How long does it take for an era to end?

February 6th, 2015

As the G20 finance ministers assemble in Istanbul this weekend, there’s a good chance at least one of them will repeat the phrase ‘the era of bank secrecy is over’, heard several times since the 2009 G20 Summit. But before anyone thinks of repeating it again, they should instead look at the plans (or lack thereof) for including developing countries. As our new report, Information for the Nations, explains, while new reforms on financial transparency are welcome, the proposals could end up leaving a number of developing countries behind.

At the heart of all this is the fact that vast amounts of money are held offshore (by some estimates up to $21 trillion); at best, only 20% of this is thought to be declared for tax. With little ability for tax authorities to find out who has cash stashed offshore, up until now little could be done to stop these tax evaders. That’s now set to change (for rich countries at least), as 52 of the biggest economies and the biggest tax havens have agreed to automatically share details of offshore accounts to tax authorities in other countries.

The impact of this is huge. The OECD estimates that even before this system has come into operation an extra $37billion of tax has already been collected, as those that know they have something to hide have come clean before they were found out.

While this is great for countries that will be getting the information (mostly developed countries), for the rest, nothing is changing. So, why aren’t all countries involved? Well, there are a few hurdles in the road, and unfortunately, the hurdles look higher for poorer countries.

First, there is a requirement that if you want to receive information from other countries, you also have to provide information on the offshore cash in banks in your own country. In principle, this is fair and necessary in the long term. But in the short term, it can act as a barrier, and seems excessive for poor countries. Setting up the laws, regulations and processes to be able to ensure that all the banks and officials in your country are able to provide the necessary information is a lot of work, especially in countries that are already short of resources.

And it’s not clear how necessary it is to have developing countries provide this information. Lots of cash from developing countries is held offshore, mostly in tax havens and developed countries. It’s estimated that 33% of African and Middle Eastern owned assets and 25% of Latin American owned assets are held offshore (compared to a worldwide average of 6%). But since lots of cash from developed countries is not held in developing countries, there would appear to be no urgent need to deny developing countries the benefits of receiving information on their own citizens before they have the ability to send data out as well.

There are other hurdles too. Rather than having every country that signs up agree to share information with every other country that has signed up (a multilateral deal), a clause has been inserted that means there has to be an additional agreement signed by each country individually on which other countries they will share information with. Countries such as Switzerland and the Bahamas have indicated that they will use this clause to only share information with countries they have a political and/or economic need to (i.e. those that can make them), and, sadly, few developing countries will make that list.

Another hurdle looks likely to be prejudice. Every time I have a discussion about automatic exchange of information and developing countries, the issue of confidentiality is raised. In some respects this is fair, because this information is confidential and should be treated as such; but there seems to be a perception that developing country revenue authorities can’t be trusted. I say perception because if we look at peer reviews of countries on confidentiality standards, many developing countries have the best ratings, while some who are at the heart of building the new system have less desirable scores. Oddly, no one seems to be raising apprehensions about those jurisdictions. These perceptions are more than just scores on a piece of paper too; every country is allowed to refuse to share information with another country, if they deem there to be a confidentiality risk.

All of these hurdles have to be jumped before developing countries face the biggest one, but the one that will make the most difference: actually using the information received to increase government revenues need to tackle poverty.

If things stay as they are, we risk a two-tiered world where bank secrecy is over for some, yet it lives on elsewhere. The result will be the inability to improve the very public services that sow the seeds of economic growth and development. The G20 must now set a new course; a course that involves fewer hurdles and more support to help others over the ones that remain. When the hurdles come down, then it may be time to talk about the end of the secrecy era.

Image used under Creative Commons Licensing / Flickr User TheTaxHaven

Written by Joseph Stead

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