Many people cite corruption as the biggest obstacle to development, but corruption has many faces. Viewed primarily as a poor country problem, corruption can be the basis for arguing against aid, on the grounds that it will be stolen or wasted. Seeing the global nature of corruption in practice, however, reveals the responsibility of aid donors and other rich countries to address their own culpability. Turns out that rich country financial secrecy can facilitate illicit transfers and even make possible grand corruption, to the tune of billions of dollars. This is why the Tax Justice Network’s Financial Secrecy Index, released last week, is being incorporated into the soon-to-be-released 2013 edition of CGD’s Commitment to Development Index.
Starting with this year’s CDI, each of the 27 countries will be scored on financial secrecy in a new CDI finance component (replacing the old “investment” component), alongside aid, trade, migration, technology, security, and environment. I couldn’t be more delighted, and not only because I’m one of the co-creators of the FSI and work each year on the numbers. The inclusion reflects a growing and welcome consensus that financial secrecy is a significant impediment to development and that phasing it out is an important facet of demonstrating a commitment to development.
The country with the worst score, for its combination of secrecy and scale: Switzerland. Dishonourable mentions also go to the US (6th worst), and – perhaps oddly – the UK. On its own terms, the UK is one of the more transparent jurisdictions, and ranks only 21st worst. However, if the UK’s unrivalled network of linked secrecy jurisdictions were considered together, the ‘British secrecy empire’ would dethrone Switzerland. The Tax Justice Network went so far as to write a letter to the Queen, highlighting the potential corruption threat from the UK’s Crown Dependencies and Overseas Territories. (This is why Prime Minister Cameron’s transparency commitments at both the G8 and Open Government Partnership summits this year are so important; and why campaigners are focused on their being extended to the UK’s linked jurisdictions.)
The Financial Secrecy Index ranks countries and jurisdictions according to their contribution to the global ‘tax haven’ problem – in effect, how much the policies of each pose a risk of corruption and illicit financial flows that damage others.
Published every two years since 2009, the FSI aims to provide a more rigorous basis for research and policy discussions about financial secrecy and to challenge conventional thinking about the nature and drivers of corrupt behaviour. The index quickly became well established and is now used in other publications and indices. For example, the FSI forms part of the Basle Anti-Money Laundering Index, while the OECD’s Bribery and Corruption Awareness Handbook for Tax Examiners and Tax Auditors recommends the FSI as a risk assessment tool.
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The FSI takes into account both financial secrecy and scale. Secrecy scores are calculated from measures of 15 dimensions, grouped into four themes: disclosure of beneficial ownership (who actually owns firms), corporate transparency, tax and financial regulation, and international cooperation. A score for each of the 15 is based on evaluation of specific indicators (49 in total), predominantly published by international organisations like the IMF – click the table for details. The total secrecy score ranges from zero (best) to one hundred (worst); although in practice no jurisdictions have yet scored below thirty.
These secrecy scores are combined with ‘global scale weights’, which reflect each jurisdictions’ contribution to the global total of financial services provided to non-residents. The reason is simple: a listing based only on secrecy scores would fail to distinguish between secrecy that is unused and thus not very important and secrecy which is central to international economic activity and therefore much more likely to be facilitating large scale corruption.
The top ten jurisdictions by secrecy score alone (the likes of Belize and San Marino) have an average secrecy score of 83.4, but in total contribute just 0.07% of the global provision of financial services to non-residents. Their secrecy is undoubtedly an issue, and any jurisdiction doing business with them should be wary of the risk of illicit flows; but globally they are unlikely to be a major part of the problem. The top ten jurisdictions by scale (led by the US and UK with around a fifth of the market each) have an average secrecy score of 59.3 and total global scale weight of 80.4%.
The top ten of the FSI, shown in the table, have an average secrecy score of 69, and total global scale of 58.9%: these jurisdictions combine secrecy with scale, and thus the potential to damage others by facilitating corrupt behaviour and illicit financial flows elsewhere. Among the ten there is quite a range: from the United States, with a secrecy score of 58 but more than a fifth of global market for financial services exports; to Jersey with a secrecy score of 75 but little more than a quarter of one per cent of the market. Index-topping Switzerland combines high secrecy (78) with a substantial global market share (nearly 5%), ahead of tiny Luxembourg, which has a secrecy score of 67 and a striking global scale of 12%). The full results are here.