Nov 27 2013

What can tax havens do to clean up their image?

Posted by: Nicholas Shaxson in: Thoughts

From Offshore Incorporations Ltd. (OIL,) a forward-looking industry survey looking at the future of tax havens (hat tip: ICIJ.) It rather speaks for itself (click to enlarge):

The OIL graph does not provide a scale, so I’ll merely measure it in centimetres on the computer screen of today’s blogger. Compare the 6.3cm score for ‘public relations’ with the less than 0.4 score for ‘governance’ – a fifteenfold difference – and this paints a picture of a secretive industry being dragged, screaming, kicking and blinking, into the (admittedly still very dim) light

But there is more. This picture is fascinating, from a political economy point of view, for it reveals something profound about the business model of these places. As TJN noted in its recent Financial Secrecy Index:

“The business model of these places is the product of two apparently conflicting offerings or incentives to international owners of financial capital. The first is to convince them that the jurisdiction is safe, trustworthy and law-abiding. The second is to convince many of them that they will tolerate and protect law-breaking dirty money. This helps explain the apparent paradox that jurisdictions such as Switzerland are regularly ranked among the ‘cleanest’ and least corrupt in international corruption rankings – while also harbouring oceans of of dirty money. One useful way to understand how these two conflicting incentives are reconciled is to summarise the overall ‘offshore’ business model, colloquially, as a message to international investors that “we will not steal your money, but we will not mind if you steal someone else’s.”

This may be a rather broad-brush summary covering a much more nuanced picture, but it does capture a fundamental truth about offshore that is essential to understand.

Some havens have sought to address this conflict at the heart of their business models by moving (somewhat) upmarket, and expanding the range of services they provide. So for example where they once hosted blood-soaked drugs money, no questions asked, they now host hedge funds and private equity firms (in which there is still plenty of tax evasion and other lawbreaking, but it’s much harder to see).

Yet Treasure Islands puts its finger on a different way of addressing the essential offshore conflict.

“Skittish financiers dislike places that are chaotically corrupt, as do onshore regulators. Secrecy jurisdictions steeped in sleaze confront this by putting on strenuous performance of rectitude, a theatre of probity that involves repeatingly projecting the essential message – ‘We are a clean, well-regulated, transparent and cooperative jurisdiction’ – burnished by carefully selected comments and praise from toothless offshore watchdogs.”

The above table rather reinforces the point. Richard Murphy has a good example of this theatre of probity today – see here. Or see this earlier blog entitled “we are not a tax haven.” There are endless examples.

There have certainly been some positive moves from tax havens, particularly in the last two or three years as the tax justice agenda has caught on. But TJN’s Financial Secrecy Index reveals just how very far there is to go, and the sheer distance between rhetoric and reality. The above table reminds us all that leopards don’t easily change their spots.

The general message is: if you have a bad reputation – don’t clean up: spin!

5 comments so far

[...] As reported by the Treasure Islands blog, a recent offshore industry survey found that “public relations” is the number one [...]

[...] Remarkable further insights and research into the theatre of probity, here. [...]

[...] is a fine example to illustrate the accuracy of this remarkable research about how tax havens strenuously fight to wash their [...]

[...] trumpet to domestic and international media and anyone who will believe them how, ahem, clean, well-regulated and transparent the historic haven for thieves and abusers has suddenly [...]

[...] research on the subject, lapped up his words. The tax havens proceeded to stir up a whole new theatre of probity on the [...]

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