The Tax Justice Network (TJN) has published its Financial Secrecy Index for 2018, showing which countries are the most secretive about their offshore financial activity – either hiding funds overseas, or opening their banking system to offshore financial flows.
The index markets itself as a ‘politically neutral’ ranking, to be used as a tool for understanding global financial secrecy, tax havens or secrecy jurisdictions, and illicit financial flows or capital flight.
According to TJN, an estimated $21 trillion to $32 trillion of private financial wealth is located, untaxed or lightly taxed, in secrecy jurisdictions or ‘tax havens’ around the world. These countries typically use secrecy to attract illicit and illegitimate or abusive financial flows.
The first big problem these environments cause is tax abuse, effectively robbing originating countries of the money needed to sustain themselves – but the problems run far deeper than that, JNS said.
“In providing secrecy, the offshore world corrupts and distorts markets and investments, shaping them in ways that have nothing to do with efficiency.
“The secrecy world creates a criminogenic hothouse for multiple evils including fraud, tax cheating, escape from financial regulations, embezzlement, insider dealing, bribery, money laundering, and plenty more,” it said.
Switzerland – “the grandfather of all tax havens” – again ranked as the most secretive financial jurisdiction in the world, where half of the $6.5 trillion in assets held by its banks originate offshore. The US, ranked second, carries a double-whammy for both being a secrecy destination (on both a federal and state level), as well as being high on the list for those abusing other secrecy destinations.
Here are the most and least financially secret countries in the world.
Despite South Africa having a relatively low level of financial secrecy within the country – and the lowest score of all African nations included in the index – the Tax Justice Network said that it doesn’t stop individuals and companies in South Africa from abusing international secrecy systems.
In fact, one of the biggest problems highlighted by not only this report, but several others and the country’s finance ministry, has to do with capital flight, the abuse of shell companies to hide money, money laundering, and other illicit financial flows.
Most South Africans will be familiar with this practice through the state capture scandal, which is still an ongoing matter in the country, as well as through various leaks and reports like the Panama Papers, which point to local companies or individuals ‘hiding’ money offshore.
“The South African Revenue Service has indicated that the country is at very high risk of illicit financial flows, and particularly transfer pricing, and that some of the largest companies listed on the Johannesburg Stock Exchange, including SAB Miller and Anglo American, have been implicated in tax avoidance stories relating to other countries,” TJN said.
“According to South African civil society group African Monitor, the country’s legal and regulatory framework for anti-money laundering from criminal activity and counter-terrorist financing is robust, but ‘there is little focus on other forms of illicit financial flows, especially those perpetrated by the multinationals’.”
In 2017, the Financial Intelligence Centre Amendment Act was passed and came into force, which aimed to tighten regulation around beneficial ownership disclosure to address, among other issues, the use of shell companies in fraudulently accessing government tenders.
The Act prevents organisations from entering a business relationship with a client when ultimate beneficial owners cannot be identified – however, South Africa has yet to implement a public beneficial ownership register in open data format.
But, as was the case with the Gupta family, even when beneficial owners have been known, government has entered contracts with companies owned by politically exposed persons and those that make use of secrecy jurisdictions, TJN said.
While the Gupta state capture saga is top-of-mind, South Africa’s financial secrecy problems extend far beyond them, the group said.
“Secrecy in South Africa and secrecy jurisdictions used by the country’s elite and multinational companies hurt the nation. If left unchecked, it will continue to allow a cosy relationship between capital and politics that undermines democracy and the rule of law.”
Here is a breakdown of South Africa’s financial secrecy score: