(Updates with Tax Justice comment in fourth paragraph.)
Oct. 4 (Bloomberg) -- Switzerland climbed to the top of a financial secrecy index, even after a global crackdown on tax evasion, according to a report from the Tax Justice Network.
The Alpine country, whose secrecy laws date back to 1934, was followed by The Cayman Islands, Luxembourg and Hong Kong, the London-based Tax Justice Network said. The U.S., which topped a 2009 index through the state of Delaware, was placed fifth in a study of 72 tax jurisdictions published today.
While Switzerland agreed in March 2009 to meet international standards to avoid being blacklisted as a tax haven by the Organization for Economic Cooperation and Development, the country continues to resist the automatic exchange of information, the Tax Justice Network said. Agreements signed in August with the U.K. and Germany to end disputes over tax evasion will “entrench Swiss banking secrecy,” according to the study.
“Both agreements lack transparency,” said Bruno Gurtner, chairman of the Tax Justice Network’s board of directors. “Banks say they will follow a white money strategy, but in practice it’s still possible to find ways to hold black money.”
Under the August agreements, Swiss banks will levy a withholding tax on capital gains earned by Britons and Germans with offshore accounts. Revenue generated will go to the British and German treasuries, while client identities remain secret.
The U.K. and German deals “demonstrate that politicians in all three countries are prepared to protect a secrecy industry that operates in the service of criminal elites,” the study said. “Although Switzerland has signed a number of OECD-style information exchange agreements, which have allowed a limited penetration of Switzerland’s fabled bank secrecy, we consider these operationally ineffective.”
Swiss banks have boosted their share of offshore wealth by attracting illicit flows from developing countries and as the appeal of Switzerland as a safe haven from Europe’s sovereign debt crisis increased, the study said.
The index used 15 indicators, including bank secrecy, corporate transparency regulations and the efficiency of tax rules, to produce a score for each jurisdiction. That secrecy score was given greater weight in this year’s index compared with 2009, when the size of a financial center had greater influence, the study said.
“The financial secrecy index reveals how the G20 is only chipping away at the outer shell of financial markets’ secrecy,” said John Christensen, director of the Tax Justice Network. “Powerful countries like Switzerland, Britain and the U.S. still block progress.”
The Dodd-Frank legislation, requiring companies listed in the U.S. to adopt country-by-country reporting, has improved the ranking of the U.S., the study said. While “pernicious secrecy facilities” still exist at state level, the ongoing crackdown on tax evasion by the U.S. Internal Revenue Service also stands out, the Tax Justice Network said.
“While major OECD partner countries like the U.K. and Germany have been negotiating pernicious and weak settlements with Switzerland on information exchange, the U.S. authorities continue to apply robust pressure on Swiss banks,” according to the study.
Hong Kong and sixth-ranked Singapore have attracted “illicit funds” following a crackdown on tax evasion in the U.S. and Europe, the Tax Justice Network said, adding that Swiss and U.K. banks have become increasingly active in these financial centers.
“Chinese élites use Hong Kong to evade Chinese taxes, criminal laws and much more,” the study said. “Chinese support has enabled Hong Kong to resist pressure from the OECD and other quarters to improve transparency.”
The other jurisdictions in the top 10 for financial secrecy are Jersey, Japan, Germany and Bahrain.
“Germany offers widespread tax exemptions for non- residents, particularly from developing countries, and this, combined with its secrecy facilities, has sucked in massive illicit financial flows,” according to the study. “The recent freezing of billions of dollars of deposed Arab despots undoubtedly represents the tip of a much larger iceberg.”
--Editors: Dylan Griffiths, Stephen Taylor
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