Bank secrecy in offshore centres and capital flows: Does blacklisting matter?

Abstract

This study analyses cross‐border capital flows in order to verify the existence and direction of the effect of the soft regulation promoted by international organizations against banking secrecy which characterized the so called tax and financial heavens. This effect is called in the literature Stigma Effect, but both the existence and the direction of the stigma effect are far from being obvious. The international capital flows can simply neglect the relevance of the blacklisting, or worst, the attractiveness of banking secrecy can produce a race to the bottom: the desire to elude more transparent regulation can sensibly influence the capital movements. We test whether being included and later excluded from the FATF blacklist is an effective measure that influences countries’ cross‐border capital flows. Using annual panel data for the period 1996–2014, we apply our framework to 126 countries worldwide. We find evidence that in general the stigma effect does not exist.

Lifting the veil on beneficial ownership

“…Moreover, banking secrecy emerges from the literature as a dominant theme (Balakina et al , 2017; Le Nguyen, 2018; Yeoh, 2018a). Le Nguyen (2018, p. 53) explains, banking secrecy originates from a long-held recognition that clients’ financial information should be protected from other concerned parties, including clients’ rivals, merchants and consumers.…”

“…Banking secrecy poses perhaps a more remarkable challenge. Banking secrecy may be the primary reason for overseas jurisdictions not sharing their clients’ beneficial ownership information with other authorities (Balakina et al , 2017; Le Nguyen, 2018; Yeoh, 2018a; Young, 2013). The need to protect clients’ financial information from potential commercial or personal harm appears to be a valid concern of overseas jurisdictions, which justifies why strict banking secrecy laws persist (Le Nguyen, 2018; Young, 2013).…”

A review of money laundering literature: the state of research in key areas

“…The need to have a global transparent governance regime is desirable but the application of such a regulation could be challenging and possibly even undesirable. Balakina et al (2017) point out that the demand and supply for tax and financial havens exist on account of the need for banking secrecy. Therefore, implementing a transparent regime in one jurisdiction is likely to create a demand for secrecy and hence reduced transparency in another jurisdiction.…”

The impact of blacklists on external deposits: one size does not fit all

“…As a result, all three were blacklisted for extended periods. Balakina et al (2017) hypothesized that while blacklists are assumed to work through a "stigma effect," under certain circumstances, a reverse "stigma paradox" may also arise, whereby some jurisdictions "elude more prudent regulation" to attract certain customer groups. Testing the impact of the FATF blacklist on annual bank flows in multivariate regressions, they find little to no evidence of a stigma effect.…”

“…Blacklists built on technical criteria represent a policy tool that can place substantial pressure on blacklisted entities to change their behavior without appearing to be overtly political or unilaterally motivated (OECD, 2010). A "stigma effect" can entail both more stringent and costly monitoring and increased reputational risks (Balakina et al, 2017).…”