Financial Transparency Coalition

It is quite well known by now that secrecy jurisdictions are not merely an atomised grouping of mostly small states exercising their sovereign rights to set their own tax, secrecy and regulatory rules and laws as they please. Nearly all of the small states are, instead, substantially protected and controlled by larger powers, notably OECD countries, and of these the United Kingdom is by far the most important. Moreover, several large OECD countries are secrecy jurisdictions in their own right (the Financial Secrecy Index gives a good idea.) Ronen Palan’s History of Tax Havens gives a good overview of how this has come about, and the book Tax Havens: How Globalization Works, co-authored by Palan with Richard Murphy and Christian Chavagneux, goes into more detail. I will be writing more about this, in great detail, quite soon.

In this context a recent article I stumbled across in a January 12, 2009 edition of Tax Notes International adds a coupe of anecdotes, which help illustrate what has been going on. Written by Bruce Zagaris, a partner with Berliner, Corcoran & Rowe in Washington, it rather speaks for itself.

“Many Commonwealth members who are SOFCs established offshore financial centers as a result of studies, recommendations, financial, and technical assistance from donors and international financial institutions. Many of these SOFCs are small island states with few alternative development options.

One experience I had, as an example, was a project I undertook in the 1990s as a sub-contractor for U.S. Agency for International Development (USAID) in Cape Verde. To try to reduce the migratory pressures from Cape Verde, USAID funded a project to try to develop a ship registry. Ironically, at the very time the U.S. Treasury was trying to crack down on international financial centers, it was funding a project to facilitate international financial services based on zero or extremely low taxes and in a country with limited experience or laws on transparency or exchange of information.

(The Marshall Islands registry, which registered BP’s Deepwater Horizon, and the Liberian registry, were also very substantially the creations of U.S. interests.) Given the role of large states in nurturing and protecting the  secrecy jurisdictions, it is hardly surprising that high-profile campaigns by the OECD against offshore secrecy have been so ineffective (read more on this here.) The headline of a recent Tax Justice Network Blog, entitled Fox conducts new review of henhouse safety nicely captures the cynicism of some of the most important global initiatives on secrecy jurisdictions.

That blog looks at  a self-serving British review into the role of City of London, which is arguably the world’s most important secrecy jurisdiction. And in a similar vein, the Bruce Zagaris article contains another interesting snippet, on the subject of a review of the effects of multilateral regulatory initiatives into small island secrecy jurisdictions of Barbados, Vanuatu and Mauritius, financed by the (British) Commonwealth Secretariat. The key point was:

The report says the costs involved in meeting the new standards have surpassed the identifiable benefits that have resulted for both the public and private sectors. The three countries reviewed had to divert the scarce public revenues toward regulating their international financial services (IFS) sector. The majority of the private firms and banks operating in the IFS sector in all three countries have experienced a significant increase in compliance costs — in some cases enough to threaten their future business viability.

It is hard to feel sympathy for the providers of offshore secrecy, and it seems one-sided to consider only the costs to domestic economies without considering the effects lax financial regulation might have on other countries.