Offshore Financial Secrecy Reform

Does transparency bring cleanliness? Offshore financial secrecy reform and corruption control

Project Summary

There is a growing recognition that the enablers of much large-scale (‘grand’) corruption lie in transnational financial networks. Popularly known as tax havens, offshore secrecy jurisdictions (OSJs) facilitate the international movement and storage of funds acquired through corruption, tax evasion, smuggling, drug trading, and other criminal activities.

A growing international reform effort has sought to address these problems by targeting offshore financial secrecy. Available evidence suggests that these initiatives have generated effects in the form of greater transparency, but there is little evidence on outcomes. Has greater transparency actually reduced the use of OSJs for illicit purposes at the global level?

This project aims to fill this gap in understanding of outcome effectiveness by (a) compiling the first historical database of financial secrecy indicators by jurisdiction, and (b) using this database to examine the impact of changing offshore secrecy on the hiding and movement of corruption proceeds through shell companies, as revealed in leaked datasets (Panama and Paradise Papers).

Policy and Programming Implications

With offshore financial secrecy reforms in areas such as information exchange and beneficial ownership reporting a key focus on efforts to combat illicit financial activity, there is need for quantitative evidence on existing reform effectiveness that can help to guide ongoing policy design and implementation. This project will fulfill this need by providing a comprehensive and systematic assessment of how effective a range of offshore financial secrecy reforms have been at curbing the use of offshore shell companies for the hiding of the proceeds of corruption. Findings will be timely and important, providing critical guidance to still intensifying financial transparency reform efforts.

Research Question

What effects are initiatives to increase the transparency of offshore secrecy jurisdictions having on the use of these jurisdictions for the hiding of developing country corruption proceeds?

Methodology

The main challenges in our area of study are related to data availability, and our methodology is designed to directly address these challenges.  Firstly, we are drawing on the expertise of the Tax Justice Network to construct the first historical database of changing financial secrecy indicators in key jurisdictions.  Secondly, we are exploiting the window that new leaked datasets (the Panama Papers, Paradise Papers, and Offshore Leaks) provide into the use of shell companies by developing country elites, including for illicit purposes such as the movement and storage of the proceeds of corruption.  Putting these together will allow us to conduct comprehensive statistical analyses of how the changing international financial secrecy regulatory and enforcement landscape has impacted the international landscape of illicit shell company use.

Ace Impact

Findings

• In countries with high political corruption, patterns of shell company formation are predictable. Activity is likely to be at its highest during periods of regime stability, and economic liberalisation processes increase shell company formation, potentially reflecting increased opportunities for corruption. Good governance reforms in these contexts often merge measures that aim to strengthen the rule of law and liberalise economies.
• Rule of law-promoting and liberalisation-promoting reforms should be decoupled, with rule of law prioritised in these contexts. Shell company formation in developing and transition economies is linked to broader macroeconomic phenomena. We should not assume that this is solely a story of elite political corruption, but rather pinpoint which economic sectors and processes are most likely to be linked to transnational corruption involving shell companies.
• Evidence was found of the offshore recycling of several types of foreign currency inflows into developing and transition economies (including mineral rents and short and long-term foreign assistance), which are linked to increased offshore shell company formation. However, in contrast to institutional and political variables, these effects do not appear to be corruption-dependent, suggesting that they are largely macroeconomic in nature.
• Using the new Regulation of Illicit Financial Flows (RIFF) dataset, we are able, for the first time, to visualise the development of the Anti-Money Laundering and Combatting the Finance of Terrorism (AML/CTF) and financial secrecy landscape over the past 30 years, and to do so at the global level, in a time-consistent way. Over this period, we find broad International Finance Facility (IFF) regulatory convergence across offshore jurisdictions and Organisation of Economic Co-operation and Development (OECD) countries, and in AML/CFT compliance and international information exchange. However, these areas of convergence are layered on top of a persistent offshore-onshore divide in other areas of financial transparency, including statutory banking secrecy and the scope and accessibility of beneficial ownership data, wherein lapses also persist in key OECD members. This is likely to have a particularly negative impact on the investigative efforts of non-governmental actors, including journalists and civil society organisations.

Evidence of Impact

• We presented the research at several fora, including the European Anti-Money Laundering Policy Forum, International Monetary Fund (IMF), and Central Bank of Bahamas Empirical AML Conference, which included people from different government intelligence units. We also engaged with stakeholders at the OECD and the European Parliament.
• We contributed to the United Nations Conference on Trade and Development-United Nations Office on Drugs and Crime (UNCTAD-UNODC) Task Force on the statistical measurement of illicit financial flows, which aims to develop a new Sustainable Development Goals (SDG) indicator to capture illicit financial flows. We also provided input on the development of a UK International Centre of Excellence on Illicit Finance.
• The RIFF database is being used by the United Nations Economic and Social Commission for West Asia in their analysis of Middle East and North Africa (MENA) illicit financial flows.
• We provided British Parliamentary staff input at the Open Ownership-organised event on financial secrecy in the UK and overseas territories, as well as on Serious Organised Crime and Anti-Corruption Evidence (SOC-ACE) and Global Integrity Anti-Corruption Evidence (GI-ACE)-sponsored sanctions, illicit finance, and organised crime at the Changing Geopolitical Order event at the British Academy.

Research Team Members

• Daniel Haberly, Senior Lecturer in Human Geography, University of Sussex School of Global Studies, Centre for the Study of Corruption and Centre for Global Political Economy
• Alex Cobham, Chief Executive, Tax Justice Network, and Visiting Fellow, Kings College London
• Valentina Gullo, Research Fellow, University of Sussex School of Global Studies and Centre for the Study of Corruption