United States “Beats” Switzerland as a Perceived Global Haven for Money Laundering and Tax Evasion

Ballard Spahr LLP

Ballard Spahr LLP

The Cayman Islands Receive “Top Honors.” But, Global Financial Transparency is Reportedly Improving in General

The United States has overtaken Switzerland as a financial secrecy haven, according to the latest rankings – the Financial Secrecy Index 2020 (“2020 Index”) – issued by the Tax Justice Network (“TJN”), which describes itself in part as an independent international network conducting research, analysis and advocacy on international tax and financial regulation and the impact of tax evasion and avoidance. According to the 2020 Index, the U.S. now has the dubious distinction of holding second place in these rankings, having “lost” only to the Cayman Islands for first place.

As always, such reports and rankings, which purport to present incredibly complex and fluid systems as neatly distilled rankings, based on numerical factors presented with seeming objective precision, must be taken with a grain of salt. Invariably, they simplify issues and reflect implicit, subjective and potentially biased judgments. Nonetheless, the 2020 Index represents the latest in a string of international pronouncements turning an uncomfortable spotlight on the U.S., which (as we have blogged here, here and here) appears to be increasingly viewed by the rest of the world as a (hypocritical) haven for money laundering and tax evasion. Switzerland may regard having been “trumped” by the U.S. in these rankings with a bit of irony and schadenfreud, given the lengthy campaign by the U.S. to battle Switzerland’s banking and tax secrecy laws and customs, including many prosecutions by the U.S. involving undisclosed offshore accounts held by U.S. taxpayers in Switzerland (and elsewhere). Certainly, the 2020 Index highlights the substantial intersection between money laundering and tax evasion, both of which thrive in environments where anonymous shell companies may proliferate.

The 2020 Index Methodology

The TJN describes the methodology of the 2020 Index as follows, observing that the index smartly attempts to focus on a country’s net effect on the global financial system:

The 2020 Index ranks each country based on how intensely the country’s legal and financial system allows wealthy individuals and criminals to hide and launder money extracted from around the world. The index grades each country’s legal and financial system with a secrecy score out of 100 where a zero out of 100 is full transparency and a 100 out of 100 is full secrecy. The country’s secrecy score is then combined with the volume of financial activity conducted in the country by non-residents to calculate how much financial secrecy is supplied to the world by the country.

A higher rank on the index does not necessarily mean a jurisdiction is more secretive, but rather that the jurisdiction plays a bigger role globally in enabling secretive banking, anonymous shell company ownership, anonymous real estate ownership or other forms of financial secrecy, which in turn enable money laundering, tax evasion and huge offshore concentrations of untaxed wealth. A highly secretive jurisdiction that provides little to no financial services to non-residents, like Samoa (ranked 86th), will rank below a moderately secretive jurisdiction that is a major world player, like Japan (ranked 7th).

Applying this methodology, the 2020 Index identifies the following countries as the “Top 10” offenders:

  1. Cayman Islands
  2. United States
  3. Switzerland
  4. Hong Kong
  5. Singapore
  6. Luxembourg
  7. Japan
  8. Netherlands
  9. British Virgin Islands
  10. United Arab Emirates

More generally, the 2020 Index criticizes countries within the Organisation for Economic Co-operation and Development (“OECD”), which tend to represent wealthy countries heavily engaged in international trade and investment, as guilty of “hypocrisy in curbing financial secrecy” because they “outsource[e] financial secrecy to their dependencies,” (for example, the Isle of Man is considered to be a dependency of the U.K.), and therefore “enable some of the worst forms of financial secrecy in the world while exercising stricter regulations on financial secrecy within their own borders.”

How the U.S. “Beat” Switzerland

The 2020 Index identifies a slightly curious and discrete reason for the U.S. rising above Switzerland in the rankings: a worsened secrecy score, “largely attributed to the passing of a new law in New Hampshire permitting the establishing of non-charitable private foundations without the need for disclosure.” In contrast, Switzerland dropped in the rankings because it increased the number of countries with which it automatically exchanges information under the Common Reporting Standard (“CRS”), created by the OECD and which currently has 105 signatories. The CRS “calls on jurisdictions to collect information on the financial activities of non-resident individuals, corporations and legal vehicles and automatically exchange that information with the jurisdiction in which the individual, corporation or legal vehicle resides.” The 2020 Index found that Switzerland also became more transparent by reducing the volume of financial activity by non-residents.

The TJN criticizes the U.S. for not following the CRS and instead using its own standard, the Foreign Account Tax Compliance Act (“FATCA”), which does not guarantee that countries exchanging information with the U.S. receive reciprocal information in return. “Importantly, the U.S. does not share beneficial ownership information, allowing non-residents to hide their bank accounts in the U.S. by holding them through legal vehicles.” The TJN advocates for the passage of proposed U.S. legislation on which we have blogged, and which is aimed at combatting the use of anonymous shell companies and improving the collection and sharing of beneficial ownership information — the Corporate Transparency Act and the ILLICIT CASH Act.

According to the TJN, Cayman attained its top spot in the rankings primarily because it has increased the volume of financial services it provides to non-residents. “The growth of Cayman’s global role points to major risks emanating from its hedge fund industry, which uses companies, trusts and limited partnerships that are cloaked in secrecy.”

The Big Picture is Improving

However, the 2020 Index concluded that, overall, “countries on the index reduced their contribution to global financial secrecy by 7 per cent.” This reduction flows from reforms involving the automatic exchange of information on the financial activities of non-resident individuals, corporations and legal vehicles — primarily through the CRS — and beneficial ownership registration. The TJN praises the automatic exchange of information because it “eliminates the obstacles, delays and politics that have deterred international cooperation and helped financial secrecy flourish.”

Further, the TJN has praised Germany in particular for “dramatically” reducing its contribution to global financial security by improving its beneficial ownership registration requirements, such as by requiring companies, partnerships and foreign trusts to disclose who their beneficial owners are. The TJN also has praised Germany for improving country-by-country reporting from companies (“a reporting practice that requires companies to publish information on the profits and costs they incur in every country they operate in, instead of only publishing a global summary of their profits and costs that lumps and blankets their country-level profits and costs into one aggregate”), which deters profit shifting and better reveals “whether multinational corporations are illicitly shifting profits out of the country under the guise of costs to avoid tax.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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