It’s the year 1959. A man and woman walk into a bank. He’s looking very dapper in his suit and tie. He looks around and pulls his fedora a bit further over his eyes. She, a pretty woman with blonde curls pulled back into a neat knot, her vibrant red lipstick in sharp contrast with her white dress. A banker welcomes them and escorts them to their vault. “Ring the bell when you’re done, and I’ll come to pick you up,” he tells them. The banker will never know what’s in that vault.
“Look at it,” Vera whispered as she took the diamond out of her bra. “It’s perfect.”
“You can’t keep it,” Ben responded. “But once we sell it, I’ll buy you another diamond ring.”
Vera sighed and handed the diamond over to Ben who stored it in their vault. They rang the bell and were escorted out of the vault by the banker.
Later that day, Robert left the bank to go home. “Extra extra, read all about it!” Robert looked at the newspaper boy.
His heart started racing when his eyes hit the front page of the newspaper. He bought a newspaper from the boy and stared at it. “Diamond heist leaves four people and a baby dead,” it read in fat letters. He couldn’t believe his eyes. Beneath the headline was a picture of a pretty woman with blonde curls. Standing next to her the man that he let into the vault earlier that day. “My God,” the banker muttered. But bound by his banker’s secrecy, there was nothing he could do.
In a day and age where private data is one of the most prized currencies, this scenario seems out of this world. Today, we need laws such as the General Data Protection Act to guarantee our privacy. As far as banking goes, we can still count on confidentiality. But, when confidentiality turns into financial secrecy, it becomes a problem.
The problem with financial secrecy
Most people agree that their financial data must be protected. But financial secrecy is the very mechanism that undermines the anti-money laundering framework. Around $21 to $32 trillion USD of private financial wealth is stored in tax havens worldwide, meaning the owners of those trillions of dollars are getting away with paying little to no taxes. The secrecy guaranteed by tax havens attracts vast financial flows. Not only from for-profit companies but also from illicit or downright criminal actors.
But the problem isn’t just that the wealth isn’t taxed and that the owners do not contribute their fair share to the societies they live in. The offshore corrupts and distorts markets and investments. More importantly, it creates pirate towns where fraud, tax cheating, embezzlement, insider dealing, bribery, and money laundering run rampant. It actively works against poorer countries’ interests as, without taxes, they rely on handouts from richer countries to develop their societies.
The Tax Justice Network has noticed that wealthy oligarchs, criminals, and looters pay lawyers, accountants, and bankers to set up trusts, foundations, and shell companies that help them hide their assets. This makes the gap between the rich and poor only wider as the wealthy and powerful use loopholes to increase their wealth. It also results in even more crime as criminals are better informed on how to make it seem that their anonymous shell companies are legitimate businesses with legitimate cash flows.
Putting an end to financial secrecy
To diminish financial crime, financial secrecy must be eradicated as well. It seems like the only way governments will work towards that goal is through the public. In recent years we’ve seen shifts in financial secrecy happening through citizens. Opinions on financial secrecy mainly concentrate on the unfairness of corporations not paying their fair share of taxes.
Polling in the United States shows that the American people favor having more transparency and an equal tax system. According to the organization Americans for Tax Fairness, the House of Representatives’ shift in 2018 from Republican to Democrat was largely due to progressives unifying in their message about tax fairness. Brits feel the same way. Sixty-nine percent of them are in favor of a wealth tax. We’re also seeing shifts in countries with traditionally strict banking secrecy acts changing their laws. Most notably, Switzerland was pressured by the United States and the European Union to participate in the Automatic Exchange of Information Act to make it legal for banks to share information. A big change as whistleblowers and leakers of client information used to face up to five years in prison and fines under their Banking Act. There’s still a long way to go however to completely abolish the Swiss Banking Act.
Although the general public is less familiar with the connection between financial secrecy and crime, electing the right people does impact the fight against money laundering. According to the Financial Secrecy Index, financial secrecy has decreased by 7 percent globally since 2018. This means that there’s less secretive banking, anonymous shell companies, and anonymous real estate practices. Without these anonymous financial secrecy facilities–that are so symbolic for tax havens–criminals have fewer opportunities for money laundering, tax evasion, and offshoring of illicit and untaxed wealth.
Here’s what needs to happen to further this trend:
- Governments realize what the consequences of financial secrecy are and are taking action to reduce it. If they can come together to take countermeasures against secrecy jurisdictions and their economic actors, that will make a significant impact.
- Corporate taxes must be made transparent by making it mandatory to publicize tax data.
- Making public registration of beneficial owners and legal owners of all financial secrecy facilities mandatory. This should become a binding recommendation of the Financial Action Task Force.
Why don’t countries give up on financial secrecy?
The short answer? Competition. Countries have fallen victim to the need to provide secrecy facilities to compete in a global financial market. Many countries do believe that being a tax haven attracts more economic activity and more employment opportunities. However, the statistical data to substantiate these claims is meager, says the International Monetary Fund (IMF). Yes, some businesses in tax havens might produce goods for the domestic or international market or pay royalties for patents or use their knowledge in these countries. Some companies even have employees that do real business within the tax haven’s borders, but in reality, most of the business done in tax havens is fictitious. Meaning that little to none of a business’ activities are carried out in the tax haven.
The Paradise and Panama Papers revealed a lot about financial secrecy in the Caribbean. But to think that financial secrecy is reserved for some remote, foreign, and exotic location is wrong. The United States is increasingly a tax haven. And in Europe, there are as many as four secrecy jurisdictions. These are Switzerland, Luxembourg, the Netherlands, and the United Kingdom.
The European Union is also one of the governments that repeatedly delays the installment of the new Global Reporting Initiative that will make it mandatory for companies to publish their tax data. We’ve discussed the EU’s soft supervision before. Financial secrecy and the unwillingness to implement the Global Reporting Initiative makes us question again how serious the EU really is about fighting financial crime.