Government, Cayman Finance criticise secrecy list

Dax Basdeo, chief officer, Ministry of Financial Services

The Cayman Islands government and financial services association Cayman Finance have hit out at the latest version of the Tax Justice Network’s secrecy index, calling it flawed, inaccurate and misleading.

In the tax advocacy group’s latest ranking, released on Tuesday, Cayman features as the world’s most secretive jurisdiction, followed by the US and Switzerland. While the TJN noted that financial secrecy around the world is decreasing, as a result of recent transparency reforms, it claimed the US, Cayman and the UK were bucking the trend.

Questionable methodology

In response to the index, Dax Basdeo, chief officer in the Ministry of Financial Services, said the Tax Justice Network ignores that the Cayman Islands meets global standards and that the methodology used in the compilation of the secrecy index was questionable.

“Unfortunately, the TJN’s methodology remains flawed, as does their definition of regulatory standards, which are not recognised by any global standard setting body.

“We do not work in ‘secret’, rather we continue to work cooperatively with tax and law enforcement authorities around the world as is reflected by independent assessments of our regime,” Basdeo said.

Dax Basdeo, chief officer, Ministry of Financial Services

Cayman Finance noted in a statement, “The Cayman Islands would not be highly ranked on any secrecy index that is objective, transparent, and based on standards established by global standard setting bodies.”

The Tax Justice Network, in turn, argues that the standards and assessment procedures used by the Organisation for Economic Cooperation Development and the Global Forum “are too lenient”.

Its own index combines a secrecy score based on 20 indicators and combines it with the scale of offshore activities, measured as a jurisdiction’s share of the global market for financial services provided to non-residents. Tying secrecy measures to the relative size of the offshore financial services sector in this way suggests a belief that offshore services are mainly predicated on secrecy.

The financial services ministry said the index incorrectly equated a country’s success in financial services with secretive banking, anonymous shell company ownership, anonymous real estate ownership or other forms of financial secrecy. “That’s not supported by the facts and is not how we operate in the Cayman Islands.”

The Cayman Islands does not permit shell companies, bearer shares or anonymously numbered bank accounts that conceal ownership. In addition, last year Cayman committed to establishing public registers of beneficial ownership. “That puts us at the forefront of initiatives to enhance tax cooperation and transparency,” the ministry said.

Cayman Finance equally criticised the Tax Justice Network for disregarding recognised global standards and global standard setters, “as well as the facts about a jurisdiction like the Cayman Islands and instead uses their own, home-made ‘methodology’ seemingly to target pre-selected jurisdictions”.

The financial services association said the TJN “purposefully uses outdated, inaccurate and irrelevant information to manipulate the results of its report”.

Skewed results

Both the Ministry of Financial Services and Cayman Finance contend that the weighting system used for the index effectively penalises countries with successful financial services industries by artificially pushing them up the ranking.

An analysis of the data indeed shows that, based on the Tax Justice Network’s secrecy score alone, Cayman ranked 39th out of 112 countries in the last iteration of the index in 2018. At the time, Cayman ranked third in the secrecy index because of the size of its offshore financial services industry. Vanuatu, on the other hand, was the most secretive jurisdiction in 2018, according to the secrecy indicators, but it only ranked 66th on the secrecy list when the weighting was applied due to the lack of a sizeable offshore sector.

In the latest secrecy list, Cayman has the 13th-highest secrecy score, a full four points higher than two years ago. Combined with the relative size of its offshore sector, Cayman is catapulted into the number one spot. The US, meanwhile, ranks 72nd out of 133 jurisdictions based on the secrecy criteria but ends up second in the final secrecy index.

Alex Cobham, CEO, Tax Justice Network

The case of the UK is even more baffling. On the basis of the Tax Justice Network secrecy criteria, the UK has the seventh lowest score in the world – 127th in terms of secrecy – but it still ends up at number 12 on the list, prompting Alex Cobham, TJN chief executive, to call the results an “Anglo-American axis of secrecy” that was exacerbating corruption and tax abuse.

The mental gymnastics that must be applied to the weighting of the risk score to arrive at the final result – the Financial Secrecy Index Value – are considerable. “The FSI Value is calculated by multiplying the cube of the Secrecy Score with the cube root of the Global Scale Weight. The final result is divided through by one hundred for presentational clarity,” the Tax Justice Network explains in a footnote to the data.

Predictably, this still results in a reflection of the relative size of the cross-border financial services industry rather than a measure of secrecy. Even if Cayman lowered its secrecy score by 20 points, which would put it roughly at number 100 in the world, it would still feature in the top 10 of the world’s most secretive jurisdictions.

Cayman Finance said the Financial Secrecy Index purports to rank each country based on “how intensely the country’s legal and financial system allows wealthy individuals and criminals to hide and launder money extracted from around the world”. Yet, at the same time, the report states that a “higher rank on the index does not necessarily mean a jurisdiction is more secretive”.

The association added, “That would mean that it is a Financial Secrecy Index with rankings that are not based on secrecy.”

Incomplete data

Given the raft of regulatory measures introduced in the past 24 months, it is also difficult to conceive how the Cayman Islands could be considered less transparent or, conversely, more secretive, than two years ago.

The ministry said the secrecy index ignored significant legislative and regulatory enhancements that the Cayman Islands has made in line with evolving global standards.

In addition, the Tax Justice Network’s assessment criteria were geared toward countries with direct taxation systems, which further skews the results. “Our public revenue is collected upon transactions, principally on goods, but the TJN’s methodology doesn’t account for this. For example, one of its Key Financial Secrecy Indicators (KFSI) isn’t applied to jurisdictions with indirect taxation, and so TJN arbitrarily ascribes a full secrecy score to Cayman,” the ministry said.

Cayman Finance concluded that “the secrecy index is so misleading and inaccurate” regarding jurisdictions like the Cayman Islands that organisations should question its validity as a reliable resource to guide their decision-making.

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