In early October, the International Consortium of Investigative Journalists, along with a number of media partners, published the Pandora Papers, which revealed a slice of the trillions stashed away in tax havens by politicians, officials and celebrities, in particular.
These leaks tell us, once again, that financial secrecy is at the heart of the global economy and runs like poison through the veins of our political systems. This institutional corruption does not make progress impossible, but it does mean that responses to the growing public anger about the revelations in the leaks will only be successful if they are precise and forensic. Policymakers must deliver measures that ensure ongoing accountability for the leading actors in these abuses – including themselves.
The hidden assets and secret incomes now being disclosed represent only a small part of what is in the near-3 terabyte cache of documents from 14 different professional services firms around the world. And the documents in total touch on just a tiny fraction of the estimated $11 trillion in undeclared assets held offshore globally, generating annual tax losses of $182bn.
The individual names and the specific cases may do more to grab public attention than these unthinkably large numbers: 35 world leaders, past and present; more than 300 public officials from nearly 100 countries; more than 100 billionaires, plus a scattering of celebrities.
The Pandora Papers have returned public and media focus to the shameful issue of financial secrecy. Each previous leak (including LuxLeaks, the Panama Papers and Paradise Papers) created a similar spike of interest. And, while that spike then passes, the underlying level of public engagement and policymaker concern has remained higher each time.
The challenge is to convert that engagement and concern into comprehensive action. As researcher and writer Zuhumnan Dapel put it, what can we do “when those in charge of the tools – the policies and the willpower of government with which to thwart the network of dirty money – seem to be among the primary beneficiaries of the status quo?”
Financial secrecy – the central challenge
The last two decades have seen substantial shifts in the international policy context. When the Tax Justice Network was established in 2003, we began to lay out the policy platform known as the ABC of tax transparency.
A is for automatic exchange of financial information – so that each tax authority will be informed of the foreign bank accounts of their own taxpayers, making simple tax evasion much less pervasive.
B is for beneficial ownership transparency, requiring public registers of the warm-blooded human beings behind companies, trusts and foundations, to end the damage done by anonymous ownership.
And C is for country-by-country reporting, a simple measure to ensure that multinational companies publish data that can reveal the extent of profit-shifting.
Each element was originally dismissed as utopian and unrealistic. But changes in attitude started with the efforts of the global tax justice movement and the impetus for progress following the 2008 financial meltdown. The summit of the G8 group of countries in 2013 gave broad support to the three elements in principle, and practical steps were taken towards the introduction of each.
Since 2012, the High Level Panel on Illicit Financial Flows out of Africa, backed by the African Union and the Economic Commission for Africa, has worked to build political support to end these abuses across the continent and beyond. The panel’s final report established the scale of illicit flows and the damage to governance that they can do. It also confirmed the centrality of the ABC measures and laid the grounds for the adoption of a global target to curb illicit flows as part of the UN Sustainable Development Goals.
The panel also provided an important definitional statement, recognising that the common feature of illicit financial flows is that of being hidden. This is true whether we are concerned with tax-related illicit flows (hiding the tax abuses of multinational companies or of individuals with offshore interests); with other commercial flows (hiding market dominance, for example, or the true origin of investments); or with laundering the proceeds of crime – from the trafficking of drugs and people to the bribery of public officials and the theft of public assets.
Financial secrecy is therefore the crucial facilitating element for illicit flows. Consistent progress in dismantling is key to ensuring accountability and a managed reduction in tax abuses and other criminal and corrupt activity.
Wolves guarding chickens?
Change has been painfully slow, however. Lobbying by multinational companies and professional enablers – bankers, lawyers and accountants – has undoubtedly undermined efforts to bring transparency to the global financial system. On top of that, the decisions on key policy reforms are largely taken at the Organisation for Economic Co-operation and Development (OECD) or related organisations. Our research shows this is highly problematic.
The Financial Secrecy Index, which we first published in 2009 and update biennially, assesses jurisdictions across a wide range of objectively verifiable criteria (including the ABC). The 2020 index saw the United States climb above Switzerland into second place, with Cayman the top-ranked secrecy threat. The UK and its network of Overseas Territories and Crown Dependencies would rank a clear first if it were treated as a single entity.
In total, OECD countries and their dependencies together are responsible for about half of all financial secrecy risks, according to the index. The State of Tax Justice 2020 meanwhile assesses that the same group is responsible for 59 percent of the $182bn the world loses to private offshore tax evasion every year. Dr Dereje Alemayehu of the Global Alliance for Tax Justice summed up the concerns: “Trusting the OECD to set global [tax] rules… is like trusting a pack of wolves to build a fence around your chicken coop.”
Compounding the role of OECD members are the domestic dynamics laid bare by the Pandora Papers. Within many countries, elites including policymakers are among the main users, or abusers, of financial secrecy.
As Professor Brooke Harrington, the leading sociologist studying the wealth-hiding industry, has written, financial secrecy offers “something even more appealing and dangerous [than tax avoidance], which is law avoidance in general. To the already rich and powerful, offshore offers a kind of superpower: impunity.”
So who guards the wolves?
Happily, we have the answers we need. We know the leading actors and jurisdictions responsible for financial secrecy. We know the mechanisms that can ensure consistent accountability, rather than relying on sporadic leaks. And earlier this year, a new high-level panel – the UN Financial Accountability, Transparency and Integrity Panel (FACTI) – laid out recommendations for precisely the comprehensive changes that are needed.
It recommends the full implementation of the ABC of tax transparency, recognising the failures so far and how lower-income countries are particularly excluded from the benefits.
The arrangements for beneficial ownership transparency are fundamental. Public registers of the natural person (the warm-blooded human being) behind every legal entity would end the need for leaks – and make markets work better, as well as taxes and other regulations. A powerful step would be to hold professional enablers accountable by requiring the disclosure of beneficial owners of all structures that lawyers and others help to establish and imposing criminal penalties for non-compliance.
The FACTI Panel also sets out the global architectural reforms to deliver an end to impunity for illicit financial flows.
In addition to a global asset register, to join up national beneficial ownership registers, three elements are key. A centre for monitoring taxing rights – originally proposed in my book The Uncounted – would collate and publish country-level data to provide annual accountability for the jurisdictions providing secrecy and promoting its abuse. A UN framework convention on tax would provide the basis for full delivery of the ABC, including holding states to account for meeting these commitments. It could also establish the space for globally inclusive negotiations in the future through an intergovernmental tax body.
At a technical level, the solutions are within grasp. Only the political obstructions remain – those of elites and of jurisdictions that profit from abuse.
In the 1995 film The Quick and the Dead, the villain John Herod controls a small town and its fearful citizens. The character sums up the threat: “Like I always say – put a fox in the henhouse and you’ll have chicken for dinner every time.”
If we, citizens of the world, don’t want this every time – more leaks, more outrage, and continuing impunity – then the agenda is clear. It is time for global tax justice.
The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial stance.