For Global Economic Development, US Must Combat Financial Secrecy

Financial secrecy is a growing global challenge. Much more than criminals stashing cash on tropical islands, financial secrecy is a big business, with more than $20 trillion US dollars hidden away in secretive tax havens around the world. The staggering size of the illicit economy means that all countries are impacted, not just rich ones.

In a number of ways, financial secrecy keeps poor countries poor. With access to secretive financial markets, bad actors can steal state funds and stash them abroad, contributing to capital flight and decreasing the tax base. Financial secrecy also allows authoritarians to use public resources as bargaining chips to maintain power. In many countries, these are crippling challenges.

The United States is a notoriously opaque jurisdiction to stash and grow financial resources. As a result of lax regulations, the Treasury Department estimates that $300 billion is laundered through the United States each year. For perspective, $300 billion is more than the combined gross domestic product of Cambodia, Cameroon, Estonia, Jordan, Nepal, Paraguay, and Uganda. US financial opacity enables kleptocracy and authoritarianism, which stifle development progress. If the US remains committed to global development, it must address financial secrecy.


The Impact of Financial Secrecy

To better understand the economic impacts of financial secrecy, consider the fact that the African continent is on the whole a net creditor. A country is a net creditor when its overseas assets are greater than its overseas debts – in many cases, an enviable financial position. Africa finds itself in this somewhat surprising circumstance due, in large part, to capital flight and illicit financial activity, which includes resources acquired through corruption, bribery, or criminal activities.

Over $1 trillion US dollars have left Africa since 1970 and are currently heaped in tax havens protected by financial secrecy. These funds are not taxed, ridding the government of an essential source of revenue and forcing it to borrow. Publicly held debt on the African continent totals nearly $200 billion. Unless this imbalance is addressed, public services will remain poor in many African countries, financially broke governments will be ineffective, and increased growth is unlikely.

Beyond the financial impacts of secrecy, tax havens are an essential tool for authoritarians aiming to maintain power. Authoritarians rely on corruption for their survival; they use stolen resources to buy political support. By some estimates, developing countries have lost $16.3 trillion since 1980 to corruption and theft of state resources. Such illicit economic activity weighs on state budgets, incites political violence, and prevents effective service delivery.

As such, it is widely recognized that authoritarian governments are unlikely to produce long-term, broad-based economic development. By helping these rulers to stay in power, financial secrecy decreases the likelihood that equitable development will be realized.

Furthermore, authoritarians are notoriously bad economic planners. Consider Turkey, a state that is governed by the increasingly authoritarian Recep Tayyip Erdogan. Erdogan’s dictatorial control has created a fiscal and monetary policy making process that is dangerously lacking in alternative perspectives. As the New York Times reported, Erdogan does not subscribe to the consensus view in economics that raising interest rates helps combat inflation. As a result, his government has been slow to address the country’s rapidly expanding economic crisis. Economic development is a tight rope; countries that fail to incorporate diverse opinions are likely to fall off. Authoritarian states with a narrow ruling elite are unlikely to succeed.

Letting the Light In

Financial secrecy empowers authoritarians, enables corruption, and stifles development. As a major enabler of global financial secrecy, the US must act. Fortunately, there is cause for optimism. Earlier this summer, Treasury Secretary Steve Mnuchin indicated that he intends to make beneficial ownership information available to law enforcement in the coming months. Such changes would allow law enforcement officials to see through the dense webs of anonymous shell companies that shield corrupt actors. With this information, law enforcement could work to prevent money laundering and hiding of illicit funds. Making this information available to the public would be the most effective means of rooting out corruption, but sharing with law enforcement would be an encouraging first step.

A successful global economic development agenda requires tackling corruption and authoritarianism. Addressing financial secrecy would be among the US government’s most significant recent contributions to global development. Secretary Mnuchin and the Trump administration should advance beneficial ownership regulations that shed light on financial secrecy and think creatively about how domestic and international economic policies can strip authoritarians and corrupt actors of opportunities for profit. By simply increasing financial market transparency, the US can give countries around the world a better shot at achieving their developmental goals.

By Greg Brown

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