum. They range from exceptionally secretive (Vanuatu and Samoa, indicated by the red bar), to moderately secretive (Finland and Denmark, indicated by the dark green bar). Clearly much more needs to be done to tackle this global scourge. (Click here for our ranking by secrecy score only.)
|Chart 1: KEY
The bars in this chart range between red indicating exceptionally secretive, to dark green indicating moderately secretive. See here for the country codes used in this chart.
Looking at all this in a more positive light, it is also important to identify what financial transparency is, as a guide to best practice and where we should be heading. As our 2015 FSI press release indicates, there have been meaningful improvements in the past couple of years.