US now a top three purveyor of financial secrecy, overtaking Singapore, Cayman Islands: TJN report

The United States, even as it doles out billion dollar penalties against entities for financial crime failures, is now viewed as one of the choice destinations for the wealthy, by legitimate or illicit means, looking for an opaque raiment of financial secrecy.

That is one of the conclusions of the 2015 Financial Secrecy Index, the latest edition of which was released Monday by the United Kingdom (UK)-based Tax Justice Network, a civil society group promoting financial transparency. The group has been calibrating and ranking countries that sell secrecy since 2009.

The United States, which “has for decades hosted vast stocks of financial and other wealth under conditions of considerable secrecy,” has moved up from sixth to third place in the index, overtaking Singapore, Luxembourg and the Cayman Islands, and just below Switzerland and Hong Kong.

“It is more of a cause for concern than any other individual country – because of both the size of its offshore sector, and also its rather recalcitrant attitude to international co-operation and reform,” according to the group. To read more details on the index, please click here.

The group acknowledges the US has been a force in cracking open bastions of secrecy, such as Switzerland, levying massive tax-related penalties against Swiss institutions and bolstering information sharing on domestic evaders through a growing stable of intergovernmental agreements under the Foreign Account Tax Compliance Act (Fatca).

The 2010 law requires non-U.S. banks and financial institutions around the world – more than 100 nations have signed on to the program – to reveal US account holders or risk a hefty tax penalty for non-compliance. The law imposes a 30% withholding tax on many types of payments coming from the US on institutions or accounts that fail to toe the line with FATCA.

Though the U.S. has “been a pioneer in defending itself from foreign secrecy jurisdictions, aggressively taking on the Swiss banking establishment…it provides little information in return to other countries, making it a formidable, harmful and irresponsible secrecy jurisdiction at both the federal and state levels.”

The US has also been reticent to cooperate with the creation of a common standard for sharing information between countries, a model created by the Organisation for Economic Co-operation and Development (OECD).

With the US shrugging off its reciprocal duties, other countries believe they can follow suit and give short shrift to the requirements of the standard, according to the Tax Justice Network, the group behind the index.

“The United States dealt global financial secrecy a devastating blow by forcing strongholds such as Switzerland to open up,” said John Christensen, Executive Director of the Tax Justice Network.

“But after this blistering start in efforts to protect itself, it is backsliding by failing to provide information in the other direction: refusing to participate directly in global transparency initiatives such as the multilateral automatic information exchange and, inexcusably, lobbying to block public country by country corporate reporting.”

“The USA must finally overcome its historically rooted opposition to reasonable tax data sharing with its trade and investment partners,” Christensen said in a statement.

AML, financial secrecy at odds

It’s not totally surprising the US has climbed several spots in the index, even though it has made financial crime programs and enforcement a regulatory and investigative priority, said a compliance officer for a large bank in Western Europe.

“The US at first glance can look transparent” and not a welcome place to stash illicit assets due to stronger AML laws, intense regulatory scrutiny on bank procedures and record penalties in recent years, said the person, who asked not to be named.

But, even with those initiatives, banks attempting due diligence and law enforcement trying to divine who is behind murky, convoluted ownership structures have no easy, centralized way to uncover the beneficial ownership information of companies incorporated in the US, the person said.

In some cases, when US-based individuals have tried to open an account at the bank and listed company owners as, say, other foreign operations in secrecy jurisdictions, the institution has refused to open the account, simply because they can’t accurately gauge the financial crime or terrorist financing risk, the compliance officer said.

“If I can’t find the name of an actual beneficial owner, or the ownership structure is needlessly complex, I won’t open the account,” said the person. “There is just too much risk that a person behind the company could be tied” to an organized crime or terrorist financing operation.

Switzerland tops list, UK a ‘huge concern’

Swinging the lens over Switzerland, it stays at the top of the index “for good reason: despite what you may have heard, Swiss banking secrecy is far from dead, though it has curbed its secrecy somewhat,” according to the index.

The creators of the index, however, noted that if Britain and its affiliated territories such as Jersey were treated as one regional unit, the United Kingdom would not sit at 15, an improvement from its prior place at 21, it would sit atop the 2015 list.

As a result, the United Kingdom remains a “huge concern,” according to the index.

“While its own secrecy is moderate, its global network of secrecy jurisdictions – the Crown Dependencies and Overseas Territories – still operate in deep secrecy and have, for instance, not co-operated in creating public registers of beneficial ownership. The UK has failed to address this effectively, though it has the power to do so.”

The index also highlighted its recommended steps countries could take take to prevent “backsliding” on the issue of financial secrecy, nudging powerful jurisdictions to oversee each other and prevent hypocritical practices, which it characterized as:

  • Lingering loopholes: Private sector “enablers” and recalcitrant jurisdictions like Dubai and the Bahamas are beavering away finding exclusions and loopholes, being picky about which countries they’ll exchange information with, and simply disregarding the rules.
  • Hypocratic oath: The United States’ hypocritical stance of seeking to protect itself against foreign tax havens while preserving itself as a tax haven for residents of other countries needs to be countered.
  • FATCA back at ya: The European Union must take the lead here by imposing a 35 percent withholding tax on EU-sourced payments to U.S. and other non-compliant financial institutions, in the same way as the U.S. FATCA scheme does; and this should become global standard practice.
  • Tricky territories: The UK has been playing a powerful blocking role to protect its huge, slippery and dangerous trusts sector, probably the biggest hole in the entire global transparency agenda.

Not having access to beneficial ownership details is “very frustrating,” said a compliance officer at a mid-size bank in Texas, who asked not to be named, adding that upcoming rules by the US Treasury requiring banks to ask companies for this information and get them to self-certify they are not lying is fraught with pitfalls and risk exposure for institutions.

“We can ask companies for their beneficial owners, but they may or may not tell the truth,” the person said. “We have no way of knowing if what they are say is correct and I am wondering if regulators will ding is if we get it wrong. I really hope regulators don’t get mad at us for not being able to get the information investigators could not get in the first place.”

The most logical step is for the US government to require company formation agents, including attorneys, to get the information and give it to law enforcement to hold in a federal database accessible to banks and investigators, similar to what is being done in the United Kingdom and Europe, said the person.

TJN’s 2015 financial secrecy index rankings (2013 placing):

  1. Switzerland (1)
  2. Hong Kong (3)
  3. US (6)
  4. Singapore (5)
  5. Cayman Islands (4)
  6. Luxembourg (2)
  7. Lebanon (7)
  8. Germany (8)
  9. Bahrain (13)
  10. UAE (16)
  11. Macao (22)
  12. Japan (10)
  13. Panama (11)
  14. Marshall Islands (23)
  15. UK (21)

The 2015 Financial Secrecy Index (FSI) focuses on 93 jurisdictions, including several that are not traditionally considered to be tax havens, such as China, France, Germany and Japan.

The group defines secrecy jurisdictions as those that set up laws and systems “which provide legal and financial secrecy to others, elsewhere. Our index shows that there is no clear dividing line between “secrecy jurisdictions” (or tax havens) and others. 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.

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.