As FATCA nears, US is accused of hypocrisy in attacking offshore secrecy while keeping its own

The United States, the author of the 2010 Foreign Account Tax Compliance Act (FATCA) that seeks to track down US persons who have financial accounts in other countries that serve to evade US taxes, is hypocritical and does not practice what it preaches, says a landmark “Financial Secrecy Index” released by the independent, London-based Tax Justice Network.

The Index accuses the United States of being “a major tax haven because it provides tax free treatment and various forms of secrecy for non-resident individuals, corporations and other entities.” (

The Tax Justice Network (TJN) report of November 2013 also says the US “has played a pioneering role in devising ways to defend itself against foreign tax havens, but has failed to address its own role in attracting illicit financial” flows and assets.

The amount held in “secrecy jurisdictions” worldwide, TJN says, amount to “$21 to $32 trillion of private financial wealth… located, untaxed or lightly taxed, in secrecy jurisdictions around the world.”

(Because of the seminal importance of the index and report of the Tax Justice Network, in coming weeks will cover additional portions applicable to other nations.)

Secrecy has broad, deep worldwide consequences, TJN says

TJN places its work and its index in a broad context beyond mere taxes:

“The problems go far beyond tax. In providing secrecy, the offshore world corrupts and distorts markets and investments, shaping them in ways that have nothing to do with efficiency. The secrecy world creates a criminogenic hothouse for multiple evils including  fraud, tax evasion and aggressive tax avoidance, escape from financial regulations, embezzlement, insider dealing, bribery, money laundering, and plenty more. It provides multiple facilities for insiders to extract wealth at the expense of societies elsewhere, creating political impunity and undermining the healthy ‘no taxation without representation’ bargain that has underpinned the growth of accountable modern nation states. Instead of depending on tax, many countries are forced to depend on foreign aid….This is not just a ‘developing country’ issue: it hurts citizens of rich and poor countries alike.”

The index ranks 82 jurisdictions “according to their secrecy and the scale of their activities.” It said the index “is a tool for understanding global financial secrecy, tax havens or secrecy jurisdictions, and illicit financial flows.”

The secrecy rankings are based on a combination of scores by which jurisdictions are given “secrecy points” and ranked on the share of the offshore financial services market they hold. Thus, countries such as the US, which was assessed 58 secrecy points out of 100, or the mid-range, ranked 6th overall because it accounts for 22 percent of the global financial services market.

Some Surprises in the “Top 10”

Using these criteria, the Index produced some surprises among the top 10 secrecy jurisdictions:

  1. Switzerland
  2. Luxembourg
  3. Hong Kong
  4. Cayman Islands
  5. Singapore
  6. United States
  7. Lebanon
  8. Germany
  9. Isle of Jersey
  10. Japan

The United States

The report highlights the problems and the implicit hypocrisy of nations, such as the United States, that fight to eliminate offshore havens to prevent the outflow of money from their taxpayers, but do little to avoid attracting money, legal or illicit, from other countries or to help them combat tax evasion.

An example of this lack of cooperation is found in the FATCA Intergovernmental Agreements the US has signed. Some of them contain explicit language about the need for the US to improve the exchange of information about foreigners who maintain assets in the US. In some cases, the language cites the need for new US legislation to facilitate this cooperation.

Major factors that rank US as offshore secrecy haven

The United States earned its 6th place rank in the FSI ratings principally because of the following factors, which the report says “help the United States attract foreign dirty money” and “arise from deliberate law-making rather than mere omission.”

  • Imposes a zero tax rate on non-resident individuals or foreign corporations from some categories of income, including interest paid by banks and savings institutions,
  • Imposes a zero tax rate on interest on government and some corporate obligations,
  • Has weak and relatively few treaty obligations to exchange relevant information with other jurisdictions,
  • Historically, the US has not required income earned in the US by non-residents to be reported to the US government. (Starting in 2013, information reporting is in place for interest from bank deposits earned by US residents from other nations.),
  • Gaps in US money laundering laws allow US financial institutions to handle the proceeds of a long list of foreign crimes if they are committed outside the US, (Title 18, US Code Section 1956),
  • A significant portion of US residential and commercial property is owned by offshore shell companies,
  • Company incorporation procedures in the US are governed by state, not federal law. Several states specialize in hosting corporations that provide secrecy, the report says.

UK territories combined are world’s largest secrecy haven

The United Kingdom, which lately has sought to reduce secrecy in its overseas territories, has a lot of work to do. Twenty one of the 82 jurisdictions ranked by the secrecy index are British territories. The Tax Justice Network says if they were evaluated as one jurisdiction they would rank first in the secrecy index, exceeding Switzerland by a large margin.

Other nations that occupy the top 30 positions include surprises like Australia, Norway, Brazil, Sweden and South Africa.

Beneficial ownership a well-guarded secret worldwide

Access to information continues to be a huge worldwide problem in the search for transparency. According to Tax Justice Network, none of the 82 jurisdictions required the automatic disclosure of beneficial ownership information to public authorities by means of a registry or on the Internet.