The hidden burden of development : financial secrecy across OECD countries and the role of the United States in shaping global corruption

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THE HIDDEN BURDEN OF DEVELOPMENT

FINANCIAL SECRECY ACROSS OECD COUNTRIES AND THE ROLE OF THE

UNITED STATES IN SHAPING GLOBAL CORRUPTION

UNIVERSITY OF AMSTERDAM

GRADUATE SCHOOL OF SOCIAL SCIENCES

MSc Political Science (International Relations Track)

Word Count: 20.766 (including footnotes and in-text references)

DR. FARID BOUSSAID

THESIS SUPERVISOR

DR. LUC FRANSEN

SECOND READER

DANIEL NEALE

STUDEND ID: 11127058 June 24th_, 2016

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ACKNOWLEDGEMENTS

I would first like to thank the whole team at Global Financial Integrity for the constant interest and support received during the three months I spent in Washington, DC doing research. I was able to access many resources that I would not have been able to get elsewhere while being surrounded and exposed to this area of study by some of the brightest minds in the field. From the start, their ground-breaking research and advisory work on illicit financial flows was very influential in generating the motivation for writing this thesis.

I would also like to express my warm gratitude to Raymond Baker, Heather Lowe, Elise Bean, and Mark Hays for making themselves available for interviews, which provided very useful data for the purposes of this paper. A special note goes to Heather and Raymond for helping me reach out to Elise, Mark, and many other experts in the field of financial secrecy and international corruption. Their interest throughout my research was truly encouraging.

None of this would have been possible without Dr. Farid Boussaid. As my thesis supervisor, he trusted me at every stage of the research and encouraged me to go to Washington while providing valuable advice and support when needed. For that freedom and trust, I am extremely thankful to him.

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ABSTRACT

Much of the academic work produced on corruption has disregarded the role of the world’s largest financial centres in providing financial secrecy and constraining development. In examining corruption through the lens of illicit financial flows, a very different picture emerges in which the spotlight turns to the receivers and facilitators of corruption that provide the structures for illicit money to be hidden. The relatively lax regulatory policies to attract capital in OECD countries have contributed towards the housing of some of the worlds’ largest inflows of finance in these countries, but does this also invite the proceeds of corruption? In extending the research to examine this phenomenon, this mixed methods thesis will analyse whether there is a relationship between financial secrecy and deregulation. The quantitative results will show that to some degree, there is a positive relation between the two, particularly in what concerns the ability to shift profits and the levels of taxation. The examination of preferences within coalition patterns in the United States will show that to understand the causality of the quantitative results, both the international market structures and the domestic politics shaping deregulation must be analysed in unison, as they mutually interact with each other to create financial secrecy.

Keywords: Corruption, financial secrecy, profit shifting, illicit financial flows, deregulation,

race to the bottom, capital attraction, tax havens, secrecy jurisdictions, development, Country-by-Country Reporting, tax abuses, Multinational Corporations.

Abbreviation of terms:

BAMLI: Basel Anti Money Laundering

Index

BEPS: Base Erosion and Profit Shifting

process

CBCR: Country by Country Reporting CPI: Corruption Perception Index GCR: Global Competitiveness Reports GDP: Gross Domestic Product

GFI: Global Financial Integrity GSW: Global Scale Weight

FATF: Financial Action Task Force FDI: Foreign Direct Investment FSI: Financial Secrecy Index IFFs: Illicit Financial Flows IMF: International Monetary Fund

IRS: Internal Revenue Service

KFSI: Key Financial Secrecy Indicator MNCs: Multinational Corporations NGO: Non Governmental Organisation ODA: Official Development Aid OECD: Organisation of Economic

Co-operation and Development

SDGs: Sustainable Development Goals TPM: Transfer Price Manipulation UNECA: United Nations Economic

Commission for Africa

UNCAC: United Nations Conference

Against Corruption

UNODC: United Nations Office on Drugs

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1. INTRODUCTION

Development aid is redundant: Imagine that for every dollar spent or invested on a developing country, at least the equivalent amount left the same place in the form of laundered money, tax abuses, criminal activities, briberies, or other corrupt practices. Sadly, this is not far from the reality in which our current world economic system operates.

Estimates suggesting that over a trillion US dollars are siphoned from developing countries every year (Kar and Spanjers, 2015) into secrecy jurisdictions located in the developed world are increasingly being digested as a threat to sustainable development and one of the greatest global development challenges we face. Indeed, outflows of corrupt gains have been consistently increasing over the last ten years to the point that they have surpassed the combined amount of global Foreign Direct Investment (FDI) and Official Development Aid (ODA) flowing into developing countries, according to conservative estimates (Kar and Spanjers, 2015). Similarly, there is also consensus that the amount of private wealth held offshore is growing (Zucman, 2015; Henry, 2012a).

The advocacy community in particular have produced varying estimates among policy reports that have led the way in highlighting the detrimental impacts that such proceeds of corruption have on economic growth, poverty alleviation, and the rule of law. The Sustainable Development Goals (SDGs) have included explicit targets to reduce illicit outflows of money under SDG 16; prominent international transparency and compliance agreements to fight corruption have emerged, such as the Financial Action Task Force (FATF), the OECD Anti-Bribery Convention, the UN Convention Against Corruption, and the Addis Tax Initiative, just to name a few. More recently, the Panama Papers leaks have exposed these issues to the world in an unprecedented manner, bringing along an international media storm that is still digesting the magnitude of the leak.

However, this attention has not seen itself reflected in the academic community. In understanding the links between corruption and development, the literature has rested upon a conceptualisation of corruption that has skewed the analysis and failed to encapsulate these realities by bypassing the role of developed countries in the global supply chain of corruption. Academic output has particularly disregarded the directionality and scope that is inherent in global corruption for an analysis based on corruption originating from public officials within a delineated jurisdiction.

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As such, a more nuanced understanding of corruption is needed that takes account of Illicit Financial Flows (IFFs), which are broadly defined as the “cross-border movement of money that is illegally earned, transferred or utilized” (GFI, 2014: 1) from three different proceeds of corruption (Baker, 2005): commercial activities (such as individual and corporate tax evasion and tax avoidance1, mis-reporting and mis-invoicing related to trade activities, and laundered money through commercial transactions), criminal activities (drug trade, human trafficking, illegal arms dealing, smuggling of contraband, terrorist financing); and individual corruption from public officials (bribery, theft, embezzlement). By understanding IFFs as the proceeds of corruption and a subset of the concept of corruption in itself, this research will not only paint a more accurate picture on how widespread corruption is worldwide, but it will also put the spotlight on the receivers and facilitators of such practices; the so-called tax havens, offshore financial centres, or secrecy jurisdictions.

Questions must therefore be asked as to why and how these increasing proceeds of corruption are dissipating from the global south into financial centres. Very little academic attention has been placed on the role that financial secrecy plays in facilitating and attracting IFFs in developed countries, which will be understood in this thesis as the legislative provision of financial services, facilities and regulations of a jurisdiction that benefit and enable people or entities to escape or undermine the laws, rules and regulations of other jurisdictions elsewhere, using opacity of financial information as a prime tool (Cobham et.al, 2015: 289). Extending the discussion to this research gap is key in order to examine the extent to which it remains such an easy practice to transfer illicit money. For instance, it is worrying how simple it can be to set up a shell company with no identifiable beneficial owner2, or for corporations to shift their profits across borders in order to legally avoid taxation. The givers, receivers, and facilitators of corruption exposed in the recent Panama Papers shed light on this phenomenon. But Panama is just a fraction of the global offshore system.

1_{Tax evasion refers to the illegal “actions by a taxpayer to escape a tax liability by concealing from the revenue}

authority the income on which the tax liability has arisen. Tax abuses refers to “the legal practice of seeking to minimize a tax bill by taking advantage of a loophole or exception to tax regulations or adopting an unintended interpretation of the tax code” (UNECA, 2015: 10).

2_{Understood as “the real person or group of people who control(s) and benefit(s) from a corporation, trust, or}

account” (UNECA, 2015: 8).

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In this sense, the role of OECD jurisdictions – which was previously overlooked in the place of blacklisted tax havens such as Panama – becomes especially relevant. The relatively lax regulatory policies of such developed countries on markets and financial services have indeed contributed towards them housing some of the largest inflows of finance in the world, but does this also invite the proceeds of corruption? The largest exporters of financial services to non-residents are not located in the Bahamas, Seychelles and the likes, but in the United States, the United Kingdom, and Switzerland, making their propensity and especially extensity to be secretive much greater (Cobham et.al, 2015). A central question needing to be addressed therefore emerges: To what extent does the process of deregulation facilitating capital movement and businesses practices help explain the level of financial secrecy across OECD jurisdictions?

I will show that the existence of secrecy appears to stem from a process of regulatory arbitrage between jurisdictions, a sort of race to the bottom in tax competition. This plausible hypothesis challenges the idea that globalisation and the adoption of deregulatory neoliberal policies reduce corruption (see Akhter, 2004; Gerring and Thacker, 2005) because the foundations from which corruption is defined are fundamentally different: Deregulation3 might well reduce the emergence of corrupt practices within a country, but it does not necessarily prevent illicit gains from other jurisdictions to be sheltered. It is this shift in attention from the givers of corruption to also include facilitators and receivers of corruption that needs to be emphasized when engaging with these topics.

Similarly, the role of private agents in shaping such race to the bottom needs to be analysed in tandem to gain a richer understanding of the driving dynamics that facilitate financial secrecy. The opacity of the global financial system has enabled private agents such as Multinational Corporations (MNCs) and High Net Worth Individuals to find loopholes in the law to legally transfer IFFs from one jurisdiction to another, which have tended to have especially detrimental effects on developing countries. As this thesis will show, this has been particularly inherent in MNC’s ability to shift profits4 through abusive transfer pricing of transactions between a firm’s entities and/or subsidiaries.

3_{Understood as the set of neoliberal policies employed under the Washington Consensus aimed at removing or}

reducing state influence on the market, industries, and financial system to create more competition and economic liberalisation (Williamson, 2002).

4_{Profit shifting refers to “tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift}

profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid” (OECD website, 2016).

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Indicative estimates suggest that the long-run revenue loss from this type of profit shifting accounts for around 0.6 percent (US$509 billion) of GDP for OECD countries, but 1.7 percent (US$213 billion) of GDP for developing countries, according to a recent IMF Working Paper (Crivelli et.al, 2015)5. More revealing is the weight that the 50 largest U.S companies carry in shaping this trend. Approximately US$100 billion were syphoned out of developing countries for each year between 2008 and 2014 as a result of their ability to reduce the the tax bill through profit shifting (Oxfam 2016). In other words, US$100 billion equate to “four times what the 47 least developed countries in the world spend on education for their 932 million citizens (and) is equivalent to what it would cost to provide basic life-saving health services or safe water sanitation to 2.2 billion people” (Ibid: 11).

Assuming that the funds would be appropriately used if available, the common denominator is the same around the world, although it is more pronounced in the developing world due to the fragile institutional developments and rule of law (Crivelli et.al, 2015): An eroded tax base limits the state budget, increases deficits and places mounting pressures on funds dedicated to improving human capital and the quality of law enforcement for instance. But in the long run, such implications are particularly burdensome in developing countries, as it can break the social contract between state and society, exacerbating continuing poverty, global inequality, failed states and the potential for extremism and terrorism to thrive. Indeed, it is a dramatic problem that cannot be overstated enough. Anyone who wishes to have a realistic understanding of why poor countries remain poor should turn towards these trends.

The purpose of this explanatory mixed methods study is to understand how and why a specific aspect of financial secrecy facilitates the proceeds of corruption (understood in this thesis as illicit financial flows) in OECD jurisdictions. In order to do so, this thesis will explore the extent to which the burden (or lack of) of regulation has shaped the level of financial secrecy. In the first, quantitative phase of the paper, replicated data from the Financial Secrecy Index (FSI) will identify which area of financial secrecy manifests itself as being systematically present throughout all OECD jurisdictions. I will show that this concerns primarily the area of corporate secrecy that enable MNCs to shift their profits and engage in tax abuses. As such, the policy responses to implement Country-By-Country

5_{These results are also consistent with previous findings in the profit shifting literature (See OECD, 2015; de}

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Reporting (CBCR)6 through the OECD’s Base Erosion and Profit Shifting7 project (BEPS) have been particularly underdeveloped throughout the population. In the second, qualitative phase of the study, the United States will be used as an explanatory case study that will follow up on the empirical results and will provide a more nuanced understanding of the relationship between deregulation and financial secrecy, particularly in terms of causality. Drawing from Waltz’s (1959) second image and Gourevitch’s (1978) second image reversed, this part of the study will look at how international market forces have simultaneously interacted with the preferences of coalition patterns that shape American domestic politics, which in unison have set in motion a market-driven race to the bottom and the structures for financial secrecy. Doing so is crucial in order to assess why the current legislative efforts to introduce CBCR in the United States and the rest of the OECD may fail to effectively curtail profit shifting from MNCs given that the dynamics behind financial secrecy are now hard hard to reverse.

2. LITERATURE REVIEW

UNDERSTANDING CORRUPTION: A MATTER OF DIMENSION AND DIRECTIONALITY Corruption and development are twin processes that are mutually reinforcing to each other’s detriment. More than thirty years ago, seminal works in the rent-seeking literature by Kaldor (1963), Bhagwati (1982), Krueger (1973), Rose-Ackerman (1978), and Tullock (1967) explored the causes and consequences of corruption with regards to resource mobilisation and the ability to tax. Essentially, their argument suggests that a higher rate of corruption will drain valuable resources from a country’s budget, reducing revenue mobilisation and taxation capacity. Indeed, the institutionalization of taxation plays a fundamental role in the economic development of a country, as it generates a social contract and mutual accountability between the government and its people: Society provides the states

6_{Understood as “a proposed form of financial reporting in which multinational corporations report certain}

financial data—such as sales, profits, losses, number of employees, taxes paid and tax obligations— for each country in which they operate” (UNECA, 2015: 8)

7_{The BEPS project coordinated by the OECD, which also involves the G20 countries, seeks to reform}

international tax standards that have become open to exploitation by multinational firms (UNECA, 2015: 8)

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with government revenue and the state in turn, re-invests these revenues (generated from taxation) in public good and security (Diamond and Mosbacher, 2013). But if a state is unable to systematically guarantee public goods through taxation, the social contract is breached, creating an environment where unaccountable elites, clientelism, and rent seeking can take over the rule of law (Ibid.).

With the passage of time, and with more public information available, the interest in this field has increased and produced enough empirical evidence to suggest that there is a general consensus among scholars on the negative impacts that it has on economic growth and development, particularly in countries with less advanced economies, weak institutions, and a poor rule of law (for a general discussion on the detrimental impacts it has on economic growth see Gyimah-Brempong, 2002; Keefer and Knack,1997; Li et.al, 2000; Sachs and Warner, 1997). Corruption reduces private investment and places a burden on business practices (Mauro, 1997, 1995); it is detrimental to human development (Ackay, 2006); undermines bureaucratic performance and governance (Gould and Reyes, 1983); increases tax evasion (Cerqueti and Coppier, 2011), and it can become so ingrained into the fabric of society that it eventually establishes itself as a permanent feature of a country’s poverty (Bardhan, 1997).

Clearly, the literature on corruption has been studied through many different lenses and has no doubt helped understand the negative effects that it has on the rule of law, economic growth, and human development. Yet, the conceptual framework under which these papers rest upon miss out on two crucial elements that are needed to capture a more nuanced understanding of what corruption is and how it works: Directionality and dimension. With regards to the latter, the commonly used definition of corruption as the illegitimate use of authority from public officials for personal gains (usually in the form of briberies, collusion, extortion, or negligence) (Søreide, 2016) places the spotlight exclusively on a state-centric approach in which public actors are the main antagonists. A dictionary definition of “corruption” will indicate that it is a “dishonest or fraudulent conduct by those in power, typically involving bribery”. But those who demand or influence such corrupt practices are equally culpable, and as such, should be included in the definition used in this paper. In this sense, corruption can be seen as mutual favours that are characterised by “the pervasive utilisation of informal modes of exchange within the formal sector” (Mudambi et.al, 2012: 488). Similarly, bribery is not the only means by which corrupt practices can take

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place. The above-mentioned “favours” can “consist of various legal or illegal forms of trading influence and bureaucratic favouritisms for equivalent services or cash” (ibid.).

In the first – legal – case, this work looks at “interpersonal connections embedded and exploited on business activities that promote mutual benefit within the bounds of the law” (ibid.), such as obtaining certificates, transcripts of documents, permits, tax clearances, and countless other items, including introductions to people who can eventually guarantee these favours (ibid). The second – illegal – aspect of corruption, is more closely related to the United Nation’s Convention Against Corruption (UNCAC) which defines “corruption offenses” (articles 15-23) as bribery of national public officials (art. 15); bribery of foreign public officials and officials of public international organizations (art. 16); embezzlement, misappropriation or other diversion of property by a public official (art. 17); trading in influence (art. 18); abuse of functions (art. 19); illicit enrichment (art. 20); bribery in the private sector (art. 21); embezzlement of property in the private sector (art. 22); and laundering proceeds of crime (art. 23) (Gray et.al, 2014: 9).

By adopting these broad definitions of corruption, this study is deliberately including an umbrella of practices that revolve around the three main proceeds of corruption that were previously highlighted as IFFs: commercial activities, criminal activities, and government corruption. Such departure from the conventional idea of corruption originates from Raymond Baker’s pioneering publication Capitalism’s Achilles Heel (2005) which provides a new conceptual conjecture that better reflects the dimension and scope of corruption. These practices of corruption offer a more accurate reflection of what it is, but they do not offer any sense of directionality on how it operates. Indeed, corruption has tended to be analysed in a hermetic manner that focuses on the causal relationship within countries and not between them. In this sense, integrating IFFs into this conceptualisation of corruption also puts the spotlight on a two-way process in which the occurrence of “cross-border transactions” needs to be emphasized, as it suggests that the roles of a supplier, receiver, and facilitator are necessary for services or capital to be exchanged (Verbeke & Kano, 2013).

It is important to note that IFFs are not to be confused with capital flight, as the latter refers to the movement of funds abroad in order to secure better returns, often in response to an unfavourable business climate or corruption in the country of origin (Kant, 2002: 354). Capital flight is defined by Kar and Cartwright-Smith (2008: iv) as:

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“an expression that places virtually the whole of the problem upon the developing countries

out of which the money comes. It suggests that it is almost entirely their responsibility to address and resolve the concern. The expression illicit financial flows does a better job of clarifying that phenomenon is a two-way street”.

IFFs essentially reflect how unrecorded cross-border transactions originating from the three previously identified sources of corrupt practices are either concealed in or facilitated by secure financial centres located in developed countries (Baker, 2005), but an important clarification needs to be established between the legal and moral connotations that it carries. Recalling the definition of IFFs as money that is illegally earned, transferred or utilised entails that such proceeds are confined to what is legally wrong and not morally wrong. Illicitness suggests that it does not necessarily correspond with violations of the law. While all illegal actions may be deemed illicit, all illicit actions are not necessarily illegal but may be morally wrong, such as tax abuses that correspond to profit shifting. In this sense, “illegal” must be understood as an action that intentionally violates “the letter or the intention of the laws and regulations (which is not illegal in itself, but morally wrong) of countries out of which the money comes, through which the money passes, or into which the money arrives” (GFI, 2014: 1).

ESTIMATING THE IMPACT OF CORRUPTION ON DEVELOPMENT: A DIFFERENT PERSPECTIVE Having clarified the importance of integrating dimension and directionality of IFFs into the understanding of corruption, the empirical evidence showcased below offers a very different picture to the one that has conventionally been presented in the academic literature. For instance, Baker’s (2005) work, which is the first major study to provide an estimate for cross-country illicit outflows from all developing countries, suggests that US$539 to US$778 billion had been drained from the developing world in 2005. But only 3 to 5 percent of that amount could be attributed to the conventional understanding of corruption – bribery, theft, and other forms of enrichment from government officials. What is so revealing about Baker’s findings is that around 60 percent of IFFs were linked to legal commercial transactions by MNCs and 35 percent to illegal criminal activities such as human trafficking, drug

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smuggling, and arms trades. In other words, around 95 percent of the proceeds of corruption had been previously unaccounted for.

Most available material that fits into this understanding of corruption has been largely advanced by policymakers and the advocacy community, and provides varying data and results (see Kar and Spanjers, 2015; Kar and Leblanc, 2013; UNECA, 2015; UNODC, 2011, 2007; Claessens and Naudé, 1993). A key challenge in the robustness of these findings arises from the lack of exposure or attention given to IFFs in the academic world, which has resulted in a concept that remains ‘marred by a lack of terminological clarity’ (UNECA, 2013: 2). Furthermore, the inherent difficulties of gathering such secretive data have played a big part in producing skewed results, with figures suggesting that US$1 trillion to US$1.6 trillion IFFs flee developing countries annually, representing around 2-5 percent of global GDP (UNODC, 2007).

Global Financial Integrity, a Washington-based NGO founded by Raymond Baker has provided the most significant contribution of empirical data on IFFs, publishing annual reports since 2006 that have covered ten-year periods at a time. Their latest findings (Kar and Spanjers, 2015) suggest that a total of US$7.8 trillion was lost to corrupt practices from 2004 through 2013, with illicit outflows increasing at an average rate of 6.5 percent per year — nearly twice as fast as global GDP – and reaching a total annual sum of US$ 1.1 trillion (Ibid.). Upper bound estimates from the early 2000s placed this figure at US$ 3.4 trillion if illegal and legal activities in the unobserved economy (excluded from GDP) are taken into account (Reuter and Truman, 2004). Of greater concern is that 80 percent of these flows originate from developing and emerging countries, meaning that in seven out of the last ten years, IFFs have surpassed the combined total of FDI and ODA flowing in. For instance, illicit outflows were roughly 1.3 times higher than the US$858 billion in total FDI, and they were 11.1 times higher than the US$99.3 billion in ODA that these economies received in 2013 (Kar and Spanjers, 2015).

Quantifying the impacts of corruption is by no means a matter of consensus, as the above shows. But despite the variations in estimates and methodologies, it is important to point out that all the reports produced on the matter converge around the notion that (1) IFFs have been consistently increasing on a yearly basis, (2) that they have surpassed the combined total of FDI and ODA flowing into the developing world, and that (3) the amount of private wealth held offshore is growing (Zucman, 2015, 2014; Henry, 2012b). The numbers should therefore be digested with a pinch of salt, but the trends are of greater

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significance. From a thematic point of view, they make a good case for this field of study to be further researched and consolidated in the academic context of the political economy of development. For the purposes of this study, these alarming trends help us direct the attention towards an area that has generally been bypassed when studying corruption through the lens of IFFs: the role played by tax havens in facilitating such practices of corruption. As previously mentioned, if corruption is a two-way process that is only being studied and confronted from one end of the spectrum, the prospects for the emergence of effective policies to counter such trends are likely to be inconsequential.

Estimating the role that tax havens play in sheltering these proceeds of corruption becomes a burdensome task. A brief exposure to some of the main findings reflect this. Fourmy (2009) estimates that US$6.2 trillion of wealth from developing country individuals is held offshore, which amounts to around US$64-US$124 billion annual tax loss. Tax Justice Network (2005), a London-based NGO claims that the offshore holdings of financial assets are valued at approximately US$9.5 trillion and US$11.5 trillion if real estate is take into account. Assuming that 20 percent of worldwide GDP can be assigned to developing countries, Cobham (2005) equates this to US$51 billion annual loss of revenue. Gabriel Zucman’s largely cited Hidden Wealth of Nations (2015) has placed this figure at US$7.6 trillion – or 8 per cent of global financial wealth – at the end of 2013, which stands in stark contrast to Henry’s (2012a) claims that the figures are in the range of US$24 to US$36 trillion as of 2015. While these numbers may not all be related to IFFs, it is revealing to find that offshore wealth has increased by 28 percent since the financial crisis started until 2013 (Zucman, 2015).

Again, these estimates are an indicative manifestation of just how complicated it is to gather consistent data in this field of study, given that the results are based on differing methodological approaches and assumptions. Firstly, these figures make differing assumptions on the distributions of assets, taxable incomes, and tax rates between developed and developing countries (Howard, 2001). Secondly, there is no indication of how much of this wealth derives from illicit funds. It may be the case that many of these offshore holdings are completely licit and are held abroad for purposes other than that of evading tax or hiding criminal proceeds for instance (Fuest and Riedel, 2012: 124). Lastly – and perhaps more importantly for the purpose of this paper – these numbers are based on differing definitional

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understandings of what a “tax haven” is and all the terms that have been used synonymously, such as “offshore financial centre”, or “secrecy jurisdiction” (Reuter, 2012). Taking GFI’s figures for example; their results indicate that 45 percent of IFFs end up in offshore financial centres, while 55 percent in developed countries (Kar et.al, 2010). One could easily argue that a developed country is also an offshore financial centre and vice versa. Clarifying this conceptual misunderstanding is therefore critical before establishing a theoretical framework.

THE ROLE OF SECRECY JURISDICTIONS AS FACILITATORS OF CORRUPTION

Academic literature exploring the role of tax havens in facilitating corruption through financial secrecy have tended to do so without reaching a consensus on what it is and what it is not. The challenge therefore arises on “how to move from a realisation that offshore is a pervasive aspect of the world economy, rather than a group of troublesome (small) jurisdictions” (Cobham et.al, 2015: 286).

Already in 1981, the Gordon Report to the U.S. Treasury found that there is no single, generally accepted criteria for determining the identification of a country as a tax haven. It offered instead a range of definitions which could potentially include any jurisdiction (Gordon 1981: 14):

“The term “tax haven” has been loosely defined to include any country having a low or zero rate of tax on all or certain categories of income, and offering a certain level of banking or commercial secrecy. Applied literally, however, this definition would sweep in many industrialized countries not generally considered tax havens, including the United States.”

Publications such as Nicolas Shaxson’s Treasure Islands (2011) and Ronen Palan’s

Tax Havens: How Globalization Really Works (2010) have rested upon such confusions.

While they both offer very comprehensive analyses on the historical processes that have shaped tax havens and the role that they currently play in the international political economy of development, they do so from units of analysis that invite a very different narrative. Palan sees tax havens as being part of a remote system that is produced by the forces of globalisation (namely the attraction of capital) and as such, focuses on the ‘traditional’

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isolated tropical islands, such as the Cayman Islands and Bermuda. Shaxson on the other hand, believes that tax havens and the offshore system are at the core of the present globalised financial system, engrained and widespread in our economies and representing the “fortified refuge of Big Finance” (Shaxson, 2011: 7). “It is a set of networks of influence controlled by the world’s major powers, notably Britain, the United States, and some jurisdictions in Europe” (Ibid: 23) that represent a very large part of the global economy. Depending on how tax havens are viewed, the scope of the problem emerges in a very different way.

As a start, the focus needs to shift away from tax related issues alone. While many countries may be labelled as low tax countries in the sense that they offer low or zero taxes on certain activities, the set of rules that govern ring-fencing of legislation may be more acute in jurisdictions that do not fit this criteria, but that provide greater opacity of financial information. In attempting to bridge this definitional gap, the concept of a “secrecy

jurisdiction”, promoted by Richard Murphy (2008) adequately fits the purpose of this study.

It is important to point out however, that I will use the terms tax haven and secrecy jurisdictions interchangeably throughout this thesis to refer to the latter, which is primarily characterised by two things:

- “The creation of regulation that the secrecy jurisdiction know is primarily of benefit

and use to those not resident in their geographical domain” (Murphy, 2008: 6)

- “The creation of a deliberate, and legally backed, veil of secrecy that ensures that

those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.” (Ibid.)

Focusing on secrecy is crucial because it “allows non-residents to take advantage of favourable features in the jurisdiction’s legal framework with the confidence that they will not run afoul of the legal system in the placeswhere they reside” (Cobham et.al, 2015: 287).

Unlike the above-mentioned understandings of tax haven, secrecy jurisdictions are not only driven by the intensity (internal policy decision making that enables financial secrecy) of their secrecy, but also by their extensity of secrecy (share of a jurisdiction’s global market for financial services to non-residents or the extent to which it has influence over the financial legal framework of extraterritorial jurisdictions), as it puts the spotlight on the propensity to which they are likely to facilitate the housing of corrupt practices (Cobham et.al, 2015).

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This does not necessarily mean that a secrecy jurisdiction exacerbates the flow of corruption. As a matter of fact, critics would argue that because of such secrecy, tax havens could have a positive effect on the global economy without necessarily having to be the source or illicit activities (Hong and Smart, 2010; Hines and Rice, 1994). This view starts from the presumption that humans are well-behaved and rational individuals, and that tax havens (or secrecy jurisdictions) are territories that offer firms and individuals favourable opportunities to sidestep poorly designed tax systems. Under such circumstances tax havens may even increase welfare in high tax countries and facilitate the flow of international capital in the global economy (Hong and Smart, 2010; Hines and Rice, 1994).

But if this were the case and human beings were well behaved, would there be any reason to be secretive in the first place? While the offshore system might not exacerbate corrupt proceeds, it can certainly facilitate them. Indeed, it is the ease and attractiveness that secrecy jurisdictions offer that invites the prospect of hiding the proceeds of criminal undertakings, financing illegal activities (e.g. terrorism), and/or tax abuses (Palan et al. 2010; Shaxson, 2011).

3. THEORETICAL FRAMEWORK AND RESEARCH METHODOLOGY

As shown in the last section of the literature review, the very existence of a secrecy jurisdiction seems to indicate that they rely on having a comparative advantage over other jurisdictions by engaging in a process of regulatory arbitrage of financial services to attract capital .(Cobham, 2015: 287).

Conventionally, it is argued that as an economy is liberalised, the resulting increased competition will disincentive opportunistic behaviours by public officials and create economic growth. I argue that such an argument is flawed on the premise that it has only looked at one side of the coin. In particular, the very concept of corruption re-emerges as an underlying feature of such weakness, as the way in which it has been defined and operationalised to reach such conclusions has been skewed towards focusing on the demand for corrupt practices within a country. Hence, when common indicators such as the Corruption Perception Index (Transparency International, 2015) measures corruption, it is unsurprising to find that it is inversely correlated with the level of GDP in a country. Does this mean that the richer a country, the less corrupt it is? Not quite. By turning the argument

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around and focusing on the supply for corrupt practices between jurisdictions, the picture becomes very different: Countries with high levels of financial secrecy (and therefore large financial centres given their ability to provide financial services to non-residents) can potentially attract all kinds of illicit funds. Whether this has been influenced by the extent to which regulatory policies that facilitate the movement of capital and business practices in a jurisdiction is a plausible hypothesis that will be examined in this thesis, as the quantitative analysis will show. In this respect, the presence of such parallel universes in the global financial system not only creates a supply-side stimulus for IFFs (Christensen, 2012), but can also challenge the notion that globalisation and the adoption of deregulatory neoliberal policies reduce corruption (see Akhter, 2004; Gerring and Thacker, 2005).

In this sense, the dynamics that potentially generate these safe houses for corrupt practices can borrow some useful elements from the “race to the bottom” literature and Gourevitch’s (1978) second image reversed. As the figure below illustrates, the theoretical framework under which this thesis is based will regard the international and domestic structures as mutually interdependent forces that impact each other simultaneously to shape financial secrecy across OECD jurisdictions.

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Much like in Waltz’s neorealist perception of anarchy, the international environment created from the process of globalisation has resulted in capital becoming footloose “to the point where states cannot halt capital mobility even if they tried. In such a world, capital will seek the location where it can earn the highest rate of return…capital will therefore engage in regulatory arbitrage, moving to countries with the lowest regulatory standards. States, fearing a loss of their tax base, have no choice but to lower regulatory standards to avoid capital flights” (Drezner, 2001: 57-8).

Kenneth Waltz’s (1959) second image theory of International Relations states that when international competition for capital is shaped by the domestic politics of hegemonic states, other hegemons – who are also exposed to the same international market pressures – will engage in a competitive vicious cycle of policy changes that will result in regulatory arbitrage to attract capital so that the balance of power can be maintained (Basinger and Hallerberg 2004; Hays 2003; Swank 2016).

The resulting outcomes of international structures placed on domestic politics “overwhelms the ability of the state to act contrary to market forces” (Drezner, 2001: 57) because from Waltz’s neorealist point of view, the market forces are so ingrained in the international system of anarchy that sates must compete with each other in order to attract capital. This mobile factor of production will not only locate in polities with the most favourable conditions (Rodrik, 1997; Berger, 2000; Drezner 2001; Scharpf, 1991), but as result will initiate a race to the bottom among states that are highly exposed to global markets by adopting free market policies and deregulatory measures to attract capital (Drezner, 2001, Berger 2000).

Unfortunately, there are no major academic works directly linking regulatory arbitrage with financial secrecy. The work from Reuter (2012), Shaxson (2011), and Palan (2010) touch upon this phenomenon vaguely by breaking away from the literature that argues that policies aimed towards deregulation and privatisation are effective mechanisms to combat and reduce corruption (see Bliss and Di Tella, 1997; Aguilera & Valdera, 2008; Djankov et. al, 2002).

It is important to note that I do not seek to disregard the opposite argument. Indeed, a wide array of literature has found a strong positive correlation between corruption and the level of regulation (see Mudambi et.al, 2013; Holcombe and Boudreaux, 2015; Stiglitz, 2012; Stockman, 2013; Stigler, 1971). I merely want to point out that the relation between deregulation and corruption deserves a more nuanced analysis in which the supply of

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financial secrecy is taken into consideration, especially as recent studies by Sharman (2011) and Findley et. al (2013) have found OECD countries to be more secretive than many tax havens. Unlike previous literature on financial transparency that was based on country-specific cases (see Sharman 2011, 2006; Emmenegger 2014), this theoretical framework is designed to identify and explain the reasons behind the systematic deficiency of financial secrecy across OECD jurisdictions by first replicating the results of FSI from 2011 to 2015, as the next section of this paper will examine.

We must also take account of other explanations that might help explain financial secrecy better, such as the interests and influence of private agents in shaping the politics of secrecy. Whether this causes the international market forces driving regulatory arbitrage or is a consequence of it (or both) needs to be properly analysed. As we shall see by examining the historical evolution of the U.S in becoming a secrecy jurisdiction, the race to the bottom theory cannot be properly understood in isolation without the role of private agents driving such process.

Recalling Gourevitch’s second image reversed (1978), the processes and procedures of decision-making along with the relationship between social and political forces must also be analysed, as they can further determine how domestic policies react to the international market forces (Ibid: 884). Unlike Waltz’s (1959) view of the international system as being the determining factor behind domestic politics and policy preferences, Gourevitch chooses to focus on regime type and coalition patterns as the dependent variables, arguing that these are “enduring features of a given political system, ones which operate over time to shape behavior at specific moments of decision, events, or policy formation” (Ibid: 883). In regarding the importance of coalitional analysis, or the examination of “how specific interests use various weapons by fighting through certain institutions in order to achieve their goals” (Ibid: 905), the preferences of different actors can act as a lubricant for loopholes within the dynamics of regulatory arbitrage. The role of MNCs and their coalitional forces (lawyers, lobbyists, accountants, and bankers) therefore emerge as a central factor in explaining how legal loopholes and escape routes around laws have been created in light of the race to the bottom for capital to guarantee that financial secrecy can be established.

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RESEARCH METHODOLOGY

This thesis will use an explanatory sequential mixed methods approach as a research methodology. In order to test the hypothesis that lax regulations facilitating the movement of capital and business practices increase the level of financial secrecy, a combination of first quantitative and then qualitative studies are required. The exploratory quantitative part will operationalize the concepts of deregulation and financial secrecy by replicating two indexes: The World Economic Forum’s Global Competitiveness Reports (GCR) and Tax Justice Network’s Financial Secrecy Index (FSI) respectively. In doing so, the first part of this thesis will provide the framework of study for the causal analysis between deregulation (and an aspect of it) and financial secrecy (and an aspect of it) that will take place in the qualitative phase of the paper.

The FSI is a combined biennial ranking of a country’s secrecy and scale of its offshore financial activities that adequately encompasses the dynamics of directionality and dimension of corruption that were previously discussed. Firstly, the quantitative component of the FSI portrays the extensity of corruption by quantifying the potential for a jurisdiction to house and facilitate the IFFs based on its global financial weight. Secondly, the FSI highlights the level of intensity of corruption in a jurisdiction by including fifteen indicators that reflect the various mechanisms by which a jurisdiction may house or facilitate the proceeds of corruption. The FSI is also the only known quantifiable index that can be replicated for the purpose of this thesis, and as such bears some necessary limitations that may somewhat skew the results. As we will see, these essentially relate to the validity and reliability of the data. Concerns may arise around the biased nature of how the indicators used to measure the intensity of secrecy are computed given that they are based on a qualitative grading and selection criteria. Similarly, the level of response generated from the surveys is quite low and some of the data used from external sources is subject to political bias.

The GCR ranks countries according to a vast array of measures relating to national competitive prowess (Lall, 2001: 1501) and reflects the dynamics of competitive advantage between countries that is inherent in the process of regulatory arbitrage that this study seeks to highlight (Lall, 2001). As such, ten indicators will be selected that relate to either factors facilitating business practices or capital freedom (see table 2). Among the strengths of the GCR is that it is widely used among policymakers and policymaking, generating a large level

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of response from the surveys that it sends. The content of such surveys however is somewhat dubious, as many of the questions are formulated in an ambiguous manner that leaves a lot of room for interpretation. Similarly, there is no methodological background on the indicators used to measure deregulation.

The results of the quantitative phase will test and examine the relationship between liberalisation and financial secrecy through a linear regression analysis, and will also identify a specific area of secrecy – using descriptive statistics of the aggregated scores from the indexes – whereby most or all OECD countries are performing weakly. The latter part of the quantitative analysis will show that Country by Country Reporting is vastly lacking in transparency and as such, enables MNCs to engage in tax abusive practices such as profit shifting. Having established the units of analysis for the qualitative study, this second phase of the thesis will provide an explanatory follow up to the results using the U.S as a case study. The objective is to integrate the theoretical framework into the analysis so that a richer understanding on the dynamics that have shaped the low levels of CBCR across OECD jurisdictions can be warranted. I will show that the United States is the largest exporter of financial services to non-residents and as such, has the highest propensity to affect the level of financial secrecy across the population (Cobham et.al, 2015). Similarly, the U.S is a hegemonic state that can draw some interesting parallels from Waltz’s second image and the race to the bottom, as its actions might affect the international market structures more than if another country was to do so. Lastly, the role of the U.S in understanding why and how the lack CBCR is so widespread is especially relevant. Of the Fortune Global 500 Companies, 127 of them are from the U.S. The rest are distributed among 35 other countries8. In this sense, the U.S carries the heaviest weight in determining whether the extent to which tax abuses from MNCs are a burden to developing countries or not.

A clear limitation from the qualitative analysis stems from the amount of first-hand data that can be gathered in examining the preferences and interests of agents in shaping U.S domestic politics and the international market structures. In this sense, the U.S has also been selected as a case study for practical reasons. During the course of this thesis, three months (March, April, May) of fieldwork were spent at Global Financial Integrity doing research on corporate secrecy, providing access to valuable resources that would not have been able

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gather otherwise. Four semi-structured interviews were conducted with senior roles from the government and NGO sectors (see annex 7) who provided inside knowledge on the dynamics behind the politics of secrecy. Efforts were also made to contact representatives of the corporate community for an interview, but these were either unavailable or did not respond in the first place9. Similarly, the three months spent in Washington DC enabled me to review comment letters sent by different stakeholders to U.S policymakers and attend high-level discussions on tax competition and its effect on development. The exposure to such resources are also a limitation in itself, as GFI’s line of work is naturally inclined to a biased narrative and most of the qualitative data has originated from advocacy work and policy reports.

4. QUANTITATIVE ANALYSIS: FINANCIAL SECRECY IN OECD

JURISDICTIONS

FINANCIAL SECRECY INDEX: JUSTIFICATION, LIMITATIONS, AND VALIDITY

Empirical data reflecting this area of study has been problematic. For instance, the most commonly used perception-based corruption assessments from the World Bank’s Country Policy and Institutional Assessment and Transparency International’s CPI (Transparency International, 2015) tend to rely on a limited sample of surveys that are sent out to a broad range of experts. Beyond the fact that collecting data on this basis can lead to biased results, they usually fail to take account of the transnational nature of corruption and focus on the domestic institutional responses to corruption, which is usually centred around abuse of power of public officials for personal gain. Unsurprisingly, a country’s level of corruption (and control of it) will always be more present in low per capita GDP places given the lack of institutional strength.

When it comes to identifying tax havens, the blacklists that have emerged from international organisations have been discretional and/or subject to political pressures whereby OECD countries are cleared for small palm-fringed islands that offer null or very

9_{I emailed Josh Magri, Vice-president of the Financial Services Roundtable on the 23}rd_{of March 2016 after}

talking to him at an event at the American University in DC, but got no reply. I also emailed his assistant on the 26th of March and 7th of April without success.

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low tax rates (Centre for Budget Accountability and Financial Transparency Coalition, 2015: 18)10.

The Financial Secrecy Index (Tax Justice Network, 2015) is a combined qualitative and quantitative ranking of a country’s intensity and extensity of secrecy that offers a much more relevant understanding of global corruption for the purposes of this paper11_{. Firstly, the}

FSI breaks away from establishing a binary division between being a tax haven or not, or being a secrecy jurisdiction or not. Rather, it parts from the premise that all 102 jurisdictions12 could potentially be considered as secretive to some degree, whereby a Secrecy Score of 0 indicates complete transparency13 and a score of 100 indicates complete secrecy. In this sense, OECD countries’ performance is matched equally in comparison to the jurisdiction which have tended to be blacklisted, giving room for real analysis and evolution over time.

Secondly, the FSI encapsulates the directionality and dimension of corruption that was previously explained. For instance, the inclusion of the Global Scale Weight (GSW)14_-

which is the quantitative half of the FSI – into the computation of the FSI takes account of a jurisdiction’s market share of financial services for non residents, which was calculated from an IMF Working Paper (Zoromé, 2007)15. It essentially puts the spotlight on the countries that affect financial secrecy globally – the extensity –, as opposed to those that are most secretive but have a considerably lower impact. The GSW does not imply that a jurisdiction will necessarily engage in financially secretive practices. Rather, it highlights the propensity

10_{Good examples of this have been documented in the OECD’s attempts to include Switzerland in its “tax}

haven blacklist” (see Emmenegger 2014: 156-160). More recently, the EU’s 2015 process of creating an “Uncooperative Tax Jurisdiction” list included no Member States and a number of countries removed Bermuda from the list following intense lobbying (EUbusiness, 2015, Hainey, 2015; Bernews, 2015)

11_{For more information with detailed explanations behind the FSI methodology, consult the latest 100-page}

document of the 2015 FSI (Tax Justice Network, 2015) (See also Tax Justice Network, 2013;2011)

12_{The latest version (2015) covers 102 jurisdictions, which includes all 34 OECD countries}

13_{“A situation of financial transparency may be characterized (1) by relevant information being placed on}

public record for all stakeholders to access; (2) by access on certain private financial data only by authorized authorities (such as tax administrations, police, etc.); or (3) by collecting, analyzing and sharing relevant information effectively with foreign counterparts.” (Cobham et.al, 2015: 289)

14_{A detailed discussion on how the GSW is calculated can be found in Tax Justice Network (2015: 62-68)} 15_{The GSW is calculated by dividing a jurisdiction’s exports of financial services by the sum of all world}

exports of financial services. The global scale weights are based on publicly available data about the trade in international financial services of each jurisdiction. The preferred data source is the IMF’s Balance of Payments Statistics (BOPS), which provides data on international trade in financial services (Cobham et.al, 2015: 292-4). A detailed explanation of the data sources from the Global Scale Weight can be found in Tax Justice Network (2015: 62-8).

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of a jurisdiction to contribute to the global problem of financial secrecy if secrecy is chosen among any of the available mechanisms (see footnote 17)

Regarding directionality, the FSI encompasses a wide array of vehicles by which corrupt practices may be sheltered. In this second – qualitative – half of the FSI, 15 Key Financial Secrecy Indicators (KFSI’s)16 are used to determine a jurisdictions’ intensity of secrecy by aggregating the combined scores of each indicator and normalizing them into a Secrecy Score (ranging from 0 to 100). A brief overview of each KFSI is provided in annex 1. For a detailed discussion on the purpose, significance, and measurement of each, consult the full methodology of the latest FSI (Tax Justice Network, 2015: 10-62)17.

Lastly, the GSW and the Secrecy Scores are combined to form the Financial Secrecy Index by multiplying the cube of the secrecy score and the cube root of the scale weight. This is done in order to achieve a scale-weighted score in which both components are given near-equal consideration. The resulting FSI score (which goes from 0 to any number above it) showcases a very different pattern of secrecy than the one usually used in the Corruption Perception Index or the Basel Anti Money Laundering Index (BAMLI) (Base Institute of Governance, 2013): the major economies of the world come out on top due to their influence and impact over other jurisdictions despite these having a lower Secrecy Score than many traditional tax havens offering low or null tax rates (see table 1).

16_{The 15 KFSIs relate to: i) banking secrecy, ii) trusts and foundations' registration, iii) recording of beneficial}

ownership, iv) public disclosure of beneficial ownership, v) public company accounts, vi) country-by-country reporting, vii) fitness for information exchange, viii) efficiency of tax administration, ix) avoids promoting tax evasion, x) harmful legal vehicles, xi) anti-money laundering compliance, xii) automatic information exchange, xiii) bilateral treaties, xiv) international transparency commitments, xv) international judiciary cooperation.

17_{For the qualitative component relating to the 15 KFSI’s and the Secrecy Score, the data is gathered from}

official and public reports by the OECD; the associated Global Forum on Transparency and Exchange of Information for Tax Purposes; the Financial Action Task Force (FATF); IMF; the U.S. State Department’s annual International Narcotics Control Strategy Report; specialist tax databases and websites such as the International Bureau of Fiscal Documentation, Price Waterhouse Coopers (Worldwide Tax Summaries), and Lowtax.net. Furthermore, surveys are sent to the ministries of finance and the financial intelligence units of all 102 reviewed jurisdictions, which includes targeted questions about the jurisdiction’s tax and regulatory system (Tax Justice Network, 2015: 6-7).

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Table 1: Comparison of corruption using the FSI, its components, and other Indexes

The FSI’s efforts to paint a differing image of how corruption and secrecy jurisdictions are perceived is mostly based on verifiable and empirical data (see footnotes 16 and 18). However, some limitations must be pointed out, particularly with regards to the Secrecy Score.

Firstly, the criteria by which the 15 Key Financial Secrecy Indicators are selected is subjective and can necessarily lead to biased results, especially considering how they are equally weighed despite there being some overlap between them (see annex 1). For instance, KFSI’s relating to tracing and disclosing the beneficial owners of anonymous companies, trusts and foundations (KFSI’s 2, 3, 4, 10) have been given a disproportionate importance in relation to other areas of secrecy, such as a country’s compliance with the Financial Action Task Force’s 49 Recommendations to combat Anti Money Laundering and Counter-Terrorism Financing (KFSI 11), which also include standards on Beneficial Ownership that are integrated in KFSI’s 2, 3, 4, 10. In replicating the FSI, a couple of changes have been made with respect to this by merging four KFSI’s into one (aggregating 2, 3, 4, and 10 together) and adding another one relating to extraterritorial reach on overseas territories (KFSI 16 in annex1). The resulting number of indicators used to compile the FSI score in this paper is therefore 13 as opposed to 15 used by Tax Justice Network.

Secondly, the criterion for grading scores within each indicator is assessed differently and subjectively. While every indicator ranges between 0 (complete secrecy) to 1 (complete transparency), the composition within each is very much heterogeneous. An indicator with 4

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variables might be graded by granting 0, 0.1, 0.5 or 1; another indicator with the same amount of variables might be graded by 0, 0.25, 0.5 or 1, etc.

Lastly, data issues can complicate comparability, availability, and reliability of sources. Official sources and reports from the OECD, the Global Forum, the FATF, or the International Bureau of Fiscal Documentation not only use differing terminology to refer to beneficial ownership or corporate tax abuses, but are also subject to political bias in their reports (Meinzer, 2012: 14-15). The lack of response generated from the surveys sent to the ministries of finance and financial intelligence units of each jurisdiction is also worrying. Only ten of the former (9.8 percent) and twelve of the latter replied (11.8 percent) for the 2015 FSI (Tax Justice Network, 2015: 8), generating a huge gap of information relating to specific jurisdiction’s tax and regulatory systems. This lack of data (or failure to provide it) is interpreted by Tax Justice Network as being secretive and is therefore awarded with a 0 score. While this inference might be true for some cases, it remains a simplistic generalisation that can produce further biased results in the FSI. Nevertheless, any index is subject to these problems, and in the case of the FSI, it is the only one that best fits the purposes of this study.

OPERATIONALISING DEREGULATION: JUSTIFICATION, LIMITATIONS, AND VALIDITY In measuring deregulation, the scope has been narrowed to fit the aspects that touch upon the freedom of capital movement and ease of business practices. The theoretical framework discusses that for the race to the bottom to occur, countries must engage in competitive policies that will attract capital. These international market forces result in policies geared towards liberalising capital combined with the easing of business practices, but this can also be a precondition for the phenomenon of regulatory arbitrage to take place. As such, an index that captures the preferences of coalitional patterns, their ability to shape domestic politics, and the potential benefits from the process of deregulation is required.

The ten selected indicators from the World Economic Forum’s Global Competitiveness Reports encompass these microeconomic perspectives of deregulation that

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would otherwise be difficult to generate through traditional data from international organisations or national statistical offices (Schwab, 2015)18

Table 2: Overview of selected indicators from the GCR to measure deregulation 1. Burden of Government regulation

In your country, how burdensome is it for companies to comply with public administration’s requirements (e.g. permits, regulations, reporting)? [1 = extremely burdensome; 7 = not burdensome at all]

2. Efficiency of legal framework in settling disputes

In your country, how efficient are the legal and judicial systems for companies in settling disputes? [1 = extremely inefficient; 7 = extremely efficient]

3. Efficiency of legal framework in challenging regulations

In your country, to what extent can individuals, institutions (civil society), and businesses obtain justice through the judicial system against arbitrary government decisions? [1 = not at all; 7 = to a great extent]

4. Transparency of Government policymaking

In your country, how easy is it for companies to obtain information about changes in government policies and regulations affecting their activities? [1 = extremely difficult; 7 = extremely easy)

5. Availability of financial services

In your country, to what extent does the financial sector provide a wide range of financial products and services to businesses? [1 = not at all; 7 = provides a wide variety]

6. Affordability of financial services

In your country, to what extent are financial services affordable for businesses? [1 = not affordable at all; 7 = affordable]

7. Ease of financing through local equity market

In your country, to what extent can companies raise money by issuing shares and/or bonds on the capital market? [1 = not at all; 7 = to a great extent]

8. Ease of access to loans

In your country, how easy is it to obtain a bank loan with only a good business plan and no collateral? [1 = extremely difficult; 7 = extremely easy]

9. Venture capital availability

Description: In your country, how easy is it for start-up entrepreneurs with innovative but risky projects to obtain equity funding? [1 = extremely difficult; 7 = extremely easy]

10. Effect of taxation on incentives to invest

In your country, to what extent do taxes reduce the incentive to invest? [1 = to a great extent; 7 = not at all] Source: Schwab (2015)

Critics of the GCR claim that it is based on an ideological bias that includes “a set of indices that do not provide competitive advantage, but that fit the Anglo/US ideology; and excludes indices that are known to offer competitive advantage, but that do not fit the Anglo/

18_{It is assumed that the extent to which these indicators pivot towards the score 7 comes as a result of}

deregulatory policies.

The hidden burden of development : financial secrecy across OECD countries and the role of the United States in shaping global corruption