Global scale weight
The second component of the Financial Secrecy Index is the global scale weight (GSW) attributed to each jurisdiction. It is based on an assessment of the size of each jurisdiction’s share of the global market for financial services provided to non-resident clients, which we use a measure of risk. The more cross-border financial services a jurisdiction provides, the greater the potential threat if the jurisdiction is not fully transparent.
The global scale weights are based on publicly available data about the trade in international financial services of each jurisdiction. Where necessary because of missing data, we build on a methodology pioneered at the IMF (IMF working paper by Ahmed Zoromé published in 2007) to extrapolate from stock measures in order to generate flow estimates. This allows us to create a comprehensive ranking of jurisdictions’ share in the total global cross-border trade in financial services. Only when this is subsequently combined with the secrecy scores, it creates a ranking of each jurisdiction’s contribution to the ultimate global problem of financial secrecy: this ranking is the Financial Secrecy Index.
To construct the global scale weight, we begin with the best data available on an internationally comparable basis. The preferred source is the IMF’s Balance of Payments Statistics, which provides, for each jurisdiction, data on its exports of financial services. For this edition of the global scale weights, we use data for 2018, which is the most recent year included in the dataset as of 1 November 2019. In the first step, we use this reported data on exports of financial services to construct the global scale weights (data on exports of financial services is reported by 94 jurisdictions in the Financial Secrecy Index).
For jurisdictions for which this data is not available, we extrapolate an estimate of the value of exports of financial services. In the extrapolation, we proceed in four further steps. In each step of the extrapolation, we use different data on variables that are highly correlated with exports of financial services. In step two, we extrapolate from reported data on exports of financial services in the IMF Balance of Payments Statistics for the year 2017 – this is because there are 11 jurisdictions assessed in the 2020 edition of the Financial Secrecy Index for which data on exports of financial services is not yet available for 2018 but it is available for 2017. In step three, we extrapolate from data on inward assets which we source from the International Investment Position (IIP) statistic which is part of the IMF Balance of Payments Statistics, and thereby obtain extrapolated values of exports of financial services for a further six jurisdictions. In steps four and five, we use data on reported inward portfolio assets and derived outward portfolio liabilities from the IMF’s Coordinated Portfolio Investment Survey. Using the inward assets data, we extrapolate the value of exports of financial services for an additional six jurisdictions, and for the remaining 18 jurisdictions, we extrapolate from derived liabilities data.
In total, we obtain data on exports of financial services (true or extrapolated) for 239 jurisdictions in the total amount of a little over US$524 billion. Of this, the 133 jurisdictions assessed in Financial Secrecy Index 2020 cover 99.83% (for comparison, the 112 jurisdictions covered by 2018 edition of the index accounted for 99.33% of the global total).
Finally, then, we calculate, for each jurisdiction, the share of their exports of financial services of the global total. This creates a global scale weight reflecting the relative importance of each jurisdiction. The global scale weight for jurisdiction I, GSW_i, is thus defined as:
It is important to note that a high global scale weight alone does not imply harbouring or supporting inappropriate behaviour by the jurisdictions in question. Arguably, those near the top should be congratulated on their success in the field of international trade in financial services (although in light of recent examples such as Iceland, Ireland and Cyprus, they may of course also want to consider the extent of their reliance on this risky sector). Rather, the global scale weight is an indicator of the potential for a jurisdiction to contribute to the global problem of financial secrecy, if secrecy is chosen in the range of policy areas discussed above. The higher the global scale weight of a given jurisdiction, the greater the risk posed to others if secrecy is chosen, and so the greater its responsibility to be transparent.
It is then only in the subsequent step where these global scale weights are combined with the secrecy scores, that we create a Financial Secrecy Index which reflects the potential global harm done by each jurisdiction.
We believe it is an important flaw in international statistics – and hence in the clarity of understanding international finance – that the flows we are trying to measure are not consistently captured. Given this context, we believe our methodology represents the most robust possible use of the available data to evaluate jurisdictions’ relative contribution to the global total of financial services provided to non-residents. One remaining uncertainty is the extent to which flows related to the management of legal entities and arrangements such as trusts, foundations, shell companies and the like are covered.
See our global scale weight methodology explained in more detail here.