Here's a critique of the UK database entries of our Financial Secrecy Index, from a lawyer at Clifford Chance - one of the world's ten biggest law firms (per Wikipedia). And what follows is a response on the points raised.
To begin, we really value expert feedback. We had a nearly two-year review process before the Jan.2018 release, which we were delighted to find brought in a great many stakeholders, including experts, users and subject jurisdiction policymakers..
You can find more information about the methodology and review, including a statistical analysis by the European Commission's index experts, here: financialsecrecyindex.com/introduction/m…
We've had some great feedback on the new edition already, not just worldwide media coverage beyond anything in previous releases. This includes contacts from jurisdictions proactively engaging on their score, which is great too.
Dan Neidle's critique is more of an attack, of course, but these are useful and welcome too, to the extent that they raise real queries. I'll try to go through all the points, one by one (so you may want to mute me if this isn't your thing!)
A quick summary: First, there are a set of points where it's clear that it's worth clarifying the text in the database, in some respect. This is useful, and we're grateful to Dan.
Second, a majority of the points raised unfortunately don't reflect a reading, or an understanding, of the methodology; or reflect an ideological difference; or are incorrect.
Dan begins with a claim that seems overstated - but you can be the judge
He goes on, highlighting what is really the key point of the critique - in effect, a rejection of our approach to the construction of the index. I'll take a little time on this, as well as looking at the individual points below.
There is a full explanation of each indicator - what it measures and why it is of relevance to financial secrecy – for each of the 20 indicators.
financialsecrecyindex.com/methodology
These are the result of the long experience with the index, and detailed stakeholder review.
financialsecrecyindex.com/methodology
These are the result of the long experience with the index, and detailed stakeholder review.
Of course, nobody has to agree with us that these are indeed the key features of the financial secrecy that results in some jurisdictions facilitating massive damage to others. The data is all there, for people to select their own preferred secrecy measures at will.
(Is it a little frustrating if people express their outrage at a given choice, without even considering (reading?) the argument for it? Perhaps a little - but I guess that's just to be expected when you put something like the FSI up. Heyho.)
Back to it. Dan continues, perhaps not remembering that I'd thanked him at the time (less than a month previously, as it happens, but no matter). We'll come to company types later.
Useful point to remember:
And this!
Here we go. This is an odd sideswipe to begin, since the 1982 list is a key reference in the literature on 'tax havens', and so in some ways a foundational part of the work that the FSI was created to respond to
If you don't share the view that anything that old is 'beyond irrelevant', you can find a historical overview of the literature and policy work in our Economic Geography paper (ungated @CGDev version also linked)
uncounted.org/2015/05/19/new…
uncounted.org/2015/05/19/new…
Here's something that comes up a bit. As the FSI methodology lays out, we take a 'weakest link' approach: so, e.g., if you have a public register of beneficial ownership for some companies, but others can be anonymous, we judge your risk *on the latter*
The FSI's concern is with the availability of secrecy services that promote risks of tax abuse and other corruption- so if New York has good transparency but Delaware doesn't, the relevant risk for financial services exports from the US is that of Delaware and not New York.
Dan does then recognise the logic but says it may not be applied fairly. All I'd say here is that the scoring is tested, but financial secrecy services are complex and we're not infallible - so if there's specific evidence of mis-scoring, we'd welcome it
Here's the ideological point. If in doubt, the methodology might offer the clue – which for KFSI 12 is here: financialsecrecyindex.com/PDF/12-Consist…
Briefly, a comprehensive personal income tax is relevant when considering exploiting a transparency loophole (financial secrecy) of automatic exchange of information related to tax havens offering residency and citizenship by investment schemes.
Although again, if someone really couldn't accept that point, it's straightforward to rerank the FSI without it.
[Confession: For the life of me, I can't see why this is a controversial one.]
[Confession: For the life of me, I can't see why this is a controversial one.]
Here's another one that starts "Error". Must be bad?
Not so much. Again, the weakest link principle combined with the methodology of the particular KFSI would have provided the answer.
financialsecrecyindex.com/PDF/13-Avoids-…
[Again, anyone can disagree - but again, this doesn't seem a controversial area to me. But I guess we're all different!]
financialsecrecyindex.com/PDF/13-Avoids-…
[Again, anyone can disagree - but again, this doesn't seem a controversial area to me. But I guess we're all different!]
On to a different area: material in the database, related to the tax system and its development, but not used in the FSI ranking
Still, a 'succession of errors'. Doesn't sound good.
Not an error, just a difference of opinion. (In which, naturally, I disagree with Dan!)
Methodology in KFSI 13 explains relevance. Per review of 112 countries’ rules (data from IBFD), the discussion of unilateral double taxation relief is consistent. Dan may disagree on its value to his practice, but can hardly argue that reflecting its existence is an error.
Another 'Error'! Oh dear...
A few things to point out here. First, the highlighted text is not ours, but a quote from a company services provider. (We should update the link, fwiw, so this is helpful.)
Second, Dan calls 'error' but actually states that our fault is to be incomplete in the description of the relevant tax laws. Probably inevitable given the thousands of pages of UK tax law, not to mention all the other jurisdictions we consider... but perhaps we can clarify text.
Dan then adds further detail which seems somewhat unclear itself...
Not sure I followed this (a source might have helped), but a quick check of the DTA between UK and Jersey does not seem to support Dan’s claim here - a tie-breaker rule may indeed allow a UK incorporated/Jersey resident company? gov.uk/government/pub…
It also seems unlikely Dan would want to suggest that the UK does not have any double tax treaties that are abused for tax avoidance. UK’s DTAs comprise notorious secrecy jurisdictions: gov.uk/government/col… , Barbados, Belize, Brunei, just to name 3 near top of the alphabet...
To name the German example here appears rather - well, unclear. As does the reason to contrast Germany to Jersey with respect to tax residency as not being determined by POEM. Perhaps Dan can clarify. As it stands, that 'Error' claim seems misplaced once again.
Moving on... Another 'Error'. And this one is 'nonsense' too. (Is that worse than an error? I don't know any more.)
And yet the substance here is once again subjective. Dan may disagree on the term 'special', but the fact is that non-taxation of income routed through a UK partnership in this way is available, and promoted by offshore providers/law firms.
While the rules may or may not be 'special', the combination of non-residents with non-UK source income clearly is a particular configuration that is clearly worthwhile highlighting if you share our underlying concerns about the range of risks.
That said, it's striking that the term has offended. Since it makes no difference to the substance, and our interest is in clear communication, perhaps we'll remove the word “special” from the sentence. (Again, that's a helpful bit of feedback.)
I realise I should have quoted these tweets also, to give Dan's full point before giving that response - apologies
And, er, this one
An example: Irish legal entities were abused for large scale tax avoidance precisely by moving tax residency out of Ireland. Any legal entity, for which tax residency can be separated from place of incorporation, is open to manipulation in that way. That is why it is relevant.
Another 'Error'
It gets worse:
In fact, to Dan's credit, we have already made a change here. Because it was clear that 'company type' was interpreted as specifically 'legal' type, we added 'or business' (language Dan suggested in a Mar.25 tweet )
This is in order to clarify that we are not after an inventory of legal entities here. Rather, we are picking up on any special types of businesses or legal company types of interest, including as marketed by company service providers
This quote from a company website reflects value of providing data which goes beyond that strictly necessary for FSI scores. I hope Dan agrees it is, or should be, of interest to regulators, journalists, law etc, if companies are promoting services that might qualify as fraud?
But Dan has correctly identified a missing source in question 143 for the Agency Trading Companies – instead we referred to the source in the other question of the database where we explain this concept further. We'll fix - helpful feedback again.
For the avoidance of further doubt, we'll include another clarification to our database reports in question 143, stating that this question refers to both non-standard legal entities and businesses which have been advertised, but might not be a separate category of legal entity
[there follows a brief hiatus of the parental variety - back soon]
Back. For another 'Error'...
Now, hands up here, the material is genuinely out of date. Dan refers to new rules UK introduced in 2017 to limit deductions for interest expense etc. That said, the info has no impact on scoring and is *explicitly dated* 2013 for all to see.
On the whole, we include a fair bit of dated info, since old schemes often have historical interest - see e.g. treasureislands.org/progressive-ta…
But perhaps we should be explicit on limits to our updating - we welcome submissions btw.
But perhaps we should be explicit on limits to our updating - we welcome submissions btw.
Incidentally, it seems that tax avoidance may still be possible under the modified debt cap because of a £2 million threshold which excludes the vast majority of small businesses:
gov.uk/government/pub…
gov.uk/government/pub…
Right, another 'error'
On the recent caselaw on film partnerships - it's rather unclear which piece of this Dan sees as invalidating the quoted text, in the sense that sectoral treatment has not been struck down although certain avoidance schemes have. Or perhaps I'm in error - Dan?
On REITs, this is interesting. Last time Dan corrected us on this, it turned out he was wrong (REITs also exist, and differently, outside the UK). But here we're on Dan's home turf only, so let's have a look.
The error would be if there were no preferential treatment - but as differential tax treatment is rather REITs' raison d'etre, so it's unclear again what the error here might be. gov.uk/hmrc-internal-…
I guess at a push you could argue that REITs change the point of taxation, rather than necessarily and inevitably leading to 'preferential' treatment - but surely that kind of hairsplitting wouldn't be the basis to call 'Error'. (Would it?)
Dan concludes this section with a damning summary: 'riddled with errors'. Trying (sort of) to be generous about this, that just seems silly to me.
You can call it 'policy preference' I guess, but a link between complex tax avoidance schemes and financial secrecy is precisely why the authorities across EU and major OECD countries already have or are in process of implementing such disclosure regimes.
Again, reading the methodology would have benefited the analysis: the relevant indicator, as ever, explains the relationship to financial secrecy.
financialsecrecyindex.com/PDF/11-Tax-Adm…
financialsecrecyindex.com/PDF/11-Tax-Adm…
A 'likely error'? Again, the methodology has the answer. In the assessment matrix, it is spelled out that an “Unknown” does not give a negative mark in this case. Only if the answer is affirmative, is the secrecy score increased.
financialsecrecyindex.com/PDF/18-Automat…
financialsecrecyindex.com/PDF/18-Automat…
On the substance, Dan has "no reason to believe“... And that's the thing: we don’t know either, because the OECD doesn't publish this, so we inserted data only about specific cases, e.g. Switzerland. Otherwise, we record 'Unknown' - which here doesn’t increase secrecy score.
An 'error' to note data as unknown? Let's see
We use 'unknown' in FSI either in cases where we cannot find a source that provides the answer, or when it is not clear whether we can conclude a positive or negative answer from the sources we use. All jurisdictions of course had an opportunity to respond to the survey sent.
The UK chose not to respond and so generally it seems fair to answer 'unknown' when the answer is not clear. Secondly, before claiming that the choice of giving ‘unknown’ answer rather than a negative one is in the UK’s favour, see - yes, again - the methodology (p.8).
On the substance, per our note, ‘unknown’ here reflects some genuine uncertainty. A study for ECON Committee indicates tax rulings may become public; a statistics paper by European Commission claims APAs are available; but we have not found any on relevant websites, so: ‘unknown’
Happy of course to update to a certain 'no' if there someone can point to an explicit statement thereof.
Another 'error' (between you and me, I'm starting to think it might have been better to start with something more like 'query'...)
Perhaps before querying our source, Dan could have - you know - checked our source. Seeing as we provide it. Just an idea, and a little radical I appreciate, but - well, there it is.
Checking the source would have revealed that we used the European E- Justice portal, last updated 15/8/2016.
The source states:
“All Administrative Court judgments, and a selection of High Court judgments that are of particular legal or public interest, are published. Judgments of the criminal division of the Court of Appeal are published if they are of legal or public interest.“
“All Administrative Court judgments, and a selection of High Court judgments that are of particular legal or public interest, are published. Judgments of the criminal division of the Court of Appeal are published if they are of legal or public interest.“
Based on the 'weakest link' principle, negative answer reflects that only a selection of high court judgements are published. [Allowing UK a clean mark here would mean giving the UK preferential treatment over other jurisdictions where the same source is used]
I should have included Dan's other tweet on this. Perhaps there's something to think about here when reviewing sub-indicators for 2020 - we can think on't.
That said, we don't buy that ‘having too many judgments’ is a justified reason not to publish court decisions. Per KFSI 14, 
As for terminology: the European e-justice portal also uses the term judgments regarding the criminal division of the court. Obviously, the use of jury is not relevant for many of the jurisdictions we assess and so the aim was to use a widely fitting terminology. Meh.
Next - not an 'error', just a 'strangely'...
The link we provided as a source leads to the UK’s 2007 FATF report which is the most updated complete mutual evaluation report of the UK so far.
The table of rating appears always towards the end of these reports (in this report, p.283-288) and given the pages varies from one report to the other, we provide only the link to the report itself and trust the reader to find it very quickly and easily.
It's not for us to explain why this report is the most recent report available, but we do mention in KFSI 17 (to which KFSI 20 refers to for further explanations on FATF reports) that “for most jurisdictions, this is the most recent type of report available for use in the FSI.“
That said, we would certainly agree that more frequent FATF evaluations would be desirable, and allow incorporation of more timely data in the FSI. This problem affects indices on money laundering even more than FSI, as they tend to rely solely/largely on FATF evaluation scores
Back to 'error'. Apparently...
Had Dan provided a source, we think he might have found that our answer is correct. The new regulations that entered into force on 1 January 2018 do not require a valid/updated LEI - contrary to the rules applicable to the OTCs derivatives trading.
Another 'Error'... Really?
The fact that a requirement is not part of a standard or is an option under a standard is irrelevant for the FSI. Our expert- and stakeholder-reviewed criteria aim to reflect the importance for financial secrecy provision.
An example: neither FATF AML Recommendations nor OECD Global Forum require beneficial ownership registration. However, the FSI for a decade has led on assessing this as the acceptable standard. Only now has the EU implemented this as a standard EU-wide, with others following.
[Perhaps there's confusion about our role here? It is emphatically *not* to be the standard bearer for weak international standards - but to set a higher bar and drive the international policy agenda towards it. Which, blush, I think we've proven pretty good at...]
A similar logic applies to the CRS and the LEI. Even if it’s only an option under the CRS, the corresponding indicator paper explains why it should be mandatory and that is what the FSI assesses.
financialsecrecyindex.com/PDF/10-Legal-E…
financialsecrecyindex.com/PDF/10-Legal-E…
Another 'error' (did I mention that 'query' might have been a better term to use? Or sometimes just 'thing I couldn't be bothered checking'?)
First, as explained somewhere above in this interminable thread (apologies), the 2007 report is not superseded, but unfortunately still the most updated full mutual evaluation report available.
As for the UK PEPs issue, while the relevant paragraph is no longer up to date, it clearly introduces the matter as a quote of a report dated 2013, allowing the reader to contextualise and check about the changes underway in meantime.
It's great that the UK has changed its laws, in the wake of the implementation of the 4th AMLD. Drawing attention to untenable loopholes is after all the reason for much of the FSI database. We should update, thanks.
acams.org/aml-resources/…
fca.org.uk/publication/gu…
acams.org/aml-resources/…
fca.org.uk/publication/gu…
To be absolutely clear: this paragraph has *no impact* whatsoever on the score of KFSI 17 and is only aimed to provide more intel on AML issues, and useful historical context.
'Error' again. {On which, see previous comments... Sigh.}
Before claiming the source is out of date, it might have been worth having a look at the Global Forum reports to see that the 2013 report is the most recent available. In KFSI 1, we explain that we use mainly the Global Forum’s elements B.110 and B.211 to assess this KFSI.
As part of ID 157 we examine whether banks have sufficient powers to obtain & provide banking info on request (which obviously relates to info exchange). The note describes serious problems in obtaining info on time - hence it is very much to the point.
'Error'
I agree: the info is not updated, but we provide the source and year (2013) for the answer so there is no confusion. To be clear, this answer has no impact whatsoever on the score. (Always happy to update if sourced)
[another hiatus - this is a hard slog...]
'Likely error'. (A little more caution?)
Once again, for reasons explained above, this is the most recent FATF report. (Again, we too would like these to be more frequent. But here we are.)
Another 'likely error'. (Careful readers may be wondering how likely 'likely' actually is by now...)
First of all, this ID is based on the assessments of 2016 International Narcotics Control Strategy Report (INCSR), Volume 2 on Money Laundering and Financial Crimes. You can see in p. 49 that the answer in this case is indeed ‘No’.
This is one of the questions for which we can use a single, inclusive and reliable source for all jurisdictions rather than to assess separately. Apart from the issue of limited resources, using a single source ensures we can compare the answers on an equal basis.
Secondly, perhaps I can suggest again that it would better to read the description of what we are assessing, before claiming 'error'? UK AML regs oblige banks to apply customer due diligence in large transactions, but we have seen no obligation to report these to authorities.
As mentioned in KFSI 1, while we would have liked to include data from the 2017 INCSR report, unfortunately this report discontinued some of the data fields we rely on - so we have used the 2016 edition.
'Inconsistency/error' - certainty of Dan's judgment reasserts itself.
And 'who cares?' We do. (Enough, even, to respond to all of this...)
And 'who cares?' We do. (Enough, even, to respond to all of this...)
We care if there's a central register because it lets you find out who owns land in a given country. If investigators have to ask each provincial/local register, it is more complicated to obtain info - especially if they have different regs on info collected & how provided
[This is a funny one, tbh - I guess Dan doesn't engage professionally with the kind of abuses around land ownership that many in our networks around the world face all too often; but these aren't alien issues, surely? Ask @andywightman for one]
Next. Merely 'Irrational'...
KFSI 4:
"The absence of easily accessible info even on legal owners of real estate cause investigations to slow down or even fail, if media, civ soc, police or public prosecutors dispose of no, or only complex, uncertain, costly or time consuming, means to access ownership info"
"The absence of easily accessible info even on legal owners of real estate cause investigations to slow down or even fail, if media, civ soc, police or public prosecutors dispose of no, or only complex, uncertain, costly or time consuming, means to access ownership info"
Dan is entitled to differ, but our view is that this info should be publicly available in open data format, or at least for free, and at worst for a small fee. [And this is not, ahem, a secret - it's there for anyone who'd like to read the methodology to see.]
Back to a more definitive 'Error'... except that this is the point referred to above, where we have changed the wording to Dan's suggested "or business" to make clear that we're not (only) referring to legal entity types.
Again, this is in order to clarify that we are not after an inventory of legal entities here. Rather, we are picking up on any special types of businesses or legal company types of interest, including as advertised by company formation agents to a certain market...
Not an error but a 'Wrong question'. (I can't take any more. Is anyone still reading?)
Sigh. The FSI is not based on UK law. Sorry Dan. If flee clauses were indeed somehow prevented in the UK, we would consider that for the answer, even if the word 'prohibition' was not used...
In any case, as you can read in the relevant note, the FSI explains that if not all trusts have to register, then it’s not possible to enforce that provision because a trust could still offer flee clauses without the authorities‘ knowledge.
Next
Again, reading the methodology would really have helped here. Because we apply the lowest common denominator principle, we answered ‘No’ in question number 179 above [i.e. Does the registration of domestic limited partnerships comprise information on the BO of all partners?].
Given that for some partnerships, BO information is not recorded, it should be clear why for FSI purposes it is no longer applicable whether or not there is an update of this BO information (in the cases where it is provided, which are not all cases).
And (finally!), one last 'Error'
Given there are cases where limited partnerships are not subject to record keeping requirements, then, according to the lowest common denominator principle, the answer for the question is negative. (Read methodology?)
In fairness to Dan, he ends a little less abrasively
I want to echo that. I'm not an expert on most of this, and the FSI team have done a sterling job in chasing down each one of these, whether they were trivial misunderstandings, differences of opinion not fact, or pointed to a need for us to clarify.
I'll echo the other piece too - it's absolutely possible, indeed almost inevitable, that there will be errors in the whole FSI database. Perhaps Dan, or any of the others whose engagement we welcome entirely, will come up with these - and we'll be delighted to review and rectify.
But I want to stress something else, too. The FSI team, with substantial funding from the @COFFERSEU programme, do a quite ridiculous amount of work to pull together the index and the database. Everything is reviewed, and everything is published for critique.
It is unfortunate when people in positions of influence and/or expertise use their position to take potshots at something like the FSI, without the courtesy to engage with that public material.
I hope that the critics who enjoyed tweeting Dan's piece out will pay equal attention to this, although of course things never seem to work quite like that.
Now, @MForstater tells me that Dan's engagement, and that of other more critical voices, is at her behest as she conducts a review of the FSI for @CGDev - where the FSI forms a part of their Commitment to Development Index.
That's fantastic! One of the privileges of being at @TaxJusticeNet has always been the extent to which real experts are willing, without financial reward, simply to share their expertise.
The FSI itself has really benefited from some of the most robust engagement - including from officials at high-ranking secrecy jurisdictions - and we are grateful always.
What is less appealing - and I really will finish this thread soon - is a rush to judgment, when no room for a defence has been allowed. Despite overseeing that review of the FSI for CGD, @MForstater tweeted that Dan's thread was justification for a complete 'product recall'.
To Maya's credit, she deleted it. But I'm not really sure the replacement is any more indicative of a fair judgment
But to return to the positive, let me thank @DanNeidle again for putting in the time to do this critique (I hate to think what it would have cost in billable hours!). Dan, if you'd like to discuss in person, with more characters, I'd be happy to meet up.
To anyone who has actually read this thread, thank you - I can only apologise for taking so much of your time!
And finally, to anyone who would like to add comments, suggestions, criticisms or queries on @FinclSecrecyInd #fsi18, we are happy to do that here, or for more involved issues just email: fsi at taxjustice dot net. Come on down!
[ok. i'm done]
