Spurred by weak beneficial ownership standards and a heftier percentage of assets controlled by convoluted corporate structures, the United States has become the second largest tax haven in the world, trailing only historical opacity bastion Switzerland.

Those are just some of the latest findings published this week in a report by the Tax Justice Network (TJN), a financial transparency watchdog group. Updated for the first time since November 2015, TJN’s 2018 Financial Secrecy Index (FSI) finds that the U.S. has surpassed the Cayman Islands as the second largest secrecy jurisdiction and now trails only Switzerland.

The answer to why the United States has jumped from six in 2013, to three in 2015 and now to two in the latest index is “pretty straightforward,” said Markus Meinzer, director of the Tax Justice Network, with the report calling the competition to see which region can sell the most secrecy as a “race to the bottom.”

The country, in recent years, has “increased its global market share three percent, from 19 to 22 percent,” in terms of offshore wealth services exported, he said. Meinzer added that more black money is likely to come, as the US does not participate in the OECD’s automatic tax information exchange program and lacks AML rules for attorneys, gatekeepers and company service providers.

“The U.S. is positioning itself as a key destination for dirty money, soaking up a lot of the money that is leaving elsewhere to find a safe haven in the U.S., fleeing from other jurisdictions participating in automatic exchange mechanisms.”

The 2018 Financial Secrecy Index (FSI) focuses on 112 jurisdictions, including several that are not traditionally considered to be tax havens, such as Germany, Japan, Lebanon and Taiwan.

This is the fifth iteration of the index since 2009. To see past index indexes, click here.

“While the United States has pioneered powerful ways to defend itself against foreign tax havens, it has not seriously addressed its own role in attracting illicit financial flows and supporting tax evasion,” according to a detailed report on the country. “It is currently a jurisdiction of extreme concern for global transparency initiatives.”

The report also notes the dichotomy of the U.S. While it created the Foreign Account Tax Compliance Act (Fatca) – which requires foreign jurisdictions to report on certain American clients – the country has lagged in implementing a global initiative based on the same model, called the Common Reporting Standard (CRS).

The translation: the U.S. is asking dozens of countries and banks to report on what their U.S. citizens are doing, but is being particularly stingy on what individuals and foreign corporations are doing within its own borders.

“Washington’s independent-minded approach risks tearing a giant hole in international efforts to crack down on tax evasion, money laundering and financial crime,” according to the report.

The continued rise of the U.S. in the 2018 index is chiefly due to a “significant change in the US share” of the global market for offshore financial services, according to the report.

Being No. 1 not all glitz, glamour

“This is not a ranking in which the U.S. wants to be number one or even number two,” said Gary Kalman, Executive Director of the FACT Coalition, one of the partner organizations of the report.

He added that the secrecy, strength and stability of this country is a “perfect recipe for attracting the proceeds of crime, corruption, and tax evasion. Internationally, this secrecy facilitates corruption that drains wealth from developing countries” and shields a bevy of potential criminal activities, including money laundering, sanctions evasion and terror financing.

The offshore sector, both clean and dirty, holds an incredible amount of wealth.

Overall, an estimated $21 trillion to $32 trillion of private financial wealth is “located, untaxed or lightly taxed, in secrecy jurisdictions around the world,” according to the report, adding that the regions, also called “tax havens,” use “secrecy to attract illicit and illegitimate or abusive financial flows.”

Several U.S. states are also considered tax havens including Delaware, which doesn’t tax intangible assets such as intellectual property, patents or trademarks, according to the International Consortium of Investigative Journalists.

The group spearheaded several of the recent major leaks, including the Paradise and Panama Papers, that gave a glimpse into the groups hiding behind obscure ownership structures, including powerful and corrupt politically-exposed persons and a cabal of the world’s most elite and powerful companies and individuals.

“More than 66 percent of the Fortune 500 have chosen Delaware as their legal home,” according to Delaware’s Division of Corporations website.

The report also detailed the reasons why Switzerland remains at the top.

Secrecy still a selling point

Switzerland has “delayed the implementation of automatic information exchange, and in 2017 lawmakers attempted to stop it altogether with countries they deemed ‘corrupt,’” according to the report.

One of the countries added to the list, Kenya, reveals how a country not typically mentioned in the same breath as classic secrecy havens can become a key player. The country ranks at 27, but has a secrecy score of 80, among the highest on the list.

The index is yet another move by governments, civil society and watchdog groups to highlight the risks of corporate secrecy and further pressure regions for change.

In December, the European Union created a blacklist of 17 secrecy jurisdictions, but delisted nearly half just weeks afterward, such as Panama and Macao. As well, several EU members are among the top 20 regions using secrecy as a selling point: Germany, Luxembourg, Malta and the Netherlands.

The United Kingdom, through its crown dependencies, also had issues of its own, with Guernsey round out the top 10 and Jersey ranked at 18.


TJN’s 2018 financial secrecy index rankings (2015 placing):

  1. Switzerland (1)
  2. United States (3)
  3. Cayman Islands (5)
  4. Hong Kong (2)
  5. Singapore (5)
  6. Luxembourg (6)
  7. Germany (8)
  8. Taiwan (unranked)
  9. UAE (10)
  10. Guernsey (17)

A look at the methodology

The group defines secrecy jurisdictions as those that set up laws and systems “which provide legal and financial secrecy to others, elsewhere.” The index states that there is “no clear dividing line between ‘secrecy jurisdictions’ or tax havens and others as they exist on a wide spectrum.”

The index measures two things, one qualitative and one quantitative.

The qualitative measure looks at a jurisdiction’s laws and regulations, international treaties, and so on, to assess how secretive it is. It gets assigned a secrecy score: the higher the score, the more secretive the jurisdiction.

Some countries have secrecy scores as high as 80, meaning very secretive, including two in the top 20, Thailand at 80 and the UAE at 84.

The second, quantitative, measurement attaches a weighting to take account of the jurisdiction’s size and overall importance the global market for offshore financial services.

For example, the U.S. stands at a whopping global scale weight of 22 percent of global financial services exports. The closest second is the United Kingdom at 17 percent.

The list is compiled analyzing 20 secrecy indicators grouped around four broad dimensions of secrecy, which overlap to some extent: Ownership registration, legal entity transparency, integrity of tax and financial regulation and international standards and cooperation.

The newest version of the index was delayed about three months due to adding new indicators and a deeper analysis of existing indicators, including beneficial ownership in the legal and beneficial areas, Meinzer said.

The goal was to view also if countries reveal true ownership in real estate, which has become a global hot spot to move and legitimize illicit funds.

The U.S., for instance, has released and renewed several geographic target orders focusing on scorching property markets in this country, including Florida, New York and California.

New issue on the horizon: freeports

The index also included another area for money laundering and tax evasion: freeports. He noted that, for instance, Swiss freeports have become vast storehouses of wealth, where the rich and powerful put their expensive, art and other assets to keep them from being identified, taxed or give evidence of a larger income that what is stated, he said.

The report also identified persisting vulnerabilities, even as countries require disclosure of beneficial ownership details, particularly when limiting these at 25 percent thresholds as formation agents are simply creating anonymous owners below the legal limits, Meinzer said.

The index also should be required reading for bank compliance officers.

The index scores should be “hard wired into the risk assessment and analytics tools” of the bank’s AML systems, he said, noting the index could give a finer point to the intensity of risk for financial crime in certain jurisdictions, particular those with a 50 or higher secrecy score.

And when a country is high on the list, with a weighty secrecy score, a bank can better “arrive at an overall sense” of the risk of the country and individuals and businesses from the region, Meinzer said.