Perplexing Risk Rankings
Updated: Mar 1
Whether it’s assessing a new foreign grantor trust client, setting up a new foreign biotech manufacturing plant or soliciting funds for a private equity investment in an offshore business, a risk assessment must be made regarding the foreign jurisdiction. If you haven’t had previous experience with the jurisdiction, you may be left scratching your head reviewing government and non-governmental organization (NGO) lists.
Given that the press frequently pounces on the concept of “black list”, I have used the European Union (EU) List of Non-cooperative Jurisdictions for Tax Purposes as my base for comparison. I have provided an explanation of each list (and links for you to review each of the complete lists) with a brief comparison of the jurisdictions included on the EU list.
My chart includes a complete list of the jurisdictions on the EU’s “grey” and “black” lists.
* EU List of Non-cooperative Jurisdictions for Tax Purposes. ** U.S. Dept. of the Treasury Resource Center - FATCA. *** OECD Status of Commitments for Automatic Exchange of Information. **** Transparency International's 2018 Corruption Perceptions Index. [Low rank means less corrupt.] ******FATF Jurisdictions with strategic deficiencies. *******Tax Justice Network Financial Secrecy Index. [Low rank means greater secrecy.]
EU List of Non-cooperative Jurisdictions for Tax Purposes
The EU created its list of non-cooperative jurisdictions (known as the grey and black lists) to maximize efforts against tax fraud, evasion and avoidance. The EU’s goal is to encourage transparency and fairer tax competition around the world through upholding international standards on information exchange, tackling harmful tax practices and dismantling artificial tax structures. The grey and black lists include non-EU countries or territories that failed to make sufficient commitments in response to EU concerns. There are 32 jurisdictions on the grey list and 8 jurisdictions on the black list. https://www.consilium.europa.eu/en/policies/eu-list-of-non-cooperative-jurisdictions/#.
U.S. Dept. of the Treasury Resource Center - FATCA The U.S. Foreign Account Tax Compliance Act (FATCA) requires that Financial Institutions (FIs) establish a compliance program consistent with the U.S. Internal Revenue Service’s (IRS) goal of detecting U.S. tax evaders who maintain certain financial accounts either directly in offshore accounts and investments or indirectly through ownership of foreign entities. Over 100 jurisdictions are participating in FATCA through intergovernmental agreements. 19 jurisdictions that are participating in FATCA are on the EU grey and black lists. Only 18 of the more than 65 jurisdictions not participating in FATCA are on the EU lists.
OECD Status of Commitments for Automatic Exchange of Information To ensure the effective implementation of tax transparency standards worldwide, the Organization of Economic Cooperation and Development (OECD) developed the Standard for Automatic Exchange of Financial Account Information in Tax Matters (The Common Reporting Standard (CRS)). Over 150 jurisdictions have made some level of commitment toward implementing CRS. 23 jurisdictions either actively engaging in CRS exchange of information or committed to doing so are on the EU lists. Only 17 of the approximately 50 jurisdictions who have not committed to CRS are on the EU lists.
Transparency International's Corruption Perceptions Index (CPI) Transparency International issues an annual index which ranks 180 countries and territories by their perceived levels of public sector corruption. The data used in the CPI is from experts and businesspeople. The index uses a scale of 0 to 100, where 0 is highly corrupt and 100 is “very clean.” The 2018 index shows that more than two-thirds of the listed countries scored below 50 with an average score of 43. The EU lists include 10 jurisdictions which rank in the top third for low corruption. On the other hand, the EU lists only 1 jurisdiction ranked in the bottom third of the CPI. Given that the EU grey and black lists by definition do not include EU jurisdictions, the lists do not include the 4 EU jurisdictions which ranked in the middle one third of the CPI (Romania, Hungary, Greece and Bulgaria).
FATF Jurisdictions with Strategic Deficiencies
As part of its efforts to combat money laundering and terrorist financing (AML/CFT), the Financial Action Task Force (FATF) identifies jurisdictions with significant weaknesses in their AML/CFT regimes. The FATF has named 2 “high risk” and 12 “other monitored jurisdictions”. Given there EU sanctions on North Korea and Iran, neither of these FATF high risk jurisdiction is on the EU grey or black lists. Only 4 of the 12 other monitored jurisdictions are on the EU lists.
Tax Justice Network Financial Secrecy Index The Tax Justice Network’s index ranks jurisdictions according to their secrecy and the scale of their offshore financial activities. The purpose of the index is to provide an understanding of global financial secrecy, tax havens or secrecy jurisdictions, and illicit financial flows or capital flight which lead to fraud, tax cheating, escape from financial regulations, embezzlement, insider dealing, bribery, money laundering, and more.
The Financial Secrecy Index includes 7 EU jurisdictions in the top 25 most secretive jurisdictions in the world (Luxembourg, Germany, Netherlands, Malta, UK, Cyprus, France).
Which List Do I Rely On? First of all, if you are not in the financial industry, you cannot dismiss that most of the above discussion relates to tax compliance. Tax compliance is a strong indicator of corruption within a jurisdiction which may impact business at every operating level. You should not rely on any one list in isolation for decision making but the various rankings and lists of tax transparency participation can be useful in your risk assessment research which should also include assessing a variety of other factors including:
Trade embargoes / sanctions
Enforcement of contracts
Restrictions on Ownership of Companies by Foreign Investors