How Financial Secrecy Undermines Democracy

This enormous explosion in the financial-secrecy system undermines democracy to a frightening extent. The system has distorted capitalism and its elites relationship with taxation and the public realm in ways that mighty vested interests have grown attached to the financial system promoting a) shielding, and therefore enabling kleptocracy, crime, and foreign interference, and b) enhancing inequality on a scale barely recognized partly because of the secrecy. The state of the public realm does show that capitalism with a secrecy system has become increasingly hard for a democratic polity to hold accountable. Understanding the architecture of the financial-secrecy system allows one to identify how to conduct its deconstruction.

Underlying our financial system, there exists an unseen world worth trillions of dollars. A broad, wide-open expanse offshore and on, undermining from within both Capitalism and Democracy. Raymond Baker calls it the financial-secrecy system, and among today's grave threats to democracy it is one of the least acknowledged.1 Made up of millions of hidden accounts, secret trusts, disguised entities, artificial trades, opaque ownerships, and more, this parallel world could not differ more starkly from what the average citizen of a Western democracy experiences as the financial system. Instead of a space of high scrutiny and observation-militarized by everything from the latest banking algorithms to the beady eyes of tax officials-this was the secret dimension into which those who could afford it retreated to stash and hide their wealth from taxation. Rather than an asset to Western capitalism and democracy, this world of secrecy and its operations have proved a quiet poison to both.

Tax avoidance-meaning technically legal methods of sidestepping taxation-has always been with us. Democracy, and in particular socially conscious, redistributive democracy, has not. Large-scale tax avoidance began to take place in earnest following the First World War and the high taxes it brought, at first mainly by means of Switzerland and the British Crown Dependencies of Jersey and Guernsey in the Channel Islands.

In the 1960s, financial secrecy's growth accelerated as the Western corporations sought to navigate the new postcolonial order emerging across Africa and Asia, and the Western elites started chafing at the stringencies of the post-war social democracy. The number of tax havens exploded, from a mere handful in the interwar years to more than seventy today, including Bermuda, Cayman Islands, Curaçao, Hong Kong, and Singapore. Bankers, lawyers, and accountants found these liminal places attractive operating bases far from Western tax offices. Such destinations advertise in the Financial Times as providers of offshore corporate vehicles and have since become knotted into almost every aspect of corporate affairs, political life, and indeed geopolitics. Proliferating rapidly "under the radar" of general public awareness, these offshore bastions of financial secrecy were undermining the very principles of onshore political capitalism and democracy-chiefly the sanctity of the rule of law.2

Offshore, financial secrecy was arriving onshore also, and in a big way. In 2019, the Hudson Institute ranked the United States as the world's second worst financial-secrecy haven between Switzerland and the Cayman Islands.3 Three years later, the Tax Justice Network called the United States the world's number-one enabler of financial secrecy.4 Changes in post-Mao China and the end of the Cold War drove the demand for financial secrecy higher as Chinese and ex-Soviet elites began paying Western lawyers, bankers, and accountants to help hide and launder ill-gotten gains. One estimate put the sum illicitly siphoned out of Russia between 1994 and 2011 at a staggering US$211.5 billion.5 Few appreciate how these trends have grown the financial-secrecy system to such gargantuan proportions, which the economist James S. Henry estimates at more than $50 trillion.6

That the problem posed by the financial-secrecy system has gone largely unnoticed should not be surprising. It is designed to be opaque, not only to the general public but also to law enforcement. Only recently have headline-making insider leaks such as the Panama Papers of 2016 and Paradise Papers of 2017-potentially a result of hacking rather than leaking-begun to lay bare how the system works. That meant millions of documents detailing the offshore dealings of companies including Apple, Facebook, McDonald's, and Walt Disney were available, as were those of people including British royals and Wilbur Ross, U.S. commerce secretary from 2017 to 2021.