The US has climbed to the top of a global ranking of countries most complicit in helping individuals to hide their wealth from the rule of law, earning the worst rating ever recorded since the ranking began in 2009. The Tax Justice Network’s Financial Secrecy Index 2022, published today, reports that the supply of financial secrecy services, like those utilised by Russian oligarchs, tax evaders and corrupt politicians, has continued to decrease globally due to transparency reforms. But five G7 countries alone – the US, UK, Japan, Germany and Italy – are responsible for cutting global progress against financial secrecy by more than half.
Ahead of tomorrow’s meeting of G7 finance ministers, who are expected to recommit to enforcing sanctions on Russian oligarchs’ hidden assets, the Tax Justice Network is calling on the G7 to commit to a global asset register to bring law and accountability to the trillions in “lawless wealth” secretively held offshore by wealthy individuals. An estimated $10 trillion is held offshore beyond the rule of law by wealthy individuals through secretive arrangements – equivalent to 2.5 times more than the value of all US dollar and EURO bills and coins in circulation around the world today.
The G7 countries’ undermining of global transparency has further fuelled calls by leading economists for a UN tax convention that moves rulemaking on international tax and finance out of the hands of the few rich countries who have repeatedly been shown to be some of the world’s biggest tax havens.
Alex Cobham, chief executive at the Tax Justice Network, said: “Globally, we’re starting to curb the financial secrecy used by Russian oligarchs, and also by tax evaders, corrupt politicians and organised crime around the world to hide and launder ill-gotten wealth. But the US, UK, Germany, Italy and Japan cut back that global progress by more than half, fuelling financial secrecy instead of fighting it. The G7 must make clear where they stand in the fight against financial secrecy by committing to a global asset register.”
Top 10 biggest suppliers of financial secrecy
The 2022 edition of the Tax Justice Network’s biennial Financial Secrecy Index sees some of the world’s biggest economies climb up the ranking. The US dramatically expanded the gulf between itself and the rest of the world by enabling the biggest supply of financial secrecy ever recorded by the index – nearly twice as much as the second biggest supplier currently on the index, Switzerland. Germany, which is hosting tomorrow’s G7 finance ministers meeting and now ranks 7th, returned to the top 10 after dropping to 14th in 2020. Japan, which returned to the top 10 in 2020, has continued to climb the index, now ranking 6th.
- United States
- Hong Kong
- United Arab Emirates
- British Virgin Islands (British Overseas Territory)
- Guernsey (British Crown Dependency)
The Financial Secrecy Index ranks each country based on how intensely the country’s financial and legal system allows individuals to hide and launder money extracted from around the world. The index grades each country’s financial and legal system with a secrecy score out of 100 where a score of 0 is full transparency and a score of 100 is full secrecy. The country’s secrecy score is then combined with the volume of financial services the country provides to non-residents to determine how much financial secrecy is supplied to the world by the country.
A higher rank on the index does not necessarily mean a jurisdiction has more secretive laws, but rather that the jurisdiction plays a bigger role globally in enabling banking secrecy, anonymous shell company ownership, anonymous real estate ownership or other forms of financial secrecy, which in turn enable money laundering, tax evasion and the evasion of sanctions. A highly secretive jurisdiction that provides very little financial services to non-residents, like Maldives (ranked 91st), will rank below a moderately secretive jurisdiction that is a major offshore destination, like Luxembourg (ranked 5th).
Key changes in ranking
Tax Haven USA undermines Biden’s pledge to fight illicit finance
The US topped the index after it increased its supply of financial secrecy to the world by almost a third (31 per cent) since 2020, resulting in the largest supply of financial secrecy ever measured by the index. The US’s supply of financial secrecy is now nearly twice as large as that of second-placed Switzerland. The increase is partly driven by the US worsening its secrecy score from 63 to 67 out of a 100, mostly by again failing to meet international standards and practice on information exchange with other countries. Countries that have still not met these international standards – some of which have been in place for over a decade – were more harshly graded in the 2022 edition of the index. The increase is also driven by the US increasing the volume of financial services it provides to non-residents by 21 per cent.
The development is at odds with US President Joe Biden’s commitments and efforts to tackle global financial secrecy. US President Joe Biden has made transparency reforms a key pillar of his foreign policy, stating: “I will lead efforts internationally to bring transparency to the global financial system, go after illicit tax havens, seize stolen assets, and make it more difficult for leaders who steal from their people to hide behind anonymous front companies.”
The Biden administration took unprecedented action within its first few months in office towards curbing rampant corporate tax abuse by multinational corporations by championing a global minimum tax rate. In his first public address to congress, on the eve of his 100th day in office, President Biden called out Switzerland, Cayman and Bermuda’s roles in enabling multinational corporations to abuse tax: “A lot of companies also evade taxes through tax havens in Switzerland and Bermuda and the Cayman Islands.”
The Biden administration has also candidly acknowledged its own country’s role in enabling global tax evasion and money laundering by wealthy individuals. US Treasury Secretary Yellen remarked in December 2021 that the US may be “the best place to hide and launder ill-gotten gains.”
The US now fuels more global financial secrecy than Switzerland, Cayman and Bermuda combined. In a separate study published in November 2021, the Tax Justice Network reported that the US is responsible for costing the rest of the world $20 billion in lost tax a year by enabling non-residents to hide their finances and evade tax.
The US adopted a historic transparency law in January 2021 requiring beneficial owners of corporations to be identified and registered, however, due to limited definitions of which legal entities and beneficial owners must register, 23 baked-in exemptions to registration, and an absence of requirements on all trusts, the law did not produce a significant secrecy score improvement for the US on the index.
The index identifies that one of the most harmful factors behind the US’s position as secrecy capital of the world is the US’s refusal to reciprocally exchange information with other countries’ tax authorities. More than 100 countries today are automatically sharing information about the financial accounts non-residents hold in their jurisdiction with the non-residents’ home tax authorities under the OECD’s Common Reporting Standard. The OECD reported in 2020 that automatic exchange of information succeeded in bringing transparency to over $11 trillion in wealth and assets that were previously hidden. In addition, 135 countries are also exchanging information via the facilitation methods defined by the amended Convention on Mutual Administrative Assistance in Tax Matters that go beyond the Common Reporting Standard. The US remains the only major economy not to participate. Hypocritically, the US does require, under the Foreign Account Tax Compliance Act (FATCA) and its related inter-governmental agreements (IGAs), all countries to share information with it about US taxpayers financial accounts abroad, but the US shares little to no information in return with countries about their residents.
If the US were to reciprocally exchange information with other countries by adopting the Common Reporting Standard and become a party to amended Convention on Mutual Administrative Assistance in Tax Matters, it would cut its supply of financial secrecy to the world by 40 per cent and drop to 3rd on the index below Switzerland and Singapore.
US President Biden urged Congress to advance more reciprocal automatic exchange of information on digital assets in connection with his 2023 budget request.16 It remains to be seen if Congress will advance these reforms, which it did not do when former US President Obama requested the same.
Ian Gary, Executive Director at the US-based Financial Accountability and Corporate Transparency (FACT) Coalition, said:
“While the US has committed to being a leader in cracking down on global corruption, these rankings show how corrupt actors are weaponizing our financial system against democracy here and abroad. Both Congress and the Biden administration have made progress, but now they must follow through on the ambitious US anti-corruption strategy, starting with fully implementing the Corporate Transparency Act. The US must also support more reciprocal automatic information exchange between countries; bring sunlight to the US real estate, private investment, and financial enabler industries; and boost funding to key agencies.”
Singapore joins top three for the first time
Singapore increased its supply of financial secrecy to the world by 14 per cent. The increase is driven by a two-point increase in secrecy score from 65 to 67 and a 9 per cent increase in the volume of financial services the country provides to non-residents. Singapore leapfrogged from 5th to 3rd after both Cayman and Hong Kong, previously ranking above Singapore, reduced their supply of financial secrecy.
Hong Kong reduced its supply of financial secrecy by 10.5 per cent since 2020 following a reduction in secrecy score from 66 to 65 and a 13 per cent drop in financial services provided to non-residents.
Cayman Islands drops from top spot after disclosing data
Cayman dropped from 1st to 14th on the index after the British Overseas Territory disclosed for the first time data indicating the true scale of the financial services it provides to non-residents – revealing it to be significantly lower than previously estimated.
In absence of self-reported data from the Cayman authorities in the IMF Balance of Payments database, the index previously utilised data from the IMF Coordinated Portfolio Investment Survey database.17 Only 30 of the 141 jurisdictions ranked on the index do not have data reported on the IMF Balance of Payments database and so are alternatively assessed on data from the IMF Coordinated Portfolio Investment Survey database. However, Cayman’s highly disproportionate hosting of cross-border portfolio investments made it uniquely placed to see significant discrepancies in estimated financial activity arising from the two databases.
Despite the disclosure of the lower figures on the provision of financial services, the small British Overseas Territory, with a population of 66,00018, continues to rank above some of the world’s largest economies, including G20 members Argentina, Australia, Brazil, India, Indonesia, Italy, Mexico, Russia, South Africa, Saudi Arabia, South Korea and Turkey, demonstrating the oversized volume of wealth being sent offshore to Cayman.
Cayman’s drop in financial secrecy is also aided by a secrecy score drop from 76 to 72 primarily resulting from the UK government extending the application of the UK’s ratification of the UN Convention for the Suppression of the Financing of Terrorism to Cayman in 2021 and the UN Convention against Corruption in 2020. Both conventions were ratified by the UK 20 years ago. British Overseas Territory Cayman is one of the several Overseas Territories and Crown Dependencies that make up the “UK spider’s web”, a network of British overseas jurisdictions that operates as a web of tax havens centred around the City of London. The UK has full powers to impose or veto lawmaking in these jurisdictions and power to appoint key government officials rests with the British Crown. In its communications to the UN Secretary-General announcing the application of the conventions to Cayman, the UK government confirmed it is “responsible” for Cayman’s international relations.
As a result of Cayman dropping from first, Switzerland and Luxembourg both moved up one position on the ranking despite both countries reducing their supply of financial secrecy. Switzerland, now ranked 2nd, reduced its supply by 17 per cent after improving its secrecy score from 74 to 70 and reducing the volume of financial services it provides to non-residents by 5 per cent. Switzerland improved its secrecy score by requiring country by country reporting from Swiss extractive companies, requiring the use of an updated Legal Entity Identifier for some financial market operators and making some partial improvements in its banking secrecy practices. Luxembourg, now ranked 5th, reduced its supply of financial secrecy by 5 per cent due to an 8.5 per cent drop in financial services provided to non-residents.
Financial secrecy continues to shrink globally despite G7 subversion
The global total of financial secrecy supplied by countries has continued to shrink. The Financial Secrecy Index observed a 2 per cent reduction in total financial secrecy, following a 7 per cent reduction in 2020. The reduction means less room for the type of practices that have come under scrutiny as countries attempt to enforce sanctions on Russian oligarchs21 – such as banking secrecy, anonymous ownership of real estate and the use of trusts to move wealth beyond the reach of the law.
The index identifies this progress to be primarily driven by more countries adopting or improving beneficial ownership registration laws – which require the identification and registration of the real individual, made of flesh and blood, who ultimately owns, controls or benefits from a company or legal vehicle – and by more countries, particularly lower income countries, improving international cooperation on anti-money laundering efforts, information exchange, treaties and judicial cooperation.
But the recent global curbing of financial secrecy was offset by more than half by just five of the G7 countries whose finance ministers are expected to recommit this week to enforcing sanctions on Russian oligarch’s hidden assets. When excluding the increases in financial secrecy from the US, UK, Germany, Japan and Italy, the Financial Secrecy Index 2022 finds that global financial secrecy actually shrunk by 5 per cent. However, the five G7 countries collectively increased their supplies of financial secrecy by enough to minimise the 5 per cent global reduction in financial secrecy down to 2 per cent – effectively leaving Russian oligarchs as well as tax evaders, money launderers and corrupt politicians around the world more room to manoeuvre and hide their assets.
The five countries, who are all members of the Russian Elites, Proxies, and Oligarchs (REPO) Task Force23 launched in March this year to ensure the effective implementation of sanctions against Russian oligarchs, now collectively supply one-eighth (12.75 per cent) of all financial secrecy in the world.
Russia increased its supply of financial secrecy to the world by 5.5 per cent, moving it up from 44th to 43rd on the ranking. Russia’s increase in financial secrecy supply was due to Russia worsening its secrecy score from 57 to 60 out of 100 after it enacted a law permitting private foundations, or “personal funds”, to be created without any indication that their owners need to be registered with a public authority, and after it ceased to report bilateral banking statistics to the Bank of International Settlements. The volume of financial services Russia provides to non-residents shrunk by 21 per cent between 2020 and 2022, prior to Russia’s invasion of Ukraine.
The US, UK, Germany and Italy all fall dangerously short on tackling the use of trusts to hide wealth and assets from the rule of law, the index finds. Of all the financial secrecy practices to have come under scrutiny in recent months, the use of trusts as a secrecy weapon of choice has particularly gained attention after investigative journalism revealed Russian oligarchs using trusts to hide their assets and after the UK Chancellor Rishi Sunak was found to be listed as beneficiary of trusts in the British Virgin Islands (ranked 10th on the index) and Cayman (ranked 14th).
The US received the worst possible grading (100 out of 100) for its regulation of trusts, one of the 20 indicators on which each country’s secrecy score is based. The US currently has no laws or policies in place systematically requiring all trusts to register their existence nor information about their owners and beneficiaries. Germany’s grading on its regulation of trusts dramatically worsened from 25 to 87.5 out of 100 due to restrictions the country put in place that hinder public access to information on the owners and beneficiaries of trusts. The UK kept a score of 50 out of 100 on its regulation of trusts despite passing new rules requiring trusts to register their ownership information. The new rules permitted too many loopholes and exemptions to constitute a material improvement in transparency on the index. Italy similarly maintained a score of 50 out of 100 after a new decree requiring more trusts to register with the national authority was put in place but then suspended by the Council of State.
Additional breakdown of G7 countries’ financial secrecy:
- Germany increased its supply of financial secrecy to the world by over a third (36 per cent) following a worsening in its secrecy score from 52 to 57 out of a 100 and a 11 per cent increase in the volume of financial services it provides to non-residents. Germany’s secrecy score deterioration is primarily due to the underwhelming implementation of new transparency laws the country passed in the run up to the 2020 edition of the Financial Secrecy Index. The new laws requiring beneficial owners of companies, trusts and partnerships to register their information saw Germany drop out of the top 10 on the index for the first time in 2020. However, restrictions put in place since the 2020 edition of the index hindering public access to information collected under the new laws has pushed Germany back into the top 10, where it now ranks 7th.
- Italy increased its supply of financial secrecy by over a third (37 per cent) following a worsening in its secrecy score from 50 to 55 out of a 100 and a 19 per cent increase in the volume of financial services it provides to non-residents. As a result, Italy leaped 20 places up the ranking from 41st to 21st. Italy’s secrecy score deterioration is primarily due to the implementation of beneficial ownership laws being halted and legal ownership information becoming less accessible to the public. Italy also failed to keep up with more robust criteria used by the 2022 edition of index to assess standards for tax rulings publication and tax treatment of investment income particularly among non-domiciled residents.
- Japan increased its supply of financial secrecy to the world by 10 per cent after increasing the volume of financial services it provides to non-residents by 28 per cent. Japan’s secrecy score marginally worsened from 62.9 to 63.1 out of 100. Japan moved up the ranking from 7th to 6th, however, this shift was due to Cayman dropping from the top of the ranking.
- The UK increased its supply of financial secrecy to the world by 2 per cent despite the volume of financial services it provides to the non-residents shrinking by 11 per cent. The UK secrecy score worsened from 46 to 47 out of 100 following a greater emphasis put on transparency of court judgments by the index. The UK does not currently publish all First-tier Tribunal and Upper Tribunal judgements. Despite the escalation of financial secrecy, the UK dropped from 12th to 13th in the ranking after both Germany and China climbed sharply up the ranking and overtook the UK on their way.
- Canada and France both reduced their supply of financial secrecy to the world (Canada by 20 per cent; France by 2 per cent). Both countries’ reduction in financial secrecy was due to improvements in secrecy scores (Canada from 56 to 51; France from 50 to 48).
Calls grows to reign in lawless wealth with global asset register
Leading economists and campaigners from around the world are calling on G7 ministers meeting tomorrow to commit to a global asset register in order to bring law and transparency to the trillions in wealth and assets secretively held offshore.
The proposal for a global asset register has rapidly gained traction after Italian Prime Minister Mario Draghi called in March for a public international asset register for individuals with assets of more than €10 million. The commissioners of the Independent Commission for the Reform of International Corporate Taxation (ICRICT), including leading economists Gabriel Zucman, Joseph Stiglitz and Thomas Piketty, and the French investigative judge Eva Joly, called on the G20 in an open letter last month to establish a global asset register.
The G7’s fuelling of financial secrecy is also amplifying calls to move rulemaking on global tax and finance out of the hands of a few rich countries and to the UN by establishing a UN tax convention.
Alex Cobham, chief executive at the Tax Justice Network, said:
“There is more wealth hidden offshore beyond the rule of the law than there are US dollars and Euros changing hands today – more than twice more to be specific. That lawless wealth is a threat to our democracies, our economies and our safety. Governments must establish and link up national asset registers to bring law and transparency to the trillions hidden offshore, and end the wild west era of wealth.
“The Financial Secrecy Index 2022 confirms that transparency reforms are working, despite sabotage from most of the G7 countries meeting tomorrow. Globally, we’re starting to curb the financial secrecy used by Russian oligarchs, and also by tax evaders, corrupt politicians and organised crime around the world to hide and launder ill-gotten wealth. But the US, UK, Germany, Italy and Japan cut back that global progress by more than half, fuelling financial secrecy instead of fighting it. The G7 must make clear where they stand in the fight against financial secrecy by committing to a global asset register.”
Moran Harari, lead researcher (indices) and interim director of financial secrecy and governance at the Tax Justice Network, said:
“Once again, a small club of rich countries setting global rules on finance and tax are found to be the ones most responsible for facilitating financial secrecy and tax abuses. For decades, rich G7 countries courted billionaires, oligarchs and corporate giants with secrecy loopholes and eyes-wide-shut-regulations. The regulations they imposed facilitated the robbing of billions from poorer countries’ public purses. And now those same regulations are making it nearly impossible for G7 countries themselves to track down the billions held offshore by sanctioned Russian oligarchs. We must move rulemaking on global finance and tax to the UN. Only a UN tax convention can make sure our global finance and tax rules are genuinely democratic and principled on human rights.”
Gabriel Zucman, Director of the EU Tax Observatory, said:
“The idea of a global asset registry may sound revolutionary, but it is not. The starting point is that many countries have had real estate and land registries for centuries. When they were introduced, the bulk of wealth was indeed real estate and land. So, these registries were recording the ownership of almost all wealth. What has happened since then, is that financial wealth plays a much more important role: today, more than half of households’ wealth is financial. The problem is that these registers have not taken these changes into account. The idea of a global asset registry is to modernize the existing tools that we already have, do a better job at identifying the beneficial owners of the assets, and extend the existing registries to financial assets to get back to the original intention, which is to cover the ownership of all forms of wealth.”
Jayati Ghosh, member of the UN Secretary General’s high-level advisory board on Effective Multilateralism, said:
“The war in Ukraine and the attempts of Western countries to go after Russian oligarchs have demonstrated that the lack of transparency highlighted by the Financial Secrecy Index 2022 can hurt all countries, including rich ones. Trying to protect your own elite can backfire when you realize that the system also protects the people you want to go after.
“It has drawn much more public attention to the different forms in which wealth is held. People also realized that it is not that difficult to identify the beneficial owner of this hidden wealth, at least a part of it. Now we know which oligarch owns which yacht. Because of that, I think there is more global willingness to accept the need and a possibility of a Global Asset Registry.”
José Antonio Ocampo, chair of Independent Commission for the Reform of International Corporate Taxation (ICRICT) and former UN Under-Secretary-General for Economic and Social Affairs Chair, said:
“The pandemic has had a huge economic and social impact but developing countries have suffered the most. In Latin America, for example, new research shows that tax revenues have fallen both in nominal terms and as a share of GDP. With rising energy and food prices, the war in Ukraine will make the situation even worse. Developing countries must have more means to finance social policies. The Financial Secrecy Index 2022 report reminds us how much tax havens impede wealth taxation and the generation of resources at a crucial time.”
Magdalena Sepúlveda, Executive Director of the Global Initiative for Economic, Social, and Cultural Rights, said:
“After two years of a pandemic that has not yet come to an end, it is not a question of returning to the “normality” that has produced so much inequality and poverty. It is now urgent to build more sustainable, more inclusive, and greener economies, economies that support women and prioritise investments in care.
“These efforts come at a cost. States, which have spent so much in response to the pandemic, must not only recover their resources but increase them to finance this turnaround. One of the key avenues is to consider fair taxation of wealth and capital income and to attack tax avoidance by multinationals and the very richest, who have never been richer. This report reminds us how urgent it is to put an end to the tax evasion scandal. And to do this, the richest countries must commit to setting up a global register of assets to put an end to tax havens once and for all.”
Hon. Irene Ovonji-Odida, panellist on the UN High Level Panel on International Financial Accountability, Transparency and Integrity, said:
“A recent UNCTAD report on economic development in Africa found that an estimated $88.6 billion leaves the continent as illicit capital flights. That’s enough to finance almost half the annual financing gap of $200 billion that the continent faces to achieve development and meet the SDGs by 2030. It also represents almost 4% of the continent’s GDP, much more than the international aid received.
“All this is of course due to the scandalous practices of global and local elites and facilitated by the international financial system with all its gaps, supported by a vast network of accountants and lawyers from rich countries, which allows them to hide their wealth legally. With a global asset registry, it would be possible to identify the beneficial owners of this hidden wealth and to make them pay taxes that would constitute precious resources for Africa. The international community knows what needs to be done, it is just the lack of political will and vested interests preventing real solutions and perpetuating a system that drives massive inequalities between and within countries.”