How poor countries are blindfolded in the
global fight against banking secrecy
IS BANKING SECRECY REALLY OVER?
Since the 2009 G20 Summit, we've seen repeated claims that banking secrecy is over. But viewed alongside the countless tax and corruption scandals that have plagued us since, it would be understandable if you question that sentiment.
In our new analysis, Unequal Exchange, we explore just how far one key transparency tool, the automatic exchange of financial information, has come. Will all countries stand to gain or will it simply be a tool for the few?
An important method of fighting cross-border tax evasion by wealthy individuals is for governments to share information about financial assets and income that other country's residents hold in their financial institutions. Technology and globalization have made it relatively easy for someone to move his or her money out of their home country and into places that may have fewer regulations and lower levels of transparency. With the help of financial secrecy (and a few complex business structures), it can become nearly impossible for authorities to track such assets. Criminals, tax evaders and corrupt politicians are able to take advantage of a porous financial system, but government authorities tracking these culprits are often caught up by the hard lines of national borders.
There have been a number of exchange of information agreements put in place aimed at helping ease this problem, but the Common Reporting Standard, developed by the G20 and Organization for Economic Cooperation and Development (OECD) is the biggest global push to end cross-border tax evasion by wealthy individuals yet. The aim is to create a global network of exchanges that would allow financial information to flow back and forth between countries regularly.
For example, France would share information on UK residents that have bank accounts in French banks. The UK would then reciprocate with information about French residents with bank accounts in the UK. This information sharing would help tax authorities clamp down on the use of offshore accounts to hide one’s money.
And this couldn’t come at a better time.
Thanks to scandals like Panama Papers and Swiss Leaks, we have an idea of the scale of the offshore world and the vast sums of money being hid. Various studies have pegged the amount of money stashed offshore at anywhere from USD$7.6 to USD$32 trillion. One recent estimate put the amount of lost tax revenue due to hidden offshore assets at USD$190 billion, but the real amount may even higher.
Often concealed by layers of corporate entities in vault-like tax havens, the missed tax revenue from hidden assets is vital to increasing government resources. It’s estimated that in Africa and the Middle East almost 33% of the region’s assets are hidden offshore and out of reach.
When the OECD and G20 began designing the CRS, they did so without meaningful consultation of low-income countries. The result was a system designed by wealthy nations, with wealthy nations in mind, making many of the prerequisites impossible for countries that don't have sizable tax administration budgets or advanced technical capacity. To make matters worse, some wealthy countries are choosing to share information predominantly or exclusively with other wealthy countries.
In our analysis of information exchange agreements in place around the globe, we found a stark political reality in which high-income countries receive the lion's share of information, while some of the world's poorest are receiving none at all. Three of the five agreements analyzed only involve European or European-linked jurisdictions, while FATCA, which involves a range of developing countries, in many cases requires that they provide information to the U.S. without receiving any in return.
The OECD's Common Reporting Standard certainly looks great on paper. Over 100 jurisdictions are signed up, including 22 middle-income countries. But despite the exchange being open to any jurisdiction that can navigate the technical hoops, participants can pick and choose which other countries they ultimately want to share information with. This means that poorer or politically weak countries are often left on the outside looking in.
Switzerland, a favorite hiding place for kleptocrats and the corrupt, has agreed to exchange information with just 9 high-income jurisdictions under the CRS (in addition to members of the European Union, under a separate EU agreement).
And when you look at the world's poorest countries, the severity of exclusion settles in.
None of the world's 31 low-income economies are on the receiving end of any automatic information exchange, while just 21 of the world's 109 middle income economies receive automatic information. This is in direct contrast to high-income countries, where 55 of the world's 78 receive information. While the number of bilateral exchanges involving developing economies is growing, it's still dramatically smaller than those involving high-income economies.
This type of information barrier means that low and middle income countries may very well continue to struggle to get their hands on information that could help reduce cross-border tax abuse.
The global map below visualizes our data. Sort by receiving or sending country and look at year by year snapshots via the timeline at the bottom of the interactive. You can click the PLAY button to watch how the number of exchanges has evolved through the years. You can download a .xls of our raw data at the bottom of the microsite.
RECEIVING INFORMATION IS HALF THE BATTLE
While it's helpful for jurisdictions to receive information, almost just as important is where the information is coming from. For example, if Kenya is receiving information from Mali, that's great, but what might be more beneficial for recouping lost tax revenue is to receive information from places like Mauritius, Switzerland, or the Cayman Islands, places that are known to harbor offshore assets.
The below interactive allows you to search through our data analysis to see the specific relationships a jurisdiction has, where it sends information, and from where it receives information.
FIGHTING TAX ABUSE WITH A BLINDFOLD ON
Receiving financial account information is vital for governments around the globe, but perhaps no more so than in the Global South, where tax revenues, both in total amounts and also as a percentage of GDP, are far lower than in the north. Increased resources are desperately needed to fund key drivers of development, such as roads, schools and health infrastructure.
As we revealed in a 2015 project called SwissLeaks Reviewed, poor countries are disproportionately exposed to the risks of the offshore system. While the absolute amounts of money leaving their borders may be smaller, when viewed as a proportion of the country’s Gross Domestic Product, the amounts often surpass those found in wealthy nations.
For example, the Democratic Republic of Congo had nearly five times more offshore wealth connected to the Swiss Leaks scandal than Germany, when considered as a percentage of GDP. Similarly, the exposure of Central African Republic was eleven times that of the USA and the figure for Kenya nine times that of Canada. The list goes on.
And this is not a theoretical concern. With the information made available through Swiss Leaks, in 2015 Spain claimed it recovered roughly $340 million in taxes and fines. When applying a similar rate of return to the money connected to Sierra Leone, for example, the potential revenue could be about $4.95 million*. Though $5 million may sound paltry at the onset, the fact that the potential tax revenue from just one bank in just one secrecy jurisdiction could equate to roughly 19% of the country's health budget is simply shocking.
But tax authorities should not have to rely on occasional leaks for such information. Without access to the world's information exchange systems, many low and even middle-income countries will be fighting cross-border tax evasion with a blindfold on.
The below interactive allows you to search our data based on a jurisdiction's income level. Countries that do not appear are not currently receiving information via the automatic exchange agreements analyzed.
*Spain/Sierra Leone figures calculated in Sept 2015, using exchange rates of that time.
WHAT'S IN OUR DATA AND WHY IT MATTERS
To create this project, we analyzed data from a number of published automatic information exchange agreements—both bilateral and multilateral—that are either in force, or set for execution in the near future. These agreements represent deals for governments to share information automatically.
We analyzed five exchange agreements, all of which are up to date in our analysis as of 4 July 2017:
1. The EU Savings Tax Directive, and a body of associated agreements with third countries and jurisdictions dependent on EU member states;
2. The EU Directive on Administrative Cooperation in the Field of Taxation, and subsequent amendments, which effectively replaced the EU Savings Tax Directive;
3. The U.S. Foreign Account Tax Compliance Act (FATCA), under which many governments have signed Intergovernmental Agreements (IGAs) since 2013 to provide information to the U.S. (and in some cases to receive some information in return);
4. The so-called ‘son of FATCA’: IGAs agreed between the UK and various UK-linked jurisdictions (Crown Dependencies and Overseas Territories) since 2014;
5. The Common Reporting Standard (CRS): a standard for information exchange designed by the OECD, and the basis for bilateral agreements between a range of different countries since 2015 to exchange information on the basis of a 2014 agreement between state parties to the Convention on Mutual Administrative Assistance in Tax Matters.
When you visualize this data, the political reality is stark and overwhelming. Three of the five agreements only involve European or European-linked jurisdictions, while FATCA, which involves a range of developing countries, in many cases requires that they provide information to the U.S. without receiving any information in return.
Perhaps unsurprisingly, the United States is the overwhelming winner when it comes to global tax information exchange, being on the receiving end of nearly twice as many information exchange agreements as the next best informed country, Belgium.
It's evident that more must be done to ensure that low income economies are able to get their hands on information that would act as a deterrent for would-be tax abusers and to track down those already hiding their money.
But alongside the goal of increasing the number of countries receiving data from exchanges like the CRS, we must also question whether or not it makes sense for such wide-reaching rules and standards to be created in a forum as closed as the Organization for Cooperation and Development in the first place.
This is why we've previously called for an intergovernmental body at the United Nations for tax matters, which would give all countries a seat at the table in deciding the best ways to tackle illicit financial flows. Read more about who makes the rules on tax and illicit flows here.
To learn more about illicit financial flows and the secrecy that helps keep the system running, click here.
Special thanks to Code for Africa, a Pan-African civic technology lab that designed our data visualizations.