Cayman Finance report attacks ‘flawed’ Financial Secrecy Index

A study released by Cayman Finance has criticised the use of what it calls incorrect data and biased criteria in the compilation of the Tax Justice Network’s Financial Secrecy Index, concluding that it leads to “distorted final rankings” and “misleading conclusions”.

The tax advocacy group’s flagship ranking consistently places Cayman at or near the top of the world’s “most secretive” jurisdictions.

According to the Cayman Finance study, which the organisation says critically assesses the methodology used for the index, significant flaws in the choice of data and scoring rendered the latest 2020 report “a useless source for accurate information” about Cayman’s financial services industry.

The Tax Justice Network argues that the Financial Secrecy Index is intended to help fight illicit financial flows. The index combines two factors: a global scale weight (GSW) that measures a jurisdiction’s financial services exports and a secrecy score (SS) that combines 20 financial secrecy indicators.

The Cayman Finance study states that TJN did not use readily available balance of payment data for Cayman to determine financial services exports. Instead, the group had used estimates that overestimated Cayman’s GSW by 860%.

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Had TJN used accurate data Cayman would rank sixth rather than first, the report said.

The financial secrecy score for each jurisdiction is calculated by multiplying the cube of the Secrecy Score by the cube root of the Global Scale Weight. This “arbitrary” calculation inflates Cayman’s score further, according to the study.

If a “more statistically sound and intuitive method” were used, Cayman would drop to 16th in the ranking, it said.

The use of what it considered biased criteria for the calculation of the secrecy score skews the assessment of Cayman further, the report said, concluding that Cayman’s actual place would be somewhere between 26th and 34th in the financial secrecy ranking.

These issues are not new. In one iteration of the index in 2015, Cayman ranked 45th out of 93 examined countries on the basis of its secrecy score alone.

Only when some measure of the size of Cayman’s financial services sector was added, Cayman was catapulted into fifth place on the secrecy ranking. This prompted critics to conclude that rather than measure secrecy, the index measured financial success.

Julian Morris

Economist Julian Morris, author of the Cayman Finance report, said in a press statement, “While the FSI is clearly an ambitious attempt to identify jurisdictions that contribute to illicit financial flows, inappropriate and statistically questionable use of its metrics undermine the integrity of their findings.

“Unless TJN makes significant changes in future reports – in particular, to use accurate data, to adjust or remove biased indicators, and to aggregate data using proper statistical methods – the FSI should not be taken seriously as an assessment of jurisdictions’ contributions to illicit financial flows,” he added.

Jude Scott, CEO, Cayman Finance

Jude Scott, the CEO of Cayman Finance, said the Cayman Islands had demonstrated its commitment to the common fight for effective global transparency and international cooperation standards.

“However, a report on transparency needs to be transparent itself and Tax Justice Network’s 2020 Financial Secrecy Index’s failure to meet that standard compromises the credibility of its conclusions,” he said.

“TJN used estimates and unqualified assumptions when accurate data was publicly available. Without substantial changes to TJN’s application of their own methodology in future reports, the credibility of those assessments as independent resources used by other organisations will be lost.”

Instead, Scott said, reviews by the European Union and the Organisation for Economic Co-operation and Development should be considered when assessing the Cayman Islands. These had found Cayman “to be transparent, consistent with good tax governance principles and without the existence of harmful tax regimes”.

The quality of the Tax Justice Network reports has even been criticised within the advocacy group itself.

John Christensen, chairman and founding director of the Tax Justice Network, who recently resigned from his role, citing “mounting frustration and disenchantment”, said the network no longer uses any staff with a tax, accounting or financial services background.

This had led to a loss of quality control and credibility of the group.

Fellow TJN founding member and tax campaigner Richard Murphy said this was most evident in the TJN’s 2020 State of Tax Justice report, which he says was widely criticised for its “poor quality” and suffered from erroneous assumptions and use of data.

Murphy also resigned as an adviser to the group. In a resignation letter, he wrote, “TJN’s vision of social justice has been replaced by a desire to perpetuate employment for its staff by the production of ever more meaningless indices.”

He said the secrecy index had been developed to promote the term ‘secrecy jurisdiction’ and was never intended to be updated in perpetuity. Instead, the network should move on “to new, bigger and more pressing tax justice issues”.

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