How Financial Secrecy Undermines Democracy

Issue Date October 2023
Volume 34
Issue 4
Page Numbers 94–108
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The expansion and sheer enormity of the financial-secrecy system is undermining democracy to an alarming extent. This system has distorted capitalism and its elites’ relationship to taxation and the public realm to such an extent that powerful vested interests are now attached to a financial system that a) conceals kleptocracy, crime, and foreign interference, and b) exacerbates inequality to a degree unrecognized precisely because of the system’s secrecy. The state of the public realm shows 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, one can identify how to conduct its deconstruction.

Beneath the surface of our financial system lies an unseen world worth trillions of dollars. This vast and expansive realm, both offshore and onshore, is undermining capitalism and democracy from the inside. 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. Rather than being a space under intense scrutiny and observation, monitored by everything from the latest banking algorithms to the beady eyes of tax officials, this hidden dimension is where those wealthy enough to gain access to it go to hide their wealth and avoid taxes. Rather than serving as an asset to Western capitalism and democracy, this secret world and its covert dealings are acting on both as a quiet poison.

About the Authors

Charles G. Davidson

Charles G. Davidson is publisher of The American Interest and a former Freedom House board member. From 2014 to 2018, he was executive director of the Hudson Institute’s Kleptocracy Initiative.

View all work by Charles G. Davidson

Ben Judah

Ben Judah is a senior fellow at the Atlantic Council and author of This Is Europe: The Way We Live Now (2023).

View all work by Ben Judah

Or perhaps the poison is no longer so quiet: This parallel world has now grown so large that it is visibly cracking the political order from which it sprang. Financial secrecy has swollen in recent years as elites have abandoned their duty to pay their fair share. A metastasizing culture of tax avoidance by corporations and the wealthy has weakened national values, institutions, and goals across the West while fueling levels of inequality that wreck national cohesion, drive spiraling resentment, and stoke anger. This is empowering the enemies of democracy at home and abroad, be they domestic populists who vow to crush the abusive system, or authoritarian kleptocrats and criminals who manipulate the system to cover their own misdeeds.

Governments need to take dramatic action to close down this parallel financial system, criminalize its enablers and reassert sovereignty over taxation.

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

In the 1960s, the growth of financial secrecy accelerated as Western corporations sought to navigate the new postcolonial order emerging across Africa and Asia, and Western elites started chafing at the stringencies of postwar social democracy. The number of tax havens exploded, going from a mere handful in the interwar years to more than seventy today including Bermuda, the Cayman Islands, Curaçao, Hong Kong, and Singapore. Bankers, lawyers, and accountants found that these liminal places offered attractive operating bases far from Western tax offices. Such destinations were advertised in the Financial Times as providers of offshore corporate vehicles and have since become knotted into almost all aspects of corporate affairs, political life, and indeed geopolitics. Rapidly expanding “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

Financial secrecy came onshore as well, 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 after that, 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 Cold War’s end 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. The system is designed to be opaque to both law enforcement and the public. Only recently have headline-making insider leaks such as the Panama Papers (2016) and Paradise Papers (2017, and possibly a result of hacking rather than leaking) begun to lay bare the system’s workings. Millions of documents became available detailing the offshore dealings of companies such as Apple, Facebook, McDonald’s, and Walt Disney as well as people such as British royals and Wilbur Ross, who was U.S. commerce secretary from 2017 to 2021. The totality of these papers shows massive tax avoidance, the concealment of kleptocratic loot, and the systemic avoidance of the rule of law. In late 2021, the leaking of the Pandora Papers offered evidence of tax avoidance by a slew of individuals ranging from the former International Monetary Fund chief Dominique Strauss-Kahn to Ukraine’s President Volodymyr Zelensky, the latter among thirty-five current or former national leaders alongside about four-hundred lower-ranking officials. It is a safe bet that these leaks, large as they seem, have given us only a keyhole view into a much bigger industry.

This is the state of our financial world. To truly grasp why it is so dangerous, consideration of first principles is needed. What underwrites political order?

Elite Exodus

Thousands of years ago, Aristotle warned in his Politics that “in democracies . . . where the laws are not supreme, there demagogues spring up” (Bk. IV, ch. 4, 1292a, Benjamin Jowett translation). From the White House to the Washington Post, it is now commonly claimed that democracy is in danger. But instead of focusing on personalities, or the parties in the arena, it is more revealing to examine foundations. For Aristotle, ethics and politics are indissoluble—and the former, through individuals and especially those who belong to elites, will affect the latter. This is why he cautioned that when those who hold power in a democracy, through their moral dispositions, choose to let laws become weak or to avoid them, democracy will become exposed to the influence of demagogues.

Western democracies today find themselves on the highway to Aristotle’s danger zone. Over the last sixty years, the decisions of elites, underpinned by their political ethics, have transformed global capitalism in a poorly appreciated but structurally significant way. Western elites, no longer as committed as their predecessors once were to values of public service, nor fearful of domestic unrest or a superpower anticapitalist rival, have progressively exited the existing system. Taxation is now treated as optional while elites compete to see who can pay the slimmest contribution to the public realm. They have done this through tax havens, secretive jurisdictions, disguised entities, falsified trades, and more. All of it conceals revenues, hides wealth, and avoid taxes while abetting crime, corruption, and kleptocracy. Hidden dealings that used to be small and marginal are now enmeshed in the financial system as a whole, cloaking an enormous stock of “stealth wealth.”

This gigantic stack of funds, unaccounted for in economic statistics, has been piling up steadily in secretive jurisdictions beyond the grasp or even the knowledge of tax officials. Such a diversion of wealth to unreachable places shifts the tax burden onto the middle class and poor. Among other things, this means that wealth inequality is much greater than official measures show: Per Jim Henry, there is a $50 trillion overhang out there of which middle-class and poor people own not a penny. The appetite for “retribution”—and the opportunity this presents to demagogues—should come as no surprise.

The basis of the social contract, the principle that all are subject to the law, has been broken. The financial-secrecy system and the ocean of “stealth wealth” it guards are why 58 percent of Americans tell pollsters that they are dissatisfied with the way democracy is going, and why a shocking 85 percent believe that the U.S. political system either needs a major or complete overhaul.7 Elites have not only become politically but financially unaccountable.

Western elites, with their heedless disdain for the spirit and often the letter of their own countries’ tax laws, are threatening the relationship between capitalism and democracy and thereby courting political instability. Far from being a Caribbean curiosity, the system of financial secrecy has allowed plutocrats, fraudsters, money-launderers, and authoritarian kleptocrats to shrink the West’s accessible tax base and with it public services; has increased the debts that nations owe; has degraded the fairness and efficiency of markets; and has made national security harder to defend. The result has been increasingly vulnerable Western political systems, strained and destabilized by ballooning inequality, to both external and internal attack. Through such antidemocratic developments as those listed above, capitalism with secrecy—in other words, capitalism without transparency, integrity, and accountability—is undermining liberal democracy.

Four key factors lie behind this development. First, ex-colonial powers, with the United Kingdom and the Netherlands leading the way, saw the cultivation of tax havens in overseas dependencies as a way to retain distant territories (the Caymans, Curaçao, Hong Kong) while using them to bolster the metropole’s own role in global financial affairs. Second, especially in the United Kingdom and the United States, neoliberal politicians on the right saw the expansion of this parallel system as adding up to quiet de facto tax cuts, and thought it might even remove key financial flows from government influence altogether. Third, with the financial-secrecy system having insinuated itself deeply into the onshore economy, elites who profit from secrecy have lobbied (and still lobby) to shield it and keep their benefits flowing. Wealthy U.S. and U.K. elites and donors to political parties have especially made their influence felt in this regard. Finally, Western politicians misjudged financial secrecy to be a peripheral issue, a mistake that would come to have grave political consequences.

The financial-secrecy system is delegitimizing Western capitalism and democracy. Unless the United States and its European allies dismantle this system, they will no longer be able to maintain domestic tranquility, deal with competition from authoritarian powers, and win the race to the carbon-neutral economy that will define the industries of the future and who has mastery over them. What is at stake is not only whether capitalism and democracy can be restored to a mutually reinforcing dynamic, but also whether the West will continue to succeed as states and societies.

As recently as the 1990s, around two-thirds of citizens across Western Europe, North America, Northeast Asia, and Australasia would tell pollsters that they were happy with democracy in their countries.8 A 2023 YouGov poll found that 70 percent of U.S. respondents rated their satisfaction with U.S. democracy as five or lower on a ten-point scale. In the same survey, the share of Americans who rated their satisfaction with their country’s democracy at zero was 21 percent.9 Meanwhile, a feeling that democracy is in jeopardy is a source of rare unity in focus groups.10 Distrust of elites and their covert, self-dealing financial machinations is helping to fuel a growing public distrust toward democracy and the institutions that underpin it.

Financial Secrecy versus Democratic Sovereignty

The fragility of Western democracy is the result of a wider assault on the state. It should come as no surprise that U.S., European, and broader Western state capacity has declined as financial secrecy has thrived. This is because the financial-secrecy system limits state sovereignty by design. As the historian Quinn Slobodian has documented, secrecy is only one front in a wider neoliberal attempt over the last sixty years to remove the market from democratic control.11 The purpose of the financial-secrecy system is to allow wealthy individuals and powerful corporations to enjoy the rule of law and other benefits offered by U.S., European, and other democracies while at the same time hiding assets from the authorities. Secrecy structures and state sovereignty are thus inherently antagonistic.

One of the large ironies at play is that major, established democracies have created a zone of financial secrecy that even their own law-enforcement agencies find very difficult to penetrate. But far from being a testament to two-fisted libertarianism, the financial-secrecy system is entirely state-dependent. The system needs four things. First, it requires legislation that creates the legal fiction of assets being domiciled in a location where they are neither present nor active, while letting their “beneficial” (i.e., real) owners keep their identities hidden. Moreover, the same governments that pass such legislation must agree to tax treaties and arrangements that allow a slew of subnational, semi-independent entities or foreign nations the right to legally domicile assets that are actually present in Western democracies while denying Western authorities the ability to tax these assets or even learn about them. This is not simply a question of how one political center recognizes another, but of how the first center chooses to treat its own elite actors and legal instruments.

Third, financial secrecy relies on domestic authorities legally permitting and even accrediting a panoply of “enablers”—lawyers, accountants, bankers, incorporation agents, cryptocurrency vendors—whose business is hiding assets. Along with those human agents of secrecy, governments must also permit an array of abstract instruments—from anonymously owned shell corporations to cryptocurrencies—whose purpose is to shield wealth from governments that might try to tax it.

Finally, the whole machine can run only if entities cloaked by the secrecy system are accorded full ability to operate within rule-of-law jurisdictions, where if anything goes wrong they can claim redress. Thus, the financial-secrecy system is entirely dependent on what it strives to undermine. This state of things results from a cumulative series of choices to value secrecy more than sovereignty, at the expense of the rule of law. This is an essential reason why we have entered Aristotle’s danger zone.

In the United States, a sobering example of what these four conditions mean can be found at 650 Fifth Avenue in New York City. Here, a combination of U.S. laws and hired enablers allowed the Islamic Republic of Iran—one of the four countries on the U.S. State Department’s official list of state sponsors of terrorism—to conceal its ownership of a Manhattan skyscraper. Iran hid behind a web of offshore shell companies that ultimately traced back to the island of Jersey. For twenty-two years, the Islamic Republic used the building to violate sanctions.12 This story—its latest wrinkle is a 2019 ruling by a federal appeals court allowing Iran to keep the building—perfectly illustrates how the United States hamstrings itself with its own laws and allows its professionals to be used against it. Thanks to the barriers put up by the financial-secrecy system, it took two decades and five agencies (the U.S. Justice Department, the FBI, the NYPD, the IRS, and the U.S. attorney’s office for the Southern District of New York) to put a stop to Iran’s illicit dealings.

The United Kingdom has seen similar absurdities. In Edinburgh, a run-down social-housing apartment was found to have been used as an address by no fewer than 530 Scottish Limited Partnerships, corporate entities favored by criminals for their ability to provide anonymity. The address was also linked to $1 billion robbed from the struggling East European nation of Moldova, some 12 percent of its GDP.13 Once again, it was British laws, enablers and enforcement that had permitted, created and fostered an environment where such vehicles could be used to plunder a country the United Kingdom was ostensibly supporting against Russian influence and to consolidate its democracy.

As we can see in Edinburgh or New York, each of these choices permitting the financial secrecy system to thrive is now having deeply negative impacts on the sovereignty of Western democracies. Accepting the principle of anonymity and the fiction of extraterritorial profits or assets is undermining the ability of the democratic world to fund public services at a time of mounting demands on the state. This has led domestically to a higher national debt than there otherwise would have been and the tax burden being shifted from the wealthy and super profitable corporations onto poorer segments of society. This represents a dire erosion of sovereign capacity.

This is now holding back Western democracies from meeting their first great challenge: to guarantee domestic stability and social harmony. This is particularly evident in the United States, where the financial-secrecy system has both exacerbated and entrenched inequality, fostering one of the highest income and wealth inequality rates in the developed world.14 Populist movements both left and right, from Occupy Wall Street in 2011 through the Trump movement of 2016, have complained that many millions of Americans are being left behind. In Europe, the rise of populism has seen Britain eject itself from the European Union via the 2016 Brexit referendum, the far right come to power in Italy under Prime Minister Giorgia Meloni, and the far right polling in second place in Germany and France.15 Across the continent, populist parties have been gaining vote share.16 The failures of neoliberal globalization are making democratic societies across the West less stable; the financial-secrecy system forms one of those failures.

Accepting secrecy’s “enablers” and the full spate of its instruments is also undermining the West’s ability to compete with authoritarian powers and protect Western political institutions.17 Kleptocrats in Russia or China can move money anonymously into the West, buying assets and building networks that facilitate political interference and compromise Western nations’ security and democratic institutions. The sheer scale of global financial secrecy, moreover, has made possible a golden age of money laundering that aids kleptocrats in converting stolen wealth into new sources of power. These can include corrupted Western officials, private armies of mercenaries, and phalanxes of enablers recruited from Western professional ranks.18

Many modern-day autocrats and authoritarians sustain their regimes with what is to them a “best of both worlds” business model: They can impose authoritarianism at home while parking their looted assets abroad under the aegis of the Western rule of law. Russia under kleptocratic president Vladimir Putin is a case in point. Having spent much of the last twenty years using London and other British-linked jurisdictions as gateways to the financial-secrecy system, the Russian elite has responded to sanctions by shifting much of its money laundering to the United Arab Emirates. The geopolitics may have changed, but the elite business model remains the same.19

Without the safe havens afforded by the financial-secrecy system, authoritarian regimes would have to find new ways to take care of business. If the work of moving and storing loot outside one’s country lost some of its certainty, kleptocrats would have to keep more pelf at home, where it would be more accessible to political accountability and appropriation. This would make the business model of contemporary authoritarianism much less attractive to those in charge. Perhaps, like nineteenth-century European elites who allowed social and political reforms in hopes of forestalling revolutions, authoritarians with domestic riches to worry about would consider relaxing their grip (even if only as part of a bid to dissipate opposition).

Examples abound of how easy Western democracies make things for kleptocrats. Only last year and despite being under sanctions, the late Russian warlord and leader of the Wagner Group Yevgeny Prigozhin was able to hire the services of U.K. lawyers who deployed lawfare tactics against journalists and suggested an elite private school for his son.20 For decades, and much to the ire of Russia’s democrats, Putin-aligned elites have used London real estate to launder their cash while paying legions of British law firms, banks, and consultants, to provide services that facilitate corruption. And this is not even to mention such offshore financial centers as the Cayman Islands (a self-governing British Overseas Territory) with their notorious banking system.21 In letting all this go on under British laws and on British soil, the U.K. government has by action and inaction been lending aid and comfort to Russian autocracy even while posturing publicly as a friend to the cause of Russian democracy.

One could not ask for a plainer example of how the financial-secrecy system undermines the West’s longstanding goals of promoting democracy and international development. Capital flowing from dubious sources through the financial-secrecy system undermines not only the sovereignty of various Western countries that allow these hidden flows, but also erodes the ground beneath national, popular sovereignty more globally, enabling and consolidating state capture across multiple countries. The less democratic sovereignty there is in the world, the safer the world is for Aristotle’s other two key political categories and democracy’s foes: tyranny and oligarchy.

This has dire implications for the Western alliance on both sides of the Atlantic. The constitutional democracies are trying to wage an intensifying great-power competition with China, only to find their efforts undercut by China’s exploitation of the financial-secrecy system. In the United States, the Biden administration calls for a “New Washington Consensus” built around supply-line security, the reshoring of manufacturing, green industrial policy, and dominating the rising industries that are set to thrive amid decarbonization. This may be pitched as a “foreign policy for the middle class,” but in truth financial secrecy will stop it cold.

Not one of these policy goals attached to the race with China will be met if secrecy is permitted to rob every value or technological chain of transparency. Without transparency, U.S. sanctions for, say, the theft of intellectual property concerning computer chips will become an instrument that is clumsy and full of holes. The Commission on the Theft of American Intellectual Property has noted that Chinese entities rely on shell companies to hide their IP theft and evade sanctions. Likewise, the U.S.-China Economic and Security Review Commission has warned that it will be unable to detect and properly scrutinize Chinese investments in U.S. technology firms if the identities of these firms’ true owners are obscured.22 Meanwhile, the financial-secrecy system is also weakening the West’s stance toward Russia and the Ukraine War, undermining sanctions on Putin’s regime and threatening to make Ukraine a nonstarter as an EU-membership candidate due to corruption.23

Nils Gilman observes that the financial secrecy system has been fueled by what he calls the “twin insurgencies” of plutocracy and organized crime, both of which are hostile to the constraints of a functioning democracy.24 Plutocrats and criminals, it seems, would prefer something like feudalism, with its patchwork of castes and exemptions under a weak state, plus an economic order whose fundamentals the populace cannot challenge.

Sovereignty as the basis of democracy is an idea first developed by Enlightenment philosophers such as John Locke and Jean-Jacques Rousseau, when societies in Western Europe were leaving feudalism behind. Western sovereignty and Western constitutional democracy, we must repeat, are linked: If the former declines, the latter will too. From this point of view, that democracy-unfriendly forces would build something like the financial-secrecy system to sap democratic sovereignty hardly looks like an accident. Taking Western democracy into Aristotle’s danger zone was a choice—by those who favor a political system that he would instantly recognize as oligarchy.

Undermining Democratic Sovereignty

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.


1. Raymond W. Baker, Invisible Trillions: How Financial Secrecy Is Imperiling Capitalism and Democracy and the Way to Renew Our Broken System (Oakland: Berrett-Koehler, 2023).

2. Alex Cobham, “The End of Empire and the Rise of Tax Havens,” New Statesman, 7 December 2020,

3. Nate Sibley, “Countering CCP Threats with Corporate Transparency,” Hudson Institute, 18 December 2019,

4. Nicole Sadek, “U.S. Lands Top Spot as World’s Biggest Enabler of Financial Secrecy in New Index,” ICIJ, 17 May 2022,

5. Sarah Freitas and Dev Kar, “Russia: Illicit Financial Flows and the Underground Economy,” Global Financial Integrity, 13 February 2013,

6. “$50 Trillion Offshore with James S. Henry,” Global Financial Integrity, 6 July 2020,

7. “How Americans See Their Country and Their Democracy,” Pew Research Center, 30 June 2022,

8. Yascha Mounk and Roberto Stefan Foa, “This Is How Democracy Dies: A New Report Shows That People Around the World Are Collectively Losing Faith in Democratic Systems,” Atlantic, 29 January 2020,

9. Jamie Ballard, “Polls from the Past: Democracy, Patriotism, and Trust in Other Americans,” YouGuv, 30 June 2023, See also Mallory Newall, Chris Jackson, and James Diamond, “Seven in Ten Americans Say the Country Is in Crisis, at Risk of Failing,” Ipsos, 3 January 2022, On attitudes in Britain, see Toby Helm, “Young Adults’ Loss of Faith in UK Democracy,” Guardian, 10 April 2022,

10. Daniel Perrin, “What Happened When 7 Trump Voters and 6 Biden Voters Tried to Find Common Ground,” New York Times, 28 July 2022.

11. Dan McAteer, “A Conversation with Quinn Slobodian: Crack-Up Capitalism (Penguin, 2023),” Oxford Intellectual History, 17 April 2023,

12. Max de Haldevang, “Iran Used Shell Companies to Hide Its Sanctions-Busting Ownership of New York Skyscraper 650 Fifth Avenue,” Quartz, 29 June 2017,

13. Tim Whewell, “The Billion-Dollar Ex-Council Flat,” BBC News, 7 October 2015,

14. “The U.S. Inequality Debate,” Council on Foreign Relations,

15. Sabine Kinkartz, “Germany’s Far-Right AfD Sees Poll Numbers Surging,” Deutsche Welle, 6 February 2023,

16. Laura Silver, “Populists in Europe—Especially Those on the Right—Have Increased Their Vote Shares in Recent Elections,” Pew Research Center, 6 October 2022,

17. Ben Judah and Nate Sibley, “The Enablers: How Western Professionals Import Corruption and Strengthen Authoritarianism,” Hudson Institute, 5 September 2018,

18. Ben Judah, “The Kleptocracy Curse: Rethinking Containment,” Hudson Institute, 20 October 2016,

19. Peter Hobson, “From Russia with Gold: UAE Cashes in as Sanctions Bite,” Reuters, 25 May 2023,

20. Miles Johnson, “Wagner Inc: A Russian Warlord and His Lawyers,” Financial Times, 24 January 2023,

21. Ben Judah, “The Kleptocracy Curse: Rethinking Containment,” Hudson Institute, 6 October 2016,

22. Nate Sibley, “Countering Chinese Communist Party Threats with Corporate Transparency,” Hudson Institute, 16 March 2023,

23. Elina Ribakova, “Transcript of Elina Ribakova’s Presentation,” Bendheim Center for Finance, Princeton University, 14 April 2022,

24. Nils Gilman, “The Twin Insurgencies: Plutocrats and Criminals Challenge the Westphalian State,” in Hilary Matfess and Michael Miklaucic, eds., Beyond Convergence: World Without Order (Washington, D.C.: National Defense University, 2016), 47–60.

25. Jannick Damgaard, Thomas Elkjaer, and Niels Johannesen, “The Rise of Phantom Investments,” International Monetary Fund, September 2019,

26. Max de Haldevang, “It’s Time to Think About Moving That Spare Billion Dollars You’ve Got Stashed in a Caribbean Tax Haven,” Quartz, 22 December 2016,

27. Rupert Neate, “King Charles Urged to Push for Breakup of UK’s ‘Network of Satellite Tax Havens,’” Guardian, 30 April 2023.

28. Steven M. D’Antuono, “Combating Illicit Financing by Anonymous Shell Companies,” Federal Bureau of Investigation, 21 May 2019,

29. “ICIJ’s Guide to Russian Wealth Hidden Offshore,” International Consortium of Investigative Journalists, 19 July 2022,

30. “ECJ Ruling on Access to Beneficial Ownership Information: Balancing Transparency and Privacy,” Vistra, 23 February 2023,

31. David Cay Johnston, “Tax Cheats Called Out of Control,” New York Times, 1 August 2006.

32. Progressive International, 22 April 2023,


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