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Africa/Global: Charting Where They Hide the Money, 2

AfricaFocus Bulletin
March 12, 2018 (180312)
(Reposted from sources cited below)

Editor's Note

"Overall, the City of London and [its] offshore satellites constitute by far the most important part of the global offshore world of secrecy jurisdictions. Had we lumped them together, the British network would be at the top of our index, above Switzerland." - Tax Justice Network

The Financial Secrecy Index (FSI) for 2018, released by the Tax Justice Network on January 31, is far more than a simple index. It is an in-depth survey as well as ranking of the countries most deeply involved in concealing wealth through offshore financial services. Based on a quantitative measure of the share of such cross-border financial services based in each country, and an in-depth qualitative evaluation of national laws and regulations affecting transparency and secrecy, the FSI provides the indispensable context for investigative journalism exposes of specific cases and advocacy by civil society groups at both national and international levels.

In striking contrast to Transparency International "Corruption Perceptions Index (CPI) (https://www.transparency.org/), which rates countries on the basis of observers' perceptions of the extent of corruption, the FSI focuses on the mechanisms which permit the fruits of corruption and other hidden assets to be concealed. Ironically, Switzerland, Luxembourg, and the Netherlands are ranked as among the least corrupt on the CPI, but they also lead on the FSI as the best places to hide the fruits of corruption, tax evasion, and other crimes.

The system that allows this to happen is in fact global, and its distribution by country, by intention, is hard to track. This two-part AfricaFocus contains substantive excerpts from the Financial Secrecy Index reports. The first part (sent out by email and available on-line at http://www.africafocus.org/docs18/fsi1803a.php) excerpts overview analyses from the authors covering the global picture and the African continent. This second part, below, provides excerpts from country reports on the United Kingdom, the United States, Kenya, Liberia, South Africa, and Mauritius.

Much more extensive data in narrative, database, and graphic formats, is available at http://www.financialsecrecyindex.com

For previous AfricaFocus Bulletins on illicit financial flows, tax evasion, and related topics, visit http://www.africafocus.org/intro-iff.php

++++++++++++++++++++++end editor's note+++++++++++++++++

Financial Secrecy Index 2018

Introduction

https://www.financialsecrecyindex.com/

The Financial Secrecy Index ranks jurisdictions according to their secrecy and the scale of their offshore financial activities. A politically neutral ranking, it is a tool for understanding global financial secrecy, tax havens or secrecy jurisdictions, and illicit financial flows or capital flight.

An estimated $21 to $32 trillion of private financial wealth is located, untaxed or lightly taxed, in secrecy jurisdictions around the world. Secrecy jurisdictions - a term we often use as an alternative to the more widely used term tax havens - use secrecy to attract illicit and illegitimate or abusive financial flows.

Illicit cross-border financial flows have been estimated at $1-1.6 trillion per year: dwarfing the US$135 billion or so in global foreign aid. Since the 1970s African countries alone have lost over $1 trillion in capital flight, while combined external debts are less than $200 billion. So Africa is a major net creditor to the world - but its assets are in the hands of a wealthy élite, protected by offshore secrecy; while the debts are shouldered by broad African populations.

Yet all rich countries suffer too. For example, European countries like Greece, Italy and Portugal have been brought to their knees partly by decades of tax evasion and state looting via offshore secrecy.

A global industry has developed involving the world's biggest banks, law practices, accounting firms and specialist providers who design and market secretive offshore structures for their tax- and law-dodging clients. 'Competition' between jurisdictions to provide secrecy facilities has, particularly since the era of financial globalisation really took off in the 1980s, become a central feature of global financial markets.

The problems go far beyond tax. 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 provides multiple ways for insiders to extract wealth at the expense of societies, creating political impunity and undermining the healthy 'no taxation without representation' bargain that has underpinned the growth of accountable modern nation states. Many poorer countries, deprived of tax and haemorrhaging capital into secrecy jurisdictions, rely on foreign aid handouts.

This hurts citizens of rich and poor countries alike.


United Kingdom

Full report at: https://www.financialsecrecyindex.com/PDF/UnitedKingdom.pdf

The United Kingdom is ranked 23rd on the 2018 Financial Secrecy Index, based on a low secrecy score of 42 and a very large scale weighting, accounting for 17 percent of the global market in offshore financial services.

Introduction and overview

The United Kingdom’s relatively low ranking on the secrecy index hides a much bigger story. We regard the UK as one of the biggest, if not the biggest, single player in the global offshore system of tax havens (or secrecy jurisdictions) today. There are two reasons for the discrepancy between its ranking and its importance.

The first is that the City of London, or “the City”, a term used to describe the UK financial services industry centred on London, is on some measures the world’s largest financial centre. As this report explains, this is built substantially on ‘offshore’ characteristics – though these characteristics in the UK’s own case aren’t particularly predicated on financial secrecy but on other offshore offerings, particularly lax financial regulation.

The second is that the UK is intricately connected to a large network of British secrecy jurisdictions around the world, notably the three Crown Dependencies (Jersey, Guernsey and the Isle of Man) and the 14 Overseas Territories, which include such offshore giants as Cayman, the British Virgin Islands and Bermuda. Though these jurisdictions have a measure of independence on internal political matters, Britain supports and controls them: the Queen appoints many of their top officials, and her head is on their stamps and banknotes. Illustrating the fact that these links are above all financial, Jersey Finance, the official marketing arm of the Jersey offshore financial centre, states that: “Jersey represents an extension of the City of London.”

Overall, the City of London and these offshore satellites constitute by far the most important part of the global offshore world of secrecy jurisdictions. Had we lumped them together, the British network would be at the top of our index, above Switzerland. (In fact, the British network is even bigger than this ‘official’ network, and includes 54 Commonwealth countries, many of whose final court of appeal is at the Privy Council in London.)

The UK’s status as both a key financial centre and a key player in a global web of secrecy that extends to other jurisdictions, results in the creation of an interconnected criminogenic environment both at home and abroad. The Panama Papers and Paradise Papers have shone an increasingly strong light on the antisocial and crime-fuelling activities of the Overseas Territories, while the dirty money continues to swill at home. The UK is the second biggest centre for wealth management after Switzerland, and at the same time its own National Crime agency acknowledges that hundreds of billions of pounds of international criminal money are laundered through its banks every year.

United States

Full report at: https://www.financialsecrecyindex.com/PDF/USA.pdf

Introduction and Background

The United States is ranked second in the 2018 Financial Secrecy Index. This is based on a secrecy score of 59.8, which is practically unchanged from 2015, although the criteria have been made more demanding.

The rise of the US continues a long term trend, as the country was one of the few to increase their secrecy score in the 2015 index. The con- tinues rise of the US in the 2018 index comes off the back of a signifi- cant change in the US share of the global market for offshore financial services. Between 2015 and 2018 the US increased its market share in offshore financial services by 14%. In total the US accounts for 22.3% of the global market in offshore financial services.

The U.S. provides a wide array of secrecy and tax-free facilities for non-residents, both at a Federal level and at the level of individual states. Many of the main Federal-level facilities were originally crafted with official tolerance or approval, in some cases to help with the U.S. balance of payments difficulties during the Vietnam War; however some facilities – such as tolerance by states like Delaware or Nevada of highly secretive anonymous shell companies – are more the fruit of a race to the bottom between individual states on standards of disclosure and transparency.

This building in Delaware is home to over 6,500 corporations, and more than 200,000 businesses hold addresses at the location.   

While the United States has pioneered powerful ways to defend itself against foreign tax havens, it has not seriously addressed its own role in attracting illicit financial flows and supporting tax evasion. It is currently a jurisdiction of extreme concern for global transparency initiatives: instead of agreeing to join and comply with the emerging glo- bal standard of multilateral information exchange, the OECD Common Reporting Standards (CRS), it has stuck with its own FATCA model (see below), which does not appear to mesh with the CRS despite technical similarities. Washington’s independent-minded approach risks tearing a giant hole in international efforts to crack down on tax evasion, money laundering and financial crime.

The U.S. has the largest share of the global market for offshore financial services; its main rival is the City of London. However, unlike the City, which built its strength on overseas empire and has historically been an outward-focused (hence heavily offshore) financial centre, the financial markets of the United States were always rather more domestically focused, and the influence of the US financial industry is diluted in a relatively much larger economy.

Financial secrecy provided by the U.S. has caused untold harm to the ordinary citizens of foreign countries, whose elites have used the United States as a bolthole for looted wealth.

Kenya

Full report at: https://www.financialsecrecyindex.com/PDF/Kenya.pdf

Kenya: Africa’s newest international financial centre

Kenya’s financial sector is highly secretive. The country scored 80 out of 100 in terms of secrecy, which explains its high ranking of 27 in the Financial Secrecy Index of 2018. Though the country’s share of the offshore world is not large, this may be set to increase as the government positions Nairobi as the latest African International Financial Centre.

Kenya lies on the east coast of Africa with a population of 48.46 million as of 2016. In 2016, Kenya was identified as one of the fastest growing economies in Sub-Saharan Africa with GDP per capita over 1445 US$ and GDP growth improving by 6% in 2016, up from 5.6% in 2015, driven by construction, manufacturing, finance and insurance, rebound in the tourism industry, strong remittance inflows, information and communication technology, and wholesale and retail trade. Kenya also takes the lead in East Africa on Foreign Direct Investment (FDI) with a majority of inflows being attributed to extractives and infrastructure projects. The key economic goal set out in Kenya’s Vision 2030 is to sustain high levels of economic growth. However, key development challenges remain, including inequality, healthcare, education and climate change.

According to a study done by Oxfam Kenya, less than 0.1% of the population own more wealth than the bottom 99.9%. The rising inequality in Kenya cannot be ignored. In the recently published Paradise Papers, a former minister was identified as having London based assets owned through a Mauritius based company. ...

Introducing the Nairobi International Financial Centre

In an effort to achieve a ‘well-functioning financial system in order to accelerate economic growth by encouraging FDI, safeguarding the economy from external shocks, and establishing Kenya as a leading financial centre in Eastern and Southern Africa’, 8 the Government of Kenya included the Nairobi International Financial Centre as one of the commitments for Vision 2030.

As a result, in September 2017, the Nairobi International Financial Centre (NIFC) Act, No. 25 of 2017, entered into force to provide a legal framework for the development of the NIFC and the NIFC Authority. According to the National Treasury, 9 the purpose of the NIFC is to establish a ‘stable, efficient and globally competitive financial services sector in Kenya’ with the ultimate objective of encouraging domestic and foreign investment, generating saving opportunities and contributing to overall economic growth.

...

The Lord Mayor of the City of London Corporation and one of the City Corporation’s main lobbying bodies, the City UK, have strongly influenced and participated in the design and implementation of the NIFC.

Liberia

Full report at: https://www.financialsecrecyindex.com/PDF/Liberia.pdf

Liberia: America’s outpost of financial secrecy

Liberia’s secrecy jurisdiction is an example of where state sovereignty has been outsourced, almost wholesale to foreign interests. In setting up the registry, the Liberian government have effectively privatised a key function of the state and even it appears some parts of Liberian law itself.

The result is that Liberia permits the establishment of some of the most powerful secrecy instruments in the world, which is reflected in its secrecy score of 80.

Although Liberia’s reputation as a secrecy jurisdiction has threatened to cause substantial damage to the reputation of country abroad, very little is known about Liberia’s tax haven role in the country itself. Its offshore corporate registry is located and managed in the United States.

The History of the Liberian Secrecy Jurisdiction

The Liberian corporate registry was developed alongside the Liberian Shipping Registry. The story goes that the US Secretary of State, Edward Stettinius visited Liberia on his way back from the Yalta Peace Conference following world war two, and saw the potential of the country. In 1947 he formed Stettinius Associates and set up a number of development projects in the country, the shipping registry being one of them.

The US had an interest in the establishment of a shipping registry in a neutral country, which would allow world trade to carry on unhindered in times of war.

With the help of lawyers from Esso and the State Department, Stettinius Associates drafted Liberia’s first maritime law. To reassure potential clients it was written into the law that the registry must be located in the United States, and managed by a US citizen. Throughout the history of the registry, the company operating the Liberian registry has been staffed by retired US generals and former employees of the US coast guard,

After its foundation in 1948 Liberia’s shipping registry grew quickly. In 1949 the country had just five ships registered under a Liberian flag. By 1955 it had overtaken Panama, the then leading flag of convenience in terms of tonnage registered. By 1965 it had surpassed the United Kingdom, the historic leading nation in terms of shipping.

The popularity of the Liberian registry was driven by its status as a flag of convenience, which is a kind of tax haven for ships. A flag of convenience is when a ship owner will register their vessel in a country other than their home country in order to take advantage of favourable tax rates or other regulations. Flags of convenience have been controversial for as long as they have existed, particularly due to their impact on labour standards.

Alongside the shipping register developed the Liberian Corporate Registry. The Corporate registry allowed ship owners to set up a Liberian company to own their ships. This in turn allowed ship owners to avoid corporation tax on the profits generated from their shipping activities and to keep the ownership of the vessels secret.

Since 2000 the contract to operate the Liberian registry has been owned by LISCR, the Liberian International Shipping and Corporate Registry, based in Vienna, Virginia, a suburb of Washington D.C. in the USA. LISCR is itself registered in the tax haven of Delaware, United States.

South Africa

Full report at: https://www.financialsecrecyindex.com/PDF/SouthAfrica.pdf

Overview

South Africa’s secrecy score of 56.10 is the lowest secrecy score of the nine African jurisdictions included in the Financial Secrecy Index 2018. Yet its global significance is the greatest of any of the African countries, reflecting the relative size of South Africa’s economy.

Secrecy undermines South Africa’s own tax base. The country’s elite, and South African and foreign multinational companies within its borders exploit weaknesses in legislation and use other secrecy jurisdictions to reduce their tax obligations in a country with deep inequality.

The entanglement of business and state interests and the use of secrecy jurisdictions dates to Apartheid-era sanctions busting in which many countries were complicit. The ensnaring of the state by business interests did not stop with the end of the Apartheid regime. In fact, the recent ‘Gupta Leaks’ reveal the extent of what is described by some South Africans, including former Public Protector Thuli Madonsela, as state capture.

Capital flight from South Africa and by South African companies

South African finance ministers have not shied away from calling out the problem of capital flight. In the 2016 Budget Speech, then Finance Minister Pravin Gordhan said, ‘We will continue to act aggressively against the evasion of tax through transfer pricing abuses, misuse of tax treaties and illegal money flows. Drawing on the work of the OECD, the G20 joint project on base erosion and profit shifting and independent bodies such as the Tax Justice Network, further measures will be taken to address such revenue losses, including inappropriate use of hybrid debt instruments’.

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. 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’.

...

South African companies which have an increasing footprint across sub-Saharan Africa are also complicit in draining the coffers of other African nations. Telecoms giant MTN – the largest cell phone company on the continent in terms of subscribers – has shifted billions of Rand, for example, from its subsidiaries in Ghana, Nigeria and Uganda through Mauritius. These countries have responded by freezing payments and Uganda has notified the company of outstanding taxes owed.

Mauritius

Full report at: https://www.financialsecrecyindex.com/PDF/Mauritius.pdf

Overview

The islands of the Republic of Mauritius lie just 2,000 kilometres off the southeast coast of Africa. Financial secrecy casts a long shadow over the idyllic sandy beaches. In entering double taxation agreements with 43 nations, 16 of which are African states, Mauritius enables companies and individuals to reduce their tax bill across the world. India and many African nations suffer as a result.

Mauritius’ secrecy score of 72.35 in the Financial Secrecy Index 2018 reflects the nation’s ongoing contribution to illicit financial flows from some of the countries that require the public finances the most. Positioned as the ‘gateway to Africa’, 2 Mauritius is in the process of ratifying, signing, or negotiating double taxation agreements with a further 14 African countries. Of its 11 Tax Information Exchange Agreements, none are signed with African jurisdictions.

The Mauritian ‘miracle’: from sugar to secrecy

At independence from the British in 1968, Mauritius was a mono-crop sugar economy. Today, financial intermediation rather than the primary commodity sector is a key driver of the economy. In 2017, financial and insurance activities contributed 12.3% to GDP and this has been growing at over 5% per annum since 2015. In contrast, the sugar sector continues to contract.

To encourage export-led industrialisation and economic diversification, export processing zones were set up in Mauritius in the 1970s with concessions to foreign investors. Duty exemptions on imported raw materials and free repatriation of capital, profits and dividends lured in investors and similar terms persist today.

The 1988 Banking Act laid the foundation for Mauritius’ offshore industry, while the 1992 Mauritian Offshore Business Activities Act established the country as an ‘international financial centre’. Over 20,000 global business companies were registered in Mauritius in 2017, managed by the Financial Services Commission. Even 30 of the 100 largest US incorporated companies have entities present in Mauritius. Global business companies may be registered in Mauritius, but they conduct most business outside the island. Just over half of these (‘category 1’) are resident for tax in Mauritius so can access tax treaties the country has signed.

The island state levies a general corporate tax rate of 15%, no capital gains tax and no withholding tax on interest and royalties for global business companies. A series of tax incentives are also given, including an 8-year tax holiday for companies with a global headquarters administration licence. The package is sweetened further by the absence of foreign exchange controls, thin capitalisation rules, and controlled foreign company legislation.

...

Missing public money

Recent revelations in the Paradise Papers 16 build on other tales of the role Mauritius plays in the offshore secrecy world. More than half a million of the 13.4 million secret records from offshore law firm Appleby that were investigated by over 90 media partners spearheaded came from Appleby’s Mauritius office. Many, many stories emerged of the way companies and individuals use the network of tax treaties and low tax regime in Mauritius to reduce their tax bill.


AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

AfricaFocus Bulletin can be reached at africafocus@igc.org. Please write to this address to suggest material for inclusion. For more information about reposted material, please contact directly the original source mentioned. For a full archive and other resources, see http://www.africafocus.org


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