Why 355 Economists may not be enough
A letter from 355 economists published on Monday, and reported across the media, urged world leaders to use the anti-corruption summit to bring an end to so-called 'tax havens' and 'offshore financial secrecy’, and claimed that there was no economic justification for allowing tax havens to continue.13 May 2016
The economists are, of course, entitled to their opinion but not all economists would be signatories to this letter. They are not a homogenous breed – there are as many kinds of economists as there are political theories, and this letter reflects only one kind.
The letter (which you can read here) was carefully orchestrated by Oxfam as part of their campaign to stop world poverty (a laudable aim) by ending corruption and the flow of capital out of states. They have used the revelations of the Panama Papers, and the opportunity of the anti-corruption summit, to put pressure on governments to introduce public registries. The problem is that their argument is flawed, is unlikely to work, and their letter is filled with inaccuracies.
We all want to stop corruption, and the summit is a good opportunity to take a step towards that, but the solution proposed in the economists’ letter won’t work, and there are alternatives which would be more effective.
What's wrong with the blanket description 'tax haven'?
Oxfam have tried to use a blanket description – tax havens – for a wide variety of jurisdictions. They have then simply tried to apply the worst traits of the worst jurisdictions to them all, including Jersey. The media have happily taken this as shorthand without realising that the traits being described by Oxfam, and the accusations levelled at them, cannot be applied to them all – certainly not to Jersey.
The letter has tried to portray the world in terms of tax havens (attracting corruption and tax dodging through secrecy) and non-tax havens. This is a gross over simplification: There are well-regulated and poorly-regulated jurisdictions. Some of the jurisdictions being labelled as tax havens, including Jersey, lead the world in the standard of their regulation. I want to address some of the errors.
The errors in the economists' letter
The letter suggests that so-called tax havens are secret yet Jersey is actually better than the UK, to take one example, for financial secrecy according to the Tax Justice Network’s Financial Secrecy Index. It also suggests that shell companies are used to hide assets: No one can hide behind a shell company in Jersey – we must know the individuals behind a company, and where they get their money from, before they are allowed to do business.
There is no doubt that the ability to hide the proceeds fuels corruption – if you can't hide the dodgy money there's little point in obtaining it. The letter suggests that the secrecy of 'tax havens' enables those proceeds to be hidden. But it doesn't distinguish between secrecy and privacy, something that I wrote about in a separate blog.
Jersey is not a jurisdiction that allows secrecy. We give clients confidentiality, but their information is checked and kept by our professional service providers and in the case of companies held on a central register. That information is available to all law enforcement and tax authorities.
The letter suggests that secrecy undermines tax collection too: Jersey is a tax-neutral international finance centre. We believe that tax should be paid where it is due, and we share information with tax authorities to enable them to levy it. We don’t encourage profits to be shifted and follow the principle that tax should be levied where it is due.
It suggests that ‘tax havens’ only benefit the rich and multinationals, yet international finance centres like Jersey enable pension funds and sovereign wealth funds to invest globally, which benefits everyone.
Why public registries aren't part of the solution
The solution – according to the economists – is a public registry. There are a whole series of reasons why public registries won't work, and Jersey Finance recently produced a short factsheet setting them out.
Independent academic research has demonstrated that asking companies to provide their own information doesn't work because people engaging in criminal activity are unlikely to comply with self-reporting requirements.
We also think that public registries could potentially lead to an increase in crime. Yes, tax and law authorities should have access to the information, but who else will want access? Making beneficial ownership information publicly available will satisfy the curiosity of NGOs, the press, and neighbours, and will lead to a few salacious headlines, but information (even the kind in the Panama Papers) will be used maliciously to identify potentially lucrative victims of extortion and kidnap. It could also lead to an increase in identity theft and cyber-crime.
Public registries are also less likely to meet international standards: FATF Recommendation 24 requires competent authorities to obtain adequate, accurate and current information – with criminals expected to conceal their interests, it won’t be accurate.
The alternative to public registries
The alternative way of tackling financial crime is to introduce standards which are better thought out than public registries, and closer to becoming reality.
Jersey fully supports the transparency principles behind the G20, OECD and EU tax initiatives, which is why we are an early adopter of the Common Reporting Standard (CRS) – a global standard for the automatic exchange of information.
Although Jersey’s register is not public, relevant information is available on request to law enforcement and competent authorities, and the recent agreement with the UK will see this information exchanged automatically. While the letter calls for public registries of beneficial ownership, the international standards to which Jersey has already committed will be more effective.
Oxfam have given the example of Malawi to illustrate the supposed impact of corruption and unfair taxation. It would be impossible to look at Malawi’s schooling and health care, and not want them to improve, but Jersey can be part of the solution.
Oxfam say that financial institutions in international financial centres are conduits for illicit activity, but these claims frequently fail to distinguish between legitimate trade between countries and illicit capital flows. Few jurisdictions work harder than us to stamp out bribery, corruption and illicit activity anywhere in the world – as international regulators have testified.
It does not help the poor and needy to make wildly speculative claims about alleged wrongdoing.
Maya Forstater, a respected researcher at The Centre for Global Development had this to say about the Malawi tax campaign: “The UK might be able to afford a myth-fueled knock-about debate on the tax affairs of big companies, but countries like Malawi and Zambia cannot.
“In the absence of any evidence of wrongdoing, it is irresponsible to brand the few companies that invest in Malawi from the UK as undermining the country’s development. Stoking the fire in this way could create reputational and tax risk for the private sector and may deter sorely needed productive investment.”
Currently, private sector per capita investment in Malawi is about US$3, and aid is about US$70 per head of population. The irresponsible and unfounded allegations made in the letter are likely to deter responsible forms of investing thus harming, rather than helping, Malawi’s cause. The sad thing is that aid agencies appear to be prioritising policy influence and publicity above good outcomes for poor nations.
What can Jersey do?
Knowledge that Jersey is stable is especially important for anyone doing business in a potentially risky or unstable country with poorly defined property rights, weak legal systems and a culture of corruption. Jersey's specialised cross-border banking, wealth management, investment and legal services can be a platform for secure and efficient cross-border transactions.
Just remember that, for all the headlines and the hype, the purpose of yesterday’s summit was to tackle corruption. We think international standards are the most effective method of tackling financial crime. We are already in the vanguard for their adoption, meaning that we are already addressing this problem, while protecting the interests of legitimate investors.