The Financial Secrecy Index

Oh, my word, Ritchie Murphy has really outdone himself this time with his new Financial Secrecy Index.

It\’s simply a quite glorious fuck up even by his standards.

By his method of ranking the worst in the world is Delaware. So children, shall we see how they\’ve scored the place?

Here.

There are twelve measures used. The more negative scores you\’ve got the worse you are: plus, there\’s a weighting to see how many people use whatever naughty laws you\’ve got. So somewhere that was very secret indeed but only three people used would not be as high (or low if you prefer) on the index as somewhere that many people used but which was only mildly naughty.

That, as it happens, is about the only sensible part of this index that I can see.

So, one by one:

This weak opacity score arises because the USA (Delaware):
1. Provides banking secrecy;

So what is the definition of bank secrecy used?

1 Is legal banking secrecy banned (i.e. Is there no legal right to banking secrecy)?

Ah, now the two things are really not quite the same now, are they? It\’s entirely possible for there to be no law banning bank secrecy while there might be other laws insisting upon bank openness. Now I\’ll admit that I\’m not an expert on US law (as of course Ritchie is not) but there are myriad laws in the US where a bank should not only inform the Feds about movements in your accounts (for example, every cash transaction over $10,000) but I\’m similarly sure that there are myriad laws where the bank *must* inform the Feds about your bank transactions (that $10,000 cash one being one of them).

I would be absolutely astonished if under any reasonable test the US had anything approaching bank secrecy: that it doesn\’t have a law against it is not evidence that the US does indeed have bank secrecy.

We also seem to have something of a misunderstanding (which will come clearer later) of the US system, which is that it is a Federal one. Only some things are regulated at State level, many others at Federal. State chartered banks at State level for example, but all of the larger ones also have Federal oversight. So the test of whether there is bank openness or not is something which will depend upon Federal, not Delaware, law.

2 Does not put details of trusts on public record;

I have no idea: anyone else?

3. Does not comply sufficiently with international regulatory requirements

Again, dunno, their definition is: 3

Does the FATF rate 90% largely compliant and with no non-compliant ratings?

4. Does not require that company accounts be available on public record;

Well, not quite, the definition here is:

Are company accounts available for inspection by anyone for a fee of less than US$10?

Anyone know whether Delaware accounts are indeed publiclly accessible and if so, for what fee? I have a feeling our own dear Companies House would fail the £7.50 test…

5. Does not require that beneficial ownership of companies is recorded on public record;

Again, it\’s not quite what they say. Their actual test is:

5
Are details of the beneficial ownership of companies available on public record online for less than US$10?

Again, I have no idea about what happens in Delaware on this point but perhaps someone would like to tell us?

6. Does not maintain company ownership details in official records;

Similarly, does Delaware allow anonymous ownership? Dunno. Their test is:

6
Are details of the beneficial ownership of companies submitted to and kept updated by a competent authority?

7. Did not respond to Tax Justice Network requests for information;

Oh, that one must hurt. That the authorities do not respond to a survey sent by self-appointed puffed up egomaniacs.

8. Does not participate in the European Union Savings Tax Directive;

Hmm, that, under this Federal system of theirs, is something for Congress to deal with, not Delaware. Under the Constitution States are expressly forbidden from signing their own foreign treaties. no?

They pass number 9 because they have many tax information sharing agreements (because the US does).

10. Does not have adequate access to banking information;

Hmm, what does that mean?

10
Has the jurisdiction\’s authority effective access to bank information for information exchange purposes?

Again, that\’s Federal, not State.

11. Allows company redomiciliation;

Eh? You mean that thing which every corporate within the EU (and EFTA) has, the right to move jurisdictions? This is evidence of them being naughty boys? Plus, I would suspect (do not know, but would suspect) that redomiciliation to another US state is easy, but redomiciliation out of the US altogether would come up against some fairly stiff Federal tax laws.

12. Allows protected cell companies.

Who knows what this means?

But shall we also look at the \”other data\”? Yes, why not.

Financial services as a percentage of GDP
Not Available
Not Available
Number of multinational company subsidiaries in the jurisdiction
Not Applicable
Not Applicable
Number of Big 4 firms in the jurisdiction
4

Number of lawyers in the jurisdiction
1104766
5
Number of accountants in the jurisdiction
Not Available
Not Available

Wow, that really is something. Delaware has more lawyers than it has head of population. Quite incredible really. Of course, what they\’ve done is use the number for all lawyers in the US. The actual Delaware Bar seems to be around 4,000 people or fewer.

And the Big Four accountants are in Delaware (assuming they\’ve not made the same mistake about the US etc)? Well, that might just be because of the Delaware Court of Chancery. And if you don\’t understand the implications of that then you\’ve really no business at all commenting upon companies or incorporation in the jurisdiction. Absolutely none at all.

This data shows
1. That the USA (Delaware) may have a significant dependence8 upon financial services;
2. That the Big Four accounting firms do have a significant presence9 in the USA (Delaware), suggesting that it does host significant international activity;
3. That the USA (Delaware) does exhibit a significant number10 of lawyers accountants when compared to other secrecy jurisdictions, suggesting the relative significance of its activities.

Well, actually, no. The evidence does not show that Delaware has a significant dependence upon financial services*, the presence of the Big Four does not show significant international activity and the number of lawyers is so hoeplessly wrong that we can conclude nothing more than that this exercise has been put together by someone with absolutely no clue what they are doing.

But then that\’s our Ritchie, ain\’t it?

There\’s one small get out for Murphy\’s army here. That they are using some US wide information. However, the idea that the presence of the Big Four and lots of lawyers in the largest economy in the world is evidence of it being a secrecy jurisdiction is simply insane. Sorry, but it really is.

*Other evidence does most certainly show that Delaware makes good money out of being a centre for the law about corporate governance. But as the above doesn\’t even try to delve into that, let alone understand it, that can\’t be what they\’re referring to as part of their evidence, can it?

16 comments on “The Financial Secrecy Index

  1. Murphy still prattling about secrecy? What you can find about the Tax Justice Network from a quick Google and a review of their 2008 accounts is that their structure is exactly what one would set up to defraud someone, to avoid or evade taxes or to minimize liability.

    Being as how Murphy has repeatedly shown himself for what he is, I shall conclude the structure is for the evil purposes in my list. After all, it’s what Murphy would do.

    One also finds in statements of financial account smug, offensive, ego-maniacal, little pufferies about how the Tax Justice Network encourages its directors to use bicycles. These limpwrists file a 21 page report for a company with a turnover of 127,000.00 pounds, which commences with 10 pages of self-congratulatory flatulence.

    Murphy and his crew are beyond parody.

  2. Error Number ONE (the first in a series): Regarding “bank secrecy”.

    Murphy doesn’t understand how federal and state laws/regulations are applied to companies doing business in the USA. Banks are regulated, first and foremost, by a variety of federal agencies, and state law cannot alter of void any of those federal provisions. “Banking secrecy”, no matter how Murphy defines it, is the same in Delaware as it is in the other 49 states.

    Bank retention of client information is a matter of federal, not state, law and regulation.

    Monitoring of fund transfers and activity within the banking system is also a matter of federal, not state, law.

    State law with regards to banking is limited to chartering, organization and ownership matters, and this makes perfect sense… every bank in the USA engages in interstate commerce, which is regulated at the federal level.

  3. Error Number TWO: Regarding public availablity of trust information.

    Information is publicly available (for free) on all incorporated entities in Delaware. This includes corporations, limited liability entities, partnerships, closed corporations and non-profits (including trusts). All you have to do is go to the web site for the Delaware Division of Corporations, go to Services, and then search via the Entity Search option.

    Evidently that bit of rocket science was beyond Murphy. I managed to get it done in less than five minutes.

    The (free) information available on all entities includes name, address, phone number, type of corporation, date of incorporation, and residency.

    For an additional fee of either $10 or $20, one can view details of the entity’s franchise status or status, tax and filing history.

  4. Error Number THREE: Regarding the public availability of ” company accounts”, by which Murphy seems to mean financial statements.

    In the USA, publicly held corporations are required to submit audited financial statements to various agencies of the federal government. All are required to submit audited annual financials and quarterly unaudited reports to the SEC. They can be found on the SEC’s web site.

    Given what is available from the SEC, there would be no reason the state of Delaware, or any other state to post that same information on their own web site.

    What this suggests is that Richard Murphy doesn’t understand the reporting requirements for publicly held companies doing business in the USA.

    As for private companies, well, they are private companies. Their stock is not sold on organized exchanges. They do not meet the legal definition of a publicly held company and are therefore exempt from all the reporting requirements for such companies. They are not required to issue GAAP-basis financial statements and they are not required to have annual financial statements audited.

    Evidently it is Murphy’s contention that all companies, whether they be publicly held or private, should be required to publicly disclose financial information. That there is a distinction between public and private companies is a matter of federal law and regulation. Thus, it is a matter no state, including Delaware, can impose additional public reporting requirements.

    Again, it appears that much, if not all, of Murphy’s concerns over “secrecy” stem from his profound ignorance of USA law relating to corporations.

  5. It’s also worth noting that most publicly held companies will have their audited financials on their own web sites. Quite a few of them also publish their SEC reports on their web sites as well.

  6. It’s even funnier what he does once he has his “Opacity Score”.

    He squares it, but then multiplies by the “global scale weight”.

    Hence, London has the lowest Opacity score – i.e. good per Murphy, but because of the size of London’s financial sector, is weighted up to finish 5th worse out of 60 countries.

    We may have the least financial secrecy, at least according to Murphy’s flawed rankings, but we need to improve by massively reducing the size of our financial sector.

    Thus he is actually recommending that financial institutions should move from the least secret jurisdiction to a more secret jurisdiction, and our position in his index will improve.

  7. It’s also worth noting that one of the reasons folks choose to keep their companies privately held is to avoid the expense of complying with federal law and regulation regarding public reporting.

    Another is even more obvious… It is to keep weapons-grade cock-ends like Richard Murphy from snooping around in other peoples’ private affairs.

  8. Error Number FOUR: “Beneficial ownership” of companies.

    There is no such thing as “beneficial ownership” of companies. Period. If you own the company, you own the company. If you choose not to manage it yourself, then what you’ve done is hire management. In publicly held companies, management is a matter of public record.

    There is such a thing as beneficial ownership of company stock, but that doesn’t seem to what Murphy is talking about.

    Bottom line? Who knows what he is talking about… I don’t, and I’d bet money Murphy doesn’t either.

  9. Error Number FIVE: Making “beneficial ownership” of companies a matter of public record.

    Once again, who knows what the hell he’s actually talking about, but the idea that a state who be in the business of maintaining ownership records for publicly held companies is beyond belief.

    Why would any state maintain a database of the millions upon millions of owners of stock for publicly held companies residing in that state? And why would they do it for private companies. Owners of either who receive dividends or profits receive K-1s and/or 1099s that are also sent to the IRS.

    Most states that tax income do so by keying off income figures derived from federal tax returns.

    There is no reason for any state to maintain lists of owners of companies… IRS reporting regulations provide the owners, the IRS and the states with a reliable mechanism for tracking dividends and distributions: Form K-1 and Form 1099.

  10. Error Number SIX: The whole maintaining of ownership details in official records thingy.

    Guess what? If you’re dealing with an S corporation or a partnership, the state’s department of taxation will have a full and complete listing of ownership that is updated every year. That’s because all S corporations and partnerships issue K-1s to all owners every year for tax preparation purposes.

    For publicly held companies, ownership details reside, in most cases, with the brokerage house used by the client. Or, in cases where a stock certificates have been issued, with the owner himself.

    The idea that any state would set up a system to track ownership of millions of shares of stock through billions of transactions per year is beyond bizarre. To what end? Both the state and the federal government can, via subpeona of records, determine ownership without much difficulty.

    In the case of privately held companies, well, again the issue is simple: They are privately held companies. There is no particular need for a state to maintain a master ownership list. It can get it via subpeona if need be.

    It’s worth noting that there isn’t a state in the union that maintains a database of company owners… it is too expensive and impractical.

    So Delaware is only one of fifty offenders.

  11. Oh yeah, publicly held companies maintain listings of their owners at all times… They have to to issue Form 1099-DIVs at year-end. If a state wants the list, they just have to subpeona it.

  12. I cannot bring myself to read Murphy’s standard issue drivel and am relying on what is said here.

    Whilst there is,of course, such a thing as a shell company, there is also a cell company. It is, broadly, a company which is divisionalised in terms of its capital and limitation of liability under the laws of Jersey and some other jurisdictions. It is has become popular in insurance.

  13. Is Murphy that much an idiot that he doesn’t know they’re called SHELL companies?

    I worked for a Shell company once.

    Wooden shoes.
    Wooden heads.
    Wouldn’t listen.

  14. Dennis the Peasant/Tim Newman

    Cell Companies

    Ritchie might have been referring to one of these.

    Their structure appears fairly sophisticated but all it means is that the company is divided into separate cells, each of which has limited liability and can be liquidated (or go bang) without affecting the rest of the company or the other cells. As with most vehicles – much like the legal structure used by the TJN – cell companies can be used quite legitimately or misused to provide a vehicle for fraud.

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