Tax Havens thriving during recession

The tax haven infrastructure that has enabled global financial crime and malpractice to flourish has barely been reformed, despite a pledge by the G20 leaders in 2009 to close it down, according to an index published by campaign group the Tax Justice Network.

Switzerland, the Cayman Islands, Luxembourg, Hong Kong and the US are placed among the top of the league as the most aggressive in providing secrecy in the latest financial secrecy index.

The UK, with the City of London and a network of overseas tax haven territories and dependencies including Jersey, Bermuda, the British Virgin Islands and the Caymans, also features prominently in the index's dirty dozen of top offenders.

The UK Treasury said it did not recognise the picture presented in the index, adding that the UK government had demonstrated a clear commitment to tackling all forms of tax avoidance and evasion.

Two years on from Gordon Brown's G20 summit pledge to tackle tax havens and the role they played in the global economic crisis, TJN says there has been little real progress. It claims the role in the Greek debt crisis of endemic tax evasion through offshore centres is being downplayed because the big powers in the G20 – the US, the UK, and Germany – are also key beneficiaries of tax havens, as the index shows.

TJN director John Christensen said secrecy jurisdictions not only facilitated widespread tax evasion by individuals, but "have become a central feature of global financial markets, creating the environment for fraud, avoidance of financial regulations, market manipulation, and money laundering". The financial secrecy index is compiled from data collected by the OECD and IMF on flows of finance though individual offshore centres and on the extent to which jurisdictions co-operate with tax authorities in other countries. TJN also surveyed finance ministries directly about their tax agreements and disclosure rules to draw up secrecy scores. These were then weighted for the share each territory has of global offshore financial services to produce a ranking of most problematic havens.

Switzerland is ranked first since it has fought hard against EU efforts to expand automatic exchange of information and to tighten up on tax collection, preferring instead to sign up to weaker individual deals with the UK and Germany, according to TJN. Swiss banks are also accused of trying to counter crackdowns by the US on tax evaders using Swiss accounts by attracting new, illicit flows of money from developing countries to make up for what it has lost. "Although Switzerland has signed a number of OECD-style information exchange agreements, we consider these ineffective … it remains a major, active impediment to global financial transparency," the reports says. The Swiss government's department of finance declined to comment.

The Cayman Islands, a British overseas territory, is placed second. "It facilitates a huge number of opaque offshore companies and trusts which can be used to hide all manner of illegitimate activities," according to the index. A spokeswoman for the Cayman Islands' financial secretariat said the territory had taken an increasingly significant role in global transparency efforts in the last 10 years. She argued there were no secrecy provisions in the islands' jurisdiction that prevent information being obtained by the tax information authority which assists in international tax matters Luxembourg is accused by the TJN of being the "death star" superweapon in the world of tax havens because of its aggressive defence of financial secrecy and its resistance to EU efforts to close tax loopholes. It wins its place thanks to the sheer size and range of financial and secrecy services it provides, accounting for 13% of global offshore financial services, compared with Switzerland, 6%, and Caymans, 4%. The UK mainland has 20% and the US 21% of offshore services. The Luxembourg Bankers' Association dismissed the index as "yet another pseudo-scientific compilation of random data for the most part wrong or deliberately misused to reach a pre-determined conclusion".

"Luxembourg has signed all international treaties and plays by the same rules as any other EU member state," chief executive Jean-Jacques Rommes said.

Hong Kong, placed at number four, is said to be one of the fastest growing secrecy jurisdictions, thanks to Chinese economic growth and China's elites using the territory to evade tax.

The US, although not widely perceived as a tax haven, offers several "pernicious" secrecy facilities at the level of individual states. Delaware, for example, is increasingly used by large corporations for subsidiaries because of its very limited requirements on disclosure and for its favourable tax treatments.

Japan and Germany make surprise entries in the top 10 with growing illicit flows and tax exemptions.

While the UK is given a relatively low secrecy score and comes in at number 13, if the City of London were combined with UK overseas territories such as the Caymans and the dependencies such as Jersey which have greater secrecy, the UK would come out as top of the league overall in the secrecy index. A spokesman for the Treasury defended the UK record on tax havens, saying: "At the budget this year we published Tackling Tax Avoidance, on tackling avoidance at the root. The Global Forum on Tax Transparency set up by the G20 in 2009 now has over 100 participating jurisdictions and over 600 bilateral tax information exchange agreements have been signed. The world has changed over the past three years and continues to do so, and the government is committed to keep up momentum."

The problem with many of the new tax information agreements, according to TJN, is that they have taken the weakest form possible, in effect requiring tax authorities to know what they are looking for before they ask for information, rather than requiring full disclosure. It hopes the new index will act as an alarm call, and warns that there is a new public mood against tax dodging by the wealthy and large corporations.

"Despite promising to close down tax havens, the G20 has not dealt with the extent to which secrecy jurisdictions now permeate the financial world and have been the catalyst for financial crises by attracting huge sums of destabilising capital into offshore markets," Christensen said.