Europe

The Big Debate: How Credible are Tax Haven Blacklists?


By Patrick Emmenegger, Professor, and Katrin Eggenberger, PhD candidate, School of Economics and Political Science, University of St. Gallen, Switzerland (31/07/2018)

The word ‘blacklist’ entered the lexicon of international relations during World War I through the Trading with the Enemy Act 1914, when the UK government issued a list of companies known to be aiding the enemy. The new Act prohibited British subjects, as well as neutral states, from trading with them. Blacklisting has since evolved into a widely used policy tool, highlighting practices that are inconsistent with international norms, such as money laundering, human trafficking or non-proliferation. The aim is to ‘name and shame’ the listed nation into following international norms.

Comparing G7 initiatives that resulted in the blacklisting of ‘tax havens’ in the early 2000s by the OECD and the Financial Action Task Force (FATF) identifies three factors that contribute to the effectiveness of blacklists: the stigma attached to the act that led to the blacklisting, the nature of any sanctions that are imposed, and the blacklist’s legitimacy.

Take the case of Liechtenstein, blacklisted by the FATF for ‘facilitating money laundering’. Not only is this an act that carries significant stigma, but the credible threat of severe sanctions prompted Liechtenstein to quickly and decisively give into regulatory demands. In contrast, Liechtenstein was slower to respond and more combative when the blacklist was devoid of any sanctions for its ‘harmful preferential tax practices’. The additional financial sanction and reputational costs (stigma) imposed by the FATF blacklist made it a more effective policy tool.

Similarly, the Republic of Nauru, was sluggish and churlish in responding to FATF and OECD blacklists until sanctions were triggered. Nauru was an early test of the USA PATRIOT Act’s sanctioning mechanisms and was penalised as a deterrent to others. Whilst financial sanctions have since been lifted, the reputational damage inflicted through its association with money laundering still hampers Nauru, as its economy continues to stagnate.

Whilst both the OECD and FATF blacklists suffered from legitimacy problems that hindered their effectiveness somewhat, the OECD list’s lack of legitimacy was a greater obstacle as it did not threaten credible sanctions, relying instead on soft power to coerce listed nations to act. It seems that even if a blacklist is perceived as lacking legitimacy, as long as it threatens painful sanctions and accuses the listed nations of a stigmatized act, it will be an effective policy tool in international relations. No wonder that there are more than 400 blacklists in use today.

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