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Piercing the Veil of Financial Secrecy

Submitted by: Francesca Rheannon

Posted: Nov 01, 2011 – 10:36 PM EST

Tags: financial secrecy, finance, tax, occupy wall st, ows, csr

 
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By Francesca Rheannon

A new index out from the Tax Justice Network goes behind the veil of financial secrecy that keeps trillions in global revenues from being properly taxed and available to national budgets. 

Occupy Wall Street just released its first financial report. The group received nearly $455,000 between September 16 and October 18 and has spent a little over a tenth of that, resulting in a substantial budget surplus—pretty fiscally responsible for a bunch of so-called anarchists.

But even more responsible is the group released the report in the interests of full financial transparency, modeling the kind of behavior it would like to see from global corporations, banks and investment houses. It’s an example the world financial community is largely failing to follow, according to a new report out from the Tax Justice Network, a pro-financial transparency group based in the UK. The group has devised a Financial Secrecy Index (FSI), rating 73 “secrecy jurisdictions” (or tax havens) on both their level of secrecy and scale of their activities.

The days of the international tax haven were supposed to be over. At least that’s what was claimed in 2009 when the G20 declared a “dramatic crackdown on tax havens” and the OECD (a.k.a. “rich countries club”) came out with a list of countries that were deemed to be violating guidelines for an “internationally agreed tax standard.” On the list were the usual suspects like Luxembourg and Hong Kong. The only trouble is some other countries given a passing grade, like Britain and the US (both members of the OECD), are huge tax havens themselves, as has been detailed in Nicholas Shaxson’s book Treasure Islands.

Shaxson, who helped create the Financial Secrecy Index, told CSRwire that one purpose of the FSI was to serve as an antidote to the hypocrisy of the OECD list, which he said singles out relatively small players in the whole offshore system. “We take the view that tax havens, if you look at what a tax haven is and the services it provides and you look at which jurisdictions provide those services, you find that a lot of the biggest ones are big OECD countries.”

And those countries are, in fact, “the main recipients from illicit flows from developing nations,” the Index states. That money makes up about half of the $1 – 1.6 trillion per year streaming around the globe under the cover of secrecy, according to the World Bank’s Stolen Asset Recovery (StAR) initiative. Corruption indices like that published by Transparency International are useful but misleading, Shaxson says. “The problem is that the most corrupt countries will tend to be poverty-stricken nations in Africa and elsewhere and the cleanest, least corrupt countries are deemed to be places like Switzerland and Singapore, which are massive tax havens, massive sinks for dirty money sluicing out of developing countries.” The Index estimates that for every dollar in global aid to developing countries, $10 “flows back, under the table.”

The Tax Justice Network calculated in 2007 off shore tax havens shielded over $255 billion in global tax revenue in the previous year, something the magazine Forbes reported. Of course, Forbes thought this was a great thing, but the FSI says the costs are staggering:

Secrecy distorts trade and investment flows, and creates a criminogenic environment for a litany of evils that hurt the citizens of rich and poor countries alike: fraud, evasion and avoidance of financial regulations, insider dealing, embezzlement, wholesale bribery, non-payment of alimony, money laundering, tax evasion and much more besides.

That “criminogenic environment” is facilitated by structural impediments to transparency, such as the laws, regulations, instruments (like offshore trusts) and international treaties that countries use to shield revenues from reporting. The FSI ranks the level of secrecy of the 73 jurisdictions it examines by focusing on these structural enablers. The narrative states the reason: “Because the core business of secrecy jurisdictions is to facilitate criminal and other activities carried out elsewhere, … financial secrecy must be analyzed according to how laws and regulations in one jurisdiction change the behavior of others…”

The FSI then weights the data according to the size and overall importance (to the global financial markets) of the jurisdiction. So, while the Cayman Islands took the Number Two spot on the rankings, as might be expected for this classic offshore tax haven, the US took Number Five. Switzerland topped the list, and the UK came in at Number 13.

CSRwire asked Nicholas Shaxson whether financial secrecy fits into the issues of economic inequality and “too big too fail” spotlighted by the Occupy Wall Street movement. He responded the link is much more direct than most people think: “What tax havens provide is a route for financial and other corporations to escape what they don't like, be it financial regulation, be it taxes, be it disclosure. These escape routes allow them to grow their profits much faster and to become much bigger. The financial sector in the US would be much, much smaller than it is today were it not for tax havens.”

It also leads to a form of economic blackmail, Shaxson says, “not only to escape but also to use the threat of escape as a kind of bludgeon to threaten to elected officials. ‘Don't regulate us too much or we'll run off to London or to Geneva’ and when politicians hear that, they get scared and they say, ‘OK, we'll give them what they want.’”

Shaxson called the City of London “probably the biggest escape route for Wall Street.” So is it any surprise the City was about to serve an eviction notice on Occupy the London Stock Exchange? As of this writing, the City was going to give the protest encampment 48 hours to get off the land it owns in the vicinity of St. Paul’s Cathedral. (Update: The eviction has been cancelled.)

Maybe, instead of the beating the protesters, it ought to join them in calling for financial transparency on the world financial markets. That might really spell the end of international tax havens.

About Francesca Rheannon

Francesca is CSRwire's Talkback Managing Editor. An award-winning journalist, Francesca is co-founder of Sea Change Media. She produces the Sea Change Radio’s series, Back to The Future, and co-produces the Interfaith Center of Corporate Responsibility’s podcast, The Arc of Change. Francesca’s work has appeared at SocialFunds.com, The CRO and E Magazine, and she is a contributing writer for CSRwire. Francesca hosts the nationally syndicated radio show, Writer's Voice with Francesca Rheannon.

This commentary is written by a valued member of the CSRwire contributing writers' community and expresses this author's views alone.

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