OpenLux: Why the Era of Financial Secrecy Needs to End

The #OpenLux investigation underlines that, despite undeniable progress in terms of transparency, there is still considerable work to be done in the fight against tax avoidance and evasion, particularly within the European Union.

The #OpenLux investigation has shown that Luxembourg, a country half the size of Delaware but with 55,000 offshore companies managing assets worth at least €6 trillion, is a major tax haven operating in the heart of the European Union.

#OpenLux, conducted by the Organized Crime and Corruption Reporting Project (OCCRP) and other media outlets, is just the latest in a series of investigations shedding light on the offshore financial system costing governments around the world close to $500 billion each year in lost income and corporate tax revenues. The use of “offshore” structures allows not only the real ownership of wealth to remain hidden, but also its location and perhaps its very existence. This same secrecy also creates fertile ground for tax evasion, avoidance, and for financial crimes and deals unquantifiable political damage as secrecy-shrouded capital infiltrates the Western political system.

Until the 2008 financial crisis, there were few political brakes on the expansion of tax havens. Governments then came under pressure to close large budget deficits and to placate voters furious about taxpayer-funded bank bailouts and the ability of multinationals and the wealthy to escape paying their fair share, widening inequality in both cases. 

The fight against tax evasion became a political priority in rich countries and the pressure on tax havens mounted. Cash-stripped Western nations started prosecuting Swiss banks for facilitating tax evasion, and disclosure of tax evaders details became a condition for settling these prosecutions. At a summit held in April 2009, G-20 countries urged each tax haven to sign at least 12 information exchange treaties under the threat of economic sanctions. Between the summit and the end of 2009, the world’s tax havens signed a total of more than 300 treaties.

The era of banking secrecy was over.

Along came the OECD Common Reporting Standard, a regime to exchange financial information automatically across borders so as to help tax authorities track the offshore holdings of their taxpayers; OECD Country-by-country reporting, a regime to exchange information between tax authorities on the profits and corporation taxes paid by multinationals in each of the countries they operate; and the EU’s 5th Anti-Money Laundering Directive, requiring all Member States to set up a centralized register of the ultimate—or so-called “beneficial”—owners of companies and make this information available to the public.

It is this type of register that journalists working on the #OpenLux investigation scraped to identify a system of phantom companies without offices or employees, created by billionaires, multinationals, sportsmen, artists, high-ranking politicians, and even royal families.

The revelations underline that despite undeniable progress in terms of transparency, there is still considerable work to be done in the fight against tax avoidance and evasion, including in the European Union, which is happy to denounce harmful tax practices in non-EU countries but not to recognize that some of its member states are tax havens.

Progress in the implementation of registers of beneficial ownership in the EU is patchy, as 17 of 27 Member States do not yet have a centralized register of the beneficial owners of companies that is available to the public, and only 5 of 27 Member States have implemented a public register which is free to access. 

Beneficial ownership data is only useful if it is public, of good quality and easy to access, so society can hold wrongdoers and governments to account.

The register in Luxembourg only employs 59 people to ensure compliance with the legal obligation to declare the beneficial owners of more than 100,000 entities. Various types of legal entities in Luxembourg are not required to register their legal ownership information, and other loopholes exist, which means that companies can continue to operate with absolute secrecy.

The Luxembourg register is not alone in its failings. The UK’s equivalent register, which since 2016 requires companies to disclose the people who own or control the company, has been subject to criticism for failing to compulsorily verify the information provided for company directors, beneficial owners and persons filing the returns.

A 2019 analysis of the data supplied showed more than 300,000 companies with no beneficial owner and more than 6,000 controlled by a beneficial owner who themselves controls over 100 companies, suggesting the likely use of fake owners.

The FinCEN Files investigation last December, which exposed how some of the world’s biggest banks were at the center of a sprawling global money laundering industry, has shown how the current loopholes allow anonymous shell companies to launder money through the UK, at a cost of £24 billion a year.

It’s not that there is no demand for accurate information. More than six billion requests to access the UK company register were made in 2018, a huge increase from when paywalls were still in place (circa six million). But things are slowly starting to improve, in the EU and elsewhere.

The UK government has now pledged to address the deficiencies in its system by introducing compulsory identity verification to help trace people who are committing fraud or money laundering and to giving Companies House greater powers to query, investigate and remove false information.

A historic anti-corruption measure banning anonymous companies in the United States also became law last January, capping a more than a decade-long campaign by transparency advocates and providing law enforcement and national security officials a powerful tool to crack down on corruption, tax avoidance and evasion, and other illicit activities.

The G-2O OECD mandated process looking at reforming the century old system of taxation of multinationals is negotiating proposals for a global minimum tax, with the US administration now back at the table to try to stop what has been a destructive, global race to the bottom on corporate taxation.

President Biden has pledged during his campaign to raise the US minimum tax on US corporations’ foreign earnings (known as Global Intangible Low Tax Income, or GILTI) to 21 percent. This measure would not only have the merit of increasing the country’s fiscal resources; it would also provide the political support for other countries’ policymakers to follow suit.

An ambitious global minimum tax could be a game changer in the fight against tax avoidance. If G-20 countries were to agree to impose a 25 percent minimum corporate tax (as the Independent Commission for the Reform of International Corporate Taxation, ICRICT, advocates) on the global income of their multinational firms, more than 90 percent of worldwide profits would automatically be taxed at 25 percent or more.

The veil of secrecy surrounding multinationals’ tax affairs is also about to come down in the EU, which under the current presidency of Portugal is about to approve a transparency measure requiring multinationals to public country-by-country data on how much profit is recorded and how much tax is paid by multinationals in each of the member states.

Increasing numbers of companies like Vodafone and Shell publish this information voluntarily, and there are also mandatory reporting standards for EU banks and some extractive sector companies. A level playing field measure, putting multinationals on par with smaller domestic businesses, will allow everyone—including citizens, policymakers, journalists, and researchers—to hold multinationals to account.

Pressure is now mounting for the US Congress to enact a similar piece of legislation.

With every additional transparency measure, the world is slowly building a global data-collection infrastructure on asset and wealth ownership. This should ultimately be combined together at a global level, starting with asset registers at national or regional level to link the underlying transparency mechanisms, to provide a vital tool against illicit financial flows, by ending impunity for hiding and using the proceeds of crime, and for removing legitimate income and profits from the economy in which they arise for tax purposes.

The phrase “sunlight is the best disinfectant” was introduced to American legal discourse by Justice Louis Brandeis in the early 20^th century. The #OpenLux investigation will once again remind governments across the world of its importance, as they look to plug revenue gaps left by Covid-19 spending and ensure that multinationals and wealthy individuals pay their fair share. As in the aftermath of the 2008 crisis, expect the post pandemic recovery to take a strong look at financial secrecy.