Why did we change the indicators?

Times change and the Financial Secrecy Index needs to adapt to those changes.

In the 2020 edition of the Financial Secrecy Index, there have been some small changes to five indicators, and a new criterion consistent with the Corporate Tax Haven Index in two indicators. For more information see the methodology. The Financial Secrecy Index 2018 included more fundamental methodological changes which are explained below.

Between January and March 2016, the Tax Justice Network undertook an open consultation of the Financial Secrecy Index methodology with its stakeholders. The survey was answered by 136 people including experts, users and officials of ranked jurisdictions from 49 different countries, including developing countries, OECD member states and small island financial centres. They answered questions on which indicators to keep (including those that do not integrate the secrecy score, e.g. whether tax evasion is a predicate offence), add, and modify. We assessed all the responses, while also considering our own resources to actually undertake new analysis and whether sources existed. For example, while we sought to include an indicator on whistleblower protection, a lack of comparative data kept us from adding it as a key financial secrecy indicator.

There are many examples for why indicators needed to change in 2018 and why new ones were added. Let’s take beneficial ownership registration of companies. While this indicator had always been assessed, it was not until 2015 that some real progress was made. So by 2018, it was not enough to just check whether beneficial ownership of companies was registered or not, but the advances of some countries, especially in the European Union, allowed us to differentiate between types of registration requirements – whether countries use a low or high threshold in the definition of beneficial owner, or whether they have a special clause for senior managers, in cases where no beneficial owner is identified.

A similar thing happened with foundations, and so that indicator became more detailed too in 2018. Likewise, more countries started to offer ownership information in open data format, so this also had to be reflected in our online indicators, since open data (e.g. free, machine-readable, etc.) is better than offering it merely for “free” (e.g. it may be free but a non-machine-readable photo of a document).

Automatic exchange of information is another area where there were many developments. Back in 2015, we merely knew which countries had committed to implementing the Common Reporting Standard. In 2018 and 2020, we know how many countries signed the Multilateral Competent Authority Agreement (MCAA), whether they had chosen voluntary secrecy (being listed under Annex A of the MCAA), or whether they were imposing extra conditions, how many activated relationships they had in place, and to what extent it is improving the transparency and use data from the automatic exchange of information.

As for new indicators introduced in 2018, we realised that the secrecy score did not cover all transparency risks. Partnerships, for example, while being assessed in 2015, were not considered for the secrecy score, even though they can also be used to hide the ownership of an individual, similar to companies. Hidden ownership of real estate and of assets stored in freeports are further important aspects of financial secrecy which we have now covered by the indicators.

Did we choose the new indicators for the previous edition of the Financial Secrecy Index (2018) to manipulate the results?

Even if we wanted to, it is technically impossible. The Financial Secrecy Index is an enormous research project, the outcome of which is unknown before it is completed. Most decisions to change indicators were taken in 2016. We publicly announced many new indicators at the beginning of 2017. In order to have known all the results beforehand assumes that we knew how each of the 112 jurisdictions in 2018 or 133 jurisdictions in 2020 would be rated, even though a lot of the data was not available until later in 2017 and 2019 (e.g. some EU countries took longer than June to publish their new beneficial ownerships laws and the Global Forum published new peer reviews – one of the main source of some of our indicators – as late as October 2017 and 2019).

To give you some idea of the work involved to assess even part of one indicator, e.g. banking secrecy, we have to read at least 20 to 30 pages of a peer review report for each jurisdiction, and sometimes additional reports. We need to read legal texts, and if we have doubts, discuss among ourselves, directly checking local laws and even consulting with local experts – for each of the jurisdictions! It takes time. We only find out what the final ranking will look like maximum 3 months before, and this time around only about 4 weeks, before the Financial Secrecy Index is published (it takes us far more than a month to prepare the layout of reports, do cross-checks, write media material, etc.). 

In order to manipulate the Financial Secrecy Index ranking by adding or removing indicators, we would also need to consider the other component of the formula: the Global Scale Weight. In that case, we would need to know back in 2016 how countries would change in their market share of financial services for non-residents, data that the IMF only published in the course of 2017 and 2019.