It is increasingly widely recognized that many of the enablers of large-scale corruption lie in transnational financial networks and, in particular, offshore secrecy jurisdictions. These secrecy jurisdictions facilitate the international movement and storage of funds acquired through corruption, tax evasion, smuggling, drug trading, and other criminal activities which, in-turn, facilitate further criminal and terrorist enterprise.
Available evidence suggests that national and international initiatives implemented over the past three decades—notably by the Organisation for Economic Co-operation and Development (OECD), European Commission, and Financial Action Task Force (FATF)— to address these problems have generated greater transparency in secrecy jurisdictions. But we have relatively little evidence on the effectiveness of outcomes: has greater transparency actually reduced the use of secrecy jurisdictions for illicit purposes at the global level? Individual success stories may be misleading. The offshore financial world is dynamic; activities are continuously shifting.
Above all, attempts to rigorously judge either the effects or the outcomes of these initiatives have been hindered by the lack of reliable, long-term data, on both (a) the extent of use of secrecy jurisdictions for illicit purposes, including in relation to corruption, and (b) how the secrecy policy landscape has changed across major jurisdictions over the past few decades. Most importantly, research on illicit financial ties between secrecy jurisdictions and developing countries has been repeatedly blocked by a lack of data that directly captures these ties. Illicit financial activity is usually either unrecorded or buried in legitimate activities, forcing researchers to use creative, roundabout methods to infer its scale and impacts.
Over the past several years, a series of high-profile data leaks—most importantly the Panama and Paradise Papers, and earlier Offshore Leaks—have substantially raised public awareness of the use of offshore secrecy jurisdictions for illicit financial activities and led to the uncovering of a number of major cases of malfeasance, including by public officials from various countries. To a large extent, the discussion of these leaks has focused on anecdotal cases; however, we believe that they also have the potential to substantially alleviate the data blockage standing between us and a rigorously quantifiable understanding of illicit offshore flows in two important ways:
- These datasets identify the beneficial ownership and control patterns of a large percentage of the world’s offshore shell companies formed in key secrecy jurisdictions over a period of roughly two decades; and
- These leaks are not biased away from opaque and nefarious activities, as is the case for existing micro-datasets of offshore companies (e.g., Orbis).
These characteristics raise the prospect of being able, with the use of careful statistical techniques, to use this data to conduct more effective analyses than have been possible to date regarding the impact of a number of factors on shell company use. This is particularly true with respect to “high-risk” structures with a likely linkage to corrupt and other illicit financial flows which appear to be, if anything, disproportionately represented in the leaked datasets in comparison to the population of offshore companies more broadly.
Crucially, however, exploiting the potential of the leaked data to shed light on how international policy reforms have impacted these structures also requires a detailed jurisdiction-by-jurisdiction picture of how the international landscape of financial regulation and law enforcement have changed over time. Constructing such a picture is, in many respects, nearly as great a challenge as obtaining data on the underlying illicit financial flows themselves.
In our GI-ACE project, Alex Cobham, Valentina Gullo, and I are attempting to understand how years of specific offshore financial secrecy (and broader) regulatory reform either have, or possibly have not, impacted the use and shape of illicit financial architectures, by connecting the potential of the leaked datasets to reveal the latter to the wealth of data and expertise that the Tax Justice Network (TJN) has accumulated in the former through a decade of constructing the biennial Financial Secrecy Index (FSI).
The FSI has only been compiled since 2009. Moreover, TJN’s refinement and elaboration of the index with each successive release means that it lacks historical continuity in definitions and data sources, and is in general far more sophisticated and detailed in later years. Consequently, in order to obtain a dataset of jurisdiction-by-jurisdiction regulatory change that is historically continuous and consistent, and extends on an annual basis back to the turn of the millennium, we have not only had to disassemble the existing FSI database into its constituent parts, but also to a large extent reconstruct it from scratch. This process has often involved a substantial level of adaption in the use of data sources, definitions, and methodologies compared to the original FSI. Ultimately, the resulting database will not only support the statistical analyses that we will conduct for the present project, but should also allow for the construction of a “Historical Financial Secrecy Index” (HFSI) that we expect to serve as a useful complement to the FSI, allowing for overall international trajectories of reform to be tracked in a manner that is not currently possible.
While constructing the HFSI is an enormous undertaking in and of itself, this is only the first phase of a larger data collection and processing effort—which will ultimately need to capture an array of institutional, political, and other characteristics of the home countries of shell company owners, as well as (where possible) characteristics of owners themselves—that will be needed to lay the groundwork for our penultimate statistical analyses. Over the coming months, we will continue to provide updates on these efforts; in the meantime, we welcome any comments or inquiries related to the nature of the analysis or potential for collaboration and outreach!
Cobham, A. 2012. Tax havens and illicit flows. In P. Reuter (Ed.) Draining Development? Pp. 337-372. World Bank.
Cobham, A. 2014. The impacts of illicit financial flows on peace and security in Africa. Study for Tana High-Level Forum on Peace and Security in Africa, 2014.
Garcia-Bernardo, J., Fichtner, J., Takes, F. W., and Heemskerk, E. M. 2017. Uncovering offshore financial centers: conduits and sinks in the global corporate ownership network. Scientific Reports, 7:6246.
Haberly, D. Wójcik, D. 2015a. Tax havens and the production of offshore FDI: an empirical analysis. Journal of Economic Geography, 15(1): 75-101.
Haberly, D. Wójcik, D. 2015b. Regional blocks and imperial legacies: mapping the global offshore FDI network. Economic Geography, 91(3): 251-280.
Henry, J. 2012. The price of offshore revisited. TJN research report. Available at: https://www.taxjustice.net/cms/upload/pdf/Price_of_Offshore_Revisited_120722.pdf
Johnson, J., Lim. Y. 2003. Money laundering: Has the Financial Action Task Force made a difference? Journal of Financial Crime, 10(1): 7-22.
Daniel Haberly is a senior lecturer at the University of Sussex. His research and teaching interests cover topics related to economic and financial geography, development, and the organization of global financial networks, with a focus on offshore finance and sovereign wealth fund investment.
Valentina Gullo iis a research fellow at the University of Sussex. Her research interests cover topics related to geography of finance, money laundering and criminal economics, with a focus on the analysis of dirty money flows and offshore finance.