US Overtakes Switzerland In Financial Secrecy Index

Chris Hamblin Editor Compliance Matters 19 February 2020

US Overtakes Switzerland In Financial Secrecy Index

A "tax justice" campaign group claims the US is now more secretive as a jurisdiction than Switzerland, while the Cayman Islands is at the top of the organization's rankings. The results are ironic because the US has led a charge against Swiss offshore bank accounts over the past decade.

(Compliance Matters is a sister news service of this one. Some additonal commentary from Family Wealth Report.)

A biennial study of financial secrecy produced by campaign group the Tax Justice Network claims that the world is opening up. The US has leapfrogged Switzerland - the traditional home of bank secrecy - while the Cayman Islands holds top spot.

The details come from the TJN's Financial Secrecy Index 2020, published today.

On average, the organization said countries cut contribution to financial secrecy by about 7 per cent. The group's claims about the iniquities of international financial centers are contested. Its indices sometimes help money-laundering reporting officers (MLROs) determine country risk.

However, a handful of jurisdictions that account for a large share of the world's financial services have bucked the trend, most notably the US, the Cayman Islands and the United Kingdom. With Switzerland finally improving enough to move off the top of the index, the TJN states: "an Anglo-American axis of secrecy now constitutes by far the greatest global threat of corruption and tax abuse."

Even before the global financial crisis of 2008, groups such as TJN and the Organisation for Economic Co-operation and Development were pressing to open up offshore centers, and indeed more "onshore" ones, by making them publish more information about who are beneficial owners of companies and trusts. (Industry figures fear this will endanger legitimate financial privacy.) Campaigners allege such centers contribute no value to the global economy and exist only to let the wealthy, politically-well connected figures and criminals (often the same persons) hide money. Defenders, such as the CATO Institute, the Washington DC-based think tank, argue that these centers defend against rapacious governments and criminals. Such centers limit how far governments can go in taxing citizens, creating a firewall against attempts to confiscate wealth. Defenders say they also enable people working outside their home countries to get access to reliable financial services instead of having to tear up arrangements every few years. Another argument in their defense is that they prevent double-taxation, and that they are hubs of valuable business expertise.

Swiss private bankers might be bemused by the TJN report. A decade ago, the US was instrumental in going against banks such as UBS that provided offshore accounts for wealthy Americans. The US and Switzerland in 2013 agreed a program under which scores of Swiss financial firms settled sums and entered non-prosecution agreements. Switzerland is also a signatory to the Common Reporting Standard framework under which countries exchange data to root out tax cheats. Ironically again, the US is not a signatory to the CRS.

Switzerland dethroned
The sixth edition of the biennial index marks the first time since 2011 when Switzerland did not occupy the top spot. This is the Cayman Islands' first premier ranking. The top 10 biggest enablers of financial secrecy in the world according to the TJN are:

1.          Cayman Islands

2.          United States

3.          Switzerland

4.          Hong Kong

5.          Singapore

6.          Luxembourg

7.          Japan

8.          Netherlands

9.          British Virgin Islands

10.        United Arab Emirates

In compiling its rankings the TJN examines every country’s legal and financial system to see how well it allows wealthy individuals and criminals to hide and launder money. Each country’s legal and financial system receives a "secrecy score" out of 100, with 100 representing full secrecy. The TJN then combines the country’s score with the volume of financial activity conducted in the country by non-residents. If a jurisdiction is, for example, ranked 10th on the index this does not mean that the TJN thinks that it is the 10th most secretive; instead, it means that it believes it to play the 10th most effective part in making banking secretive and promoting anonymous shell company ownership, anonymous real estate ownership or other forms of financial secrecy, which in turn help money launders and tax evaders.

The TJN sees Samoa as a highly secretive jurisdiction that provides few or no financial services to non-residents (another of its bugbears), but ranks it below Japan (see above), a moderately secretive jurisdiction that is nonetheless a major financial force in the world.

The Cayman Islands have increased their supply of financial secrecy to the world by 24 per cent, moving them up from third on the 2018 index to first today. This is because this jurisdiction has increased the volume of financial services provided to non-residents by 21 per cent. It is also partly due to its secrecy score increasing by 4, from 72 to 76 out of 100, after they "failed to keep up with methodological updates to the Financial Secrecy Index that reflect the evolving nature of the financial secrecy landscape." The TJN particularly singles out the Cayman Islands' hedge fund industry for opprobrium.

The Granite State
The US's rise on the index springs from the passage of a law in New Hampshire allowing non-charitable private foundations to be set up without the need to divulge the founders' identities, beneficiaries or beneficial owners to the authorities.  Switzerland has helped itself in the eyes of the TJN by automatically exchanging information about the financial activities of non-resident individuals, corporations and legal vehicles with more and more countries in accordance with the Common Reporting Standard. The US has yet to sign up to that standard, which has 105 signatories. Switzerland’s score has also lessened because fewer non-residents keep their money there.

In October the US House of Representatives passed a Bill — the Corporate Transparency Act - to end the abuse of anonymous companies. The Senate Banking Committee is considering similar legislation, which it calls the ILLICIT CASH Act. 

UK - going backwards?
The UK has increased its "secrecy score" by four marks, more than any other country, both at home and its network of associated jurisdictions. Its overall supply of financial secrecy to the world, however, has risen by 26 per cent since 2018, moving it up from 23rd to 12th. The City of London receives wealth via these satellites, including the British Virgin Islands, which ranks 9th and Guernsey which ranks 11th on the TJN ranking.

These jurisdictions on average increased their supply of financial secrecy to the world by 17 per cent over the last two years, the TJN said, which is more than double the rate at which countries around the world on average reduced their supply to global financial secrecy. If the UK and its network of Overseas Territories and Crown Dependencies were treated as a single entity, they would rank first on the index.

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