Secrecy indicators

The Financial Secrecy Index is a ranking of jurisdictions based on combining a qualitative measure (a secrecy score, based on 15 secrecy indicators) with a quantitative measure (the global weighting to give a sense of how large the offshore financial centre is). The secrecy score and the weighting are arithmetically combined with a special formula - the cube of a jurisdiction's secrecy score is multiplied by the cube root of its global scale weight - to create the final score, which is then used for the FSI ranking. Full details of our methodology are available here.

Below are the fifteen secrecy indicators that we have used to assess jurisdictions. Click on each one for a detailed description of the indicator. Below this list is a short summary of each indicator.

 

Box: “You’ve treated my country unfairly!”

The FSI (predictably) gets attacked by the secrecy jurisdictions. The most common attacks are below – here they are, with our generic responses.

“You are x-bashing” (e.g. “Swiss-bashing.”)
  A: No we aren’t. We “bash” everyone. Read e.g. the U.K. or U.S. reports before levelling that accusation.
“We’ve been peer-reviewed by abc and they say we smell of roses!”
  A: We don’t use ‘accepted international standards’ as our benchmarks. We want things to improve, so we set a higher bar. Tough luck.
“You haven’t taken our xyz recent reform into account !”
  A: Nearly always, this is because we have a clear cut-off date (generally, end-Dec 2014) to enable us to compare countries fairly. We give no special treatment on this. Your reforms probably wouldn’t affect your country’s ranking anyway, not least because most other countries are improving too. We’ll include your reforms in the 2017 FSI.
“There isn’t any data.”
  A: That may be because you’re focussing on the narrative reports. Those are political and economic histories. You need to consult the database reports. They weren’t available when we published on November 2nd, but they are available now.

 

A short summary of each secrecy indicator

 

Our 15 secrecy indicators can be grouped around four broad dimensions of secrecy, which overlap to some extent. These are A) knowledge of beneficial ownership; B) corporate transparency; C) efficiency of tax and financial regulation; and D) international standards and cooperation. Here is a very brief summary of each.

 

The summaries below skirt over many nuances; if you disagree with a jurisdiction's assessment, make sure you consult the detailed indicator above, not the summary below.

 

A: Knowledge of beneficial ownership

There can be a considerable distinction between the legal owner of an asset and the beneficial owner. Essentially, the beneficial owner or owners are the warm-blooded humans which ultimately control or have the power to enjoy the asset or benefits derived from the asset. Quite often, the legal owner is a different person or people: for example the trustee of a trust is technically the legal owner of the assets in the trust - but may only manage the trust assets under precise instructions; the trustee cannot take personal benefits from the trust (other than fees for services provided.)

Indicator 1: banking secrecy.

This measures the extent to which relevant information about the beneficial owners of bank accounts must be recorded, verified and maintained by the relevant bank, and if this is shared with competent local authorities to allow information exchange. This information must be readily accessible without too many hurdles (such as requiring a court order) placed in the way of accessing it.

Indicator 2: registers of trusts and foundations?

This indicator looks at the extent to which a jurisdiction publishes details about the various parties to trusts and/or private foundations in a central register which is publicly accessible via the internet. Because it can be hard to pin down exactly who the beneficial owner of a legal structure really is, we require these registries to reveal all relevant parties of these arrangements. Alternatively, not all jurisdictions' laws provide for the creation of private foundations, which is credited as if foundations were made fully transparent.

Indicator 3: company beneficial ownership

This indicator assesses whether a jurisdiction requires all limited liability companies to submit beneficial ownership information upon incorporation to the relevant governmental authority, and to keep it updated. This indicator does not consider whether or not this information is made public.

B: Corporate Transparency


Given the pervasiveness of companies in dubious offshore schemes, and considering their privileges granted by society, we argue that corporations should be subject to a higher standard of transparency than merely submitting information to public institutions.

Indicator 4: publicly available company ownership

This indicator examines the extent to which a jurisdiction makes company beneficial and legal ownership accessible over the internet for less than 10US$/€.

Indicator 5: publicly available financial accounts

This indicator reviews whether the financial statements of each type of company with limited liability is accessible online again for less than 10US$/€.

Indicator 6: country by country reporting

This indicator then asks if countries require companies to submit and publish certain financial data on a country-by-country basis.

C: Efficiency of tax and financial regulation


It might seem at first glance that efficient tax or financial regulation is not related directly to financial secrecy. However, one common way of preserving secrecy in financial matters is to encourage a culture of non-compliance through, for example, not collecting basic information from local economic actors. Similarly, dispensing with basic tools for efficient tax administration (such as the reliance on taxpayer identification numbers for matching information from various sources) can lead to non-compliance. Tax loopholes and incentives can also increase complexity in international tax, which can create opacity. Furthermore, countries with low or zero tax rates frequently invite undeclared, secretive investments for tax evasion or avoidance purposes, and secrecy often naturally accompanies such facilities.

Indicator 7: reporting payments to non-residents

This indicator explores whether resident financial institutions and companies have to report to their local tax administration information on all interest and dividend payments to all non-residents. This enables their local authorities to provide the relevant information to foreign jurisdictions in a timely and accurate way. Even the best international information-sharing agreements are worth little if the local jurisdiction does not collect the necessary information in the first place.

Indicator 8: efficiency of tax administration

This shows whether the local tax administration uses taxpayer identifiers for efficiently analysing information, and whether there is a dedicated unit for large taxpayers. Without adequate organisational and technical capacity in this respect, whether by accident or by design, the financial dealings of individuals and corporations can be expected to remain unchallenged, creating financial opacity.

Indicator 9: avoids promoting tax evasion

This indicator indicates whether the jurisdiction facilitates tax avoidance and encourages tax competition. This is assessed through a special methodology, which you can access here.

Indicator 10: harmful legal vehicles

This indicator has two parts. First, it shows whether the jurisdiction allows the creation of “protected cell companies” (PCC, also known as “incorporated cell companies” or “segregated account companies”) in their territory. A PCC is essentially a corporate entity, common in small secrecy jurisdictions, that contains within itself a number of cells which behave as if they are companies in their own right, but are not. The cells are carefully kept separate from each other, which makes them hard to penetrate.

The second component measures whether the jurisdiction prohibits the administration of trusts with ‘flee clauses,’ where a trustee can quickly relocate the trust from one secrecy jurisdiction to another as soon as anyone comes looking for information, allowing criminals to stay one step ahead of law enforcement.

D: International standards and cooperation


Financial globalisation has increasingly meant that countries need to co-operate and share information about each others’ taxpayers, if they are to tax and police their citizens and criminals effectively. Some co-operation mechanisms are bilateral, while several multinational initiatives are either in place or under preparation.

Indicator 11: Anti Money Laundering

This indicator examines the extent to which the jurisdiction’s anti-money laundering regime is considered effective by the Financial Action Task Force (FATF), the international body dedicated to counter money laundering.

Indicator 12: automatic information exchange

This registers whether or not the jurisdiction has committed to participate in multilateral automatic information exchange on tax matters. Since February 2014, the Common Reporting Standard (CRS) has been rolled out by the OECD as the new global mechanism implementing multilateral automatic tax information exchange. Early adherence to the multilateral version is the basis for a full credit.

Indicator 13: Bilateral Treaties

This is another two-part indicator. The first part gives a full credit whether the jurisdiction has signed sufficient treaties conforming to the OECD’s ‘on request’ standard of cross-border information exchange. While much weaker than ‘automatic’ information exchange, we give a jurisdiction credit if it has signed such treaties with 53 other countries. Second, a jurisdiction can also get credit for having signed and ratified the Amended Council of Europe / OECD Convention on Mutual Administrative Assistance in Tax Matters.

Indicator 14: international transparency commitments

This indicator looks at the extent to which a jurisdiction has entered into five different international conventions. These are: 1) Amended Council of Europe / OECD Convention on Mutual Administrative Assistance in Tax Matters; 2) The 2003 UN Convention against Corruption; 3) The 1988 UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances); 4) The 1999 UN International Convention for the Suppression of the Financing of Terrorism; and 5) The 2000 UN Convention against Transnational Organised Crime.

Indicator 15: International Judicial Co-operation

This measures the degree to which a jurisdiction engages in international judicial cooperation on money laundering and other criminal issues, based on FATF assessments. Compliance with these recommendations means that a jurisdiction is not just willing to receive requests for cooperation by foreign authorities, but is able to take effective action to cooperate with such requests.