End secrecy jurisdictions to clean up the global economy and finance development

26/07/2011

Global wealth is created in some countries but often ends up in others. This results in some bizarre facts, such as the leading banana importer into the EU is the murky island of Jersey near Saint-Malo; India received almost half of its Foreign Direct Investment (FDI) over the last 10 years from the tiny island of Mauritius; and the leading destination for captive insurance companies is Bermuda and the Cayman Islands.

This disconnection between real economy and the financial data is predominantly the result of multinational companies (MNCs) and banks artificially transferring their profits from where they do business, to secrecy tax jurisdictions. This can be legal, but frequently is not. Transfer mispricing and abusive debt transfers are common practice. The OECD estimates that 60% of global trade occurs within MNCs. Half of all international financial and trade transactions involve ‘tax havens’.

The main characteristic of ‘tax havens’ is their opacity, which prevents foreign authorities – be they tax, judicial or prudential authorities – to enforce the law. This isn’t just about low tax rates and indeed a much more accurate term is secrecy jurisdiction. Secrecy jurisdictions present a triple challenge to the world political leaders: a) they weaken the sovereignty of every state and jeopardise any attempt at global regulation; b) they create a significant bias in international investment, trade and financial data and statistics, making it very difficult to design appropriate global policies; c) they siphon the world’s wealth away from developing countries, which are estimated to lose one trillion dollars as a result of illicit financial flows annually.

While the economies of developing countries, including in Africa, are still reeling from the effects of a global economic crisis for which they bear no responsibility, so far donors have failed meet their commitment to adequately fund the Millennium Development Goals. Alongside the need for the international community to meet their financing commitments to developing countries, making the recent fight against secrecy jurisdictions work for developing countries could make an even more vital contribution towards ending poverty.

Although as civil society organisations we question the legitimacy of 20 countries to govern the entire world economy, we also stress the central responsibility of the 20 leading economies to consider and address the needs of developing countries. They particularly need to do so when discussing global public goods such as financial regulation and transparency, related global standards and measures for their enforcement. Secrecy does not only deny states the information they need to enforce laws and regulation; it also prevents citizens from holding their governments fully to account, and can deprive investors of information they need to make responsible decisions. As the most influential members of international standard-setting bodies (e.g. FSB, IMF, OECD, FATF) and the host of major MNCs that do business in secrecy jurisdictions, only G20 countries have the power to overcome the era of global financial secrecy. This is the only way they can honour the pledges they made “to do whatever is
necessary to strengthen financial regulation to rebuild trust” (London, April 2009) and “to turn the page on an era of irresponsibility” (Pittsburgh, September 2009).

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