Global Financial Integrity


Secrecy Jurisdictions

The terms “tax haven” and “secrecy jurisdiction” often refer to the same thing: physical locations characterized by laws and structures that promote secrecy. This secrecy enables wealthy individuals to hide financial assets from tax authorities and other claimants. It also enables criminals and kleptocrats to launder wealth accumulated through illicit means, such as drug trafficking, human trafficking, the pilfering of public funds and resources, embezzlement, extortion, and other forms of corruption.

The term ‘secrecy jurisdiction’ is useful, then, because it grasps at the actual operations of the offshore world: the word ‘secrecy’ emphasizes the financial secrecy component of offshore systems, and the word ‘jurisdiction’ emphasizes the legislative component. Both of these components are necessary for the effective functioning of offshore systems; you can’t hide assets or launder illicit wealth without secrecy, and you can’t have secrecy unless a jurisdiction has (or has not) passed requisite laws.

How do secrecy jurisdictions provide secrecy to non-residents? Through a patchwork of opaque financial structures, such as anonymous companies, trusts, offshore banks, unchecked mutual and hedge funds, under-regulated private investment industries, and laws that allow these structures to exist. As economist Gabriel Zucman notes, secrecy jurisdictions tend to specialize in different, but interconnected, offshore services. While Switzerland has long been the global epicenter of offshore banking, it heavily relies on Luxembourg, another leading secrecy jurisdiction, which specializes in the incorporation of large, lucrative mutual funds. Offshore wealth sitting in Swiss banks is routinely folded into these Luxembourg funds.

Meanwhile, in the Western Hemisphere, U.S. citizens looking to dodge taxation or purchase assets anonymously can seamlessly incorporate anonymous companies in the British Virgin Islands or Singapore. While anonymous companies have been effectively outlawed in the U.S. by the 2021 Corporate Transparency Act (CTA), the U.S., not to be outdone by fellow secrecy jurisdictions, offers foreign clients an array of opaque financial services, including private investment vehicles such as real estate, private equity, venture capital, and investment consultation. The U.S. also offers offshore clients access to impenetrable trusts, such as those located in South Dakota. As GFI and the International Consortium of Investigative Journalists have detailed, a myriad of dubious actors have used these mechanisms to stash spectacular amounts of illicit wealth in the United States.

Efforts to fight financial secrecy and its harmful effects are underway. The U.S., for its part, has passed a number of laws intended to demystify the built-in opacity of secrecy jurisdictions. To crack down on U.S. nationals using the machinery of secrecy jurisdictions to evade taxation, Congress passed the Foreign Account Tax Compliance Act (FATCA) in 2010. FATCA requires foreign financial institutions that hold and/or manage the offshore assets of U.S. citizens to report such holdings to the IRS. The CTA, passed a decade later, dealt a significant blow to financial secrecy in the U.S. (but not enough to prevent the U.S. from becoming the top offender, by an order of magnitude, in the 2022 Financial Secrecy Index).