The scale of the wealth removed from national tax authorities—James Henry’s $50 trillion as of 2020—has turned out to be far vaster than we once thought. The financial-secrecy system has by now so distorted international trade and investment flows that official statistics show tiny Luxembourg (population 660,000) with as much foreign direct investment as the United States and much more than China.25 This obscured “stealth wealth” is highly concentrated in Western jurisdictions. Those under British sovereignty, including such notorious tax havens as Jersey and the Cayman Islands, have been estimated to hold a third of total offshore wealth, while Switzerland is believed to be the world’s single largest offshore financial center.26 The accumulation of such enormous sums should be understood not as a natural occurrence, but as the result of a political process. Powerful actors pursuing their own profit have built the financial-secrecy system to limit national sovereignty.
To achieve their ends, they first use complexity, masking the system so it is hard to identify. Intricate webs of shell companies are a favorite trick. Second comes the playing of different jurisdictions off one another as they compete to see which can rake in the most business with low taxes, lax standards, and strategic opacity. Third is capture: giving politicians financial incentives to look the other way. Finally, there is financial coercion: threatening any politicians who seem as if they might act against secrecy with the prospect that other, rival politicians can be funded who will not. These methods have stymied political action to curb financial secrecy and left mainstream parties across the West unwilling to try anything stronger than tentative remedialism, a form of action that seeks only to ameliorate a problem and not engage in transformative change. The Tax Justice Network has identified the United Kingdom as a major procrastinator. British officials have promised that the three Crown Dependencies and the fourteen British Overseas Territories will be required to set up beneficial-ownership registries, but the deadlines have been pushed back. Recent statements hint that these jurisdictions may never establish such registries, and Jersey has even introduced a new anonymous vehicle.27 In the United States, meanwhile, analysts and officials see attempts to enforce the 2021 Corporate Transparency Act as mostly a failure so far.
An artificial and contrived complexity has long been a key carapace of secrecy. The sheer difficulty of explaining long, mind-numbing chains of nesting shell companies hampers political debate and popular understanding. Meanwhile, even professionals who work for the public authorities find it notably hard and time-consuming to track down and prove the beneficial ownership of assets hidden by means of these shell games. The sands of time (and with them statutes of limitations) run while legal action finds itself mired in the quicksand of indefinite delay. As the FBI admitted to the U.S. Senate’s banking committee in 2019:
Strategic use of these entities makes investigations exponentially more difficult and laborious. The burden of uncovering true beneficial owners can often handicap or delay investigations, frequently requiring duplicative, slow-moving legal processes in several jurisdictions to gain the necessary information. This practice is both time consuming and costly.28
Even some senior officials find the financial-secrecy system too complex to understand, reform, or abolish. Easily grasped expedients such as beneficial-ownership registries have been gaining traction at the expense of proposed laws that would cut off financial secrecy at the root. This low-powered remedialism is a consequence not of any law of finance or economics, but of a secrecy-services industry that deliberately uses complexity to hide assets. The International Consortium of Investigative Journalists (ICIJ) has found that the Pandora Papers show almost 400,000 companies tied to Russian beneficiaries.29 The ICIJ has further shown examples of Russian oligarchs moving assets through the financial-secrecy system not only before but also after sanctions were imposed. This is despite years of remedialist Western policy tinkering.
Creating complexity and inciting competition between tax jurisdictions to offer the lowest rates are not the whole tale of how the secrecy-services industry has weakened Western democracy. Within countries, the rich and powerful have used both capture and coercion to stop national governments from acting against the industry. The machinations that determine who wins and who loses from the tax system not only built the secrecy machine, but maintain it as well. Financial secrecy, in other words, is part of the wider story of the neoliberal economic order. Today, that order encourages a certain learned helplessness on the part of officialdom. If Western democracies are going to claw back their sovereignty from the world of hidden wealth, they will have to unlearn that sense of helplessness under the guidance of a simple insight: What was politically built (financial secrecy) can be politically unbuilt.
Reasserting Democratic Sovereignty
Remedialism is not enough. Reclaiming Western sovereignty will require a cultural shift, for policy is downstream from culture. To get the shift started, the existence and malign consequences of financial secrecy must be explained and broadcast as widely as possible. Then, systematic financial secrecy—its ills put on display—must be rendered unacceptable. The United States anchors global capitalism and so must take a leading role. So must the United Kingdom, whose far-flung network of tax satellites has been estimated to account for 40 percent of all tax losses faced by other countries. Finally must come EU buy-in since Brussels wields immense regulatory power and the EU includes such notorious financial-secrecy hotspots as Luxembourg.
The great political-reform movements that have shaped U.S. democracy, from the rejection of the British Crown to the rejection of human slavery, each began with a moral reckoning and reassessment. The same is now required of Western societies and in particular their national elites if the West is to right itself and end this threat. As it stands, the West will struggle to maintain social harmony, protect its institutions, and succeed at great-power competition and modernization as long as the financial-secrecy system thrives.
As of this writing, Western governments are lagging. Despite the Biden administration’s December 2021 launch of the U.S. Strategy on Countering Corruption and Congress’s passage of the Corporate Transparency Act the same year, U.S. action is still insufficient. The implementation of beneficial-ownership reporting requirements is set for January 2024, but more needs to be done to dismantle the financial-secrecy system. Britain, as noted, keeps delaying action on its tax satellites. And the EU has taken a step backward with the European Court of Justice’s recent opinion limiting the accessibility of beneficial-ownership registries. Western enablers everywhere continue to operate the financial-secrecy system with impunity.30
The technocratic approach to politics often forgets that it is a moral question—the question of how we should live—that is at the heart of good politics. Only with the renewed embrace of moral politics can the tactics of the financial-secrecy machine be banished from the lives of nations. The West requires a psychological shift that rejects the absurdities and trickeries of the financial-secrecy system. Principles, not policies, must be the starting point. A concerted ethical campaign is needed to reject the secrecy system’s four pillars: 1) laws that accept the fiction of anonymous and domestically active but externally domiciled corporations; 2) secrecy jurisdictions or tax havens that are routinely treated as if they are law-based states; 3) laws that enable “enablers” to enable evasions of the law; and 4) engagement with any of the instruments designed to promote financial secrecy.
This approach would be bold—but not unheard of in the U.S. Capitol. The late Senator Carl Levin (D.-Mich.) first proposed measures to strip the underlying legal recognition of tax havens in 2006 when he argued that “we should assume any transaction in a tax haven is a sham.”31 Restoring this ethical dimension to financial reform is essential. Authors from Adam Smith to Max Weber, or more recently, David Landes, have stressed the importance of culture and “social capital” in underpinning economic achievement.
And while the moral side is stressed, neither should the practical side of the argument be neglected: Ending undue financial secrecy would restore wealth to U.S. society and drive a stronger economy. Time and energy could go into finding good investments rather than locating the next tax haven. The same will follow for other Western democracies. Everywhere their spirits and their laws are being weakened by elite misbehavior, and just as Aristotle predicted, demagogues are rising up to exploit the resulting consternation and demoralization.
Politicians at the highest level should embrace the removal of the financial-secrecy system from democratic capitalism. By doing so they can show that political elites will move to curb the excesses of the super-rich and reduce the appeal of demagogues and toxic populism. This politics is close to a tipping point where it becomes politically obvious, but not quite there yet. Calls in the U.S. Senate for a Transatlantic Anti-Corruption Council and the bipartisan group of Congressmembers who moved the Corporate Transparency Act to passage are to be commended, as is the work of countless journalists, activists, and academics.
In the public square, the disfiguring addition of financial secrecy to capitalism appears to have no legitimacy, and no scholar, opinion journalist, or think tank defends it. And yet: The financial-secrecy industry may have no overt lobby, but its defenders are legion. Those seeking action should take heart from reflecting that every time a public campaign has achieved political momentum in the United States (with the Corporate Transparency Act) or the United Kingdom or EU (beneficial-ownership registries), defenders of secrecy have lost once they found themselves forced to make their case out in the open. Those who profit from the system are highly unpopular across the West. Stealth has been their strength; the more they are exposed, the weaker they become.
Looking back over the last sixty years, political naïveté has been as much to blame as political cynicism for letting the financial-secrecy system thrive and exert its powerfully warping influence on democratic capitalism. This is because, to quote the political scientist Lea Ypi, it was a mistake to think that capitalism and democracy are congenitally, rather than contingently, compatible.32 Instead, the story of the West over the last sixty years shows that capitalism requires regulation if it is to work in concert with democracy. The main task of Western politics in the twenty-first century should be to bring democracy and capitalism, each of which has done so much for the modern world, back into positive alignment. It is incumbent on the current generation of leaders to lead democracies out of Aristotle’s danger zone
