Martin Hearson from Action Aid is live in St. Andrews, Scotland today for the G20 Finance Ministers meeting.  Be sure to check out his live updates on Twitter @ActionAidUK.

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Global Financial Integrity released the following statement last night urging G20 Finance Ministers meeting in St Andrews today and tomorrow to make the connection between illicit financial flows from developing countries, their absorption by secrecy jurisdictions/tax havens, and the devastating effect this has on global poverty.  From GFI:

Washington, DC — As the Group of Twenty Finance Ministers meet tomorrow in St Andrews, Global Financial Integrity (GFI) urges leaders to acknowledge the devastating link between illicit financial flows from developing countries, secrecy jurisdictions (tax havens), and global poverty.

“Every year the developing world loses as much as $1 trillion to secrecy jurisdictions via government corruption, criminal activity, and tax evasion,” said GFI Director Raymond Baker. “Overwhelming official development assistance by roughly 10 times, curtailing these flows is critical to alleviating global poverty and enabling economic development.”

Thus, GFI is requesting that the G20 Ministers adopt the following language in any official communiqué resulting from the summit:

“We recognize the link between illicit outflows of capital from developing countries, absorption of those resources by tax havens and secrecy jurisdictions, and the adverse impact those flows have on poverty alleviation and economic development.

We welcome work by the FATF to help detect and deter the proceeds of corruption by prioritizing efforts to strengthen standards on customer due diligence, beneficial ownership and transparency. To build on those advances we call on the FATF to further its work by recommending that the beneficial ownership of all companies, trusts and foundations be made a matter of public record. We also ask the FATF to amend recommendation number 1 to list tax evasion as a predicate crime for a money laundering charge.”

Additionally, GFI and other civil society organizations sent a letter to G20 Finance Ministers last week welcoming the G20’s recent focus on tax haven secrecy, while also calling on the G20 to a) support a truly multilateral agreement for automatic exchange of tax information between jurisdictions, including the disclosure of beneficial ownership of assets and trusts , and b) support an international accounting standard requiring multinational companies to report profits on a country-by-country basis. To read the full text of the letter, click here…

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Philosophers distinguish between two types of moral imperatives: negative duty and positive duty.  Negative duty is the moral obligation not to cause harm, whereas positive duty is the moral responsibility to prevent harm.  For example, you have a negative duty not to push another person in front of a speeding train.  You might also have a positive duty to pull an injured man out from in front of a speeding train.

Most humanitarians talk about our positive duty to eradicate poverty.  In the face of overwhelming inequalities of income, rampant disease, and widespread starvation, these people contend that we have a moral responsibility to help poor nations and people.   Thomas Pogge, a philosopher from Yale, has another take.  He believes we have a negative duty to not make worldwide poverty worse.  But he also believes this minimal moral obligation is not being fulfilled.  Pogge argues rich countries are actively harming “many in the poor countries through the global economic order they impose.”  For this reason, poverty is a human rights issue because, in Pogge’s view, someone “is a human rights violator when he or she actively harms others or contributes to harming them.”

Thomas Pogge points to a variety of features of the developed-country-dominated global economic order that worsen poverty.  For example, Pogge cites protectionist measures in the world trade system, like agricultural subsidies prevalent among developed countries, which are widely argued to exacerbate poverty.  Many development Economists note subsidies make agricultural products cheaper to produce in developed countries, which give these farmers a huge competitive advantage and drives down the global price of agricultural products. So farmers in developing countries, instead of improving the agricultural self-sufficiency of their home country and gaining wealth through exports, are forced out of the market.  In fact, according to a report by the World Bank, if developed countries cut agricultural subsidies by 10 percent and manufacturing subsidies by 5 percent, they would produce gains for developing countries “of nearly US$350 billion in additional income by 2015.”

I believe there is an even better example of the Western’s world negative duty to not harm the poor.  And that is the phenomenon of illicit financial flows.  It is, in fact, the developed world’s systems of international finance that allow practices like abusive transfer pricing by multinationals.  These mechanisms funnel billions of dollars out of the developing world, into tax havens and…the developed world.  Which brings me to my next point.

An analysis on the absorption of illicit financial flows has so far shown that the majority of the funds wind up in developed country banks, including Switzerland and Ireland, but even more in the United States and the United Kingdom.  Raymond Baker, Director of Global Financial Integrity, has estimated that about a half trillion dollars per year flow out of non-western countries and “are lodged permanently in deposits, properties, and market investments in the United States and Europe.”  So why do we allow this to happen?  Baker explains “We have been guided for many years by an implicit cost-benefit analysis suggesting the receipt of such money is good for the United States, good for Europe.”  Or to put it simply: we like the money.

For these reasons I would argue we have a negative duty and, therefore a human rights obligation, to end the practices which foster systems that encourage and exacerbate poverty.  These goals can in part be accomplished by addressing the shadow financial system by instilling systems of automatic tax information exchange and country by country reporting.  Of course these steps cannot end illicit financial flows outright.  But they will take a leap towards curtailing them and, hopefully, a step towards ending poverty worldwide.

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A smiling Urs Roth appeared on Bloomberg TV last week in a video version of whistling through the graveyard.  Roth, who is CEO of the Swiss Banking Association, was in Washington to meet with the key people who will shepherd the country through the next iteration of banking regulation.  With Swiss bank giant UBS recently coming out on the wrong end of a heavy weight bout with the Justice Department, Roth was no doubt trying to make nice with the people who could make his job a whole lot more difficult in the future.

Part of Roth’s p.r. campaign was to appear on Bloomberg television.  He looked and sounded confident but what came out of his mouth was complete spin that belied the severe blow Swiss banking is taking after the recent tax evasion scandal.  The essence of the interview can be distilled down to the following exchange:

“JON ERLICHMAN, BLOOMBERG NEWS: Urs, obviously one of the biggest questions is wealthy clients, will they turn their back on Swiss banks? What evidence have you seen for or against that?

ROTH: Fortunately, none at all. What we have been very satisfied of was that all of the financial centers which concentrate on wealth management have at the – basically at the same time accepted the OECD-26 standards. So that was good for Switzerland. And Switzerland has many other advantages for wealthy clients to be there and to continue business in Switzerland.”

None at all?  Really?!

On Tuesday the Wall St. Journal jammed a wrench into Roth’s spin cycle with the following story:

“Swiss bank UBS AG (UBS) is facing big challenges at its wealth management business, which is suffering from both homemade problems and structural changes in the business of managing assets for the rich, and may see more clients taking their wealth elsewhere in coming quarters.

The Zurich-based bank said clients continued to pull out funds in the third quarter, resulting in net new money outflows of 16.7 billion Swiss francs ($16.2 billion) at its wealth management business, which includes private banking, or managing funds for very rich clients.”

The real story is that people are voting with their wallets and are exiting Swiss banking.  It’s no longer deemed safe (i.e secret) enough to do business there.  True, many of those people may be putting their money into other secrecy jurisdictions.  But the ultimate message is that vigilance works.  The dogged pursuit of the UBS case by the Justice Department did a world of good as far as pulling back the veil of secrecy that hides so much corrupt, tax evading, criminal and terrorist money.  Hopefully, the Obama administration has only just begun.

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Switzerland Freezes Tax Treaty Negotiations With Italy
Tax Analysts, November 3, 2009

News Analysis: Getting Serious About Offshore Evasion?
Tax Analysts, November 3, 2009

Change the law on tax avoidance
Guardian.co.uk, November 2, 2009

US tax authorities take a closer look at Bermuda
The Royal Gazette, November 3, 2009

UPDATE: UBS Private Bank Faces Challenge, Changing Model
Wall Street Journal, November 3, 2009

Better to hide money in Delaware than Switzerland
MSN Money, November 3, 2009

TJN report biased, says CIG
Cayman News Service, November 3, 2009

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USA #1 in Ranking of World’s Most Secretive Financial Jurisdictions
November 1, 2009

Square Mile too secretive, says report
The Independent, November 1, 2009

Azerbaijan’s economy grows, despite global crisis: US experts
The Trend, November 2, 2009

Obama faces criticism as US state tops secrecy table: Delaware named as world’s most secret financial location
Guardian.co.uk, October 31, 2009

Take That Switzerland! Delaware Is Most Secretive Financial Center
Reuters, November 1, 2009

Manila’s tax chief resigns for not meeting targets
Reuters, November 2, 2009

Switzerland suspends tax deal with Italy
Euronews, November 2, 2009

Liechtenstein Joins Global Tax Information Exchange Forum
Tax Analysts, October 30, 2009

Liberia corruption fighter killed
BBC, November 2, 2009

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Richard Murphy has just posted two videos on his YouTube channel – one explaining the new Financial Secrecy Index, and the other going into detail about Delaware, which came in ranked number one.  Check them out below:

The Tax Justice Network Financial Secrecy Index:

Delaware:

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The results of the 2009 Financial Secrecy Index

Finally, the time has come to reveal the names of the secrecy jurisdictions that we have ranked according to both their lack of transparency and their scale of cross-border financial activity. For the first time ever, and based on far, far stronger criteria than those used by the OECD, we can now announce the world’s leading secrecy jurisdictions.

Nothing remotely like this has ever been done before.

Our new index assesses each jurisdiction on an opacity rating – how secretive the jurisdiction is – combined with a weighting according to size. We put special emphasis on the opacity score. Read more here.

And here we go . . .

Counting down from number 5, we have, at number 5, the City of London in the United Kingdom, the world’s largest financial centre, and the state within a state that sits like a spider at the centre of a web that includes exactly one half of all 60 secrecy jurisdictions ranked on the Index. Its satellite jurisdictions work hard to hoover up dirty money from around the world, and channel it into London. Did the sun ever really set on the British Empire? Despite ranking as the most transparent of the secrecy jurisdictions we surveyed, London operates on such a vast scale, and is so politically unaccountable, that it has the potential to do more damage than the vast majority of its competitors.

At number 4, the Cayman Islands combine a truly appalling Opacity Score of 92 per cent – meaning they were awarded a credit on only one of the twelve indicators used for our assessment – with a massive scale of operation. Cayman authorities are also among the world’s leading ‘tax haven deniers’. On the basis of our evidence, they should now stop relying on spin and get their house in order instead.

Few will be surprised to see Switzerland coming in at third position. Swiss bankers have earned themselves a dreadful reputation for furtiveness, political manoeuvring, and the blackest secrecy. Shame on them for scoring a brutal 100 per cent on their opacity assessment, and for constantly trying to wriggle out of cleaning up their act. And shame on the Swiss government, for tolerating this. They need to understand that the global zeitgeist is firmly against them.

The Grand Duchy of Luxembourg ranks number two on the index. While not such a big player in private banking as Switzerland, Luxembourg hosts a massive hedge fund activity which attracts investors from around the world. TJN recently visited the Grand Duchy and met various bankers. Like their counterparts in other secrecy jurisdictions, they like to portray themselves as guardians of privacy. What they do not say is that it is the privacy of rich élites that they care about – that is, élites in other countries who want to evade paying their taxes.

And now for the big winner of the competition for the world’s most important secrecy jurisdiction . . . . .

Step forward Delaware in the United States of America. Ranked alongside 59 other secrecy jurisdictions, your commitment to corporate secrecy, and your resolute lack of cooperation and compliance with international norms, places you at head of the new Financial Secrecy Index.

Most ordinary people would never consider Delaware alongside Bermuda, Monaco and Grand Cayman as a secrecy jurisdiction. Yet your Opacity Score is as bad as the Cayman Islands’ score, and the sheer scale of your operations places you well ahead of the rest. Your status reveals a brazen contradiction at the heart of the American free market. Properly functioning markets depend on transparency and symmetric access to information, but secrecy jurisdictions like Delaware, Wyoming and Nevada purposefully set out to undermine market transparency.

The also rans . . .

The top Dirty Dozen secrecy jurisdictions – in reverse order – are:

#12 Austria

#11 Jersey

#10 Hong Kong

#9 Belgium

#8 Singapore

#7 Bermuda

#6 Ireland

#5 UK – City of London

#4 Cayman Islands

#3 Switzerland

#2 Luxembourg

#1 USA – Delaware

For access to the full index, click here…

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Much as expected, the Foot report into the Crown Dependencies and the Overseas Territories is disappointing. Appoint the wrong man to do the job – and Michael Foot was always the wrong man to do this job – and he has even defected to the Tories whilst undertaking it in an extraordinary show of poor etiquette – and you will get the wrong answers. How could a man who makes his living from offshore have ever done this job?

But the report, none the less seeks to delivers some small punches. It is, for example,  adamant that these places must raise enough tax to bear their own risks. I agree, of course. It is only too obvious that they have delivered tax haven facilities on the basis of subsidy from the UK, direct or indirect. The UK subsidy of £230 million VAT to the Isle of Man each year was just the most obvious example – and at least that has been reduced now, albeit I think a subsidy of maybe £90 million a  year remains. The demand that each place raise more tax is reasonable and appropriate. The fact that sales taxes are promoted shows that Foot, true to his Tory colours, understands nothing about social justice. This makes the local population of these places, many of whom are really not very well off, pay the price of tax haven activity for the world’s rich.

And the fact that this is the centrepiece of the report also shows a poverty of thinking on Foot’s part. He may have noticed that some of the world’s largest banks have failed of late – despite claims to have been profitable. That was because they were massively under-capitalised to withstand the risks inherent within their business models. Raising some VAT or its equivalent in Guernsey and other such places is the equivalent of what a small rights issue did for RBS in 2008 – it utterly failed to correct the inherent flaw within its balance sheet. The reality is that these places promote risk which it is way beyond their capacity to manage or bail out. In which case this focus is completely wrong. The only way to manage financial risk in these places is to dramatically curtail the risk they deliberately, provocatively and inappropriately underwrite without capacity. And that would have required their financial services sectors to be radically curtailed. Foot is not saying they should do that. And therein lies the flaw in his report. It has missed the real issue: Foot thinks the risk is in the weakness in government revenues in these places, and there’s no doubt it’s true. But nothing they could raise could in any way help manage they risks they face. So whilst the proposals marginally reduce UK government risk they do nothing for the real issue.

The same is true of his focus on improved regulation. I think Foot realises the regulations with which he urges enhanced compliance were drawn up by bankers to let offshore happen beneath a veneer of respectability whilst permitting the flow of funds to continue – cutting out just the smallest and most egregious part of the business. He knows because he was part of the elite – in the UK at the Financial Services Authority and offshore in various appointments – that made sure the system was designed to deliver constructive non-compliance. He was also one of those most responsible for setting up the system of bank regulation that has so spectacularly failed. That is the veneer of respectability that allows the abuse to continue. And just as the rules he delivered at the FSA were useless – so are the offshore rules he is now promoting. They were never designed to really regulate financial abuse, were never intended to stop tax abuse, were never intended to stop the creation of asymmetric information that encourages market abuse, and were never intended to curtail this abuse in the social interest. So encouraging compliance with them now is absurd: the only thing he should have been doing is to demand automatic information exchange on the identity and income of all users of offshore tax havens, the introduction of country-by-country reporting and massive increases in the transparency of offshore structures so that the accounts, beneficial ownership and true nature of the identity of management of all offshore entities (including those in London, Delaware, and beyond) be available on public record, freely accessible and subject to massive penalty (yes, massive – including forfeiture and more) if inappropriately recorded. There are only at best very tentative steps in this direction.

Then we would have seen change. Instead we have a weak apology for a report that is going to do little, but allow it to be claimed the issue has been tackled – especially by George Osborne, who has every reason to promote the abuse no doubt beloved by many of his friends. I never had high hopes for this report. And even then I have been underwhelmed. A weak man, born to be an apologist, has delivered a weak report. It was what I expected but after a period of real progress this is, without doubt, a set back.

The moral: never again appoint insiders to undertake reviews. It does not work. Strong outsiders do work. Just look at the contrast with the Nimrod review to see what I mean.

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Dear Martha,

I want to get this letter to you before the lawyers call, which will be any day now.  You might ask yourself why you are even hearing from me.  I know the last time we exchanged words was when you shouted at me in front of our divorce lawyers—something about the value of our (or what is now my) house. I won that ruling, of course.  I hope you’ve finally learned that turning up the volume on your mouth is not as persuasive as solid reason.  But dredging up old battles is not the point of this letter.

Martha, I want to put aside differences and be honest with you.  It’s the least I can do.  I have had a Swiss bank account with UBS for almost ten years.  I originally opened the account on the advice of a certain banker, Bradley Birkenfeld; perhaps you’ve seen his name in the news.  Or maybe you haven’t.  You’ve never bothered much with newspapers.  Plus I’m sure you’re much too busy lately spending money from your generous divorce settlement to inconvenience yourself with CNN.

Since you probably don’t know—Bradley Birkenfeld is the man responsible for starting the investigation into American’s UBS accounts.  A couple months ago, he was sentenced to three years in prison.   What a waste.  That man was an outstanding, dedicated manager of my wealth.  A friend told me he once stuffed diamonds into a toothpaste tube to bring them into the U.S. for a client—now that’s dedication.  It’s really unfortunate what’s happened to him.  But what goes around comes around, I guess.  Hopefully this will teach a lesson to the next upstart banker who gets any ideas about giving away banking information.

Anyway, that backstabbing UBS bank has given up the identities of 4,450 of its American clients; names that our bankers promised to take to the grave.  Most of these depositors were just engaging in some creative portfolio diversification.  Perhaps the clients weren’t paying all the taxes they should on those accounts.  But if you ask me, with the rates this government has been charging us, I think we have every right to skirt some of these ridiculous taxes.  Remember that 18 karat diamond necklace I got you for your birthday, right before the divorce?  Well that never would have hung around your neck if it hadn’t been for our Swiss account.  No need to thank me, though, I was just doing right by our family.

We don’t have any information on whose names are on this list that the IRS now has.  And we are not going to find out for a couple weeks.  However, the government offered an “amnesty” program, for which the deadline was October 15^th.  I didn’t want to take part—honestly I don’t know why the IRS would even blink at a couple million—but I was strongly advised to turn my name in.  So I have decided to take the high road (even if it is completely unjust) and I have revealed the bank account to the IRS.

Martha, the lawyers will contact you in the next few days.  As you probably have guessed, the account was not revealed during our divorce, so I’m sure some portion is technically yours.  Also, though I don’t want to bother with all the legalistic nonsense, you should probably know that you have violated tax laws as well, because your name was also on our income filings.

Yours,

Herman

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Attorney Charles Falk of Porzio, Bromberg & Newman says he had a situation a year ago in which a husband had filed joint tax returns before his divorce. So when the client made a voluntary disclosure to the IRS that he had used a Swiss bank account to evade taxes, his ex-wife was notified of the disclosure as well. She had technically violated tax laws as well because her name was on the income filings, even though she never knew the account existed. A new divorce settlement was reached with the man handing over more money to his ex-wife.

Time Magazine, Friday, August 21^st, 2009

This post was inspired by the real case above, but the characters in the letter are fictional.  The opinions expressed do not represent those of Global Financial Integrity or the Task Force on Financial Integrity and Economic Development.

I do not mean any offense to Bradley Birkenfeld, who has been monumental in assisting the IRS reclaim millions in tax evading dollars.

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US Lawmakers Now Agree with Cayman Approach to Tax Transparency
Reuters, October 29, 2009

Treasury to Focus on Information Exchange, Tax Evasion, Officials Say
Tax Analysts, October 29, 2009

New threat for UK’s offshore havens: tax
Guardian.co.uk, October 29, 2009

Offshore Disclosure Process Will Continue to Produce Benefits, IRS Officials Say
Tax Analysts, October 29, 2009

Future Fund enjoys tax break in Cayman Islands
Sydney Morning Herald, October 29, 2009

UBS ex-client avoids prison for tax conviction
AP, October 29, 2009

Italian bank raids complicate relations
Swissinfo.ch, October 29, 2009

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Rumour reaches me the Foot Report will be out tomorrow.

It’s interesting to speculate on what this report can now add to the issues the Crown Dependencies and British Overseas Territories now face. Since it was announced almost a year ago the Turks & Caicos Islands have passed into British control, Cayman has seen its economic wings clipped and has been ordered to tax, all three Crown Dependencies have been told their system of corporate taxation is unacceptable and must be reformed and the Isle of Man has had £140 million of its VAT subsidy withdrawn leaving it in economic turmoil – but definitely delivering a clear message to those in the place who responded rather aggressively to Alastair Darling’s comment that it was a tax haven.

And yet, there is much still to be done. Regulation in these places has a long, long way to go. They remain secrecy jurisdictions – places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain that is designed to undermine the legislation or regulation of another jurisdiction. They do in addition create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so. If they are to be sustainable that needs to be tackled.

For details of what needs to change read the individual jurisdiction reports here.

Let’s hope Foot does something to shine light into these very dark places, because that’s very necessary.

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