oppginnlev-MastersThesis JarleAarbakkeTollaksen

A world of secrecy
International political factors and secrecy jurisdictions
Jarle Aarbakke Tollaksen
Department of Political Science

Faculty of Social Sciences
University of Oslo
Spring/May 2016
II
A world of secrecy
International political factors and secrecy jurisdictions
ii
Jarle
c Aarbakke Tollaksen
2016
A world of secrecy. International political factors and secrecy jurisdictions.
Jarle Aarbakke Tollaksen
http://www.duo.uio.no/
Trykk: Reprosentralen, Universitetet i Oslo
Words: 34 315
Abstract
Much of the literature on secrecy jurisdiction thus far has revolved around the domes-
tic political factors inducing countries to become secrecy jurisdictions. In this thesis, I
identify political factors at the international level related to position in the international
system and to geographic location, and assess the importance of these as determinants of
which countries become secrecy jurisdictions and of their degree of financial secrecy. In
addition, I evaluate the international political factors’ ability to predict which countries
may become secrecy jurisdictions in the future. I find that none of the international
political factors identified in this thesis significantly increase the likelihood of a country
becoming a secrecy jurisdiction, or increase their expected degree of financial secrecy.
Rather, the results of this thesis mainly give credit to the domestic political factors, as
well as the non-political country characteristics. However, international political factors
may be useful in predicting future secrecy jurisdictions, and thus be important guides to
policy. The results of this thesis underscore the importance of continuing to push secrecy
jurisdictions to take domestic measures to ensure greater financial transparency, and the
need for a more coordinated effort at the international level to curb financial secrecy and
the use of secrecy jurisdictions.
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Acknowledgements
There are a great number of people I would like to thank for supporting me over these
years as a student of political science, and for contributing to my academic development.
I can only name a few, but all of your encouragement and input are greatly appreciated.
First, I would like to thank my main supervisor Sirianne Dahlum. I am so grateful for
all of your insights and feedback as this thesis has been coming along. I really appreciate
you letting me be in charge of my own thesis throughout the whole process, while at the
same time always giving me advice and pointing me in the right direction. I am also very
grateful to Tore Wig for joining in on the final leg of this project, with fresh eyes and
new perspectives and suggestions for improvements.
To all of my friends and fellow students who have helped me in the process of writing
this thesis, with proofreading, helping me with R, giving constructive feedback and many
other things: I am so grateful! A big thank you to Ingebjørg Finnbakk for encouragement,
good conversations and lasting friendship; to Eilev Hegstad for good methods discussions,
as well as conversations on everything from politics to religion; to Julia Stangeland, for
many lunches and small breaks needed to survive the long days at Blindern.
A shout-out to Astrid-Therese Theisen and Maria Moe: You are strong and indepen-
dent women, and we are going to take on the world together!
The biggest thank you of them all goes to my awesome family, and to my parents who
have never stopped believing in me. Thank you for continuing to encourage me to keep
stretching after the greatest achievements possible. Thank you to my brother and sister,
and the in-laws, for continuing to cheer me on.
Any remaining mistakes in this thesis are solely my own.
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Contents
1 Introduction 1
1.1 The research puzzle and its relevance . . . . . . . . . . . . . . . . . . . . 3
1.2 Research design and findings . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.3 Outline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2 Secrecy jurisdictons 13
2.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.2 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3 Literature Review 23
3.1 Domestic political factors . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.2 International political factors . . . . . . . . . . . . . . . . . . . . . . . . 29
4 Theory 33
4.1 Motivations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.2 Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
4.3 Location . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
4.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
5 Research design 51
5.1 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
5.2 Dependent variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
5.3 Independent variables: International determinants . . . . . . . . . . . . . 62
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viii CONTENTS
5.4 Control variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

5.5 Statistical models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
5.6 Inferences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
5.7 Evaluating predictive power . . . . . . . . . . . . . . . . . . . . . . . . . 82
6 Results 87
6.1 Secrecy jurisdiction status . . . . . . . . . . . . . . . . . . . . . . . . . . 88
6.2 Degree of financial secrecy . . . . . . . . . . . . . . . . . . . . . . . . . . 98
6.3 Summary of main findings . . . . . . . . . . . . . . . . . . . . . . . . . . 105
6.4 Evaluating predictive power . . . . . . . . . . . . . . . . . . . . . . . . . 107
6.5 Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
7 Robustness checks 125

7.1 Model specification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
7.2 Multicollinearity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
7.3 Outliers and influential observations . . . . . . . . . . . . . . . . . . . . . 128
7.4 Alternative operationalizations . . . . . . . . . . . . . . . . . . . . . . . . 129
7.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
8 Implications 133
8.1 Implications for theory and further research . . . . . . . . . . . . . . . . 134
8.2 Policy implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
9 Conclusion 141
Bibliography 144
Appendix A 155
Appendix B 161
List of Figures
4.1 The hierarchy of world cities as core-periphery relations . . . . . . . . . . 38

4.2 Geographic distribution of secrecy jurisdictions . . . . . . . . . . . . . . . 48
5.1 Frequency of tax haven listings . . . . . . . . . . . . . . . . . . . . . . . 58

5.2 Secrecy scores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
5.3 Membership of international organizations . . . . . . . . . . . . . . . . . 64
5.4 Membership of international organizations by country group . . . . . . . 66
5.5 Map of dependent territories . . . . . . . . . . . . . . . . . . . . . . . . . 67
5.6 Average corporate tax rates by region . . . . . . . . . . . . . . . . . . . . 69
5.7 Distance from major financial centers . . . . . . . . . . . . . . . . . . . . 70
5.8 Concentration of secrecy jurisdictions by region . . . . . . . . . . . . . . 71
5.9 International characteristics of secrecy jurisdictions . . . . . . . . . . . . 72
5.10 Other characteristics of secrecy jurisdictions . . . . . . . . . . . . . . . . 77
5.11 5-fold cross validation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
6.1 Predicted probabilities of being a secrecy jurisdiction — position . . . . . 91

6.2 Predicted probabilities of being a secrecy jurisdiction — location . . . . . 96
6.3 Plot of estimated coefficients in position OLS models . . . . . . . . . . . 101
6.4 Plot of estimated coefficients in location OLS models . . . . . . . . . . . 104
6.5 In-sample AUROC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
6.6 Out-of-sample AUROC . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
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x LIST OF FIGURES
List of Tables
4.1 Summary of theoretical framework and hypotheses . . . . . . . . . . . . 50
5.1 Descriptive statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

5.2 List of secrecy jurisdicions . . . . . . . . . . . . . . . . . . . . . . . . . . 57
5.3 Summary of operationalizations and data sources . . . . . . . . . . . . . 76
6.1 Logit estimates of determinants of secrecy jurisdiction status — position 89

6.2 Logit estimates of determinants of secrecy jurisdiction status — location 93
6.3 OLS estimates of determinants of degree of financial secrecy — position . 99
6.4 OLS estimates of determinants of degree of financial secrecy — location . 103
6.5 Summary of main findings . . . . . . . . . . . . . . . . . . . . . . . . . . 106
6.6 Summary of out-of-sample predictive performance . . . . . . . . . . . . . 114
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Chapter 1
Introduction
Tax havens with their financial

opacity are one of the key
driving forces behind rising
wealth inequality, as well as a
major threat to our democratic
socities.
Thomas Piketty
Secrecy jurisdictions, often called ‘tax havens’, are central components of today’s global-
ized economy.1 This thesis investigates international political factors as determinants of
which countries become secrecy jurisdictions and of their degree of financial secrecy. By
identifying political factors at the international level along two dimensions—position and
location—I am able to assess these factors’ explanatory power, as well as predictive power.
While secrecy jurisdictions facilitate legal tax planning and profit shifting, they
also create opportunities for a variety of illegal activites, ranging from tax evasion to
corrupt practices and money laundering. With more than half of world trade, at least on
paper, passing through secrecy jurisdictions (Christensen and Hampton 1999:15), this is
1 Chapter quote from Zucman 2015:vii
1
2 CHAPTER 1. INTRODUCTION
not a marginal phenomenon, but rather an integral part of the global economy.
Following the 2008 financial crisis and the large public deficits faced by many
countries, fighting offshore tax evasion and curbing the use of secrecy jurisdictions
by multinational corporations and individuals have become a key policy issue for
governments and international institutions alike (Johannesen and Zucman 2014:66).
With legally enforced secrecy provisions, lack of transparency and absent information
exchange agreements, the use of secrecy jurisdictions gives rise to substantial revenue
losses for governments, and seriously challenges the design of the modern tax systems.
The recent release of the ‘Panama Papers’, revealing that a number of politicians,
government officials and other people in positions of power use secrecy jurisdictions to
hide away money, has called further attention to this issue. The fallout of the revelations
of the Panama Papers also shows that the use of secrecy jurisdictions is not only an
economic issue, but also a political one. Although the entirety of the repercussions of the
Panama Papers remains to be seen, the leaks have already forced the prime minister of
Iceland, Sigmundur David Gunnlaugsson, to step aside after revelations of his ownership
in a holding company registered in a secrecy jurisdiction (Duxbury, Gauthier-Villars
and Verbergt 2016). UK prime minister David Cameron also face pressure after it was
revealed that he has benefitted from an offshore trust (Chan 2016), while investigations
are being launched in both Pakistan and Argentina to look into the use of secrecy
jurisdictions by politicians and government officials (Duxbury et al. 2016). These
responses, by politicians, the public and regulatory institutions alike, to the revelations
of the Panama Papers show that the politicians’ use of secrecy jurisdictions to hide away
money pose a serious threat to their legitimacy as public servants, and to our democratic
societies.
1.1. THE RESEARCH PUZZLE AND ITS RELEVANCE 3
1.1 The research puzzle and its relevance

In order to understand secrecy jurisdictions—how they work, how to effectively tackle
the threats they are posing, and how to curb the use of them—it is important to
understand the political factors, international as well as domestic, inducing countries2
to become secrecy jurisdictions and to pursue financial secrecy. The understanding of
which political factors act as determinants of this will, in turn, influence which measures
are taken to curb the use of secrecy jurisdictions.
Whereas domestic political factors relate to the internal structures of a country,

such as the country’s legal system, regulatory institutions and so on, international
political factors relate to the external structures that give rise to secrecy jurisdiction,
such as protectionist banking systems in other countries, financial centers in the near
vicinity securing a substanital flow of capital and so on. Domestic political factors
associated with secrecy jurisdictions have received some scholarly attention. These
studies have first and foremost investigated how governance quality (see e.g. Dharmapala
and Hines 2009, and Rose and Spiegel 2007), political stability (see e.g. Shaxson and
Christensen 2013), population and country size (see e.g. Hudson 2000 and Hampton and
Christensen 2002), level of democracy (see e.g. Hampton and Christensen 2002; 2007,
and Shaxson and Christensen 2013) and legal system (see e.g. Dharmapala and Hines
2009, and Dyreng, Lindsey and Thornock 2013) are associated with secrecy jurisdictions.
Few have, however, examined the international political factors associated with secrecy
jurisdictions closely. This thesis aims at contributing to reduce this gap in the research
on secrecy jurisdictions by identifying political factors on the international level inducing
countries to become secrecy jurisdictions and to introduce financial secrecy provisions,
and assess the importance of these factors as determinants of which countries become
secrecy jurisdictions and of their degree of financial secrecy.
2I use the word ‘country’ to denote any territory or area for which I have data, and these do not need
to be e.g. diplomatically recognized sovereign states with UN seats. Thus I include: territories (e.g.
American Samoa); physical disparate parts of countries (e.g. Aruba); self-governing areas (e.g. Cook
Islands); special administrative areas (e.g. Hong Kong); dependencies (e.g. Guernsey); disputed areas
(e.g. Taiwan) etc.
1.1.1 International political factors
Why should we expect international political factors to matter when it comes to which
countries become secrecy jurisdiction and their degree of financial secrecy? First of
all, since secrecy jurisdictions are a truly global phenomenon, seeking to attract mobile
capital and finance flowing across country borders, it seems plausible that international
factors also play a role in giving rise to these jurisdictions. Structures of the international
political system should offer opportunities and incentives for countries to establish them-
selves as secrecy jurisdictions, and thereby serve as determinants of secrecy jurisdiction
status and degree of financial secrecy. Second, in a more general sense, it is obvious that
international factors and structures influence and cause domestic politics. It is shown in
the literature that international factors influence domestic political decisions, political
events, policies, coalitions and regime type or change (see e.g. Gourevitch 1978). It
seems plausible that this kind of international influence should be evident when it comes
to countries’ decisions to establish themselves as secrecy jurisdictions and to pursue
financial secrecy as well.
Cayman Islands is perhaps the first country that springs to mind when you hear
the words ‘tax haven’ or ‘secrecy jurisdiction’. It seems premature to explain why the
Cayman Islands is a secrecy jurisdiction by examining only domestic political factors,
like governance quality, regulatory institutions, legal system and so on, without taking
into account the special relationship the Cayman Islands has to the host of the worlds
premiere financial center, City of London, as a dependent territory of the UK, securing
political, economic and legal stability. Or to leave out of the analysis the fact that the
Cayman Islands is located in the near vicinity of another major international finance
center, New York, that secures a steady flow of capital, or that it is situated within a
region with a number of other secrecy jurisdictions that together offer a wide range of
services to individuals and corporations wishing to escape taxation and regulations. To
be able to provide the full picture of why a country becomes a secrecy jurisdiction, and
pursues a higher degree of financial secrecy, it seems plausible that international political
1.1. THE RESEARCH PUZZLE AND ITS RELEVANCE 5
factors need to be included in the analysis.
A few scholars have examined some of the possible international political factors
associated with secrecy jurisdictions. Baldacchino (2010) and Hampton (1994; 1996),
among others, looks into the association between dependency status and secrecy
jurisdictions, while Shaxson and Christensen (2013) and Christensen (2012) have
investigated the international ‘safe haven’-role played by secrecy jurisdictions, which
are both international political factors. These studies have not, however, examined
the association between international political factors and secrecy jurisdictions in a
quantitative way. Generally, few of the studies on secrecy jurisdictions thus far have
distinguished between political, geographic and demographic factors, and few have, to
my knowledge, distinguished between domestic and international political factors in
their studies.
I make a clear distinction between domestic and international political factors,

and identify political factors at the international level likely to explain which countries
become secrecy jurisdictions and their degree of financial secrecy. The international
political factors identified in this thesis relate to two theoretically distinct dimensions:
position and location. While the factors along the position dimension are related to a
country’s position in the international systems regarding issues of power and dependence,
the factors along the location dimension are related to the geographic region a country
is located in regarding issues of policy and regimes.
The two international political factors of the position dimension are hierarchical
position in the international system, where countries in a weak hierarchical position
are assumed to become secrecy jurisdictions and to pursue a higher degree of financial
secrecy in order to gain a more prominent position in the international hierarchy, and
dependency status in relation to metropolitan countries, where dependent territories
are assumed to use their special ‘within, yet without’-role to engage in rent-seeking
financial secrecy activites. The international political factors of the location dimension
are level of taxation of surrounding countries, distance from a major international
financial center, and geographic diffusion of financial secrecy. The level of taxation of
surrounding countries, and being located in the near vicinity of a major international
financial center, is assumed to spur countries to, as a competitive strategy, engage in
secrecy jurisdiction activites, specializing in economic and political services few others
provide. Being located in a region with many other secrecy jurisdictions is assumed
to bring about economies-of-scale benefits and mutual rewards based on similarity of
regimes, which could make a diffusion effect apparent, where countries engage in secrecy
jurisdiction activities because their neighboring countries already do. Together, these
constitute international political factors that could function as determinants of which
countries become secrecy jurisdictions and determinants of these jurisdictions’ degree of
financial secrecy.
1.1.2 Research question
Based on the knowledge gap described above, the research question of this thesis is,
Can international political factors explain the likelihood of a country becoming a secrecy
jurisdiction, and the jurisdiction’s degree of financial secrecy?
This research question consists of two parts. The first part of the research ques-
tion relates to the association between international political factors and secrecy
jurisdiction status, and I investigate international political factors as determinants of
which countries become secrecy jurisdicions, and which do not. The second part of
the research question relates to the association between international political factors
and degree of financial secrecy, where I go one step further and compare secrecy
jurisdictions with each other along the dimension of degree of secrecy. According to this
understanding, the question is not only if a country is a secrecy jurisdiction or not, but
also how secretive the different secrecy jurisdictions are.
1.2. RESEARCH DESIGN AND FINDINGS 7
It is also important to note that the research question not only relates to examin-
ing international political factors that can explain which countries have become secrecy
jurisdictions already, but also which countries that are likely to become secrecy juris-
dictions in the future. Examining the model’s predictive performance will therefore be
an important part of this thesis. Much like Hampton (1994) on a theoretical basis tries
to identify which small island economies might be potential offshore financial centers
in the future, this thesis sets out not only to identify international political factors as
determinants of which countries are secrecy jurisdictions and their degree of financial
secrecy today, but also of which countries might become secrecy jurisdictions, and have
a high degree of financial secrecy, in the future.
1.2 Research design and findings
To answer the research question posed above, I rely on existing data by combining a
number of datasets from, among others, the World Bank, The Tax Foundation, the
Correlates of War project, and Tax Justice Network, as well as collecting part of the
data manually. The empirical analysis proceeds in two steps. First, I conduct an
analysis investigating the likelihood of being a secrecy jurisdiction. In this analysis, the
dependent variable is a clear-cut choice of being, or not being, a secrecy jurisdiction.
Second, I conduct an analysis investigating the degree of financial secrecy of the secrecy
jurisdictions identified in this thesis. Here, I compare the secrecy jurisdictions with
each other, and the dependent variable is a question of degree of opacity. In addition,
I evaluate the predictive power, both in-sample and out-of-sample, of the international
political factors.
I find that none of the international political factors identified—hierarchical posi-

tion, dependency status, tax rates of surrounding countries, distance from financial
center or geographic diffusion—significally increase the likelihood of a country being a
secrecy jurisdiction, when controlling for domestic political factors, other country char-
acteristics, as well as regional effects. Two of the domestic political factors—governance

quality and legal system—perform well, however, indicating that being well-governed
and having a legal system of British origin (Common Law) is associated with a high
likelihood of being a secrecy jurisdiction. In addition, I find that there is a strong
association between having a small population and being a secrecy jurisdiction.
When investigating international political factors as determinants of degree of fi-

nancial secrecy, I find that most of the international political factors do no significantly
increase the degree of financial opacity in secrecy jurisdictions, with the exception of
dependency status. The results of this thesis indicate that being a dependent territory
is associated with a lower degree of financial secrecy. However, this effect pulls in the
opposite direction of what is expected, and does not support the notion of dependent
territories as jurisdictions with a higher degree of financial secrecy compared to indepen-
dent states. In addition, I find that both being an island and being affluent is associated
with a lower degree of financial secrecy, while being well-governed and having a small
population is associated with a higher degree of financial secrecy.
The analyses of determinants of secrecy jurisdiction status and degree of financial

secrecy mainly give credit to the domestic political factors, as well as the non-political
country characteristics. In addition, the analyses show that there are different mecha-
nisms at work when it comes to whether a country is a secrecy jurisdiction or not and
the jurisdiction’s degree of financial secrecy. While being well-governed and having a
small population is associated with both being a secrecy jurisdiction as well as having
a high degree of financial secrecy, being an island and being affluent is associated with
lower degree of financial secrecy, and has no significant effect on the likelihood of being
a secrey jurisdiction.
By examining the predictive power of the models in this thesis, I find that in-
cluding international political factors give a better ability of predicting which countries
1.3. OUTLINE 9
become secrecy jurisdictions compared to focusing solely on domestic political factors

and non-political country characteristics. This is only the case for models examining
secrecy jurisdiction status, and not models investigating degree of financial secrecy. The
predictive performance of the international model indicates that international political
factors should not be completely dismissed as important factors related to secrecy
jurisdictions, as they—in a more practical sense—can help identify which countries could
become secrecy jurisdictions in the future.
The findings of this thesis spur the need for further research on secrecy jurisdictions,
both to find improved ways of measuring and operationalizing secrecy jurisdictions, to
make sure that data are available for these jurisdictions, and to identify more political
factors at the international level. They also offer theoretical insight that can lead to
refinements of the approaches to research on secrecy jurisdictions. The findings have
implications for the policy initiatives and approaches launched to combat, and curb
the use of, secrecy jurisdictions in the future, where the emphasis should continue to
be put on making the secrecy jurisdictions themselves reform and make changes to
their domestic policies. However, more coordinated efforts at the international level
and multilateral approaches, are needed, as well as measures that shift the incentives of
secrecy jurisdictions toward cooperation and transparency.
1.3 Outline
This thesis proceeds as follows. In chapter two I introduce the concept of secrecy
jurisdictions. I do this by offering a definition of secrecy jurisdictions, make clear the
different components of the concept, and explain the different terms associated with this
concept. I continue by providing some background information to introduce the reader
to the phenomenon of secrecy jurisdicions and financial opacity.
In chapter three I introduce the reader to the relevant literature on political fac-
tors associated with secrecy jurisdictions. I organize the literature around two
dimensions already introduced in this chapter: domestic and international political
factors. The literature review makes clear that substantially more research has been
done on domestic political factors compared to international political factors.
I proceed by presenting the theoretical underpinnings of the empirical analysis in

chapter four. In this chapter I show how the discussion on international political factors
as determinants of secrecy jurisdiction status and degree of financial secrecy fits into the
larger discourse on international hierarchy, dependence, geopolitics and policy diffusion
by extending well-known theories in these fields, and apply them to the case of secrecy
jurisdictions. By doing this, I identify international political factors I expect to be
associated with secrecy jurisdictions, and derive hypotheses that will be tested in the
empirical analysis of this thesis.
In chapter five I present a research design that enables a quantitative analysis of

the international determinants of secrecy jurisdiction status and degree of financial
secrecy. I describe the data used in this thesis and how it has been gathered, provide
variable operationalizations, present the statistical models as well as the validation
methods that will be used, and discuss what inferences can be drawn from the analyses
I will be performing.
The results of the analyses are presented in chapter six, along with discussions of
the findings. The results of the analyses are validated through an evaluation of both
the in-sample and out-of-sample predictive performances of the models. This is followed
by robustness checks in chapter seven, where I evaluate how robust the results are to
different variable operationalizations and model specifications, and to the removing of
outliers and influential observations.
In chapter eight I give a brief presentation of implications for both theoretical ap-
1.3. OUTLINE 11
proaches to research on secrecy jurisdictions, the need for further research on this topic,
as well as implications for policies to curb financial opacity and the use of secrecy
jurisdictions, before I conclude the thesis in chapter nine.
Chapter 2
Secrecy jurisdictons
The provision of legally enforced

secrecy is a key attraction to
users of secrecy jurisdictions.
John Christensen
In this chapter, I introduce the concept of secrecy jurisdictions.1 I do this by first offering
a definition of secrecy jurisdictions, make clear the different components of the concept,
and explain the different terms associated with it. I return to detailed operationalizations
in chapter 5, but will introduce the reader to these concepts as they may be unknown to
many. I then provide some statistics to shed light on the issues of secrecy jurisdictions,
before I give a short introduction to the history of the development of these jurisdictions
and how they are used by both individuals and multinational corporations.
2.1 Definitions
2.1.1 Secrecy jurisdictions
Tax Justice Network (TJN) offer a definition of a secrecy jurisdiction that will serve
as a guideline for the way the term is used in this thesis: “A secrecy jurisdiction
1 Chapter quote from Christensen 2012:326
13
14 CHAPTER 2. SECRECY JURISDICTONS
provides facilities that enable people or entities escape or undermine the laws, rules and
regulations of other jurisdictions elsewhere, using secrecy as a prime tool” (Tax Justice
Network 2015a:3).
Shaxson offers a similar definition of a secrecy jurisdiction2 : “(...) a place that

seeks to attract business by offering politically stable facilities to help people or entities
get around the rules, laws and regulations of jurisdictions elsewhere” (2011:8). Shaxson
also points to several features of a secrecy jurisdiction: (1) it offers secrecy combined
with refusal to cooperate with other jurisdictions in exchanging information; (2) it offers
very low or zero taxes; (3) it ring-fences its economy from the services it offers, in order
to protect itself from its own offshore tricks; (4) its financial service industry is very large
compared to the size of the local economy; (5) its local politics is captured by financial
services interests (2011:9-10).
The main difference between the two definitions offered here is that TJN’s defini-
tion stress and emphasize the secrecy aspect of these jurisdictions. In short, the secrecy
provisions these jurisdictions offers are (a) banking secrecy laws in combination with
limited government right of inquiry; (b) allowance of establishment of entities whose
ownership is hard to identify; and (c) loose regulation combined with bureaucratic hur-
dles against information exchange with other countries (Palan, Murphy and Chavagneux
2010:33-35). Together, these secrecy provisions constitute the opacity that characterize
these secrecy jurisdictions.
2.1.2 Financial secrecy spectrum
In addition to being, or not being, a secrecy jurisdiction, one can talk about the existence
of a financial secrecy spectrum that secrecy jurisdictions are placed along (Tax Justice
Network 2015c:1). In TJN’s Financial Secrecy Index, secrecy jurisdictions are ranked
2 Shaxson
uses the terms ‘secrecy jurisdiction’ and ‘tax haven’ interchangeably, “depending on which
aspect I want to stress” (Shaxson 2011:9).
2.1. DEFINITIONS 15
according to their degree of financial secrecy and the scale of their trade in international
financial services. Using this approach, TJN move away from the notion of a clear-cut
choice of being, or not being, a secrecy jurisdiction, and acknowledge and emphasize that
the question of whether a location is a secrecy jurisdiction or not cannot be answered
simply by yes or no, but is a question of degree (Tax Justice Network 2013:1). Employing
this understanding of a secrecy jurisdiction, the question is not only if a location is a
secrecy jurisdiction or not, but also a question of how secretive these jurisdictions are,
understood as where they are placed along a financial secrecy spectrum. I return to a
detailed discussion of how this is operationalized in chapter 5, along with a list of which
countries and territories are considered secrecy jurisdictions in this thesis in accordance
with the definition offered in section 2.1.1.
2.1.3 The different terms of offshore banking
As pointed out by Gregory, “The terms associated with the world of offshore
banking—secrecy jurisdictions, tax havens, and offshore financial centers—are used
inconsistently and are often confusing” (2012:863). In this section, I briefly explain the
various terms, and explain why the term ‘secrecy jurisdiction’ will be used in this thesis.
I also explain secrecy jurisdiction in relationship with the other terms.
A ‘tax haven’ is normally understood as a country or jurisdiction with no or low

direct or indirect tax rates compared with other states (Gregory 2012:863). This is
sometimes also referred to as “low or now tax jurisdictions”. An ‘offshore financial center’
(OFC), on the other hand, refers to a country or jurisdiction that offers sophisticated
financial instruments and services (Gregory 2012:863). Often these jurisdictions are
characterized by the location of branches and subsidiaries of major international banks.
Finally, ‘banking secrecy’ is understood as a “bank’s legal obligation not to disclose
information obtained from its customers through their banking relationship” (Auwarter
in (Gregory 2012:863)). Countries and jurisdictions characterized by banking secrecy—or
other secrecy provisions—are often referred to as ‘secrecy jurisdictions’.
Shaxson (2011) use the term ‘secrecy jurisdiction’ interchangeably with the term
‘tax haven’, depending on which aspect—taxation or secrecy—he wants to stress, and
Palan et al. (2010) understand secrecy jurisdictions as similar to tax havens, the only
difference being that opacity, rather than level of taxation, is considered the key trait of
these locations. Palan et al. (2010) also underscore that the term ‘secrecy jurisdiction’ is
the term most often used today by those campaigning for reform in the area of financial
secrecy and international taxation (2010:3).
In this thesis, I will primarily use the term ’secrecy jurisdictions’, as defined in
section 2.1.1 above, and follow the understanding of Palan et al. by treating it as similar
to tax havens, but with secrecy as the main feature. This is because low taxation and
sophisticated financial services are not the main benefits of using offshore banking; what
really matters are these jurisdictions’ total confidentiality (Gregory 2012:865).
Of course, there are significant overlaps in these terms, and many jurisdictions of-
fering no or low taxation also offer sophisticated financial services and financial secrecy
provisions etc. Still, by primarily focusing on secrecy jurisdictions, the focus of this
thesis will be on the real attraction of these countries and jurisdictions: the veil of
secrecy that ensures that stakeholders can operate largely in the dark.
2.2 Background
2.2.1 Statistics
It is notoriously hard to pin down numbers for how much money are located in, or
passing through, secrecy jurisdictions. In this section, I provide rough estimates to
give an impression of what kind of numbers we are talking about, and to show that
secrecy jurisdictions are not a marginal phenomenon, but central components of today’s
globalized economy.
2.2. BACKGROUND 17
In 2010, IMF estimated that the balance sheets of small island financial centers
alone added up to $18 trillion, equivalent to a third of the the world’s GDP (Shaxson
2011:8). More than half of cross-border lending is conducted through offshore jurisdic-
tions, and around a third of foreign direct investment by multinational corporations
is invested, or at least passes, through secrecy jurisdictions (Palan et al. 2010:50-52;
Shaxson 2011:8). The Bank of International Settlements estimate that offshore bank
deposits of individuals totales $2.3 trillion, which means that approximately one-fifth of
all bank deposits of individuals are held offshore (Palan et al. 2010:62). Illicit capital
flight, or illicit money flows, going to secrecy jurisdictions are estimated to between
$1 trillion and $1.6 trillion annually (Palan et al. 2010:71). In a report by Global
Financial Integrity, illicit financial flows from developing countries are estimated to $
991 billion in 2012, and between 2003 and 2012 developing countries are estimated
to have lost $6.6 trillion in illicit outflows (Kar and Spanjers 2014:7). These illicit fi-
nancial flows consist of money from corruption, criminal activities and illicit capital flight.
Palan et al. claim,
Tax havens undoubtedly facilitate tax evasion, tax avoidance, money launder-
ing, and corruption, but no one is able to estimate the sums involved with any
degree of accuracy. Consequently, no one is able to address the corruption
that underpins this market. (2010:76)
Although the above-mentioned numbers are rough estimates, and the inaccuracy of the
numbers make it hard to address the full consequences of secrecy jurisdictions, the esti-
mates still give an indication of the role secrecy jurisdictions play in the global financial
system. The numbers show with absolute certainty that secrecy jurisdictions are not a
marginal phenomenon that researchers and politicians need not concern themselves with.
Rather, the estimates provide grounds for claiming that secrecy jurisdictions are central
components of today’s economy that deserve more scholarly and political attention.
2.2.2 History
Sometimes secrecy jurisdictions are understood as a new phenomenon associated with

the current wave of globalization and technological revolution. Although it is true that
there have been a rapid increase in the number and scope of secrecy jurisdictions since
the 1970s, this development can be traced all the way back to the end of the 19th
century. In this section, I provide a brief introduction to the history of the development
of secrecy jurisdictions to show that this phenomenon has been a part of the global
economy for a long time.
Palan et al. (2010:108) distinguish between three stages in the development of tax
havens and secrecy jurisdictions. The first stage lasted from the late 1800s to the 1920s,
witnessing the emergence of most of the familiar instruments of secrecy jurisdictions.
Permissive laws were passed in the states New Jersey and Delaware in order to attract
capital from their wealthier neighbors, followed by other European countries, first and
foremost Switzerland and the United Kingdom.
During the second stage, from the end of World War I through the early 1970s,
the proliferation of the tax haven strategy started. The Swiss banking law of 1934,
which placed banking secrecy under the protection of criminal law, further developed
Switzerland as a secrecy jurisdiction, and this practice was also soon copied by other
countries and jurisdictions (Palan et al. 2010:120). From the end of the 1920, the City of
London developed as “the world’s premier financial center” (Palan et al. 2010:135), with
the dependent territories and jurisdictions functioning as a network of offshore satellites
in all parts of the world3 (Shaxson 2011:14-16).
In the third stage, from the early 1970s and through the late 1990s, there was an
explosion in the number of secrecy jurisdictions, leading into what is called “the golden
3 Shaxsoncalls this “the British spider’s web”, claiming, “The British havens scattered all around the
world’s time zones attract and catch mobile international capital flowing to and from nearby jurisdictions,
just as a spider’s web catches passing insects” (2011:14-16).
2.2. BACKGROUND 19
years” of tax havens. This increase in number can partly be explained by the 1970s
financial crisis caused by high oil and raw material prices, accelerating inflation and
declining growth, propelling multinational enterprises to seek ways to increase their
profitability. And, as Palan et al. puts it, “(...) tax havens were only too happy to help”
(2010:140). Furthermore, development in communication and transportation made tax
havens more easily accessible (Palan et al. 2010:140-141).
Even now, new secrecy jurisdictions are being created, and used by individuals
and multinational enterprises in new ways. At the same time, more and more organi-
zations and institutions are comitting themselves to fighting secrecy jurisdictions, with
OECD, EU and G20 at the forefront. An increasing number of states are also adopting
policies aimed at combating financial secrecy.
2.2.3 The use of secrecy jurisdictions
Both individuals and corporations use secrecy jurisdictions. For obvious reasons,
proponents and opponents of secrecy jurisdictions have different explanations of why
and how these jurisdictions are used. The proponents emphasize legal corporate tax
planning, healthy tax competition and economic efficiency, while the opponents point to
tax evasion, capital flight, corruption and money laundering (see e.g. Christensen 2012,
Dharmapala 2008, and Rose and Spiegel 2007). In this section I, briefly summarize how
corporations and individuals use secrecy jurisdictions, and the main opportunities these
jurisdictons offer.
For individuals, the main motivation for using secrecy jurisdictions is pretty straight-
forward: they want to hide away their wealth from the relevant tax authorities. This
is mainly done in three ways: (i) relocating to a secrecy jurisdiction, (ii) becoming a
“permanent tourist”, or (iii) shifting capital into secrecy jurisdictions through various
offshore instruments, such as trusts and foundations (Palan et al. 2010:81-94). The
primary goal of these techniques is to achieve secrecy in financial affairs, and to add
layers of secrecy by making sure the money are cloaked under strong bank secrecy laws
or impenetrable trust mechanisms. For multinational corporations, however, the use of
secrecy jurisdictions is a little more complex.
According to Dharmapala, “(...) corporations use tax havens for legal tax avoid-
ance and tax-planning activities” (2008:666). It is important to note the word legal :
most of the activities in secrecy jurisdictions pursued by corporations are, although
questionable, within the law. The tax avoidance and tax planning of multinational
enterprises mentioned by Dharmapala takes the form of profit shifting, whereby the
corporations use secrecy jurisdictions to reduce their tax liabilities (Schindler and
Schjelderup 2013:3; Dharmapala 2008:667).
The profit shifting is usually done through either transfer pricing or debt shifting.
Transfer pricing happens when affiliates of the same multinational corporation trade
goods and services among themselves, and locate their activities in a way to ensure
that payments from other affiliates flow towards those located in secrecy jurisdictions
(Dharmapala 2008:667). Multinational corporations can also use the strategy of debt
shifting, where debt is shifted from low-tax to high-tax jurisdictions. The essence
of profit shifting, in other words, is to shift the profits of the company into low-tax
jurisdictions in order to minimize the tax costs, while at the same time shifting the costs
of the same company into high-tax jurisdictions, where these costs can be deducted
against tax.
While profit shifting and tax avoidance may be legal, secrecy jurisdications also
create opportunities for a variety of illegal activities, ranging from tax evasion to corrupt
practices and money laundering. Shaxson explains a practice called laddering, where a
corporation’s structure is sliced between several jurisdictions, where each jurisdiction
“(...) provides a new legal or accounting ’wrapper’ around the assets”, deepening
the secrecy and complexity of the corporation’s structures and assets (2011:25). This
2.2. BACKGROUND 21
practice of laddering and added secrecy provides a fertile ground for illegal activites.
The use of secrecy jurisdictions for individuals to illegally evade home-country taxes is
a known problem (Dharmapala 2008:665). Both Christensen (2012:325-326) and Rose
and Spiegel (2007:1329) claim that these jurisdiction offer a supply side to corrupt
practices, and point to the fact that these jurisdictions facilitate money laundering,
fraud, embezzlement, insider-trading and bribe-paying.
For individuals seeking to hide away their wealth, secrecy provisions are the most
important reasons for using secrecy jurisdictions. For multinational corporations
financial secrecy is important, but in addition, provisions regarding corporate structures
and flexible incorporation of company entities are essential.
To sum up, secrecy jurisdiction is a multifaceted concept. The essence of secrecy

jurisdictions, however, is the provision of legally enforced secrecy, which makes them
attractive for both individuals and multinational corporations wanting to escape
regulation. Secrecy jurisdictions are an integrated part of the international system, and,
as the historical account of this chapter shows, have been so for quite some time.
Chapter 3
Literature Review
Some of the characteristics of

tax havens are well-documented
in the literature.
Dharmapala and Hines
In this chapter, I introduce the state of the art in the literature on political factors
characterizing secrecy jurisdictions.1 The literature review is organized around two
dimensions: the domestic political factors and the international political factors as-
sociated with secrecy jurisdictionss. As this literature review reveals, there is done
substantially more research on domestic political factors compared to international
political factors. This underscores the necessity for more research on the relationship
between international political factors and secrecy jurisdictions, which resonates well
with the research question of this thesis.
Before presenting the different contributions, it may be helpful to make the dis-
tinction between the two dimensions—domestic factors and international factors—even
more clear. Domestic political factors relate to the internal structures of the countries
themselves. These are factors the countries have control over and to a certain degree can
1 Chapter quote from Dharmapala and Hines 2009:1058
23
24 CHAPTER 3. LITERATURE REVIEW
change themselves. Such structures are legal systems, regulatory institutions, political
institutions and so on. International political factors, on the other hand, relate to
external factors that give rise to secrecy jurisdictions. These external factors can create
a “favorable environment” for the emergence of secrecy jurisdiction activities, such as
protectionist banking systems in other countries, and financial centers in the near vicinity
securing a substanital flow of capital. These are characteristics not of the countries
themselves, but of the environment the countries are situated in. The countries have not
produced this environment, and cannot influence it in a significant way. However, the
countries can take advantage of the conditions they face in this environment (Palan et al.
2010:18). External factors are also related to outside dominance. That is, a country may
experience that another country exerts influence over them, for example by being in an
asymmetric power relationship with another country. In other words, while domestic
factors relate to the countries themselves and the structures they control, international
factors relate to the environment the countries are situated in and the structures they
can take advantage of, as well as the outside dominance other countries may exert over
them.
3.1 Domestic political factors
Quite a few studies have examined the association between certain domestic political
factors and secrecy jurisdictions. In this section, I present five related, yet distinct,
aspects that together will hopefully give an understanding of the scholarly attention
given to domestic political factors related to secrecy jurisdictions thus far.
3.1.1 Governance quality
The quality of governance seems to be an imporant determinant of which countries and

territories become secrecy jurisdictions and which do not. According to Dharmapala
and Hines, ”there are almost no poorly-governed tax havens” (2009:1058). Using the
Worldwide Governance Indicators (WGI), which includes measurements of voice and
3.1. DOMESTIC POLITICAL FACTORS 25
accountability, political stability, government effectiveness, rule of law, and the control
of corruption, the authors find that the association between good governance and the
likelihood of being a secrecy jurisdiction is both statistically significant and quantita-
tively very large (Dharmapala and Hines 2009). Dharmapala and Hines propose an
explanation where only well-governed countries credibly can commit not to expropriate
foreign investors or not to mismanage the economy. Such a commitment is necessary to
attract high levels of foreign investments, and secrecy jurisdictions are therefore thought
to be unsuccessful in the abscence of high-quality governance.
While governance quality can be treated as a unitary concept, it can also be bro-
ken into individual parts. In researching the determinants of offshore financial centers,
Rose and Spiegel (2007) test the effect of rule of law, political stability and regulatory
quality, all dimensions encompassed by the concept ‘governance quality’ and included
in the WGI. Somewhat surprising, Rose and Spiegel find that neither rule of law nor
the political stability of secrecy jurisdictions seems to be relevant determinants (Rose
and Spiegel 2007:1316). However, countries with higher regulatory quality are much
more likely to attract assets and to be a secrecy jurisdiction than countries with lower
regulatory quality.
It seems safe to claim that governance matters, and that good governance is asso-
ciated with higher likelihood of being a secrecy jurisdiction. It is interesting to note,
however, that while Dharmapala and Hines find a strong and significant effect of
governance quality when treated as a unitary concept, Rose and Spiegel find that when
broken into separate dimensions, neither rule of law nor political stability has an effect,
while regulatory quality, on the other hand, seems to be a relevant determinant of a
country being a secrecy jurisdiction.
3.1.2 Political stability
Although political stability is included in the measurement of governance quality in the

WGI, it is an important dimension that deserves more attention in and of itself. In the
WGI, political stability is understood as the likelihood of destabilization or overthrowing
of a government by unconstitutional or violent means (Kaufmann, Kraay and Mastruzzi
2009:6). This is clearly an important part of the concept ‘political stability’, and Hamp-
ton and Christensen (2007) highlight that negative risk perceptions related to this kind
of instability affect the willingness to hold assets offshore. However, political stability
can also be understood in another way: the stability of domestic financial laws and
rules. Shaxson and Christensen capture this aspect in their notion of ‘the double-edged
stability requirement’, comprising of two elements: stability and rule of law, along with
a flexible democracy so that democracy does not “get in the way of finance” (2013:73-74).
The focal point in this latter understanding of political stability is not so much
stability in the form of absence of international turbulence or the destabilization of
government, but rather, stability in the form of safety from rules and regulation, and
an assurance that the needs of finance is protected from political challenge. Shaxson
and Christensen claim that this double-edged stability is a requirement for a country
becoming a successful secrecy jurisdiction.
3.1.3 Size and island status
A considerable amount of the literature on secrecy jurisdictions is centered on the

relationship between Small Island Economies (SIEs) and secrecy jurisdictions. Many of
the world’s SIEs are dependent territories or subnational jurisdictions, although a few of
them are independent countries. The fact that so many SIEs are secrecy jurisdictions are
often explained by economic factors like restricted comparative advantages, diseconomies
of scale, high transport costs and small labor markets, or physical-geographic factors like
the boundedness and insularity of islands (Hampton and Christensen 2002; Baldacchino
2010). However, there are a couple of political factors associated with size and island
3.1. DOMESTIC POLITICAL FACTORS 27
status and secrecy jurisdictions worth mentioning.
Firstly, as a way of overcoming the challenges and restrictions of small size, small
states and territories can use the capacity to formulate their own regulatory structures
in a way that attracts foreign capital (Hudson 2000). Of course, larger states can also do
this, but in this case it is directly linked to the small size of the jurisdictions employing
this as a competitive strategy to overcome some of the disadvantages of being a small
state.
Secondly, Hampton and Christensen (2002) point to a specific culture characteriz-

ing small islands and microstates that is well suited to facilitate the successul emergence
of secrecy jurisdictions. This culture includes partial or absent media independence,
absence of higher education institutions or an intellectual community that can critique
and oppose policy, in addition to a suppression of whistle-blowing explained by insularity
and inward-looking focus in these states and territorities.
The fact that most secrecy jurisdictions are small countries or territories is one of
the most robust findings in the literature on determinants of which countries become
secrecy jurisdictions (see e.g. Dharmapala and Hines 2009, Slemrod and Wilson 2009,
and Kanbur and Keen 1993). This if often explained by either economic, geographical
or political factors. Although the political factors are of most interest in this thesis, it
is safe to presume that it is the interaction between all of these factors that account for
why so many secrecy jurisdictions are small countries or territories.
3.1.4 Level of democracy
Associated with the issue of size, is the democratic challenges that follows from being
a small polity. Hampton and Christensen (2002; 2007) point out that small polities
often have few democratic checks and balances upon the executive power, and often a
weak or no formal parliamentary opposition. Such weak democracies with few checks
and balances are vulnerable of being captured by financial elites and the interests of
international capital, making them susceptible to becoming secrecy jurisdictions.
Related to another aspect discussed earlier, the double-edged stability requirement

presented in section 3.1.2, is the soft authoritarianism necessary to keep finance
protected from democratic challenge, and to stop democratic politics to interrupt
the business of making money. Shaxson and Christensen claim that in order to be a
successful financial center, financial actors must “take deliberate and sustained steps
to neutralise democracy and undercut potential democratic challenges to finance”
(2013:74). Democracy not getting in the way of finance is an important aspect of secrecy
jurisdictions, making the level of democracy a relevant determinant of which countries
become secrecey jurisdictions and which do not.
3.1.5 Legal system
The last domestic political factor given scholarly attention worth mentioning in the
literature on secrecy jurisdictions, is the countries’ legal systems. Dharmapala (2008)
finds that secrecy jurisdictions are more likely to have British legal origins, and less
likely to have French legal origins, compared to non-secrecy jurisdictions. Dharmapala
and Hines (2009) find that the effect of legal origin on tax haven status is significant, and
explain this by the fact that most capital exporting countries (e.g. the United Kingdom
and the United States) have a legal system of British origin, and that a legal system
matching those countries could raise the return of being a secrecy jurisdiction (2009:1062).
However, Blanco and Rogers (2010) find that legal origins do not have a signifi-
cant effect on attracting foreign capital. This might question the explanation of
Dharmapala and Hines (2009). The prevalence of legal systems of British origins in
secrecy jurisdictions, may rather be explained by the simple fact that so many secrecy
jurisdictions are former British colonies or current dependent territories, and thus
countries and territories with British legal origins.
3.2. INTERNATIONAL POLITICAL FACTORS 29
Exploring the role of Delaware as a domestic tax haven, Dyreng, Lindsey and
Thornock (2013) claim that Delaware’s legal system is an important factor because it
can provide significant legal benefits compared to other states. Delaware has a separate
court system devoted to resolving corporate legal disputes, and has well-established and
predictable laws and precedents. This leads Dyreng et al. to conclude, “(...) few other
states can effectively compete with Delaware’s economies of scale and legal efficiencies in
the market for incorporation” (2013:753). It makes sense that legal systems making it
attractive for firms to incorporate, often with strong anti-takeover statutes (Bebchuk and
Cohen (2002)), will attract foreign capital, and be associated with secrecy jurisdictions.
3.2 International political factors
Substantially more research has been done on domestic political factors characterizing
secrecy jurisdictions than on international political factors. However, a few scholars have
also investigated political factors on the international level. In this section, I present the
international political factors that have received scholarly attention thus far.
3.2.1 Dependency status
An important political factor associated with secrecy jurisdictions is a country’s depen-

dency status, that is, whether it is an independent state or in a dependent relationship
with another metropolitan country. Eden and Kudrle (2005) note that about half of all
secrecy jurisdictions are linked to an OECD member country, either as a former colony
or dependency, possession or free association. Many of these are linked to Britain,
either as an Overseas Territory, Crown Dependency or Commomwealth member country
(Christensen 2012:332). According to Dharmapala, secrecy jurisdictions are “somewhat
more likely to be dependent territories, rather than sovereign states” (2008:663).
Following Baldacchino, the explanation of the association between dependence

and secrecy jurisdictions can be found in the fact that these dependent territories
occupy a fuzzy middle ground between full sovereignty and conventional municipality
(2010:xxii+19). The dependent territories have enough jurisdictional capacity so that
they can carve out a space—juridical, regulatory and legislative—of reduced regulation
essential to the emergence of offshore finance (Palan 1998; Vlcek 2007), and at the same
enjoy the benefits of the stability that follows being linked to a major metropolitan
economy and being within a currency or monetary union with a major trading currency
(Hampton 1996; Hampton 1994). It is this duality, this ‘within, yet without’-aspect of
these territories, that makes them suitable as secrecy jurisdictions.
3.2.2 Safe haven
Associated with the issue of political stability on the domestic level, is the notion of
political stability of a country in an international context. Political stability here,
is related to the idea of a secrecy jurisdiction functioning as a sanctuary regarding
international conflicts and instability. Shaxson and Christensen (2013) claim that
part of the attractiveness of a secrecy jurisdiction is the idea of it being a safe
haven from international turbulence. For a secrecy jurisdiction to constitute as a
real safe haven, it should be situated in a region of instability and turbulence, and
can thus establish itself as a peaceful oasis where assets and capital safely can be funneled.
Christensen (2012) also claims that secrecy jurisdictions can be seen as a reaction
to the high tax and strict regulatory regimes imposed by other governments. Surrounded
by “overly protectionist, anti-competitive, and over-regulated onshore banking systems”
(Christensen 2012:327), secrecy jurisdictions can establish themselves as sancturaries
from taxation and regulation.
The determinants and motivations of being a secrecy jurisdiction can in both of

these instances be found on the international level; in the face of international turbulence
and strict regulation in other countries, offshore banking services emerges.
3.2. INTERNATIONAL POLITICAL FACTORS 31
To summarize, a substantial amount of research has been done on the association

between domestical political factors and secrecy jurisdictions, such as governance quality,
political stability, size and island status, level of democracy and legal system. However,
only a few scholars have investigated international political factors in this regard.
Moreover, the association between the few international political factors identified in the
literature and secrecy jurisdictions, have not been investigated in a quantitative way.
There is therefore a need to fill this gap in the literature on secrecy juridictions, by
performing more systematic analyses of the association between international political
factors and secrecy jurisdictions.
Chapter 4
Theory
To understand tax havens, one

needs to appreciate the
geopolitical and environmental
conditions that gave rise to
them in the first place.
Palan, Murphy and

Chavagneux
In this chapter, I present the theoretical underpinnings for the empirical analysis
conducted in this thesis.1 I show how the discussion on international political factors as
determinants of secrecy jurisdiction status and degree of financial secrecy fits into the
larger discourse on international hierarchy, dependence, geopolitics and policy diffusion
by extending well-known theories in these fields, and apply them to the case of secrecy
jurisdictions.
In addition, I develop a framework that the international political factors can be

analyzed within. I start by laying out four different motivations for countries to become
secrecy jurisdictions. Each of these motivations underpin the theories and mechanisms
1 Chapter quote from Palan, Murphy and Chavagneux 2010:17
33
34 CHAPTER 4. THEORY
presented in this chapter, and are explicitly connected to these. For each of the
international political factors, I derive hypotheses that will be tested in the empirical
anaylses in chapter 6. I organize the theories and mechanisms along two dimensions:
position and location. Position is related to a country’s position in the international
systems regarding issues of power and dependence, while location is related to the
geographic region a country is located in regarding issues of policy and regimes.
4.1 Motivations
The main reason for a country to become a secrecy jurisdiction is simple: to attract
mobile capital (Palan et al. 2010:21). Secrecy juridictions do this in different ways, and
offer a wide range of services and provisions in order to capture capital flowing across
borders, but the underlying driving force of all secrecy jurisdictions is the search for
capital and finance. However, one can go one step further and ask, “Why do these
countries want to attract mobile capital?” I propose four different answers to this
question, and each of them serve as a motivation underlying the theories presented in
this chapter, and the hypotheses derived from these theories.
First of all, I propose that countries become secrecy jurisdictions, and seek to
capture capital and finance, because they want to gain power, status and influence.
Among the top ten exporters of financial services, one can find relatively small countries
like Luxembourg, Cayman Islands, Singapore and Hong Kong (Tax Justice Network
2015a). A motivation for these countries can be to use their increasing expertise in
financial services to gain a more prominent position in the global economic system in
the future than they otherwise would have had. In addition, countries may agree to be
“used” as secrecy jurisdictions in order to please a more powerful state. By doing this,
the country hopes the connection to the more powerful state in turn will give them a
status they otherwise would not enjoy. Hence, I propose that countries become secrecy
jurisdictions as a way of gaining more influence, power and status, and below I connect
4.1. MOTIVATIONS 35
this to a country’s hierarchical position in the international system, as well as a country’s

dependency status, and how this could serve as a determinant of secrecy jurisdiction
status and degree of financial secrecy.
Second, I propose that countries seeking to attract capital do this as a form of

rent-seeking. That is, to obtain economic and political gains without reciprocating.
Becoming a secrecy jurisdiction is then just another way of getting easy access to money
and other rewards. I relate this to dependent territories’ “managed dependency”, where
these territories exploit relations with their patron economies to extract political and
economic privileges, thus making dependency status a determinant of secrecy jurisdiction
status and degree of financial secrecy.
Third, for many countries, becoming a secrecy jurisdiction is a competitive strat-

egy. With other countries imposing strict regulations on individuals and multinational
corporations, secrecy jurisdictions engage in what is often called a “race-to-the-bottom”
by specializing in services other countries do not provide and by offering substantially
lower tax rates. At its heart, secrecy jurisdictions use financial opacity and low tax
rates as a competitive strategy, and I relate this to the ‘safe haven’-aspect of secrecy
jurisdictions below.
Finally, attracting capital may be a way for countries to reap economies-of-scale

benefits, so long as other surrounding countries engage in the same behavior. There
are mutual rewards to be gained from the clustering of countries with similar tax and
secrecy regimes, and by becoming a secrecy jurisdiction, countries may enjoy some of
the benefits of economies-of-scale, as well as other less-tangible rewards of having similar
regimes. Below, I relate this to the geographic diffusion of secrecy jurisdictions.
These four motivations should be understood as underlying logics of the interna-

tional political factors I present in this chapter. While it is true that countries become
secrecy jurisdictions in order to attract mobile capital, there are many different reasons
for why countries are interested in capturing capital and finance. While those presented
above are the underlying logics and motivations, I will now go in detail on some of the
theories and mechanisms that can be used to explain why countries become secrecy
jurisdictions and pursue a high degree of financial secrecy.
4.2 Position
International political factors along the position dimension are related to a country’s po-
sition in the international system. Issues of power, status and dependence are important
factors of this dimension, and the focus is on the systemic environment that gives rise to
secrecy jurisdictions. In this section, I outline two determinants of secrecy jurisdiction
status and degree of financial secrecy along this dimension: hierarchical position and
dependency status.
4.2.1 Hierarchical position
Palan et al. claim that over the years, more and more countries have adopted the
‘tax haven strategy’ and joined the ‘tax haven game’ (2010:141). What could spur
countries into becoming secrecy jurisdictions? More specifically, what kind of hi-
erarchical relationships between countries could be expected to be associated with
countries becoming secrecy jurisdictions? By using a theory of financial integration,
I propose that countries that have a weak hierarchical position in the international
system will use the strategy of becoming a secrecy jurisdiction, and the strategy of
increasing their degree of fincancial secrecy, to gain a stronger hierarchical position in
the international system, moving itself from the periphery of the international system
to the very center. This is related to the motivation of gaining more power, influence
and status by becoming a secrecy jurisdiction, as described in section 4.1. This entails
countries becoming secrecy jurisdictions having a clear agenda, and that the process
of a country establishing itself as a secrecy jurisdiction is the result of a conscious strategy.
4.2. POSITION 37
It is when one state possesses authority over another state that hierarchy exists
in the international system (Lake 2007:56). However, the extent of authority will vary,
and the hierarchical relationships can take the form of dependencies, protectorates,
spheres of influence, differentiating capabilities and so on. Many scholars agree that
there is a wide variety of hierarchical relationships in the international system, and Lake
emphasizes that anarchy and hierarchy are not mutually exclusive:
[I]t is a fallacy of division to assume that because the system is anarchic

all relationships within that system are anarchic as well. Relations between
states can be and often are characterised by varying degrees of authority and,
in turn, hierarchy. (2009:37)
Although the international system as a whole must be understood as anarchic without

a single overarching authority, the relationships between countries within this system is
characterized by varying degrees of power and authority.
These hierarchical relationships create a system with dominant states and subor-
dinate states, great powers and small powers etc. According to Clark,
This hierarchy is commonly assigned in terms of politico-strategic power,

yielding the traditional groupings of Great Powers, medium powers, and small
powers. (...) Outside a statist perspective, it may be analysed in terms of
centres or cores, semi-pheripheries and peripheries. Its key theme is that
disparities in capability are reflected, more or less formally, in the decision
making of the society of states. (1989:2)
On the basis of capabilities, countries find themselves grouped within the international
system, and in hierarchical relationships with other countries in this system. These
relationships, in turn, have policy consequences, and influence countries’ behavior (Lake
2007:71).
Hierarchical relationships can be understood in many different ways, but in this

thesis I follow the notion of hierarchy as core-periphery relations. According to Hanna,
“The world economy can be divided into three zones: the core, the periphery and the
semiperiphery” (1995:454). Places, regions and countries can be classified as either core,
semiperiphery or periphery based on their capabilities and material conditions. Hanna
stresses that core and peripheries “only form in relation to each other”, which means
that the configurations are not fixed, and the core-periphery relations can change over
time (1995:454). The core-periphery relation is a horizontal relation homologous to the
vertical relation (top-down) often associated with hierarchy, with actors in the core
exerting authority over those in the periphery (1995:454). Using world cities as actors,
Friedmann (1986) illustrates hierarchy as core-periphery relations, as shown in figure
4.1. This can easily be extended from cities to countries, and thereby illustrate the
core-periphery hierarchical relationships characterizing the international system.
Figure 4.1: The hierarchy of world cities as core-periphery relations, copied from Friedmann
1986:74
Looking at small powers in a weak hierarchical position, Katzenstein in his book Small
States in World Markets (1985) analyze how small European states differ from their
large industrial counterparts in how they respond to economic change. Katzenstein
4.2. POSITION 39
shows that these small states respond to the challenge of economic change by employing
a strategy of international liberalization, claiming,
The securing of a liberal international economy has been an overriding ob-

jective for the small European states. Since the position of small states is
intrinsically weak, this group of states has a strong interest in lowering tar-
iffs, in preventing the formation of economic blocs, and in strengthening the
principle of multilateralism. (1985:40)
This is echoed by Lake, who also claims that the weaker hierarchical position a country
finds itself in, the more economically open it will be (2009:39). Small states press for
more free trade and economic liberalization to diffuse dependence and vulnerability,
and move itself from the periphery in a hierarchic system, to the core of an integrated
economy. Small states’ pursuit of financial integration where the world economy is
moving towards an open, integrated economy is therefore not based on altruism, but
on self-interest, and is a conscious political strategy in order for small states to become
more powerful and influential actors in the international system.
The theory of small states employing a strategy of international liberalization to

gain a stronger hierarchical position, can perhaps also be extended to smaller countries
in the periphery of the international system employing a ’tax haven strategy’.2 Following
this logic, countries with a weak hierarchical position can become a secrecy jurisdiction,
and take measures to increase their financial secrecy, as a conscious strategy of moving
itself from the periphery of the international system to the very core of it, at least to
the center of an integrated global economy. An initial economic small power could
in this way develop into a medium or great economic power. This could explain why
tiny Cayman Islands, an overseas dependent territory of the UK, with a land area of
only 264 sq km and a population of 56 000 have become the sixth largerst exporter
of financial services in the world, following larger countries like the United States, the
2 Small country does not only refer to smallness in size (land area, population, economic size etc.),
but also refers to a country with a relatively weak hierarchical position in the international system.
United Kingdom, Luxembourg, Germany and Switzerland (Tax Justice Network 2015a).
And why somewhat larger Luxembourg with its 2,586 sq km and 570 000 inhabitants
has become the world’s third largest exporter of financial services, accounting for over
11 percent of the world’s total export of financial services (Tax Justice Network 2015a).
Over the years, secrecy jurisdictions have established themselves as a nexus in the
global economy. The numbers provided in section 2.2.1 of this thesis show that secrecy
jurisdictions are not a marginal phenomenon, but rather central components of today’s
global economy. Almost all major financial players—from wealthy individuals to invest-
ment funds to transnational corporations—engaged in international trade and financial
investments have to relate to secrecy jurisdictions and the services they provide. Small
and weak countries can be moved from a position in the periphery of the international
system into a position of influence at the core of the system by pursuing the ’tax haven
strategy’ and becoming secrecy jurisdictions.
Hypothesis 1:
A country in a weak hierarchical position in the international system is more likely to be
a secrecy jurisdiction, and have a higher degree of financial secrecy, than a country in a
strong hierarchical position.
As mentioned in the previous chapter, a few scholars have noted that many secrecy
jurisdictions are dependent territories (see e.g. Eden and Kudrle 2005, and Christensen
2012). This does not necessarily mean that these territories become secrecy jurisdictions
because of their dependency status and their linkages to a metropolitan patron. Countries
like Switzerland, Austria and the United Arab Emirates challenge this understanding of
only dependent territories being secrecy jurisdictions. However, there are several reasons
for why dependency status could explain which countries become secrecy jurisdictions,
4.2. POSITION 41
and their degree of financial secrecy. I argue that this can be explained primarily by
two factors: firstly, being a dependent territory of a major metropolitan actor provides
autonomy alongside security and political stability—a fertile ground for the emergence
of offshore finance, and secondly, that these dependent territories are being “set up” or
encouraged to function as secrecy jurisdictions by their patrons, in order for the patrons
to use them to their own advantage. This is related both to the motivation of rent-
seeking and the motivation of gaining a more prominent position presented in section 4.1.
While dependency status is related to the notion of hierarchical position laid out
in the previous section, the underlying logics of the factors are different. While many
dependent territories are in a weak hierarhical position, the fertile ground for the
emergence of offshore finance in dependent territories should not be expected to be
evident in other countries in a weak hierarchical postion. And the outside dominance
exerted by other countries should be greater of a metropolitan country over a dependent
territory, compared to that of a powerful country over a country in just a weaker
hierarchical position.
To understand why dependency status could lead to countries becoming secrecy

jurisdictions, the ‘within, yet without’-aspect of dependent territories is important to
understand. According to Baldacchino, dependent territories “occupy the fuzzy middle
ground between full sovereignty and conventional municipality” (Baldacchino 2010:19).
This means that many of the dependent territories have autonomy over important issues
like taxation, legislation and internal affairs. This autonomy can, as in the instances of
secrecy jurisdictions, be used to carve out spaces of reduced regulation, thereby facili-
tating the emergence of offshore finance. At the same time, the dependent territories’
defence and foreign affairs are often conducted by their patrons (Hampton 1994:239;
1996:108). In addition, dependent territories are often in monetary unions with major
trading currencies, creating a “relatively risk-free financial space” that would not have
been possible with an independent local currency (Hampton and Christensen 2002:1665;
Hampton 1994:238). When a major metropolitan patron is responsible for the foreign
affairs and defence of a dependent territory, as well as the monetary policy, this provides
the dependent territory with both security and political and economic stability that,
alongside autonomy of internal affairs, allow for a fertile ground for the emergence of
offshore finance and the development of the dependent territory into a secrecy jurisdiction.
Baldacchino calls this process of exploiting relations with onshore economies to

extract political and financial privileges “managed dependency” (Baldacchino 2010:112).
Following the logic of managed dependency, the dependence of a territory on a major
patron is turned into a strategic resource that the territory can use to its advantage. The
dependent territories transfer their patron’s good governance reputation to themselves,
enjoy the advantages of their patron’s foreign relations, and have their borders secured
by their patron’s military forces, while at the same time retaining autonomy over
domestic affairs. Together, these factors allow for dependent territories to opt for more
flexible and less rigourous regulation, less transparency and lower tax rates.
The managed dependency-thesis, where dependence on a major patron economy is

turned into a strategic resource, is not the only way to explain the relationships between
dependent territories and secrecy jurisdictions. Another way of understanding this
relationship is that dependent territories are being “set up” and encouraged to increase
their financial secrecy, and to establish themselves as secrecy jurisdictions, by their
patrons, either to reduce their dependence on aid, or to be used by financial elites in the
patron countries. Noticing that many secrecy jurisdictions are linked to OECD countries
as a dependency, possession or free association, Eden and Kudrle claim that through
these linkages patron countries encourage abusive tax activities in these territories
(2005:109-110). Similarly, Hampton and Christensen claim that,
In the United Kingdom, successive governments encouraged the overseas ter-

ritories and dependencies to establish themselves as tax havens in order to
reduce their dependence on UK grant in aid. (2002:1659)
4.2. POSITION 43
Shaxson agrees that the United Kingdom has encouraged the dependent territories to
establish themselves as secrecy jurisdictions, but goes even further in claiming the the
UK has “set up” these secrecy jurisdictions as a network of offshore satellites in order
to give the City of London—the world’s premiere financial center—a truly global reach,
attracting and catching mobile international capital from all parts of the world (Shaxson
2011:15). Furthermore, Shaxson claims that the secrecy jurisdictions are then used by
the financial elites in the UK to do things there that would not be allowed to do at home:
[T]his British spider’s web lets the City [of London] get involved in business
that might be forbidden in Britain, providing sufficient distance to allow fi-
nanciers in London plausible deniability of wrongdoing. (2011:15)
In this sense, dependent territories do not primarily establish themselves as secrecy

jurisdictions as a strategic option, but is rather encouraged and “set up” to function as
secrecy jurisdictions, and then used by the financial elites in the patron economies to
do business they would not do at home. It is for this reason Eva Joly calls the use of
secrecy jurisdictions, “a modern form of colonialism” (Gaarder 2006).
Most likely, the association between secrecy jurisdictions and dependency status
should be explained by a combination of both of these factors. In short, the dependent
territories are both being encouraged, set up and used, as well as establishing themselves
as secrecy jurisdictions as a strategic choice. According to Bertram, many small island
economies “sell” strategic services to metropolitan patrons in order to gain a more
prominent status and geopolitical significance, and the reliability of the provision of these
services are greater for dependent territories with close linkages to the “purchasing”
government (Bertram 2004:352-353). Following this logic, the dependent territories sell
services and allow themselves to be used in order to gain a more prominent status, to
be elevated to a better position and to become more geopolitically significant. Since
these strategic services are important for the purchasing governments, this works well
for both the dependent territories and the patron countries. Using Cayman Islands,
a British Overseas Territory, as an example, Shaxson (2011) elaborates on how this
relationship between a dependent territory and a patron works well for both parties.
He claims that the Caymanians understand that the British connection gives them a
status they would otherwise not enjoy, and that they therefore are more than willing
to give Britain effective control. The UK, on the other hand, wants influence without
responsibility—retaining effective control, while at the same time pretend not to be in
control. Shaxson claims,
[T]hey [the UK] can turn around when things go wrong and say “it’s all your
[the Caymanians’] fault” – but in the meantime they are pulling all the strings.
(2011:110)
This shows how this arrangement works well for both parties, both for the patron
and the dependent territory. It also shows that we are witnessing a “decolonization
withouh disengaging” (Houbert 1986), as several major international powers continue to
maintain special relationships with secrecy jurisdictions, and use these for their own gain.
Hypothesis 2:
A dependent territory is more likely to be a secrecy jurisdiction, and have a higher
degree of financial secrecy, than an independent country.
4.3 Location
International political factors along the location dimension are related to a country’s
location, where issues of policy and regimes in surrounding countries are important. The
focal point is here on the geopolitical environment the countries are situated in that could
give rise to secrecy jurisdictions. In this section, I outline three determinants of secrecy
jurisdiction status and degree of financial secrecy along this dimension: tax rates of
surrounding countries, distance from a major financial center, and geographic diffusion.
4.3. LOCATION 45
4.3.1 Safe haven from taxation
As a result of globalization and financial integration, tax bases and capital are more
mobile than before, creating a challenge for countries in the context of taxation (Norwe-
gian Ministry of Finance 2014:6). Significant differences in tax rates among countries
creates incentives for corporations to move taxable profit, and for individuals to shift
taxable wealth, to jurisdictions with lower tax rates. Based on this, should secrecy
jurisdictions be expected to rise in the face of high tax rates in surrounding countries,
as a way of attracting nearby mobile capital wanting to escape taxation? I argue that
secrecy jurisdictions can be understood as ‘sanctuaries’ or ‘safe havens’ of taxation, and
that they are more likely to arise in regions with high tax rates, as well as in geographic
proximity to major international finance centers, given that geographic distance matters
to the relocation of capital. This is related to the motivation of becoming secrecy
jurisdiction as a competitive strategy, taking advantage of the environment one is sit-
uated in, and engaging in a competitive “race-to-the-bottom”, as described in section 4.1.
In a narrow sense, the understanding of secrecy jurisdictions as ’sanctuaries’ or

’safe havens’ means that they could function as a safe haven from international turbu-
lence, where individuals and corporations located in an unstable environment funnels
assets into secrecy jurisdictions to protect them from being expropriated. And in the
same way, secrecy jurisdictions could function as a safe haven from crimimal laws, where
individuals, organizations and enterprises hide away assets from illegal activities. In a
broader sense, secrecy jurisdictions can also function as a safe haven from taxation in
general, where individuals and corporations try to escape taxes in their own country by
shuffling assets into secrecy jurisdictions with low or no taxes. Shaxson and Christensen
claim,
International financial centers offer escape routes, or havens of ’safety’, from

other jurisdictions’ laws, rules, and regulations – which are, for all their im-
perfections, usually put in place for good reasons. (2013:74)
Providing these escape routes from regulation and taxes is the raison d’être for many
secrecy jurisdictions, and some even claim that offshore banking services arose as a
response to “overly protectionist, anti-competitive, and over-regulated onshore banking
systems” (Christensen 2012:374). Sancturary is one of the key provisions that secrecy
jurisdictions can offer, and an important part of their existence.
In today’s globalized world economy, one could expect capital to flow freely any-
where in the world, and that secrecy jurisdictions therefore should be able to be located
far from the source country and still function as a safe haven for individuals an enterprises
located in the source country. However, Hines (2010) shows that proximity matters.
Examining the volumes of portfolio capital that flow betwen secrecy jurisdictions and
non-secrecy jurisdictions, Hines finds that for secrecy jurisdictions, nearby countries
are the largest sources and destinations of their capital flows (2010:107). This result
shows that the location of a secrecy jurisdiction, somewhat surprisingly, does matter. In
Hines’ own words, “Given the ability of portfolio capital to flow anywhere in the world,
it is striking that proximity has such a substantial effect” (2010:108). Cobb explains
this locational dimension by the fact that face-to-face contact between providers and
consumers of financial services strengthens the trust between the two parties, and is
required in order to gain the necessary knowledge to successfully provide such services
(Cobb 1998:14). The fact that secrecy jurisdictions cater to their clients from nearby
countries should also be taken into account (Hines 2010:108-109).
Regardless of the reason for capital to first and foremost flow to neighboring countries,
the implication of this is that a country situated in a region with high corporate tax
rates should, with high probability of success, be able to establish itself as a secrecy
jurisdiction to attract nearby foreign capital. In this sense, the tax rates regimes in a
region would serve as a determinant for a country within that region to establish itself as
a secrecy jurisdiction and pursue financial opacity. Surrounded by neighboring countries
with high tax rates and strict regulations, a secrecy jurisdiction would be a welcome ’safe
4.3. LOCATION 47
haven’ for individuals and multinational enterprises located nearby wishing to escape
taxation and regulation.
Given that proximity matters for capital flows, a country located in close geo-
graphic distance to a major financial center should also be more likely to be able to
succeed in its mission to establish itself as a secrecy jurisdiction. Roberts touches on
this, and claims that one could expect a clustering of secrecy jurisdictions in geographic
proximity to, and within the same time zones as, the major international financial
centers, namely London, Tokyo and New York (1994:101). The geographic distance to
one of these cities could therefore be a determinant of a country’s likelihood of being
able to function well as a safe haven.
Hypothesis 3:
A country surrounded by countries with high tax rates is more likely to be a secrecy
jurisdiction, and have a high degree of financial secrecy, than a country surrounded by
countries with low tax rates.
Hypothesis 4:
A country’s geographic proximity to a major international finance center is associated
with a higher likelihood of being a secrecy jurisdiction, and a higher degree of financial
secrecy.
4.3.2 Geographic diffusion
It is widely acknowledged in the literature that policies tend to diffuse across bor-
ders. For instance, the diffusion of democracy, where regional and neighboring effects
constitute important determinants of the magnitude and direction of regime change
in a given country, is well-documented in the literature (see e.g. Przeworski, Alvarez,
Cheibub and Limongi 2000, Starr 1991, and Brinks and Coppedge 2006). Could the
same logic and effects apply when it comes to secrecy jurisdictions, resulting in a
geographic diffusion of financial secrecy? I argue that a process of ‘neighbor emulation’

can take place, resulting in a spatial clustering of secrecy jurisdictions. This is re-
lated to the motivation of economies-of-scale and common reward presented in section 4.1.
Roberts (1994) identifies five regional clusters of secrecy jurisdictions: Caribbean,

Europe, Middle-East, South-East Asia and South Pacific. This is illustrated in figure
4.2. According to Roberts, each regional cluster is connected and function as an adjunct
to the major economic blocs and the financial centers therein (1994:101-105; 1995:252).
A theory of democratic diffusion can perhaps shed some light on why one could expect
to see a regional agglomeration of secrecy jurisdictions.
Figure 4.2: Geographic distribution of secrecy jurisdictions, copied from Roberts 1994:98
Brinks and Coppedge (2006) look at a specific model of democratic diffusion in their
study, namely neighbor emulation, where neighboring countries tend to converge toward
a shared level of democracy (or nondemocracy). In this model, the core assumption is
that countries are rewarded when their regimes are similiar to those of their neighbors
(Brinks and Coppedge 2006:466). These rewards can be rewards like peace, trade, ease
4.3. LOCATION 49
of communication etc., but the importance is not placed on the nature of the reward of
having similar regimes, but on the fact that the countries believe that there exist some
kind of reward that can be gained from having similar regimes. The model of neighbor
emulation is decisional, which means that one country makes a change that is similar in
nature to the change occuring in other countries (Brinks and Coppedge 2006:466).
Extending this logic to secrecy jurisdictions, one could expect neighboring coun-
tries of secrecy jurisdictions to make changes to converge toward a shared level of
financial secrecy. Roberts claims that individuals and corporations using secrecy
jurisdictions want to avoid “putting all of their eggs in one basket”, and therefore spread
their interests and assets among several jurisdictions (1995:251). Seeing as secrecy
jurisdictions serve certain economic major blocs, and that geographic proximity matters
when it comes to capital flows, a jurisdiction may then be more attractive when it has
other secrecy jurisdictions in the immediate vicinity so that individuals and enterprises
can spread their interests among the jurisdictions in the cluster. Recognizing these
possible rewards of having similar regimes in the context of financial secrecy, neighboring
countries may become secrecy jurisdictions and together form a regional cluster of
secrecy jurisdictions.
It is important to note that secrecy jurisdictions within the same spatial cluster
do not necessarily outcompete each other, because each jurisdiction can specialize in
a particular niche (Roberts 1995:99). Each jurisdiction creates or exploits its own
comparative advantage, and develop their advantages within niches like banking,
insurance, mutual funds etc. For example, whereas Bahamas has specialized in banking,
Bermuda has specialized in captive insurance, Jersey has their comparative advantage
in trusts, while Cayman Islands’ premiere niche is hedge funds (Roberts 1995:250;
Shaxson 2011:23-24). Since there is a wide array of financial services secrecy jurisdictions
can specialize in, they can work alongside each other, rather than outcompete each other.
It is worth noting that hypothesis 5, presented below, and hypothesis 3 are con-
flicting. While hypothesis 3 states that secrecy jurisdictions should rise in face of
high tax rates in surronding countries, hypothesis 5 indicate a clustering of secrecy
jurisdictions, which entails low tax rates in the surronding countries.
Hypothesis 5:
A country surrounded by secrecy jurisdictions is more likely to be a secrecy jurisdiction,
and have a high degree of financial secrecy, than a country surrounded by non-secrecy
jurisdictions.
4.4 Summary
The five hypotheses derived from the theory, and presented in this chapter, are the ones
I will investigate in the empirical analysis of this thesis. All of the hypotheses can be
placed along either the location or position dimension, and there are four motivations for
countries to become secrecy jurisdictions underlying these hypotheses and underpinning
the theories and mechanisms of these. Together, these make out the theoretical framework
of this thesis. This is summarized in table 4.1.
Table 4.1: Summary of theoretical framework and hypotheses
Hypothesis Motivation Dimension
Hypothesis 1 & 2 Power, status and influence Position

Hypothesis 2 Political and economic rent-seeking Position
Hypothesis 3 & 4 Competitive strategy, race-to-the-bottom Location
Hypothesis 5 Economies-of-scale, common reward Location
Chapter 5
Research design
In God we trust. All others

must bring data.
W. Edwards Deming
In this chapter, I present a research design that enables a quantitative analysis of the
international determinants of secrecy jurisdiction status and degree of financial secrecy.
I start by describing the data used in this thesis, and explain how the data has been
gathered. Second, I introduce the reader to the variables used in this thesis and provide
variable operationalizations. Finally, I present the statistical models as well as the vali-
dation methods that will be used in this thesis, and discuss what kind of inferences can
be drawn from the analyses I will be performing.
5.1 Data
The empirical analysis proceeds in two steps. First, I conduct an analysis investigating
the likelihood of being a secrecy jurisdiction. I do this by using data from 2014, covering
202 countries.1 Second, I conduct an analysis investigating the degree of financial secrecy
of the secrecy jurisdictions identified in this thesis. For this analysis, I use data from
1 List of countries included in the dataset is provided in table A.3 in appendix A.
51
52 CHAPTER 5. RESEARCH DESIGN
2008, 2010, 2012 and 2014 that covers 51 secrecy jurisdictions. The data used for this
thesis is collected by combining a number of datasets from, among others, the World
Bank, The Tax Foundation and the Correlates of War project, as well as collecting part
of the data manually. Descriptive statistics for the dataset are provided in table 5.1.
Table 5.1: Descriptive statistics
Statistic N Mean St. Dev. Min Max
Secrecy jurisdiction status 805 0.252 0.435 0 1

Secrecy score 200 75.705 14.161 37 100
Hierarchy 749 57.175 20.428 6 122
Dependency 805 0.089 0.286 0 1
Tax rates 805 24.539 5.225 12 35
Log of distance 805 3.424 1.098 –4.605 4.579
Geographic diffusion 805 25.555 25.371 0.000 83.000
Governance quality 805 0.021 0.925 –2.491 2.202
System of government 805 0.359 0.480 0 1
Legal system 805 0.361 0.481 0 1
Log of population 805 15.292 2.364 9.134 21.034
Island 805 0.273 0.446 0 1
Log of GNI per capita, PPP 805 9.197 1.270 6.247 12.096
5.1.1 Missing data
A number of the secrecy jurisdictions are small states and dependent territories, and
data on several of these are often not included in regular dataset using countries as
units of analysis. However, data on these jurisdictions are often available from other
sources. Where possible, missing data on these jurisdictions have been replaced with
data from other sources than the original dataset. CIA World Factbook2 has been
an invaluable source in providing data to replace many of these missing values. The
strategy of replacing missing data on these smaller jurisdictions and territories by data
from CIA World Factbook is also employed by other studies on secrecy jurisdiction (see
e.g. Dharmapala and Hines 2009, and Rose and Spiegel 2007). By replacing missing
2 Available at: http://1.usa.gov/1ju9ux8
5.1. DATA 53
data on these jurisdictions with data from other sources, the number of missing values
is dramatically reduced.
For a few regions, there are missing data on tax rates for the year 2008. By ex-
amining the data, however, it is easy to see that the average regional corporate tax rates
are remarkably stable over time. For countries with missing values on this variable for
2008, nonmissing values for the following year are therefore used as proxies.
The remaining missing values, first and foremost data on governance quality and
gross domestic product (GNI), are handled by multiple imputation.3 Since most of the
missing data in the dataset are on secrecy jurisdictions, removing these observations from
the dataset would result in a selection bias. Multiple imputation reduce bias and increase
efficiency compared to listwise exclusion (Honaker et al. 2011:1), and will normally be
better, and almost always not worse than, listwise exclusion (King, Honaker, Joseph
and Scheve 2001:51). Therefore, imputation is preferred compared to listwise exclusion.
Multiple imputation involves imputing m values for each missing item in a dataset, and
creating m completed dataset for which the observed values are the same across the
completed dataset, while missing values are filled in with different imputations to reflect
uncertainty levels (King et al. 2001:53). The results of the m imputed datasets can then
be combined to ensure as accurate imputed values as possible. Multiple imputation is
therefore preferred compared to other simpler methods of imputation, such as mean impu-
tation, that can lead to serious biases in variance and covariances (Honaker et al. 2011:1).
For data on GNI, data on expected gross domestic product growth for different
regions4 are used to specify upper and lower bounds missing values following or
preceding nonmissing values should be expected to vary within, to ensure as accurate
imputed values as possible. All countries have at least one value on the variable to
be imputed that can be used to specify which bonds the imputed values should be
3 Multiple imputation is done by using Amelia II, created by Honaker, King and Blackwell (2011)
4 Available at: http://bit.ly/1lRakVX
expected to vary within. Five imputed (“completed”) datasets are generated, and for
each missing cell in the original dataset I assign the mean of the five imputed values
of that cell. In all, 42 values are imputed, which corresponds to 0.5 percent of the
observations in the dataset. After performing multiple imputation, there is only missing
data on two of the variables: one which will only be employed in the second analysis
(on a subset of the full sample with no missingness for the subset), and one which only
have data for independent countries, with missing values for all dependent territories.
In addition, there is missing data on Syria 2012-2014 since no good estimates of GNI of
Syria since 2011 exist because of the “war driven deterioration of the economy” (CIA
World Factbook). Syria 2012-2014 are removed from the dataset, leaving a dataset with
complete data on most relevant variables.
5.1.2 Units of analysis
The units of analysis in the dataset are countries, not restricted to diplomatically
recognized sovereign states with UN seats, but including territories (e.g. American
Samoa), physical disparate parts of countries (e.g. Aruba), self-governing areas (e.g.
Cook Islands), special administrative areas (e.g. Hong Kong), dependencies (e.g.
Guernsey), disputed areas (e.g. Taiwan) etc. 185 of the countries in the dataset are
independent countries, while 18 are dependent territories.5
A couple of the countries in the dataset, the Channel Islands and the Nether-
lands Antilles, are worth commenting on briefly. The Channel Islands are sometimes
treated as two separate units, the Bailwick of Jersey and the Bailwick of Guernsey.
Other times, however, they are treated as one unit. I have, for data purposes, chosen
to treat them as a single unit. The Netherlands Antilles were a constituent country of
the Netherlands, but was dissolved in 2010. After the dissolution, a few smaller islands
became special municipalities of the Netherlands, while the bigger islands Curaçao and
5 Dependent
territories included in dataset are: Aruba, Anguilla, Andorra, Netherlands Antilles,
Bermuda, Channel Islands, Cook Islands, Cayman Islands, Micronesia, Guam, Hong Kong, Isle of Man,
Macao, Marshall Islands, Palau, Puerto Rico, Turks and Caicos Islands and U.S. Virgin Islands
5.2. DEPENDENT VARIABLES 55
Sint Maarten became constituent countries of the Netherlands. For this reason, the 2008
and 2010 data covers the Netherlands Antilles, while 2012 and 2014 data covers the
separate units of Curaçao and Sint Maarten. For consistency, however, I have chosen to
treat Curaçao and Sint Maarten as the Netherlands Antilles, even for 2012 and 2014.
In addition to the fact that several secrecy jurisdictions are dependent territories,
some are also subnational states or regions. City of London in the United Kingdom,
Delaware in the United States, Dubai in the United Arab Emirates, and Labuan in
Malaysia are examples of this. However, it is hard to take this subnational aspect
into account in the dataset, since all data are at the country level. Therefore, these
countries are defined as secrecy jurisdictions, even though the offshore activities largely
are restricted to areas within these countries.
5.2 Dependent variables
In this section, I discuss the operationalization of the two dependent variables of this
thesis. For the first analysis, secrecy jurisdictions status will be the dependent varible,
while degree of financial secrecy is the dependent variable for the second analysis.
5.2.1 Secrecy jurisdiction status
As mentioned in section 2.1.1, a secrecy jurisdiction “provides facilities that enable people
or entities escape or undermine the laws, rules and regulations of other jurisdictions
elsewhere, using secrecy as a prime tool” (Tax Justice Network 2015a:3). There is
by no means consensus on this definition, and there are widely conflicting definitons
of what a secrecy jurisdiction is (Murphy 2009:1). But as previously mentioned, this
wide-encompassing notion of a secrecy jurisdiction makes sure that important aspects
characterizing secrecy jurisdictions, including the aspect of secrecy and non-cooperation,
taxes, ring-fencing, financial service industry, and political capture, are left out (Shaxson
2011:8-10), and is therefore used in this thesis.
According to Adcock and Collier, a “measurement is valid when the scores de-
rived from a given indicator can meaningfully be interpreted in terms of the systematized
concept” (2001:531). In other words, you need to make sure that you are measuring
what you want to measure. In the framework of measurement validity of Adcock and
Collier (2001), secrecy jurisdiction is the systematized concept, so the question is then
which indicator can best capture this concept. Such a wide definition of a secrecy
jurisdiction as the one presented above makes the concept hard to operationalize, since
it is hard to find a single indicator, or a few indicators, that captures and measures
this concept adequately. There are no straight-forward indicators that cover the whole
concept as presented above, so scholars studying secrecy jurisdictions find themselves
having to choose between a single measure that captures part of the bigger concept, or
a wide range of indicators that together measure the whole concept.
Most studies on secrecy jurisdictions resort to a list of secrecy jurisdictions that is

compiled on the basis of both qualitative and quantitative measures that together aim
to capture the whole concept. For example, OECD’s list of countries with ‘harmful tax
practices’ are based on indicators such as taxation on financial or other services income,
provisions of instruments of tax evasion, transparency, exchange of information, local
business activities of foreign enterprises, and size of fincancial services sector relative to
the overall economy (OECD 2000). As collecting data on these indicators is extremely
resource and time demanding, most studies resort to previously compiled lists, and many
studies use the same lists, for instance the lists of Hines and Rice (1994) or OECD (2000).
Zoromé (2007), on the other hand, does not accept this approach of using previ-
ously compiled list as an operational definition of a secrecy jurisdiciton. Instead, he
proposes that the ratio of financial services export to GDP could serve as an indicator
for OFC status. However, in order to arrive at this one single indicator of OFC status,
Zoromé exclusively focus on the ring-fencing aspect of a secrecy jurisdiction, and
disregards the other aspects of secrecy jurisdictions. In other words, the price to pay to
arrive at a single indicator measuring secrecy jurisdiction status, would be to focus on
just one of the aspects of this multifaceted concept.
As I want to capture the broad notion of secrecy jurisdictions in this thesis, I

choose to follow the majority of the scholars who have done studies on secrecy juris-
dictions before, by using a previously compiled list of jurisdictions as the dependent
variable. In this thesis, I use the list provided by Palan et al. (2010), listing 56 countries
as secrecy jurisdictions. This list is presented in table 5.2.
Table 5.2: List of secrecy jurisdictions according to Palan et al. (2010:41-44)
Andorra Anguilla Antigua & Barbuda

Aruba Austria Bahamas
Bahrain Barbados Belgium
Belize Bermuda British Virgin Islands†
Cayman Islands Channel Islandsa Cook Islands
Costa Rica Cyprus Dominica
Gibraltar† Grenada Hong Kong
Ireland Isle of Man Latvia
Lebanon Liberia Liechtenstein
Luxembourg Macao Malaysia
Maldives Malta Marshall Islands
Mauritius Monaco Montserrat†
Nauru Netherlands Netherlands Antilles
Niue† Panama Samoa
Seychelles Singapore St. Kitts & Nevis
St. Lucia St. Vincent & Grenadines Switzerland
Turks & Caicos Islands United Arab Emirates United Kingdom
United States Uruguay Vanuatu
Virgin Islands (U.S.)
†
Not included in dataset because of data availability
a
Presented as separate units, Jersey and Guernsey, in Palan et al. (2010), but included in dataset as one
entity
The list is compiled by reviewing the previous tax haven lists produced, and choosing
the countries that have been labeled secrecy jurisdictions at least three times before. In
addition, seven countries are added based on the author’s own assessments. In essence,
Palan et al. (2010:30-38) identify four ‘tax haven characteristics’ used for this assessment:
(i) low or nil taxation, (ii) secrecy provisions, (iii) light and flexible incorporation, and
(iv) financial niche strategies. The frequency of previous listings of the countries in the
list used in this thesis is presented in figure 5.1. As figure 5.1 shows, 41 countries have
been classified as secrecy jurisdictions six times or more in previously published lists.
The list is comprehensive, and includes all of the jurisdictions usually regarded as tax
havens or secrecy jurisdictions.
Figure 5.1: Frequency of tax haven listings in the list from Palan et al. (2010)
7
Number of jurisdictions
Count: 11 Count: 10 Count: 9 Count: 8 Count: 7 Count: 6 Count: 5 Count: 4 Count: 3 Added
There are several drawbacks with using a previously compiled list of secrecy jurisdictions
as an indicator of secrecy jurisdiction status today that are worth mentioning briefly.
First of all, since the list by Palan et al. (2010) is compiled on the basis of previously
produced lists, it is hard to know whether these previously compiled lists are capturing
exactly what we want to measure. If each list is based on diverging understandings of
the concept of secrecy jurisdiction, the indicator that pools all of these together can
be hard to use as a valid measurement. However, the fact that the same countries
appear in the different lists indicate that the different lists capture the same phenomenon.
A closely related, yet distinct, challenge of using a list based on previously com-
piled lists, is the fact that the lists are compiled and produced in different time periods.
This can give rise to a contextual specificity problem, where the “same score on an
indicator may have different meaning in different contexts” (Adcock and Collier 2001:534).
Finally, relying on a previously compiled lists that, in turn, are based on lists
provided by other studies as an indicator, could bring a circularity into the identification
of secrecy jurisdictions. Countries may thus be identified as secrecy jurisdictions simply
because they have been identified as a secrecy jurisdiction on a previous occasion.
Despite these weaknesses, using the list of Palan et al. (2010) seems like the best
option in order to capture the whole concept of secrecy jurisdictions. Concerning the
contextual specificity problem, it should be noted that lists compiled independently
without regard to previously lists published, identify many of the same secrecy jurisdic-
tion, indicating that the understanding of what a secrecy jurisdiction is has remained
relatively stable over time. Murphy shows, by reviewing several tax haven lists produced,
that there is a “remarkable agreement over a long time period with regard to the tax
haven status of some locations” (2009:4). In addition, Palan et al. are conscious of
not only reproducing previous lists, and adds a couple of countries—”friendly amend-
ments”—based on their own assessments to make sure the concept is captured as well as
possible.
As shown in table 5.2, the dataset used in this thesis include data on almost all
of the secrecy jurisdictions identified by Palan et al. (2010). In all, the dataset covers 51
secrecy jurisdictions, while data availability on four of the secrecy jurisdictions identified
by Palan et al. are so limited that I have chosen not to include these in the dataset.6
Based on the list of Palan et al., I construct a dichotomous variable, where countries
receive a score of one if they are secrecy jurisdictions and zero otherwise, that will be
used in the first analysis.
5.2.2 Degree of financial secrecy
The understanding of secrecy jurisdictions presented in this chapter thus far, has been
one of a clear-cut choice between being, or not being, a secrecy jurisdiction. However, in
addition to this, one can also talk about the existence of a financial secrecy spectrum
that the jurisdictions can be placed along. Tax Justice Network emphasize “the existence
of a secrecy spectrum in which jurisdictions [can be] rated according to how ‘secretive’
they are” (2015c). Using this approach, secrecy jurisdictions can be compared to one
another by investigating the jurisdictions’ degree of financial secrecy.
A central component of Tax Justice Network’s Financial Secrecy Index (FSI) is

the secrecy score each jurisdiction included in the index receives:
Secrecy jurisdictions with the highest secrecy scores are more opaque in the
operations they host, less engaged in information sharing with other national
authorities and less compliant with international norms relating to combating
money-laundering. (Tax Justice Network 2015b:2)
In order to calculate a secrecy score, 15 Key Financial Secrecy Indicators (KFSIs) have
been assessed. These 15 indicators each fall into one of four categories; (i) knowledge of
beneficial ownership, (ii) key aspects of corporate transparency regulation, (iii) efficiency
of tax and financial regulations, and (iv) international standards and cooperation (Tax
Justice Network 2015b:11). For every jurisdiction, each KFSI is assessed and given a value
between zero and one, and one compound secrecy score is then computed by adding the
values of each of the KFSIs and dividing it by the number of assessed KFSIs (Tax Justice
6 These secrecy jurisdictions are: The British Virgin Islands, Gibraltar, Niue and Montserrat.
Network 2015b:9). The secrecy score is then presented as as percentage score, where
a value of 0% would equal full transparency, while a value of 100% would equal total
opacity.
Figure 5.2: Number of observations by secrecy score
80
60
Number of observations
Secrecy score
91−100
81−90
71−80
40
61−70
51−60
41−50
31−40
20
31−40 41−50 51−60 61−70 71−80 81−90 91−100

Secrecy score
By using Tax Justice Network’s secrecy scores from their bi-annually released FSI7 as a
variable for degree of financial secrecy, each jurisdiction can receive a score between 0
and 100 on this variable. The FSI has been released four times; in 2009, 2011, 2013 and
2015, and I pool these indeces together in the dataset. However, the data cut-off point
for the construction of the indeces is December 31 the previous year, and the secrecy
scores should therefore be assigned to the year of the data cut-off point, rather than the
year of publication. The FSI 2009 is therefore used as 2008 data in the dataset used in
this thesis, the FSI 2011 as 2010 data etc. Secrecy scores are available for all secrecy
jurisdictions included in the dataset, and figure 5.2 shows how the observations (pooled
7 Available at: http://www.financialsecrecyindex.com

together for 2008, 2010, 2012 and 2014) are distributed according to the secrecy scores
received. It shows that the majority of observations receive a secrecy score of 71 or above,
while a few observations receive a lower secrecy score. The lowest secrecy score received
by a country in the dataset is 37, while the highest is 100.
5.3 Independent variables: International determi-

nants
In this section, I provide operationalizations for each of the independent variables of
the analyses. Each of the variables presented in this section correspond to one of the
hypotheses derived in the previous chapter, and also relate to either the position or
location dimension. Hierarchical position and dependency status are related to position,
while regional tax rates, distance from financial centers and geographic diffusion are
related to location.
5.3.1 Hierarchical position
Hierarchy, as conceptualized in section 4.2.1, is related to a country’s position in the

international system, namely in the core or in the periphery. If a country is situated in
the core of the international system, it is in a position where it is present at the arenas
where decisions are reached and agreements are made, while a country situated in the
periphery of the international system will be placed on the outside of these arenas, and
take the decisions and agreements reached in these arenas as more or less exogenously
given.
Following this understanding of hierarchy, membership in international organiza-

tions will be used as a proxy variable for hierarchical position in the international
system. There are other, perhaps more precise, measures of hierarchical position (for ex-
ample membership of hierarchical military alliances (see Leeds and Anac 2005:188-189)),
but data for these measures are often not available for many of the secrecy jurisdictions.
5.3. INDEPENDENT VARIABLES: INTERNATIONAL DETERMINANTS 63
I will therefore rely on this proxy—membership in international organizations—as a

measure of hierarchical position. A country with membership in many international
organization is then in a strong hierarchical position, while a country with membership
in few international organizations is in a weak hierarchical position.
This way of understanding the association between hierarchical position and membership
in international organizations can be challenged by an alternative view: that low
membership need not indicate a weak hierarchical position, but, rather, such a strong
hierarchical position that a country need not be a member of international organizations,
because it is strong enough on its own. The functionalist approach to international
organizations emphasize that international cooperation is essential to improve living
standards and take full advantage of opportunities because “states are simply too small”
(Jacobson, Reisinger and Mathers 1986:142). Following this understanding, great powers
would be less in need of membership in international organization, while small powers
would be much more dependent on these organizations to take full advantage of the
opportunities that lie in international cooperation.
In this thesis, however, I follow the understanding of the relationship between

membership in international organizations and hierarchical position as prescribed by
Jacobson, Reisinger and Mathers, claiming,
Given their presumed propensity to be extensively involved in world politics,

one would expect greater powers to have more IGO memberships than lesser
powers. (1986:150)
Based on this, a country in a strong hierarchical position is expected to have more

memberships in international organizations, while a country in a weak hierarchical
position is expected to have few memberships in international organizations.
I construct this variable using The International Organizations Dataset from The
Correlates of War Project (Pevehouse, Nordstrom and Warnke 2004). The IGO dataset
contains information about 496 intergovernmental organizations from 1815 to 2005.

Based on this, I construct an index of membership in intergovernmental organizations
(international organizations that have at least 3 nation-states as their members), where
each country receives a score according to how many international organizations they
are members of, lagged 10 years. I am only interested in full members, and therefore
observers and associated members are coded as non-members of a given organization.
Membership is lagged, because according to the theory, countries will become secrecy
jurisdictions as a strategy in order to move themselves from the periphery of the
international system to the core. The hierarchical position of a country needs to be
lagged to capture this phenomenon. Organizations that do not exist in the year of
analysis is removed from the dataset, leaving data on 309 international organizations. In
the IGO dataset, data is only available for sovereign states.
Figure 5.3: Membership of international organizations
20
15
Number of countries
Number of countries
20
15
10
10
0
5
0 50 100
Number of organizations
Investigating the 2014 data more closely, France is the country scoring the highest, with
membership in 122 organizations, while Taiwan is the country scoring the lowest, with
membership in 6 organizations. This indicates, according to this measure, that Taiwan

is in a particularly weak hierarchical position in the international system, while France
is in a particularly strong hierarchical position. France is followed by Germany, the
Netherlands, Belgium, Italy and the United Kingdom as the countries with membership
in most organizations, while Taiwan is followed by Andorra, Palau, Tuvalu, Kiribati and
Liechtenstein as the countries with membership in fewest organizations. This gives the
variable a certain degree of ‘face vailidity’ (Mosier 1947), as this measure appears to
be capturing the notion of hierarchical position. The histogram in figur 5.3 show the
distribution of number of countries for intervals of number of organization membership.
Clearly, most countries cluster in the middle, within the interval of membership in 40-79
organizations. This seems plausible; most countries are in a middle-position regarding
hierarchical position—the semi-periphery—while a few countries are in an especially
strong or weak hierarchical position—core or periphery, respectively.
There are also interesting differences between different groups of countries. Grouping
some of the countries together, an OECD member country is, on average, member of 81
international organizations, while the Caribbean small states and the Pacific island small
states are members of, on average, 49 and 27 international organizations, respectively.8
This is illustrated in figure 5.4. This indicates that OECD countries, in general, are in a
strong hierarchical position, while Caribbean and Pacific island small states, in general,
are in a relatively weaker hierarchical position.
As presented in section 4.2.2, a dependent territory should be more likely to be a secrecy

jurisdiction, and have a higher degree of financial secrecy, than an independent country.
When assigning dependency status to the different countries included in the analyses, the
classification of countries into two categories—dependent and independent—following
8 Grouping of countries according to the World Bank
Figure 5.4: Membership of international organizations by country group
80
60
Number of organizations
Country group
OECD countries
40 Caribbean small states
Pacific island small states
20
OECD Caribbean Pacific island

countries small states small states
Bertram (2004) is used. According to this classification, countries that are freely
assosiated or politically integrated with metropolitan nations are classified as dependent
territories, while all other are classified as independent states (Bertram 2004:344).
Following this classification, the dependent territories constitute quite a diverse

group, including overseas territories, selv-governing areas in free association with another
state, special administrative regions, and dependencies, to name a few. Common for
all of the dependent territories is that they do not possess full political independence.
According to this classification, a few United Nations members are also classified as
dependent territories. These are the Federal States of Micronesia, Marshall Islands
and Palau. All of these are classified as dependent territories because they are in free
association with the United States, who continues to accept responsibility for the defence
of these countries (Lake 1996:8).
Figure 5.5: Map of dependent territories included in dataset
I
sl
eofMan
Channel
Isl
ands
Andor
ra
Ber
muda
Cayman Tur
ks& Caicos
Isl
ands Is
lands HongKong
Angui
ll
a Macao
PuertoRico
USVi r
ginIs
lands Guam
Mar
shal
lIs
lands
Ar uba
Pal
au
Net
her
landsAnt
il
les Mi
crones
ia
CookI
sl
ands
Data on dependency status is mainly based on Bertram (2004) and Eden and Kudrle
(2005), and supplemented by the CIA World Factbook for countries not covered by
the other sources. In all, the dataset includes data on 185 independent countries and
18 dependent territories. Figure 5.5 shows the geographic location of these dependent
territories.
5.3.3 Safe haven from taxation
Regional tax rates
As explained in section 4.3.1, a jurisdiction surrounded by countries with high tax rates
and strict regulations would be a welcome sancturary for individuals and multinational
enterprises located nearby wishing to escape taxation and regulation. This implies that
high tax rates in neighboring countries could lead a country to establish itself as a
secrecy jurisdiction.
For this thesis, I calculate an average regional corporate tax rate to measure this
“need of safe haven”-aspect. By using corporate tax rates data from The Tax Foun-
dation’s Corporate Income Tax Rates around the World dataset9 , supplemented with
data from the professional services firms KPMG10 and Deloitte11 for a few jurisdictions
missing from the Tax Foundation dataset, I am able to calculate an average regional
corporate tax rate for 20 regions12 . For each country, the national score on the variable
is removed from the calculation, so that each country receives a score indicating the
average tax rates of the other countries in the region. By using the average regional tax
rate as a measure, I am able to provide data even for countries with missing data on
national corporate tax rate, because I am interested in the regional tax rates, not the
tax rate for each individual country.
Ranging from 12 percent (Balkans) to 35 percent (Central Africa), there are significant
differences in the average regional tax rates. This is illustrated in figure 5.6. Both the
mean and the median of these average regional tax rates are 24 percent.
It is important to note that this measure only speaks to part of the safe haven
aspect, namely the taxation part. As previously mentioned, low tax rates are only
part of the attractiveness of secrecy jurisdictions, and there could be other regional
features making a jurisdiction appealing as a safe haven, for example strict regulations
in neighboring countries, no bank secrecy legislation in neighboring countries etc. The
measure of regional tax rates, therefore, is only relevant for the aspect of safe haven from
taxation, not necessarily the broader notion of secrecy jurisdictions as safe havens.
9 Available
at: http://bit.ly/1kVJcaV
10 Available at: http://bit.ly/1LexxPz
11 Available at: http://bit.ly/1T4Lhid
12 These regions are: Central Asia and the Caucasus, East Asia, South Asia, South-East Asia, North
Africa and the Middle East, Arabian Peninsula, Oceania and the Pacific Islands, Central Africa, East
Africa and the Horn of Africa, Southern Africa, West Africa, Nordic countries, Western Europe, South-
ern Europe, Central Europe, Eastern Europe, Balkans, North and Central America, South America,
Caribbean
Figure 5.6: Average corporate tax rates by region
Central Africa
North and Central America
South Asia
East Africa and Horn of Africa
Southern Africa
South America
West Africa
Southern Europe
Nordic countries
Oceania and Pacific Islands
Caribbean
North Africa and Middle East
South−East Asia
East Asia
Arabian Peninsula
Central Europe
Western Europe
Eastern Europe
Central Asia and Caucasus
The Balkans
0 5 10 15 20 25 30 35
Average regional corporate tax rate
Distance from financial centers
To be able to function well as a safe haven, a secrecy jurisdiction should also be located
close to one of the major international financial centers, as proximity matters to the flow
of capital (Hines 2010), making distance a potential determinant of secrecy jurisdiction
status and degree of financial secrecy. There is general consensus that London, New York
and Tokyo are the world’s major financial centers (Cobb 1998; Meyer 2015). Distance
is measured by air distance in 100 kilometers, is log transformed, and represents the
smallest distance of the country’s capital to either London, New York or London. The
distance is computed by the online tool ’DistanceFromTo’, which allows you to calculate
the air distance between cities.13
Investigating the 2014 data, the Channel Islands is the country with the shortest distance
13 Available at: http://www.distancefromto.net

Figure 5.7: Distance from major financial centers
15
Number of countries
Number of countries
15
10
10
0
5
0 2500 5000 7500 10000

Distance
to one of the three cities (apart from the UK and Japan), with its 294 km from London.
Mauritius, on the other hand, is the country with the longest distance to one of the three
cities, located 9745 km from London. Figure 5.7 shows the number of countries located
within intervals of kilometers from London, New York or Tokyo.
5.3.4 Geographic diffusion
Following the logic of policy diffusion and ’neighbor emulation’, one could expect a re-
gional clustering of secrecy jurisdictions. To measure the diffusion effect, I again rely on
the regional classification of countries14 and calculate the percentage of countries within
that region that are classified as secrecy jurisdiction according to the secrecy jurisdiction
status variable presented in section 5.2.1. For each country, the national score is removed
from the calculation, ensuring that the variable captures the diffusion effect each country
is exposed to from the surrounding countries.
14 The same 20 regions as presented in section 5.3.3

Figure 5.8: Concentration of secrecy jurisdictions by region
The geographic concentration of secrecy jurisdictions by regions is illustrated in figure

5.8. The map shows that there are large differences between the regions when it comes to
concentration of secrecy jurisdictions; four regions have no secrecy jurisdictions in their
region, while in two regions secrecy jurisdictions account for more than 50 percent of the
countries within the region. In the Caribbean, more than 70 percent of the countries are
secrecy jurisdictions, while in Western Europe, more than 80 percent of the countries are
classified as secrecy jurisdictions.
5.3.5 Summary: International determinants
Based on the independent variables presented above, it is now possible to say something
about which international characteristics seem to distinguish secrecy jurisdictions from
the rest of the world. This is illustrated in figure 5.9, and can serve as a first glimpse of
the data before more systematic testing and analysis is performed in the next chapter.
The first thing to notice, is that there does not seem to be a significant difference, on
Figure 5.9: International characteristics of secrecy jurisdictions (relative to non-secrecy juris-

dictions)
Hierarchical position
Independence (fraction)
Secrecy jurisdiction status

Regional tax rate Non−secrecy jurisdiction
Secrecy jurisdiction
Distance
Regional clustering
0.00 0.25 0.50 0.75 1.00
Note: My own calculations, based on data for 2014. The plot shows the characteristics of secrecy jurisdictions relative
to non-secrecy jurisdictions. The average value of non-secrecy jurisdiction is set to 1 for the variables hierarchical
position, regional tax rate and distance, with the average value of secrecy jurisdictions expressed as relative to this,
while the value of secrecy jurisdictions is set to 1 for the variable geographic diffusion. The variable independence
shows the fraction of countries in each category being an independent country.
average, between secrecy jurisdictions and other countries when it comes to hierarchical
position and regional tax rate. Setting the value of non-secrecy jurisdictions on these
two variables to one, secrecy jurisdictions are, on average, more likely to have a slightly
weaker hierarchic position and be located in a region with slightly lower tax rates than
other countries. However, the differences do not seem to be particularly large.
Second, secrecy jurisdictions are more likely to be dependent territories compared

to other countries. About 25 percent of the secrecy jurisdictions are dependent terri-
tories, while only 3 percent of other countries are dependent territories. In addition,
secrecy jurisdictions are, on average, located in closer geographic proximity to the major
international financial centers, compared to other countries.
5.4. CONTROL VARIABLES 73
Finally, the international characteristic that seems to stand out is the number of
secrecy jurisdictions in the region. Secrecy jurisdictions are, on average, much more
likely to be surrounded by secrecy jurisdictions, compared to other countries.
5.4 Control variables
In this section, I present and operationalize two sets of control variables that are derived
from the previous literature on secrecy jurisdictions. I choose to treat the control variables
as two different sets; one set with domestic political determinants that have been shown to
be associated with secrecy jurisdictions in previous studies, and one set with non-political
control variables accounting for more general characteristics like demography, geography
and economy. This is because the question of whether international or domestic political
factors are better in explaining the likelihood of a country being a secrecy jurisdiction is
an interesting an substantive question in and of itself, and I therefore want to distinguish
between the control variables that account for domestic political determinants and the
non-political control variables in the analyses following in the next chapter.
5.4.1 Domestic political determinants
As mentioned, most previous studies on secrecy jurisdictions have focused on domestic

political factors. I now present and operationalize the most important domestic political
determinants associated with secrecy jurisdictions found in these studies.
First of all, governance quality seems to be an important determinant of the like-

lihood of being a secrecy jurisdiction (Dharmapala and Hines 2009; Rose and Spiegel
2007). Dharmapala and Hines (2009) notes that there are almost no poorly-governed tax
havens, and explaines this by the fact that “only better-governed countries can credibly
commit not to expropriate foreign investors (including indirectly through regulations or
higher future taxes), or not to mismanage the economy in a way that prevents foreign
investors from earning profits” (2009:1064). To measure governance quality, the dataset
The Worldwide Governance Indiactors (Kaufmann and Kraay 2014), which measures
countries’ governance institutions on six dimensions, is used. In this thesis, I aggregate
these six indicators into a compound governance index for each country, using the
(unweighted) mean of the available measures.
The nature of the political system in a country may also be associated with secrecy
jurisdictions. In all democracies, the struggle to exercise and control public authority
gives rise to political uncertainty. In a presidential system with checks and balances,
formalization is the solution to the issue of political uncertainty, while in parliamentary
systems, where all power is concentrated in the governing party, co-optation of interest
groups is one solution to this issue (Moe and Caldwell 1994). Following this, parliamen-
tary systems could be more prone to becoming secrecy jurisdictions, as interest groups of
international finance are likely to be co-opted into the government and party system and
become participants in the internal decision making. To measure system of government,
I rely on the World Bank’s Database of Political Institutions (DPI) (Beck, Clarke, Groff,
Keefer and Walsh 2001). I construct a dichotomous variable distinguishing between par-
liamentary systems and other systems of government. Following the operationalization
of Beck et al., countries in which the legislature elects the chief executive are classified
as countries with a parliamentary system (Keefer 2012:4). Data from DPI is extended
to 2014 (from 2012) and supplemented for a few countries, using the CIA World Factbook.
Finally, a country’s legal system may be a determinant secrecy jurisdiction status

and degree of fincancial secrecy. A main distinction can be drawn between legal system
of British origin (Common law) and legal systems of French origin (Civil law). Following
the understanding of civil law as an interventionist legal system and common law as a
defence against regulation and expropriation (La Porta, Lopez-de Silanes, Shleifer and
Vishny 1999:224), one could expect secrecy jurisdictions to be more likely to have a
system of common law. Also, an important aspect of common law is the confidential
relationship between banker and client (Hampton 1994:237), which adds to the suspicion
that countries with common law are more likely to be secrecy jurisdictions. To measure
this, I include an indicator for whether a country’s system of commercial law has a British
origin (Common law) or not, obtained from La Porta et al. (1999), and supplemented
by data from CIA World Factbook for jurisdictions and territories not included in the
dataset of La Porta et al.
The data sources and variable operationalizations of both the international and
the domestic political determinants of secrecy jurisdiction status and degree of financial
secrecy are provided in table 5.3.
5.4.2 Other control variables
Other control variables included in the analyses, are non-political country characteristics
related to demography, geography and economy. As mentioned in section 3.1.3, size and
island status could be factors explaining which countries become secrecy jurisdictions
(see e.g. Hampton and Christensen 2002; Slemrod and Wilson 2009, and Kanbur and
Keen 1993). This is accounted for by including a variable measuring the log of total
population, taken from the World Bank’s World Development Indicators dataset15 , as
well as a dummy variable indicating whether a country is an island. In addition, to
account for the fact that secrecy jurisdictions are generally more affluent than other
countries (Dharmapala and Hines 2009), a variable measuring GNI per capita (PPP)
is included. Data on GNI and population is obtained from the World Bank’s World
Development Indicators dataset, supplemented with data from CIA World Factbook for
a few countries, and is log transformed to make up log of GNI per capita (PPP).
15 Available at: http://bit.ly/1aS5CmL

Table 5.3: Summary of operalizations and data sources for international and domestic political determinants 76
Variable Operationalization Expectation Data source Hypothesis

International determinants
Position
Hierarchical position Membership in international organizations negative IGO dataset from COW-project Hypothesis 1
(Pevehouse et al. 2004)
Dependency status Dependent territory or independent state positive Bertram (2004), Eden & Kudrle (2005), Hypothesis 2
CIA World Factbooka
Location
Regional tax rates Average regional corporate tax rates negative Tax Foundation (2014), KPMG, Hypothesis 3
Deloitte
Distance from financial Air distance (100 km) to nearest city of positive Calculations based on online tool Hypothesis 4
center New York, Tokyo or London ’DistanceFromTo’
Geographic diffusion Percentage of secrecy jurisdictions in region positive Calculations based on list of secrecy Hypothesis 5
jurisdictions (Palan 2010)
Domestic political determinants

Governance quality Average score of the six ‘Worldwide positive The World Bank’s Worldwide Governance
Governance Indicators’ Indicators (Kaufmann et al. 2014)
System of government Parliamentary or presidential system positive The World Bank’s Database on Political
Institutions (Beck 2001), CIA World
Factbooka
Legal system Commercial law of British origin (Common positive The Quality of Government (La Porta
Law) or other legal system et al. 1999), CIA World Factbooka
a
CIA World Factbook is used to add available information not included in original data source
CHAPTER 5. RESEARCH DESIGN
5.4.3 Summary: Control variables
Based on the control variables presented above, it is also possible to say something about
which domestic institutional features as well as more general non-political characteristics
seem to distinguish secrecy jurisdictions from other countries. This is illustrated in
figure 5.10.
Figure 5.10: Other characteristics of secrecy jurisdictions (relative to non-secrecy jurisdictions)
Governance quality
Parliamentary (fraction)
Common law (fraction)

Secrecy jurisdiction status
Non−secrecy jurisdiction
Secrecy jurisdiction
Population
Island (fraction)
GNI per capita, PPP
−0.25 0.00 0.25 0.50 0.75 1.00
Note: My own calculations, based on data for 2014. The plot shows the characteristics of secrecy jurisdictions relative
to non-secrecy jurisdictions. The variable governance quality shows the average score on the governance index for
the two categories of countries. The variables parliamentary, common law and island, show the fraction of countries
in each category having a parliamentary system, having a common law system, and being an island. For the variable
population, the average population for non-secrecy jurisdictions is set to 1, while for the variable GNI per capita, the
average score for secrecy jurisdictions is set to 1.
First of all, secrecy jurisdictions, on average, seem to be better-governed than other

countries, receiving an average score on governance quality of 0.75, compared to -0.22
for non-secrecy jurisdictions. Secrecy jurisdictions, on average, are also more likely to
have a parliamentary system of government, and have a legal system of British origin.
The more general traits of secrecy jurisdictions also follow, on average, the ex-
pected patterns; secrecy jurisdictions are smaller in population size, more likely to be an
island, and are more affluent than other countries.
5.5 Statistical models
In this section, I describe the statistical models used in the two analyses. It is important
to match the model used in an analysis to the level of measurement of the dependent
variable (Long 1997:3), since the statistical estimator could be biased or inefficient if the
model assumes the wrong functional form corresponding to the level of measurement of
the dependent variable.
As described and operationalized above, in the first analysis that will be performed,
which investigates secrecy jurisdiction status, the dependent variable is a binary variable
measuring a discrete choice, namely whether or not the countries are secrecy jurisdictions
(Y=1) or not (Y=0). Since the dependent variable is binary, one cannot assume that
the relationship between the variables is linear. Rather, since the dependent variable
is censored above 1 and below 0, the relationship between the variables results in a
nonlinear, S-shaped functional form (Long 1997:35). One cannot, either, assume that
the error term is normally distributed or homoscedastic. For these reasons, a logistic
regression model, which estimates how the log odds of secrecy jurisdictions status, Y,
changes with changes in the independent variables, will be employed. The binary logit
model can be specified as:
!
py
ln = β0 + β1 X1i + ... + βn Xni + εi (5.1)
1 – py
In equation 5.1, y is the dependent variable, while py is the probability of y. β0 is the

intercept, β1 – βn are slope coefficients for the independent variables X1 i – Xn i, and ε
constitute the error term. The subscript i is the cross section unit (country). I return to
a test and a discussion of whether this is the correct model specification for this analysis
in chapter 7, and test whether the relationship between the variables can be expressed
5.6. INFERENCES 79
by the logarithmic function.
The dependent variable in the second analysis that will be performed, which in-
vestigates degree of financial secrecy, is an index between 0 and 100. I treat this as a
continuous variable, which means that one can assume that the relationship between
the variables is linear (Long 1997:3), and that the error terms are normally distributed
and homoscedastic. Therefore, a linear regression model—ordinary least-squares (OLS)
regression—will be employed. The OLS regression can be specified as:
yit = β0 + β1 X1it + ... + βn Xnit + εit (5.2)
In equation 5.2, yit is the dependent variable, β0 is the intercept, while β1 – βn are slope
coefficients for the variables X1it – Xnit . εit constitute the error term. The subscript
i is the cross section unit, while the subscript t points to the time series unit (year).
In chapter 7, I return to a discussion of whether this is the correct model specification,
and run a Tobit model to check whether the results are robust to an alternative model
specification.
5.6 Inferences
By using secrecy jurisdiction status, for which I do not have data over time, as the
dependent variable in the first analysis, this analysis is necessarily restricted to cross-
sections. All of the studies examining determinants of secrecy jurisdictions thus far have
been restricted to cross-sectional analysis (see e.g. Dharmapala and Hines 2009, Rose
and Spiegel 2007, and Blanco and Rogers 2010), and Dharmapala and Hines explain why
this approach is used in their study:
As tax haven status is highly stable over time, there is no meaningful longi-
tudional variation in this measure, and the analysis is necessarily restricted
to cross-sections. (2009:1060)
While it is not given that secrecy jurisdiction status is time invariant by nature, it
has been shown empirically that the countries understood as secrecy jurisdictions have
remained stable over time (as discussed in section 5.2.1).
The second analysis employs degree of financial secrecy as the dependent variable.
This variable varies over time, but has only been released four times, leaving a time
series where the dependent variable is only measured at four independent time points.
Since this is not a long enough time period to perform time-series cross-sectional analysis
(Beck and Katz 1995:634), a pooled cross-sectional analysis will therefore be performed
in this analysis.
Statistical models are often used to draw inferences about causal relationships.
Denoting two variables as D and Y, with D being the cause and Y the outcome, many
statisical analyses try to establish a causal relationship between D and Y. Using statis-
tical analyses, like for example multiple regression, one can easily observe associations
between D and Y, however it need not be causality inducing an association between the
two variables (Keele and Stevenson 2014:3). Instead of causality, confounding factors
can induce an association between D and Y (Keele and Stevenson 2014:3). In this
thesis, I try to control for this by collecting and including relevant confounders in the
analyses. However, it is important to be mindful that there may be other confounding
variables not included in the analyses, resulting in an omitted variable bias.
In addition to bias due to confounding variables, problems may arise due to asso-
ciation being nondirectional, meaning that an association my imply that Y causes D
instead of D causing Y (Keele and Stevenson 2014:3-4), resulting in an endogeneity
problem. In a cross-sectional analyses where there is no variation over time, it is
especially hard to draw causal inferences, since it is hard to employ robust techniques
handling endogeneity problems. The independent variable in the analyses I will be
performing that is probably most vulnerable to such an endogeneity problem is hierar-
5.6. INFERENCES 81
chical position. It can be argued that hierarchical position can affect secrecy jurisdiction
status and degree of financial secrecy, while one also can argue that secrecy jurisdiction
status and degree of financial secrecy may affect hierarchical position. The variable
capturing regional tax rates may also be vulnerable to such an endogeneity problem,
since regional tax rates both can affect secrecy jurisdiction status and financial degree
of secrecy, while one can also argue that having secrecy jurisdictions in the region can
affect the regional tax rates because of increased tax competition in the region. Trying
to reduce this possible endogeneity problem I lag the hierarchy variable by 10 years.
Due to data availability this is not possible to do with the regional tax rates. However,
investigating this variable further, it is easy to see that the regional tax rates have
remained remarkably stable over time. Lagging this variable would most probably not
have made a significant difference. However, it is important to note that endogeneity
may still be an issue in my analyses.
Because of this, it can be hard to draw robust causal inferences on the basis of
the analyses performed in this thesis. Despite taking measures to be able to come as
close as possible to drawing causal inferences, as explained above, making sure that
the inferences are causal, rather than associational, may be hard. I will not, however,
have any problem with drawing associational inferences, and describe how the different
variables are associated with secrecy jurisdiction status in the first analysis, and degree
of financial secrecy in the second analysis.
The use of statistics in political science is generally for three main purposes, namely,
description, prediction and causality (Keele and Stevenson 2014:2). While the first
part of the empirical analysis in the next chapter will focus on associational and
cautious causal inferences, the second part will focus on evaluating whether the models
constructed are able to predict secrecy jurisdiction status and degree of financial secrecy.
5.7 Evaluating predictive power

By employing the statistical methods described in section 5.5, I will be able to uncover
robust associations. However, variables that are statistically significant may not increase
the ability of the models to predict the outcome of interest (Ward, Greenhill and Bakke
2010). Hence, I can be left without a comprehensive picture of whether international po-
litical factors increase the ability to predict which countries become secrecy jurisdictions,
as well as secrecy jurisdictions’ degree of financial secrecy. According to Ward et al.,
[T]oo much attention has been paid to finding statistically significant rela-
tionships, while too little attention has been paid to finding variables that
improve our ability to predict [civil wars].(2010:363)
In order to give a comprehensive picture of international political factor’s explanatory

and predictive power, I evaluate the predictive powers of the models of this thesis. In
this section I present the methods used to do this evaluation of predictive power.
5.7.1 In-sample prediction
One way of evaluating the overall predictive performance of a model is to evaluate the
in-sample performance. This involves calculating the error rate between the predicted
and observed values of the dependent variable on the original sample. The in-sample
prediction method should be understood as an alternative way of evaluating a model’s
performance, going beyond just looking at statistical significance of individual variables,
and will give an impression of whether the models are able to predict secrecy jurisdiction
status and degree of financial secrecy. In this sense, in-sample prediction is another
measure of goodness of fit.
A weakness with this approach, however, is that the predictions are based on the
same sample of data used to fit the models. According to Hill and Jones,
[S]ince scholars routinely use all of the data to fit their models, they have no
way of knowing if the patterns they uncover are the results of the pecularities
5.7. EVALUATING PREDICTIVE POWER 83
of a particular dataset or whether they are more general. That is, many of
the results in the literature likely result from overfitting, meaning they reflect
noise in the data rather than meaningful relationships. (2014:662)
This problem of overfitting poses a serious threat to the ambition of being able to gener-
alize and make inferences about unobserved facts from that which we can observe.
5.7.2 Out-of-sample prediction: K-fold Cross-Validation
In addition to in-sample validation, a model’s predictive performance out-of-sample can

be evaluated. I will do this by using K-fold cross-validation. Cross-validation involves
partitioning the data into a “training” and a “test” set. The model is then fit on the
training set, and the fitted model is used to predict the responses for the observations in
the test set, before the predictive performance on the model in the test set is evaluated
(James, Witten, Hastie and Tibshirani 2013:176). K-fold cross-validation is a special
case of cross-validation, and it involves randomly dividing the set of observations into k
equally large folds, using k-1 folds to fit the model and to predict the dependent variable
in the excluded fold, repeating this process k times until all folds have been predicted by
a combination of the others (James et al. 2013:181-183). The out-of-sample performance
of the model is evaluated by averaging the prediction results across the folds. The K-fold
cross validation method (here: 5-fold cross-validation) is illustrated in figure 5.11. One
of the advantages by using the cross-validation approach is that you are able to perform
out-of-sample predictions, while at the same time making use of the complete dataset. I
am repeating the procedure of K-fold cross validation 100 times to even out the influence
of single partitions.
Out-of-sample validation is a way of testing how well a model is able to predict

unseen events, by fitting the data on a subset of the dataset and evaluate its ability
to predict the dependent variable on another subset of the dataset. This makes it
a relevant tool for evaluating theories, and their generalizability. An out-of-sample
validation of a model’s predictive power is an important step towards being able to gener-
Figure 5.11: 5-fold cross validation
Note: Illustration of the 5-fold cross-validation method. The original dataset (marked in
white) is partitioned into five equal folds. Each of the folds acts as a test set (marked in
beige), and the remainder as a training set (marked in blue). Figure copied from James
et al. 2013:181.
alize the findings to out-of-sample situations, “such as the future!” (Ward et al. 2010:364).
Examples of studies using out-of-sample validation to assess the relative predictive

performance of statistical models are Hegre (2008), demonstrating the importance of
including size variables when investigating states’ engagement in militarized conflicts,
Hill and Jones (2014), assessing the veracity of potential explanations for state repres-
sion, Gleditsch and Ward (2013), investigating whether incorporating contentious issues
and conflict management can help improve out-of-sample prediction and advance the
understanding of conflict dynamics, and Ward et al. (2010), conducting a comparison of
the statistical significance and predictive power of variables used in the most influential
models of civil war.
5.7.3 Metric for measuring predictive power
The most common metric used to evaluate predictive performance of logistic regression
models is the Area Under the Receiver Operating Characteristics curve (henceforth
AUROC). A Receiver Operating Characteristics (ROC) curve illustrates the relationship
between the rate of false positives (the number of incorrectly predicted positive outcomes
divided by the total number of negative outcomes) and the rate of true positives (the
number of correctly predicted positive outcomes divided by the total number of positive
outcomes), over the entire range of possible thresholds corresponding to the predicted
probabilities from the model (Ward et al. 2010:366). Better models will have the lowest
false positive rate coupled with the highest true positive rate, which means that better
models will have ROC curves that cover more area. A ROC curve that is on the diagonal
line gives an AUROC of .5, and predicts no better than chance, while a ROC curve that
leaves the maximum space between it and the diagonal line gives an AUROC of 1, which
indicates a perfect predictor.
To evaluate the predictive performance of linear regression models, a metric that

summarize the deviance between observations and predictions—true outcome and
predicted outcome—is common. I will use the mean squared error (MSE). Formally,
MSE is given by
n
1X
MSE = (yi – f̂(xi ))2 (5.3)
n
i=1
where yi is the observed outcome for the i th observation, and f̂(xi ) is the predicted
outcome. A small MSE indicates better predictions (James et al. 2013:29-30).
For the in-sample validation, the MSE is simply computed for each model. For
the k-fold cross-validation, the MSE is averaged over the k regressions, resulting in a
k-fold cross-validation estimate, given as follows:
k
1X
CVk = MSEi (5.4)
k
i=1
The k-fold cross-validation estimate is interpreted in the same way as MSE: a small CVk
indicates better predictions.
The evaluation of the models’ predictive power will serve as a first test of the
models developed in this thesis. The in-sample predictive performance indicates how
well the models fit the data in the dataset, while the out-of-sample prediction evaluation
can take me on step further in being able to generalize and make inferences about unseen
events. Considered as a whole, this evaluation of prediction power both complements
the classical hypothesis testing by indicating which factors are substantively important
and which are not, and also goes one step beyond the classical hypothesis testing by
increasing the ability to generalize the findings to out-of-sample situations. In addition,
models that predict well are valued for their applied utility, and serve as important
guides for policy for practioneers and policy makers (Ward et al. 2010:372; Shmueli
2010:291).
Chapter 6
Results
What is missing in this debate

[on tax havens] is data. Tax
evasion by the wealthiest
individuals and large
corporations can be stopped,
but only if we have statistics to
measure it.
Gabriel Zucman
In this chapter, I present the results of the analyses performed in this thesis and evaluate
a few of the models further.1 I start by presenting the results from the logistic regression
models, where secrecy jurisdiction status is the dependent variable, followed by a presen-
tation of the results from the ordinary least squares regression models, where degree of
financial secrecy is the dependent variable. I proceed by investigating the models further
by evaluating the models’ predictive power, both in-sample and out-of-sample. In the
end of the chapter, I discuss the main findings of these analyses, and point to the most
interesting inferences to be drawn from the analyses performed in this thesis.
1 Chapter quote from Zucman 2015:2-3
87
88 CHAPTER 6. RESULTS
6.1 Secrecy jurisdiction status
In this first analysis, secrecy jurisdiction status is the dependent variable, and I investigate
which international political factors can be associated with a higher likelihood of a country
being a secrecy jurisdiction. I start by presenting results from the models investigating
aspect related to a country’s position, before I continue by looking at aspects related to
a country’s location.
6.1.1 Position
Table 6.1 reports the results from logit models in which the dependent variable equals
one for secrecy jurisdictions and zero otherwise, and where the independent variables of
the position dimension—hierarchical position and dependency status, respectively—are
included along with different sets of control variables. All models including control
variables also include regional dummies to control for regional effects.2
The estimated coefficient of hierarchy, operationalized as membership in interna-

tional organizations, in model 1 is not statistically significant. When controlling for
domestic political factors (as well as regional effects) in model 2, however, the coefficient
is negative and statistically significant at the 1% level. The negative coefficient indicates
that a stronger hierarchical position is associated with a lower likelihood of being a
secrecy jurisdiction. This is consistent with hypothesis 1 presented in 4.2.1, where a
country in a weak hierarchical position could employ a strategy of becoming a secrecy
jurisdiction in order to move itself from the periphery of the international system to the
core of an integrated, global economy. The results in model 2 show that, controlling
for domestic political factors, increasing the number of organizations a country is mem-
ber of with one, the odds ratio of being a secrecy jurisdiction decreases by a factor of 0.097.
2 For
the regional dummies I use the following five regions: Europe, Africa, Asia, Oceania and the
Americas
6.1. SECRECY JURISDICTION STATUS 89
Table 6.1: Logit estimates of determinants of secrecy jurisdiction status — position
Dependent variable: Secrecy jurisdiction status
Hierarchical position Dependency status
(1) (2) (3) (4) (5) (6) (7) (8)
∗∗∗
Hierarchy –0.009 –0.034 0.034 0.031
(0.009) (0.012) (0.021) (0.023)
Dependency 2.632∗∗∗ 1.996∗∗ 0.295 0.735
(0.596) (0.786) (0.812) (0.884)
Governance quality 1.457∗∗∗ 0.963∗ 1.212∗∗∗ 1.000∗
(0.376) (0.557) (0.347) (0.530)
System of government 0.506 0.312 0.387 0.653
(0.522) (0.593) (0.494) (0.568)
Legal system 1.544∗∗∗ 1.471∗∗ 1.799∗∗∗ 1.405∗∗
(0.592) (0.642) (0.552) (0.599)
Log of population –0.666∗∗∗ –0.705∗∗∗ –0.445∗∗∗ –0.506∗∗∗
(0.207) (0.233) (0.122) (0.132)
Island 1.417∗∗ 0.662 1.436∗∗∗ 0.615
(0.590) (0.668) (0.552) (0.624)
Log of GNI per capita 0.778∗∗ 0.218 0.918∗∗∗ 0.309
(0.318) (0.400) (0.293) (0.383)
Regional dummies? N Y Y Y N Y Y Y
Observations 188 188 188 188 202 202 202 202
Log Likelihood –95.435 –63.987 –61.319 –55.255 –101.885 –72.272 –66.739 –59.164
Akaike Inf. Crit. 194.870 145.974 140.638 134.510 207.771 162.545 151.478 142.328
Note: This table reports estimated coefficients from logit models, in which the dependent variable equals one for secrecy
jurisdictions and zero otherwise. Standard errors in parantheses. Data for all models is from 2014. In columns 1-4
hierarchy is the independent variable of interest, reported with different control variables, while in columns 5-8
dependency status is the independent variable of interest. *p<0.1; **p<0.5, ***p<0.01
However, when controlling for non-political country characteristics in model 3, and these
characteristics and domestic factors together in model 4, the coefficient is no longer
statistically significant. Population seems like an important determinant in models 3 and
4; when population is added to the regression the coefficient for hierarchy is no longer
statistically significant and changes direction. The fact that the coefficient for hierarchy
is no longer significant and changes direction when population is added, indicates that
the negative association between hierarchy and secrecy jurisdiction status is driven by
population size. Thus, the hypothesis that countries in the periphery becomes secrecy
jurisdictions in order to move themselves to the core of the international system is not
supported by the data, given the operationalization of hierarchical position used in this
thesis.
Increasing membership from its minimum to its maximum in model 4, keeping

the other variables at their means, is positively associated with the predicted probability
of being a secrecy jurisdiction, but these results are, as illustrated in figure 6.1, associated
with considerable uncertainty, and therefore not statistically significant.
In model 2 and 3 all control variables, except system of government, are statisti-
cally significant, and follow the expected directions. In model 4, where all the control
variables are included at once, governance quality is statistically significant at the 10%
level, legal system is significant at the 5% level, and population is significant at the
1% level. These results indicate that the likelihood of being a secrecy jurisdiction is
positively associated with being well-governed and having a legal system of British
origin, and negatively associated with having a large population, controlled for the other
variables.
With no support for the first hypothesis, I now turn to the other variable of in-
terest of the position dimension: dependency status.
The estimated coefficient of dependency, operationalized as either being a depen-

dent territory of a metropolitan country or an independent country, in model 5 is both
statistically and substantially significant. Going from an independent country to a
dependent territory, the odds ratio of being a secrecy jurisdiction increases by a factor
of 13.9. This result holds when controlling for domestic political factors in model 6;
the effect of dependency status on being a secrecy jurisdiction is both statistically and
substantially significant. This is consistent with hypothesis 2 presented in section 4.2.2,
stating that a dependent territory is more likely to be a secrecy jurisdiction than an
independent country. However, when controlling for non-political country characteristics,
the effect of dependency status is no longer significant. 15 of the 18 dependent territories
are islands, and almost all of the territories have rather small populations, so a natural
explanation of why dependency status is not significant in model 7, is that these control
variables capture the effect of being a secrecy jurisdiction contributed to dependency

status in models 5 and 6.
When controlling for both domestic political factors and other country character-
istics, the effect of dependency status on secrecy jurisdiction status is not significant.
Going from an independent country to a dependent territory (increasing dependency
status from its minimum to its maximum) in model 8, keeping the other variables at
their means, does not have a particular effect on the predicted probability of being a
secrecy jurisdiction, as illustrated in figure 6.1, and is associated with great uncertainty.
Figure 6.1: Predicted probabilities of being a secrecy jurisdiction — position
1.0 1.0
0.8 0.8
Predicted probabilities
0.6 0.6
0.4 0.4
0.2 0.2
0.0 0.0
25 50 75 100 125 0.00 0.25 0.50 0.75 1.00
Hierarchy Dependency
Note: Plots include 95% confidence intervals and are based on the models where all control variables are
included (models 4 and 8 in table 6.1), and lets the independent variable of interest vary from its minimum to
its maximum keeping all other (continuous) variables at their means (binary variables at zero).
In model 6 and 7 all control variables except system of government are statistically
significant, and follow the expected directions. In model 8, where all the control
variables are included at once, governance quality is statistically significant at the
10% level, while legal system is significant at the 5% level, both positively associ-
ated with being a secrecy jurisdiction. Population, on the other hand, is negatively
associated with being a secrecy jurisdiction, and is statistically significant at the 1% level.
Controlling for both the other country characteristics, domestic political factors as well
as regional effects, neither of the two variables at the position dimension—hierarchical
position and dependency status—prove statistically significant. Now I turn to variables
related to a country’s location.
6.1.2 Location
Table 6.2 reports the result from logit models in which the dependent variable equals
one for secrecy jurisdictions and zero otherwise, and where the independent variables of
the location dimension—regional tax rates, distance from financial center and geographic
diffusion of secrecy jurisdictions, respectively—are included along with different sets of
control variables. Since controlling for regional effects in models which measure regional
phenomena—such as regional tax rates—makes for a very strict model, the intermediate
models are estimated without regional dummies. The full models, i.e. the models
including the independent variable of interest along with all control variables, however,
include regional dummies.3
The estimated coefficient for regional tax rates, operationalized as the average cor-
porate tax rates of the surrounding countries within a region, in model 1 is negative and
statistically significant at the 1% level, indicating that countries surrounded by countries
with high corporate tax rates are less likely to be secrecy jurisdictions. Increasing the
regional tax rate with 1 percent decrease the odds ratio of being a secrecy jurisdiction
by a factor of 0.35. This is contradictory to hypothesis 3 presented in section 4.3.1,
stating that being situated in a region with high tax rates should increase a country’s
likelihood of being a secrecy jurisdiction. A possible explanation of this result, is that
many secrecy jurisdictions are located in regions with other secrecy jurisdiction, making
3 Importantly,the regions used for regional dummies are larger than the regions used to measure
regional tax rates and concentration of secrecy jurisdictions within a region. This is to ensure variance
within the regions used to control for regional effects. While the regions for the regional dummies use
five regions (Africa, Asia, Europe, Oceania and the Americas), regional tax rates and concentration of
secrecy jurisdiction use 20 regions (as explained in section 5.3.3).
Table 6.2: Logit estimates of determinants of secrecy jurisdiction status — location
Regional tax rates Distance from finance centre Geographic diffusion
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
∗∗∗
Tax rates –0.104 –0.055 –0.016 –0.037
(0.033) (0.048) (0.049) (0.072)
Log of distance –0.454∗∗ –0.004 –0.263 –0.179
(0.178) (0.187) (0.178) (0.204)
Diffusion 0.040∗∗∗ 0.022∗∗∗ 0.015∗ 0.007
(0.007) (0.008) (0.009) (0.011)
Governance quality 1.372∗∗∗ 1.054∗∗ 1.478∗∗∗ 0.992∗ 1.239∗∗∗ 1.026∗
(0.302) (0.533) (0.321) (0.532) (0.304) (0.530)
System of government 0.113 0.507 0.202 0.515 0.061 0.546
(0.433) (0.552) (0.427) (0.551) (0.440) (0.553)
Legal system 1.740∗∗∗ 1.366∗∗ 1.686∗∗∗ 1.350∗∗ 1.485∗∗∗ 1.324∗∗
(0.419) (0.591) (0.422) (0.588) (0.424) (0.595)
Log of population –0.421∗∗∗ –0.536∗∗∗ –0.478∗∗∗ –0.567∗∗∗ –0.415∗∗∗ –0.532∗∗∗
(0.108) (0.133) (0.119) (0.141) (0.111) (0.131)
Island 1.204∗∗ 0.670 1.044∗∗ 0.524 0.853 0.571
(0.499) (0.614) (0.516) (0.643) (0.545) (0.642)
Log of GNI per capita 1.000∗∗∗ 0.317 0.907∗∗∗ 0.338 0.917∗∗∗ 0.319
(0.247) (0.387) (0.246) (0.379) (0.240) (0.383)
Regional dummies? N N N Y N N N Y N N N Y
Observations 202 202 202 202 202 202 202 202 202 202 202 202
Log Likelihood –108.776 –80.629 –70.869 –59.391 –109.722 –81.292 –69.767 –59.143 –94.656 –77.249 –69.334 –59.341
Akaike Inf. Crit. 221.552 171.257 151.739 142.783 223.443 172.584 149.534 142.286 193.313 164.498 148.669 142.682
Note: This table reports estimated coefficients from logit models, in which the dependent variable equals one for secrecy jurisdictions and zero otherwise. Standard errors in parentheses.
Data for all models is from 2014. In columns 1-4 regional tax rate is the independent variable of interest, reported with different control variables, in columns 5-8 distance from a
major financial centre is the independent variable of interest, while in columns 9-12 geographic diffusion is the independent variable of interest. *p<0.1; **p<0.5, ***p<0.01
the tax rates of neighboring countries low, not high. This clustering of secrecy jurisdic-
tions, as presented in section 4.3.2, therefore implies that higher likelihood of being a
secrecy jurisdiction is associated with low regional tax rates.
The coefficient for regional tax rates is not, however, statistically significant when
control variables are added in model 2 and 3, and when control variables are added
along with regional dummies in model 4. Increasing the corporate tax rates from its
minimum to its maximum in model 4, keeping the other variables at their means, does
not have a particular effect on the predicted probability of being a secrecy jurisdiction,
as illustrated in figure 6.2, and is associated with considerable uncertainty. In model 2
and 3 all control variables, except system of government, are statistically significant at
least at the 5% level. In model 4, governance quality and legal system are statistically
significant at the 5% level, while population is significant at the 1% level.
Turning to the next variable on the location dimension, the estimated coefficient
of distance from financial center is negative and statistically significant at the 1% level in
model 5. The negative coefficient indicates that increasing the distance from a financial
center is associated with a lower likelihood of being a secrecy jurisdiction, as prescribed
in hypothesis 4 in section 4.3.1. When controlling for domestic political factors and
non-political country characteristics in models 6 and 7, and the control variables along
with regional dummies in model 8, the effect of distance is not statistically significant in
any of the models. Increasing the distance from its minimum to its maximum in model
8, keeping the other variables at their means, does not have a particular effect on the
predicted probability of being a secrecy jurisdiction, as illustrated in figure 6.2, and the
great uncertainty illustrate why the effect does not prove statistically significant.
In model 6 and 7, all control variables, except system of government, are statisti-
cally significant at least at the 5% level, and in model 8 governance quality is significant
the the 10% level, legal system is significant at the 5% level, while population is
significant at the 1% level. The direction of the all control variables are as expected.
The estimated coefficient of geographic diffusion, operationalized as percentage of

surrounding countries within a region being secrecy jurisdictions, in model 9 is positive
and statistically significant, indicating that a country surrounded by other secrecy
jurisdiction has a higher likelihood of being a secrecy jurisdiction. Increasing the share
of secrecy jurisdictions in the region with one percent, the odds ratio of being a secrecy
jurisdiction increases by a factor of 1.04. This is consistent with hypothesis 5 presented
in section 4.3.2, claiming that a country surrounded by other secrecy jurisdiction is more
likely to engage in ’neighbor emulation’ and converge toward a shared level of financial
secrecy with its neighbors, and thus more likely to be a secrecy jurisdiction.
This result holds when controlling for domestic political factors and non-political
country characteristics separate in models 10 and 11, where the effect of diffusion is
statistically significant at the 1% level in model 10 and at the 10% level in model
11. When controlling for both the domestic political factors and the other country
characteristics at the same time, along with regional dummies, in model 12, however,
the effect of geographic diffusion on the likelihood of being a secrecy jurisdiction is no
longer statistically significant. Increasing the degree of geographic diffusion from its
minimum to its maximum in model 12, keeping all other variables at their means, does
not have a particular effect on the predicted probability of being a secrecy jurisdiction,
as illustrated in figure 6.2, and is associated with a considerable amount of uncertainty.
In model 10 and 11, all control variables, except system of government and island, are
statistically significant at the 1% level. In model 12 governance quality is statistically
significant at the 10% level, legal system is significant at the 5% level, while population
is significant at the 1% level.
In all models in which they are included in table 6.2, the coefficients for popula-
Figure 6.2: Predicted probabilities of being a secrecy jurisdiction — location
1.0 1.0
0.8 0.8
0.6 0.6
0.4 0.4
0.2 0.2
Predicted probabilities
0.0 0.0
10 15 20 25 30 35 0 25 50 75 100
Tax rates Distance
1.0
0.8
0.6
0.4
0.2
0.0
0 20 40 60 80
Diffusion
Note: All plots include 95% confidence intervals and are based on the models where all control variables are
included (models 4, 8 and 12 in table 6.2), and lets the independent variable of interest vary from its minimum
to its maximum keeping all other (continuous) variables at their means (binary variables at 0).
tion, legal system and governance quality are statistically significant, indicating that
these factors are important determinants of secrecy jurisdiction status. When all of these
variables are added together, none of the independent variables of interest of the location
dimension are statistically significant. In other words, the likelihood of being a secrecy
jurisdiction in these models is best explained by having a small population, having a
legal system of British origin, and being well-governed, rather than by international
political factors of the location dimension.
6.1.3 Interaction
As mentioned in section 4.3.1, geographic proximity to a major international finance

center is by some regarded as close to a necessity in order for a country to establish
itself as a secrecy jurisdiction and successfully provide the financial services of these
jurisdictions (see e.g. Cobb 1998). Following this logic, some of the other determinants
of secrecy jurisdiction status could be said to be conditioned on geographic proximity.
This seems especially plausible for the effect of geographic diffusion. According to
Roberts (1994), the regional clusters of secrecy jurisdictions should be understood as,
“adjuncts to one of the three financial blocs centred for the moment on London, Tokyo
and New York City” 1994:101-105. In other words, the diffusion effect resulting in
clustering of secrecy jurisdictions could be expected to only matter for countries located
close to a major international finance center, and not for countries located further away.
This leads me to believe that countries surrounded by other secrecy jurisdiction that are
also located close to a major financial center should experience the diffusion effect, while
countries surrounded by other secrecy jurisdictions that are also located far away from a
major financial center should not necessarily experience this diffusion effect. This is to
say that diffusion is conditioned on a country’s distance from a financial center. In order
to capture this potential conditional effect, I run models including an interaction term,
where distance and geographic diffusion are the two constitutive terms. The result of
these models are presented in table A.1 in appendix A.
The results show that the interaction term, as well as the two constitutive terms,
are all statistically significant, both alone and when different set of control variables
are added. The coefficients for distance and diffusion cannot be interpreted as the
effect of a change in one of the independent variables on secrecy jurisdiction status,
as the coefficients in the previous models have been interpreted, when the model
includes an interaction term. Rather, the coefficients for distance and diffusion captures
the effect of one of the constitutive terms in the interaction term when the other
constitutive term is zero (Brambor, Clark and Golder 2006:72). The results of the
full model, model 4, in table A.1 indicate, first of all, that given no other secrecy
jurisdictions in the region, greater distance from a major international finance center
is associated with higher likelihood of being a secrecy jurisdiction. Second of all, the
results indicate that given a distance of zero km, greater concentration of secrecy juris-
dictions in the region is associated with a higher likelihood of being a secrecy jurisdiction.
Plotting the interaction effect for different values of the constitutive terms in fig-
ure A.1, indicates that the diffusion effect, where countries emulate their neighbors, is
apparent in regions located close to one of the major international financial centers,
indicating that geographic proximity to a financial center is important for a country to
be able to establish itself as a secrecy jurisdiction. However, when being located far
away from a major financial center, a regional clustering and a following diffusion effect
is less likely to take place, because the environment for establishing itself as a secrecy
jurisdiction is less favorable.
These results confirm the expectation laid out above; the effect of geographic dif-
fusion on the likelihood of being a secrecy jurisdiction is conditioned on a country’s
distance from a major international financial center. Countries surrounded by other
secrecy jurisdictions that are also located close to a major financial center have a high
likelihood of being a secrecy jurisdiction, while countries surrounded by other secrecy
jurisdictions that are also located far away from a major financial center have a low
likelihood of being a secrecy jurisdiction.
6.2 Degree of financial secrecy
In this second analysis, I move on to examine differences among secrecy jurisdictions. The
degree of financial secrecy is the dependent variable, and I investigate which international
political factors can be associated with a higher degree of financial secrecy.
6.2. DEGREE OF FINANCIAL SECRECY 99
6.2.1 Position
Table 6.3 reports the results from OLS models in which the dependent variable varies
between 0 and 100 on degree of financial secrecy, and where the independent variables of
the position dimension—hierarchical position and dependency status, respectively—are
included along with different sets of control variables. All models including control
variables also include regional dummies to control for regional effects.
Table 6.3: OLS estimates of determinants of degree of financial secrecy — position
Dependent variable: Degree of financial secrecy
Hierarchical position Dependency status
(1) (2) (3) (4) (5) (6) (7) (8)
Hierarchy –0.377∗∗∗ –0.281∗∗∗ 0.012 –0.003

(0.046) (0.046) (0.089) (0.093)
Dependency 1.699 0.116 –4.111∗∗ –4.628∗∗
(2.232) (1.998) (1.938) (1.957)
Governance quality 0.632 6.239∗∗ –1.856 4.400∗∗
(2.157) (2.895) (1.999) (2.159)
System of government 2.364 0.447 0.715 1.531
(2.100) (2.118) (1.947) (1.712)
Legal system –5.724∗∗ –2.060 –1.237 0.985
(2.252) (2.766) (1.958) (2.044)
Log of population –3.576∗∗∗ –3.817∗∗∗ –3.401∗∗∗ –3.821∗∗∗
(0.918) (0.986) (0.435) (0.461)
Island –8.462∗∗∗ –8.826∗∗∗ –7.194∗∗∗ –9.486∗∗∗
(2.094) (2.592) (1.828) (2.233)
Log of GNI per capita –1.307 –4.175∗∗ –2.011∗ –3.587∗∗∗
(1.241) (1.793) (1.078) (1.343)
Regional dummies? N Y Y Y N Y Y Y
Observations 152 152 152 152 200 200 200 200
Log Likelihood –604.614 –576.172 –568.791 –565.481 –814.091 –774.186 –746.056 –742.433
Akaike Inf. Crit. 1,213.229 1,170.345 1,155.582 1,154.962 1,632.182 1,566.371 1,510.111 1,508.866
Note: This table reports estimated coefficients from OLS models, in which the dependent variable can vary between 0 and
100 on degree of financial secrecy. Standard errors in parantheses. Pooled regression for the years 2008, 2010, 2012
and 2014. In columns 1-4 hierarchy is the independent variable of interest, reported with different control variables,
while in columns 5-8 dependency status is the independent variable of interest. *p<0.1; **p<0.5, ***p<0.01
The estimated coefficient for hierarchical position, operationalized as membership in

international organizations, is negative and statistically significant when no control
variables are included in model 1, and when controlling for regional effects and domestic
political factors in model 2. This indicates that a weak hiearchical position is associatied
with a high degree of financial secrecy, as prescribed in hypothesis 1 in section 4.2.1.
However, the results do not hold when also controlling for non-political country charac-
teristics in model 3, or in the full model including regional dummies, domestic political
factors and other country characteristics in model 4.
While the effect of being a dependent territory is not statistically significant alone
or when controlling for only domestic political factors (as well as regional effects)
in models 5 and 6, the coefficient for dependency status is negative and statistically
significant at the 5% level when controlling for other country characterstics alone in
model 7, and in the full model controlling for regional effects, domestic political factors
and country characteristics together in model 8. The negative coefficient indicates
that being a dependent territoriy is associated with lower degree of financial secrecy,
contradictory to the effect prescribed in hypothesis 2 presented in section 4.2.2.
A possible, albeit speculative, explanation for this is related to the fact that dif-
ferent secrecy jurisdictions cater to different clientele, as explained in section 2.2.3.
Some secrecy jurisdictions seek to attract the wealth of rich individuals, and for these
jurisdictions financial secrecy provisions are the most important features. For the
secrecy jurisdictions seeking to attract multinational corporatons, however, provisions
regarding corporate structures and flexible incorporation are just as important. Secrecy
jurisdictions targeting multinational corporations are dependent upon stable and
trustworty legal structure, which the metropolitan patron can provide for dependent
territories. Secrecy jurisdictions without such a connection to a metropolitan patron
may experience a lack of trust in the jurisdiction’s legal structure, which forces them
to specialize in secrecy provisions. This results in dependent territories having a lower
degree of financial secrecy compared to independent states.
Going from being an independent country to a dependent territory, controlled for

6.2. DEGREE OF FINANCIAL SECRECY 101
domestic political factors, other country characteristics and regional effects, the esti-
mated degree of financial secrecy decreases by 4.6 points on the secrecy score index.
The control variables of the different models of table 6.3 all act in similar man-
ners; both governance quality and affluence are statistically significant at least at
the 5% level in the full models (models 4 and 8), while population and island are
significant at the 1% level in the same models. While the effect of governance quality
and population follow the prescribed direction, the effects of island status and affluence
pull in the opposite direction of what is expected. The coefficient of governance quality
is positive, indicating that being well-governed is associated with having a higher
degree of financial secrecy. The coefficients of population, island status and affluence,
on the other hand, are negative, indicating that having a small population, not be-
ing an island, and not being affluent is associated with a higher degree of financial secrecy.
With one of the variables of the position dimension proved statistically significant
when all of the control variables are introduced, as illustrated in figure 6.3, I now
investigate the variables of the location dimension further.
Figure 6.3: Plot of estimated coefficients in position OLS models
Hierarchy ●
Dependency ●
−8 −6 −4 −2 0
Note: The estimated coefficients are taken from the models including all control variables (models 4 and 8 in table 6.3),
and are plottet with 95% and 90% confidence intervals, where the thickest line represents the 90% confidence interval, and
the thinner line represents the 95% confidence interval.
6.2.2 Location
Table 6.4 reports the result from OLS models in which the dependent variable varies
between 0 and 100 on degree of financial secrecy, and where the independent variables of
the location dimension—regional tax rates, distance from financial center and geographic
diffusion of secrecy jurisdictions, respectively—are included along with different set of
control variables. As in section 6.1.2, the intermediate models are estimated without
regional dummies. The full models, i.e. the models including the independent variable
of interest along with all control variables, however, include regional dummies.
The effect of regional tax rates is positive and statistically significant at the 5%
level when no control variables are included in model 1, indicating that being surrounded
by countries with high corporate tax rates is associated with having a higher degree of
financial secrecy. This supports hypothesis 3 presented in section 4.3.1, claiming that
jurisdictions introduce secrecy provisions to function as a safe haven from taxation in
a region of high tax rates. This result holds when controlling for non-political country
characteristics in model 3. The coefficient is not statistically significant, however, when
controlling for domestic political factors in model 2, or when all of the control variables
are included, along with regional dummies, in model 4.
The estimated coefficient of distance from financial center is positive and statisti-
cally significant at the 1% level both when no control variables are included in model
5, and when controlling for, respectively, domestic political factors in model 6, and
non-political country characteristics in model 7. The positive coefficient indicates that
an increase in distance from the closest financial center of New York, Tokyo or London
is associated with an increase in degree of financial secrecy, contradictory to hypothesis
4 presented in section 4.3.1. When controlling for both domestic political factors, other
country characteristics and regional effects in model 8, however, this result does not
hold, and the effect of distance is not proven statistically significant.
Table 6.4: OLS estimates of determinants of degree of financial secrecy — location
Regional tax rates Distance from finance centre Geographic diffusion
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
∗∗ ∗
Tax rates 0.440 0.012 0.319 0.140
(0.172) (0.191) (0.164) (0.167)
Log of distance 5.407∗∗∗ 4.642∗∗∗ 3.532∗∗∗ 0.733
(0.585) (0.678) (0.646) (0.838)
Diffusion –0.069∗∗ 0.032 –0.086∗∗∗ 0.039
(0.032) (0.036) (0.031) (0.040)
Governance quality –8.875∗∗∗ 3.681∗ –3.520∗∗ 3.198 –9.765∗∗∗ 3.088
(1.733) (2.166) (1.602) (2.168) (1.826) (2.181)
System of government 0.928 2.353 1.655 2.036 0.733 1.912
(2.059) (1.779) (1.815) (1.724) (2.023) (1.724)
Legal system 3.323∗ 1.507 4.032∗∗ 1.764 2.835 0.803
(1.964) (2.095) (1.721) (2.156) (1.981) (2.113)
(0.427) (0.445) (0.432) (0.501) (0.430) (0.449)
Island –5.521∗∗∗ –10.055∗∗∗ –3.928∗∗ –9.725∗∗∗ –4.791∗∗ –10.476∗∗∗
(2.085) (2.247) (1.969) (2.288) (2.101) (2.277)
Log of GNI per capita –4.335∗∗∗ –3.741∗∗∗ –3.003∗∗∗ –3.514∗∗ –4.047∗∗∗ –4.047∗∗∗
(0.949) (1.364) (0.897) (1.416) (0.937) (1.366)
Regional dummies? N N N Y N N N Y N N N Y
Observations 200 200 200 200 200 200 200 200 200 200 200 200
Log Likelihood –811.136 –793.699 –775.392 –744.994 –778.518 –772.163 –763.057 –744.958 –812.032 –793.314 –773.528 –744.873
Akaike Inf. Crit. 1,626.272 1,597.398 1,560.785 1,513.988 1,561.036 1,554.325 1,536.114 1,513.916 1,628.063 1,596.628 1,557.057 1,513.747
Note: This table reports estimated coefficients from OLS models, in which the dependent variable can vary between 0 and 100 on degree of financial secrecy. Standard errors in parantheses.
regression for the years 2008, 2010, 2012 and 2014. In columns 1-4 regional tax rate is the independent variable of interest, reported with different control variables, in
columns 5-8 distance from a major financial center is the independent variable of interest, while in columns 9-12 geographic diffusion is the independent variable of interest.
*p<0.1; **p<0.5, ***p<0.01
The association between geographic diffusion, operationalized as percentage of surround-

ing countries within a region being secrecy jurisdictions, and degree of financial secrecy
is negative and statistically significant at the 5% level in model 9 when no control
variables are included, and at the 1% level in model 11, controlling for non-political
country characteristics. The negative coefficient indicates that increasing the number of
secrecy jurisdiction within a region is associated with a lower degree of financial secrecy,
contradictory to hypothesis 5 presented in 4.3.2. However, when controlling for domestic
political factors separate, and along with other country characteristics and regional
dummies, the effect is no longer statistically significant.
Figure 6.4: Plot of estimated coefficients in location OLS models
Diffusion ●
Distance ●
Tax rates ●
−1 0 1 2
Note: All the estimated coefficients are taken from the models including all control variables (models 4, 8 and 12 in
table 6.4), and are plottet with 95% and 90% confidence intervals, where the thickest line represents the 90% confidence
interval, and the thinner line represents the 95% confidence interval.
While none of the independent variables of interest at the location dimension prove
statistically significant when controlling for both regional effects, domestic political
factors and non-political country characteristics, as illustrated in figure 6.4, several
of the control variables perform well. The effects of population, island and GNI per
capita are statistically significant in all the full models, while the effect of governance
6.3. SUMMARY OF MAIN FINDINGS 105
quality is significant in three of these models. While the effect of governance quality and
population follow the prescribed direction, the effects of island status and affluence pull
in the opposite direction of what is prescribed.
Recalling from the first analysis, which investigates determinants of secrecy juris-
diction status, governance quality, legal system and population were deemed important
determinants. The results of this second analysis, investigating degree of financial
secrecy, indicate that in addition to governance quality and population, island status
and affluence are important determinants of degree of financial secrecy. Legal sys-
tem, on the other hand, is not an important determinant of the degree of financial
secrecy. Interestingly, these results indicate that different mechanisms at the domestic
level—both political and non-political—are at work when it comes to determinants of
secrecy jurisdiction status and determinants of degree of financial secrecy among secrecy
jurisdictions. I discuss this further in section 6.5.
6.3 Summary of main findings
The main findings of the two analyses, the first investigating determinants of secrecy
jurisdiction status and the second investigating determinants of degree of financial
secrecy, are summarized in table 6.5.
The first analysis could not find support for any of the hypotheses presented in chapter 4.
However, the results indicate that both governance quality, legal system and population
size are important determinants of which countries become secrecy jurisdictions. In
addition, arguments for a possible interaction effect between distance from financial
center and geographic diffusion were presented in section 6.1.3, and this interaction
effect was proven statistically significant.
The second analysis did not find support for any of the hypotheses presented in
Table 6.5: Summary of main findings
Secrecy jurisdiction status Degree of financial secrecy
Hypothesis 1 Not supported Not supported

Control variables
Governance quality Positively significant Positively significant
System of government Not significant Not significant
Legal system Positively significant Not significant
Population Negatively significant Negatively significant
Island status Not significant Negatively significant
GNI per capita Not significant Negatively significant
chapter 4, but still found an effect that proved statistically significant: being a depen-
dent territory is associated with having a low degree of financial secrecy. The effect of
dependency status is statistically significant, but the hypothesis stating that dependent
territories are more likely to have a high degree of financial secrecy is not supported by
the data. In addition, the results indicate that both governance quality, population size,
island status and affluence are associated with jurisdictions’ degree of financial secrecy.
While the analyses of this thesis thus far have focused on statistically significance,
I will now go one step further, and evaluate the predictive power of the factors intro-
duced in this thesis; the international political factors, the domestic political factors,
and the non-political country characteristics.
6.4 Evaluating predictive power
As mentioned in section 5.7, identifying variables that are statistically significant is

not the same as identifying variables that have good predictive power. The results
presented in this chapter thus far have uncovered robust associations and have cautiously
pointed towards causal relationships, but I will now go one step further and evaluate the
predictive power of some models. As I aim to identify not only determinants of which
countries are secrecy jurisdiction and jurisdictions that have a high degree of financial
secrecy today, but also determinants that can say something about which countries are
potential secrecy jurisdictions and jurisdictions with high degree of financial secrecy in
the future, this is an important way of evaluating the models I have presented thus far.
I evalute the models’ predictive performances in two steps, using the tools de-
scribed in chapter 5: I first evaluate the models’ in-sample predictive performances,
before I use K-fold cross-validation to evaluate the models’ predictive performances
out-of-sample. I do this for both the logistic and linear regression models, using the
metrics for evaluating predictive power as described in section 5.7.3.
To evaluate the models’ predictive performances, I start with a null model that
only contains the intercept. I proceed by adding the non-political country character-
istics—population, island and GNI per capita—which gives me a baseline model. The
domestic model, which adds the domestic political factors—governance quality, system of
government and legal system—to the baseline model, is then compared to the null model
and the baseline model. In the international model, I add the international political
factors—dependency status, regional tax rates, distance and geographic diffusion—to
the domestic model.4 Thus, I am able to assess whether the international political
factors yield greater predictive power by comparing the predictive performances of the
international model to the predictive performance of the null model, the baseline model
4 Hierarchical
position is not included, since it is impossible to include both hierarchy and dependency
status at once when data for hierarchical position is only available for independent countries.
and the domestic model. I do this both in-sample and out-of-sample.
6.4.1 In-sample predictive power
By evaluating the in-sample predictive performance of models, one can get an impression
of the overall predictive performance of the models, and see how well the models are able
to predict secrecy jurisdiction status and degree of financial secrecy on the observations
in the dataset. For the logistic regression models (where secrecy jurisdiction status is
the dependent variabel), I plot ROC curves and calculate the AUROC of the models,
while for the linear regression models (where degree of financial secrecy is the dependent
variable), I calculate the models’ mean squared errors (MSE). The results of the in-sample
validation of the linear regression models are reported and illustrated in appendix A, but
is commented on briefly in this section.
Secrecy jurisdictions status models: AUROC
In figure 6.5, the ROC curves and AUROC of three different models are presented. As
explained in section 5.7.3, a ROC curve that is on the diagonal line gives an AUROC
of .5, and predicts no better than chance, while a ROC curve that leaves the maximum
space between it and the diagonal line gives an AUROC of 1, which indicates a perfect
predictor. I start by plotting the ROC curve and calculating the AUROC for the baseline
model, which gives an AUROC score of .903. Compared to the null model that contains
only the intercept, which gives an AUROC of .5, indicating that the model predicts
no better than chance, the baseline model does a far better job of predicting secrecy
jurisdiction status.
The domestic model adds the domestic political factors to the baseline model,
and this model receives an AUROC score of .923. In the international model, I add
the international political factors to the domestic model, which gives an AUROC score
of .924. Both the domestic model and the international model predict better than the
baseline model, and the international model performs slightly better than the domestic
model.5
Figure 6.5: In-sample AUROC
Note: The baseline model includes the variables population, island and GNI per capita. The domestic model
includes the variables of the baseline model, in addition to the domestic political factors (governance quality, system
of government and legal system). The international model includes the international political factors (dependency
status, regional tax rates, distance and diffusion), in addition to the variables of the domestic model.
Overall, the AUROC scores of the three models range from .903 to .924, which indicates
that all of the models do a very good job of predicting secrecy jurisdiction status.
5 There is no consensus among scholars on what constitute a ‘slight’ or a ‘significant’ improvement,

but in any event an increased AUROC indicates increased predictive power
Degree of financial secrecy: MSE
The results of the in-sample validation of the linear regression models, investigating de-
gree of financial secrecy, are reported in table A.2 and illustrated in figure A.2 in appendix
A, but the main findings will be commented on briefly here. Following the same pro-
cedure as described above, the MSE of the baseline model is 103.1, significantly lower
than the null model with an MSE of 199.5. In other words, the baseline model predicts
significantly better than the null model. The MSE of the domestic model is 100, an
improvement compared to both the null model and the baseline model, while the inter-
national model —adding the international political factors to the domestic model—with
an MSE of 95.6 performs better than both the null model, the baseline model and the
domestic model. These results indicate that including the international political factors
yield greater predictive performance than focusing solely on domestic political factors
and non-political country characteristics.
6.4.2 Out-of-sample predictive power
By evaluating the predictive power of the models out-of-sample, I can evaluate how well
the models are able to predict unseen events, and thus evalute the models’ generalizability.
Evaluating the model’s predictive power out-of-sample may be a better way of assessing
the veracity of explanations of determinants of secrecy jurisdictions status and degree
of financial secrecy (Hill and Jones 2014:662), and is an important step towards being
able to generalize the findings to events not covered in the dataset. To evaluate the
model’s out-of-sample predictive power I employ the strategy of 5-fold cross-validation,
as explained in section 5.7.2. The 5-fold cross-validation is repeated 100 times for each
model, to even out the influences of single partitions. For the logistic regression models
(secrecy jurisdiction status), I calculate the median AUROC of the 100 repetitions for
each model, while for the linear regression models (degree of financial secrecy), I calculate
the median MSE of the 100 repetitions for each model. I comment briefly on the results of
the out-of-sample validation of the linear regression models, while the results are reported
in appendix A.
Secrecy jurisdiction status: AUROC
Figure 6.6 shows the distribution of 5-fold cross-validated AUROC scores for 100
iterations for each of the models evaluated. I evaluate the same models here as in the
in-sample evaluation in section 6.4.1. The median out-of-sample AUROC score of the
baseline model is .878, which is somewhat lower than the in-sample AUROC for the same
model (.903). The median AUROC score for the baseline model is substantially larger
than for the null model, which does not predict any better than chance (AUROC: .5),
indicating that the baseline model does a far better job at predicting secrecy jurisdiction
status compared to the null model.
In the domestic model, the domestic political factors—governance quality, system of

government and legal system— are added to the baseline model, which gives a median
out-of-sample AUROC score of .889. This is a slight improvement from the baseline
model, while the median out-of-sample AUROC of the domestic model is lower than the
median in-sample AUROC of the same model (.923).
The real test is now to compare the international model, which adds the interna-
tional political factors to the domestic model. If the international model yields greater
predictive power compared to the domestic model and the baseline model, this indicates
that including international political factors are important to determine which countries
become secrecy jurisdictions.
Adding the international political factors to the domestic model, gives an median
out-of-sample AUROC of .923, which is a significant improvement compared to both
the baseline model and the domestic model. This international model, in other
words, does a better job of predicting secrecy jurisdiction status compared to the
model including only the non-political country characteristics, as well as the model
including both the non-political country characteristics and the domestic political factors.
Figure 6.6: Out-of-sample AUROC
Note: The baseline model includes the variables population, island and GNI per capita. The domestic model includes the
variables of the baseline model, in addition to the domestic political factors (governance quality, system of government and
legal system). The international model includes the international political factors (dependency status, regional tax rates,
distance and diffusion), in addition to the variables of the domestic model.
Although the median out-of-sample AUROC scores overall are lower than the in-
sample AUROC scores, the models still do a good job of predicting secrecy jurisdiction
status out-of-sample, indicated by median AUROC scores ranging from .878 to .923.
The international model including the international political factors performs better
than both the baseline model and the domestic model, indicating that the international
political factors are important predictive factors of secrecy jurisdiction status. In other
words, taking these factors into account will give a better ability of predicting which
countries could become secrecy jurisdictions in the future, than focusing solely on
domestic political factors and other country characteristics.
Degree of financial secrecy: MSE
The results of the out-of-sample validation of the linear regression models investigat-
ing degree of financial secrecy are reported in table A.2 and illustrated in figure A.3
in appendix A, but the main findings will be commented on briefly. The MSE of the
baseline model is 111.5, which is significantly lower than the MSE of the null model con-
taining only the intercept, which receives an MSE of 201.5. The MSE of the domestic
model is 111.2, an improvement compared to both the the null model and the baseline
model. The international model —adding the international political factors to the domes-
tic model—receives an MSE of 111.8, and performs poorer than both the baseline and
the domestic model. These results indicate that including international political factors
does not yield greater predictive power compared to domestic political factors and other
country characteristics when it comes to predicting degree of financial secrecy. While
the international model performed better than both the baseline model and the domestic
model in-sample, this is not the case out-of-sample.
6.4.3 Summary: Out-of-sample prediction
Table 6.6 summarizes the results of the out-of-sample validation. For the models investi-
gating determinants of secrecy jurisdiction status, including international political factors
yields greater predictive power compared to the models only including non-political coun-
try characteristics and domestic political factors. In other words, taking the international
political factors into account will give a better ability of predicting which countries be-
come secrecy jurisdictions than focusing exclusively on domestic political factors and
other country characteristics. This evaluation of predictive performances indicates that
while the international political factors does not have much explanatory power, these fac-
tors have good predictive power, and should be taken into account when assessing which
countries could become secrecy jurisdictions in the future.
Table 6.6: Summary of out-of-sample predictive performance
Model AUROC Improvement MSE Improvement
Null model 0.5 – 201.5 –

Baseline model 0.878 .378 111.5 90
Domestic model 0.889 .389 111.2 90.3
International model .923 .423 111.8 89.7
Note: The column AUROC reports the AUROC values of all of the models, the column MSE reports the MSE
values of all of the models. The columns Improvement reports the model’s improvement in, respectively, AU-
ROC (higher AUROC values indicate improvement) and MSE values (lower MSE values indicate improvement),
compared to the null model.
For the models investigating degree of financial secrecy, however, the international model
performs poorer than both the baseline model and the domestic model. This indicates
that including international political factors will not improve the ability of predicting de-
gree of financial secrecy. It is worth noting that the MSE values of the baseline, domestic
and international model only range from 89.7 to 90.3, indicating that the three models’
predictive power on degree of financial secrecy are pretty similar.
6.5 Discussion
With the results of the analyses investigating determinants of secrecy jurisdiction status
and degree of financial secrecy presented above, investigating both the factors’ explana-
tory and predictive power, it is time to go more in-depth into the main findings of these
analyses. In this section, I focus not only on the independent variables of interest—the
international political factors—but also on the effect of some of the control variables in
the analyses.
6.5. DISCUSSION 115
6.5.1 Determinants of secrecy jurisdiction status
The first analysis, presented in section 6.1, investigated determinants of secrecy ju-
risdiction status, and examined whether international political factors are important
in explaining the likelihood of a country being a secrecy jurisdiction. As table 6.5
shows, none of the hypotheses presented in chapter 4 were supported by the data. The
analysis uncovered some robust associations between international political factors and
the likelihood of being a secrecy jurisdiction in the intermediate models, but when
controlling for both domestic political factors, non-political country characteristics and
regional effects in the full models, none of the estimated coefficients of the international
political factors were statistically significant. In other words, I could not find robust
evidence that there is an association between hierarchical position, dependency status,
tax rates of surrounding countries, distance from financial center or geographic diffusion
and secrecy jurisdiction status.
While no single effect of the international political factors in this analysis proved
significant, an interaction effect, however, between distance from a major international
financial center—New York, London or Tokyo—and geographic diffusion was revealed.
This result indicates that countries located in a region with many other secrecy juris-
dictions that at the same time are located close to a major financial center have a high
likelihood of being secrecy jurisdictions, while countries located in a region with many
other secrecy jurisdictions that at the same time are located far away from a major
financial center are not very likely to be secrecy jurisdictions. However, except from this
finding, there is little evidence that international political factor explain the likelihood
of a country being a secrecy jurisdiction.
Despite the lack of robust associations, however, the international political factors
can help us to predict which countries become secrecy jurisdictions in the future.
When evaluating the prediction power of the model including the international political
factors in section 6.4, both the in-sample and out-of-sample validation indicate that
the international model yields greater predictive power compared to the baseline model
(including only the non-political country characteristics) and the domestic model (which
adds the domestic political factors to the baseline model). Although it is hard to
determine exactly how much better the international model predicts, the results indicate
that the international political factors should not be completely dismissed as important
factors related to secrecy jurisdictions, as they can be useful in a more practical sense to
predict which countries will become secrecy jurisdictions in the future.
While the concepts of explanatory power and predictive power are often conflated,
there is actually a clear distinction between the two (Shmueli 2010). Whereas explana-
tory power concerns testing causal explanations through theoretical lenses, predictive
power concerns predicting new or future observations, and often involves temporal
forecasting (Shmueli 2010:290-291).6 According to Shmueli, there is a “disparity between
the ability to explain phenomena at the conceptual level and the ability to generate
predictions at the measurable level” (2010:293). While the international political factors
do not lend support to the causal and theoretical explanations offered in this thesis,
they do give support to political factors at the international level as important features
to take into account when seeking to identifyl potential future secrecy jurisdictions.
Predictive models are valued for its applied utility (Ward et al. 2010:372; Shmueli
2010:291), which means that international political factors should be important to take
into account for practioneers, and they should serve as powerful guides to policy for
policy makers seeking measures to ensure that countries do not establish themselves as
secrecy jurisdictions in the years ahead.
While none of the international political factors prove significant, three of the
control variables perform extremely well in all of the models in this first analysis, and
deserve to be mentioned briefly: governance quality, legal system and population. The
estimated coefficient of governance quality is positive in all models, which resonates with
6 Temporal forecasting means that observatons until time t are used to forecast future values at time
t + k, k > 0 (Shmueli 2010:291).
6.5. DISCUSSION 117
previous studies that, as mentioned in section 3.1.1, find a positive association between
governance quality and the likelihood of being a secrecy jurisdiction. In a recent study
by Dharmapala and Hines (2009), the authors find that the effect of governance quality
is statistically significant and substantially very large, and explain this by the fact that
only well-governed jurisdictions can credibly commit to not expropriate foreign investors
or not to mismanage the economy – commitments necessary to attract high levels of
foreign investments.
The estimated coefficient of having a legal system of British origin is also positive
in all models, indicating that having a Common law system is associated with higher
likelihood of being a secrecy jurisdiction. Explanation of the prevalence of legal systems
of British origin in secrecy jurisdiction can be found in the fact that most capital ex-
porting countries have a legal system of British origin and that a legal system matching
those countries could raise the return of being a secrecy jurisdiction (Dharmapala and
Hines 2009), that common law (in contrast to civil law) is a non-interventionist legal
system (La Porta et al. 1999), and that the confidential relationship between bankers
and clients is an important aspect of the Common law system (Hampton 1994).
Both governance quality and legal system are factors of the domestic level, which
indicates that it is domestic, rather than international, political factors that mainly
explain the likelihood of a country being a secrecy jurisdiction. It is also worth noting
that both governance quality and legal system, as described above, are related to the
notions of non-intervention and stability. It is not surprising that having institutions
based on the principles of non-intervention is associated with a high likelihood of being
a secrecy jurisdiction, as this helps finance and capital escape rules and regulation,
protects it from political and/or legal intervention, and does this within a stable political
and legal framework. This should make a well-governed country with a Common law
system more likely to succeed in its mission to establish itself as a secrecy jurisdiction,
compared to poorly-governed countries and countries with a Civil law system.
The estimated coefficient of population, one of the non-political country charac-

teristics, is negative in all models, indicating that a small population is associated with
a higher likelihood of being a secrecy jurisdiction. This gives merit to the explanation of
secrecy jurisdictions as small economies and small polities, in line with previous findings
in the literature. As explained in section 3.1.3, there are both economic, political and
geographic factors related to size that can explain why a small country is more likely to
become secrecy jurisdictions. The economic factors relate to, among others, small labor
markets, restricted comparative advantage and diseconomies of scale, while the political
factors relate to, among others, absent media independence, absence of higher education
institutions, and fewer democratic checks in small polities. All of these factors create a
favorable environment for the establishment of secrecy jurisdictions, and for using this
as a competitive strategy to overcome some of the disadvantages of being a small state.
The interaction effect between the two political factors at the international level—distance
from financial center and geographic diffusion—represent a small caveat in the dismissal
of international political factors as determinants of secrecy jurisdiction status. In
addition, the predictive power of the international model indicates that international
factors should be taken into account when assessing which countries are likely to become
secrecy jurisdictions in the future. Together, the interaction effect and the predictive
performance of the international model indicate that international political factors play
some role in determining which countries become secrecy jurisdictions, and which do not.
Nevertheless, the evidence of this analysis gives credit mainly to the domestic political
factors related to non-intervention and stability, as well as the effect of population.
6.5.2 Determinants of degree of financial secrecy
The second analysis, presented in section 6.2, investigated differences among secrecy ju-
risdictions, and examined determinants of the jurisdictions’ degree of financial secrecy. As
table 6.5 shows, this analysis also did not find support for any of the hypotheses presented
6.5. DISCUSSION 119
in chapter 4. Controlling for regional effects, domestic political factors and non-political
country characteristices, neither hierarchical position, tax rates of surrounding coun-
tries, distance from financial center or geographic diffusion proved statistically significant.
While none of the hypotheses were supported by the data, I still find a significant
association between dependency status and degree of financial secrecy, indicating that
being a dependent territory is associated with a lower degree of financial secrecy. This
effect, however, pulls in the opposite direction of what is prescribed in the hypothesis,
which laid out an expectation of dependent territories having a high degree of financial se-
crecy. Even though I find little evidence of international political factors as determinants
of degree of financial secrecy, several of the control variables prove statistically significant.
In addition to the effect of population and governance quality described above,

the effect of island status and affluence on degree of financial secrecy proved statistically
significant. While the effect of being an island and being affluent are both negatively
associated with degree of financial secrecy, they were insignificant or positively (when
significant) associated with secrecy jurisdiction status. This indicates that there are
different mechanisms at work regarding determinants of secrecy jurisdiction status
and determinants of degree of financial secrecy among secrecy jurisdictions. These
findings are particularly interesting since almost all studies on secrecy jurisdictions
have focused on whether or not being a secrecy jurisdiction, and this is one of the first
studies investigating degree of financial secrecy among secrecy jurisdictions. I will briefly
comment on each of these two factors.
As pointed out in section 3.1.3, a considerable amount of the literature on secrecy

jurisdictions is centered on the Small Island Economies (SIEs), and many scholars find a
relationship between being an island and the likelihood of being a secrecy jurisdiction.
According to Baldacchino,
[I]f one wishes to transform a place in order to endow it with the possibility
of doing something different, perhaps shady, perhaps unconventional, perhaps

dangerous, (...) then that place should be on an island, or an island in toto.
(2010:4)
In other words, the geographic boundedness of islands makes them especially attractive
to mobile capital wanting to escape regulation. In a sense, this gives islands a compara-
tive advantage when it comes to attracting mobile capital. In light of this, the finding
of this thesis that islands have a lower degree of financial secrecy is somewhat suprising.
Increasing secrecy provisions could, however, be understood as mainland countries’ way
of trying to “offset” the comparative advantage of islands. In other words, islands are
attractive locations in and of itself, while mainland countries may need to increase their
secrecy provisions in order to compete against the SIEs, resulting in mainland countries
having a higher degree of financial secrecy compared to island states.
Also surprising is the finding which indicates that higher degree of financial se-
crecy is associated with lower GNI per capita. This implies that more affluent countries
have a lower degree of financial secrecy. Several studies have found that secrecy
jurisdictions are more affluent compared to other countries (see e.g. Dharmapala and
Hines 2009), but when comparing secrecy jurisdictions with each other, affluence is not
associated with higher degree of financial secrecy, but with lower degree. One possible
explanation for this is that—related to the mechanism of mainland countries mentioned
above—less affluent countries increase their secrecy provisions in order to attract more
capital. In a sense, less affluent countries engage in predatory “race-to-the-bottom”
regarding transparency in order to attract more capital and become more affluent.
The results of the out-of-sample validation confirm the results of the analysis in-
vestigating explanations of degree of secrecy jurisdiction, where the domestic model
performs better than the baseline model only including the non-political country
characteristics, while the international model including the international political factors
performs poorer than both the domestic model and the baseline model. According to the
6.5. DISCUSSION 121
results of the evaluation of the models’ predictive performance, focusing on the domestic
political factors—in addition to the non-political country characterstics—yield greatest
predictive power.
To sum up, both the analysis presented in section 6.2, examining explanatory
variables of degree of financial secrecy, as well as the evaluation of the models’ predictive
power, find that the hypotheses of this thesis is not supported by the data. Rather, the
analyses of degree of financial secrecy give credit to governance quality, in addition to
the non-political country characteristics of population size, island status and affluence.
6.5.3 Possible explanations of non-findings
What can explain these non-findings, when it seems so plausible that international
political factors should play a major role in the development of secrecy jurisdictions? The
explanation could, of course, be that there simply is no association between international
political factors and, respectively, secrecy jurisdiction status and degree of financial
secrecy. Instead, domestic political factors and non-political country characteristics
are more important determinants. However, there are also a few methodological and
theoretical explanations that may seem plausible.
As mentioned several times before, data availability is alway an issue when study-
ing secrecy jurisdictions, who are notoriously reluctant to share information. For this
reason, I have been limited to performing a cross-sectional analysis (in addition to a
pooled cross-sectional analysis) in this thesis, since I do not have data that varies over
time for secrecy jurisdiction status. Having information over an extended period of time
would have given a better ability of identifying associations and causal relationships.
A problem related to this, but still a problem of its own, is the fact that I have few
observations in the dataset. Both the analysis investigating determinants of secrecy
jurisdiction status, as well as the analysis examining determinants of degree of fincancial
secrecy, have around 200 observations, which is few observations when it comes to
uncovering robust associations of this kind. In addition, measurement errors are always
a challenge in statistical models, and the operationalizations of the variables may be
an issue, especially since I have had to rely on a few proxy variables to be able to
capture the effect I am interested in. All of these factors can be potential methodological
explanations of why I cannot find that international political factors explain secrecy
jurisdiction status and degree of financial secrecy.
Another—more theoretical—explanation is related to the distinction between do-

mestic and international factors. In this thesis, I have treated this division between
political factor at the domestic and the international level as clear-cut, but in reality,
this division may be more blurry, and the two levels may intertwine. According to
Gourevitch (1978), the domestic and international level influence each other and are
so interrelated that they may be hard to analyze separate. With secrecy jurisdictions
being such a global phenomenon, it may not be plausible to see the domestic factors as
completely “isolated” from international influence. Using the dependent territories of
the UK as an example, while governance quality, system of government and legal system
are treated as isolated domestic factors in this these, these factors are also influenced by
the UK, both through historial and current relationships. I find it useful to distinguish
between the two levels, because the logic of the internal and external factors are very
different. Whereas the domestic political factors are elements the secrecy jurisdictions
themselves have control over and can change as they want, the international political
factors are exogenously given, cannot be altered by the secrecy jurisdictions themselves,
rather, they can only be exploited by the secrecy jurisdiction for their own advantage.
Since the models of this thesis include domestic political factors as control variables,
these variables should be able to capture this effect, but at the same time, this framework
could benefit from being developed further to accomodate for these kind of intertwining
of the two levels.
6.5. DISCUSSION 123
6.5.4 Summary
The main conclusion to be drawn from the analyses performed in this thesis, is that I do
not find support for the hypotheses stating that international political factors should be
important determinants of secrecy jurisdiction status and degree of financial secrecy. I
do not find that being in a weak hierarchical position, being a dependent territory, being
surrounded by countries with high tax rates, being located close to a major financial
center, or being surrounded by secrecy jurisdictions increase the likelihood of being a
secrecy jurisdiction or increase the expected degree of financial secrecy.
Although the findings of this thesis are pretty consistent, it may be premature to
completely dismiss international political factors as determinants of secrecy jurisdiction
status and degree of financial secrecy, as the statistically significant interaction effect of
distance and diffusion as well as the predictive performance of the international model
of secrecy jurisdiction status represent important caveats to these findings. Although
the international models have little explanatory power, the good predictive performance
when it comes to secrecy jurisdiction status makes the international political factors
relevant for practioneers and policy makers. The analyses of this thesis, however, mainly
give merit to the domestic political factors, as well as to the non-political country
characteristics.
Chapter 7
Robustness checks
It ain’t what you don’t know

that gets you into trouble. It’s
what you know for sure that
just ain’t so.
Mark Twain
The results presented in the previous chapter should hold under a number of alternative
specifications. In this chapter, I check the model specifications of the main models,
and test whether multicollinearity is a problem. I also test whether the main findings
are robust to alternative variable operationalizations, and check whether the results are
driven by outliers and influential observations. I focus on testing the full models presented
in section 6.1 and 6.2 (i.e. the models where the international political factor of interest
is included along with all of the control variables and the regional dummies). The results
of the robustness checks are included in appendix B.
7.1 Model specification
An important precondition for using a particular statistical model is that the relationship
between the variables that is assumed in the statistical model and the relationship in
125
126 CHAPTER 7. ROBUSTNESS CHECKS
the real world correspond to a satisfactory degree.
As described in section 5.5, the relationship between the variables in the logistic
regression models is assumed to result in a nonlinear, S-shaped form. That is, the
relationship between the independent variables and the logit of the dependent variable
is assumed to be linear. To test whether the relationship between the independent
variables and the dependent variable can be expressed by the logarithmic function, I
have done a so-called “link test” (Pregibon 1980). This test uses the predicted values
and the squared predicted values of the dependent variable from the original model
as variables in a new model. In this new model, the predicted values should be a
statistically significant predictor (since it is the predicted value from the model), unless
the model is completely misspecified. Similarly, the squared predictive values should
not have much predictive power in this model, except by chance. In other words, if the
predicted values are not statistically significant, while the squared predicted values are
significant, the link test is significant, which indicates that the model is misspecified.
I test whether the models employing secrecy jurisdiction status are misspecified,
and the results of the link tests are reported in table B.1 in appendix B. The results show
that the link test is not significant for models 2-6, which indicates that the logarithmic
link function is appropriate. For model 1, however, investigating the effect of hierarchical
position on the likelihood of being a secrecy jurisdiction, the results indicate that the
model is misspecified, and that the relationship between hierarchy and the logit of the
dependent variable is not linear. To see whether this misspecification drives the result, I
run the model again using a linear regression model. This does not change the results,
as shown in table B.2. Also, in section 7.4, I test whether the results of the hierarchy
model hold when the hierarchy variable is log transformed. Running a link test on this
alternative hierarchy model indicates that this model is correctly specified, while the
results are the same as in the original hierarchy model.
7.2. MULTICOLLINEARITY 127
As described in section 5.5, I treat the dependent variable of the second analysis,
which investigates degree of financial secrecy, as a continuous variable. Formally,
however, the dependent variable of this analysis—an index between 0 and 100—is a
limited dependent variable, censored under 0 and over 100 (Long 1997:2). To handle this,
a Tobit model can be estimated, which uses all of the information, including information
about the censoring of the dependent variable, and provides consistent estimates of the
parameters (Long 1997:189).
I test whether the results of the models employing degree of financial secrecy as
dependent variable change when estimated using a Tobit model. The results are
reported in table B.3 in appendix B, and show that the results hold to this alternative
model specification; of the international political factors, only the effect of being a
dependent territory is statistically significant, in addition to the control variables that
were significant in the original analysis.
7.2 Multicollinearity
Multicollinearity occurs when two or more independent variables are highly correlated
with each other. A high degree of multicollinearity might lead to an identification prob-
lem, making it hard to identify the effects of the independent variables on the dependent
variable, due to high standard errors of the variable estimates that are correlated with
each other (Skog 2013:286-287). The high standard errors of the estimates may also
make significant relationships seem insignificant.
To check for multicollinearity, I calculate the Variance Inflation Factor (VIF) for
each variable in all of the full models presented in the previous chapter. The VIF is
defined as:
1
VIF(βi ) = (7.1)
1 – R2i
where R2i represents the proportion of variance in the ith independent variable that is
associated with the other independent variables in the model (Fox 1991:673-674). The
results of the VIF calculations are reported in tables B.4 and B.5 in the appendix. Fol-
lowing the convention of deeming multicollinearity a problem if it exceeds a threshold of
10, I find that multicollinearity is not a problem in any of the models.
7.3 Outliers and influential observations
An outlier is an observation whose value on the dependent variable is unusual given

the values of the independent variables. A variable that is both an outlier and have a
high leverage (that is, a highly different predictor behavior than the rest of the data)
can produce substantial influence on the estimated coefficients (Fox 1991:21). In other
words, an outlier is an observation that does not fit the model well, while an influential
observation can change the fit of the model in a substantive way. It is important to
make sure that outliers and influential observations do not drive the results of an analysis.
I detect outliers by observing the Studentized residuals, and check for influential
observations by observing the Cook’s distance (Cook’s D). Following Fox (1991), I do not
give numerical threshold for which observations should be deemed outliers or influential
observations. Rather, I plot the residuals and Cook’s D, and examine the points that are
substantialle larger than the rest. The Studentized residuals and Cook’s D are plotted
for the all the models in figures B.1-B.10 in appendix B.
Starting with the models employing secrecy jurisdiction status as the dependent
variable (the logistic regression models), by observing the plots in figures B.1-B.5, two
outliers can be detected for all the models: Lebanon and Liberia. In all models, except
the distance model, three influential observations can be detected: Lebanon, Liberia and
the United States. For the distance model, the only influential observation is Japan.
Removing these outliers and influential observations and running the models again does
7.4. ALTERNATIVE OPERATIONALIZATIONS 129
not change the results of the effect of the international political factors compared to
those presented in the previous chapter, as reported in table B.6. In other words, the
results presented in the previous chapter are not driven by outliers and influential cases;
I can still not prove an association between the international political factors and secrecy
jurisdiction status after removing these observations.
For the models employing degree of financial secrecy as dependent variable (OLS
models), two outliers can be detected by observing the plots in figures B.6-B.10:
Austria 2008 and Switzerland 2008. These observations are also deemed influential
observations, in addition to Mauritius 2008. As reported in table B.7, the results of the
international political factors on degree of financial secrecy do not change (compared to
the results presented in the previous chapter) when running the models again with these
observations removed. The results presented in the previous chapter is, in other words,
robust to the removing of outliers and influential case, and these observations do not
drive the results.
To summarize, the associations between the international political factors and, re-
spectively, the likelihood of being a secrecy jurisdiction and the jurisdiction’s degree of
financial secrecy, are robust to the exclusion of the identified outliers and influential
observations.
7.4 Alternative operationalizations
I also test whether the results presented in chapter 6 are robust to different opera-
tionalizations of the variables. I provide an alternative operationalization of one of
the dependent variables, secrecy jurisdiction status, as well as an alternative opera-
tionalization of dependency status. In addition, I run a model where the hierarchy
variable is log transformed. I check whether the results are robust to these alternative
operationalizations.
As described in chapter 5, most scholars resort to a list of secrecy jurisdictions

compiled on the basis of both qualitative and quantitative measures to define which
countries are secrecy jurisdictions and which are not. In this thesis I use a list compiled
by Palan et al. (2010). For an alternative operationalization, I use one of the first
lists compiled of secrecy jurisdictions, a list compiled by Hines and Rice (1994). I test
whether the results of the models in the first analysis, the analysis where I employ secrecy
jurisdiction status as the dependent variable, are robust to this alternative operational-
ization of secrecy jurisdiction status. The results are reported in table B.8 in appendix B.
The results show that the results are not dependent on the operationalization of
secrecy jurisdiction status; none of the international political factors prove statistically
significant when using an alternative list of secrecy jurisdictions. The interaction effect
that was found in the previous chapter, is not statistically significant when using the list
of Hines and Rice.
In chapter 5, dependency status is defined as a dichotomous variable distinguish-

ing between independent countries and dependent territories. However, a few scholars
(see e.g. Bertram 2004 and Eden and Kudrle 2005) operate with a third category:
countries in free association with a metropolitan patron. By using this understanding
of dependency status as an alternative operationalization, I end up with a categorical
variable with three different categories: (i) independent countries, (ii) countries in free
association with another country, and (iii) dependent territories of another country.
The results of employing an alternative operationalization of dependency status are
reported in table B.9. The results show that the effect of being a dependent territory or
a country in free association with a metropolitan patron on secrecy jurisdiction status is
not statistically significant (consistent with the results in chapter 6), while the effect of
being a dependent territory on degree of financial secrecy is negative and statistically
significant (consistent with the results in chapter 6). The effect of being a country in
7.5. SUMMARY 131
free association with another country on degree of financial secrecy is not statistically
significant.
Hierarchical position is in chapter 5 defined as the number of international orga-

nizations a country is member of. As an alternative measure, I log transform this
variable. The results of running the hierarchy model with this variable log transformed
are reported in table B.10. The effect of hierarchical position does not change when
using an alternative measure; the association between hierarchical position and, respec-
tively, secrecy jurisdiction status and degree of financial secrecy, remains statistically
insignificant. Since the link test described in section 7.1 indicated that the original
hierarchy model was misspecified, I run a link test on this alternative hierarchy model.
The link test is not significant, which indicates that this model is correctly specified.
7.5 Summary
The main findings of this thesis are that international political factors are not important
determinants of secrecy jurisdiction status and degree of financial secrecy, and I find
that these results are robust to different model specifications, exclusion of outliers and
influential observations, and alternative operationalizations of variables. In addition, I
find that the logistic models are correctly specified, and that multicollinearity is not a
problem in the models. The negative association between being a dependent territory
and degree of financial secrecy is robust both to an alternative model specification (Tobit-
model), and to the exclusion of outliers and influential observations. The interaction
effect that was proved significant in the previous chapter, however, does not hold to
an alternative specification of secrecy jurisdiction status. All in all, the results of the
models, as presented in chapter 6, are robust to a number of alternative specifications
and operationalizations, lending further support to the findings presented in this thesis.
Chapter 8
Implications
Only combined international

pressure can truly have an effect
[on fighting financial opacity],
by shifting the incentives of tax
havens.
Gabriel Zucman
I will now discuss some of the implications of the non-findings of this thesis, and the
following rejection of the hypotheses regarding international political factors as determi-
nants of secrecy jurisdiction status and degree of financial secrecy.1 First, I offer some
theoretical implications, and point to the implications the findings of this thesis have for
further research. Second, I reflect on how these findings should have implications for the
policy initiatives and approaches launched to curb financial opacity and the use of secrecy
jurisdictions.
1 Chapter quote from Zucman 2015:5
133
134 CHAPTER 8. IMPLICATIONS
8.1 Implications for theory and further research
As mentioned in section 6.5, a possible explanation for the non-findings of this thesis is
related to the distinction between domestic and international political factors. Whereas
I have treated the division between political factors at the domestic and the international
level as clear-cut, this division, in reality, may be more blurry, and the two levels may
intertwine. This calls into question how fruitful the clear divisions between the two levels
are when analyzing secrecy jurisdictions and other similar phenomena. At the very least,
the domestic and international political factors need to be analyzed simultaneoulsy,
seeing as they often can be interrelated. Theoretical approaches to the study on secrecy
jurisdictions should take this into account, and develop a theoretical framework that
allows the two levels to interrelate.
The negative findings of this thesis have, in my opinion, three implications for
further research. First, more emphasis should be put on coming up with a better
way of measuring secrecy jurisdiction status. To rely on a list of secrecy jurisdictions,
like I have in this thesis, which allows for no variation over time, limits the ability of
investigating determinants of which countries become secrecy jurisdictions by restricting
the analyses to cross-sections. As mentioned in section 5.2.1, Zoromé propose an
alternative operationalization of secrecy jurisdiction status that allows for variation
over time, but with a much more limited understanding of what a secrecy jurisdiction
is. A similar approach capturing the broad notion of secrecy jurisdictions, would be a
giant step forward in the research on secrecy jurisdictions. In its essence, Tax Justice
Network’s work on the Financial Secrecy Index (FSI) aim to fill this gap, but the FSI
does not yet cover all countries. While the first FSI released in 2009 covered 60 countries
and jurisdictions, the latest FSI released in 2015 covered 102 countries and jurisdictions.
It is my understanding that the ambition is for the FSI to cover all the countries in
the world in the end, which will make it very useful as a tool for analyzing secrecy
jurisdictions in a quantitative way.
8.2. POLICY IMPLICATIONS 135
Second, substantially more work should be done on expanding data material to

cover smaller countries, territories and jurisdictions. A great portion of available
datasets, with a few exceptions, only cover sovereign states. When studying secrecy
jurisdictions, this is not adequate, since many of them, as pointed out in this thesis,
are dependent territories and subnational jurisdictions. One way to go, would be to
follow the example of Gleditsch (2002), expanding data on GDP and bilateral trade
flows to remedy coverage problems. Gleditsch expands GDP and trade data to cover,
amongst others, the secrecy jurisdictions Antigua & Barbuda, Maldives, Nauru, Andorra,
Liechtenstein, Monaco, San Marino and São Tomé & Principe. To do similar expansions
on other data sources would also improve the ability of analyzing secrecy jurisdictions in
a systematic way.
Finally, more research should be done seeking to identify more relevant interna-
tional political factors that could be used to analyze secrecy jurisdiction within a similar
framework as proposed in this thesis.
8.2 Policy implications
The findings of this thesis should not only spur the refinement of theoreretical approaches
to, and further research on, secrecy jurisdictions. They should also influence the measures
taken and the initiatives launched to combat secrecy jurisdiction, and to curb the use of
them.
As I do not find support for the international political factors presented in this
thesis as important determinants of which countries become secrecy jurisdictions and
their degree of financial secrecy, there is little evidence that taking these factors into
account should have a substantial effect on preventing countries from becoming secrecy
jurisdictions and pursuing a high degree of financial secrecy. Based on the findings of
this thesis, there is not a strong case for working toward countries becoming members
of international organizations and integrating them in the international system in this

particular way to prevent them from becoming secrecy jurisdictions. Similarly, few things
point toward targeting the relationship between dependent territories and metropolitan
countries as a fruitful approach. There is little evidence to support a “race-to-the-
bottom” where countries should lower their corporate tax rates to avoid other countries
establishing themselves as secrecy jurisdictions, and the findings of this thesis do not em-
phasize a particular need to call attention to the regional clustering of secrecy jurisdiction.
The findings of this thesis indicate that it is, rather, the domestic political factors
that explain secrecy jurisdiction status and degree of financial secrecy. In my opinion,
this means that the measures taken should be directed at the domestic factors the
secrecy jurisdiction themselves control and can influence. Leaving the limited scope
of the specific domestic factors presented in this thesis for a moment to address the
domestic political factors more in general, the approaches should then be aimed at
pushing the secrecy jurisdictions themselves to reform. When domestic political factors
are the most important determinants of secrecy jurisdiction status and degree of financial
secrecy, the policy initiatives to fight secrecy jurisdictions also need to be targeting these
factors. This implication leads to two questions: (i) how should the secrecy jurisdictions
reform, and (ii) how should the secrecy jurisdiction be pushed to reform? I answer these
questions in turn.
8.2.1 Ensuring transparency
Since the most attractive features of secrecy jurisdiction is opacity, getting the secrecy
jurisdictions to ensure transparency is the most effective way of curbing the use of them.
First of all, ensuring the exchange of information with other countries’ tax au-
thorities is essential. When policy makers in 2009 declared that, “the era of bank secrecy
is over” (G20 2009), this was on the basis of an agreement among the G20 countries to
urge each secrecy jurisdiction to sign at least 12 bilateral information exchange treaties.
However, Johannesen and Zucman (2014) show that the G20 initative has not led to a
repatriation of funds held offshore, but, rather, that tax evaders have shifted deposits
to other secrecy jurisdictions not covered by a treaty with their home country. In other
words, the funds globally held offshore are left roughly unchanged. In addition, the
relocation of deposits have benefitted the least compliant secrecy jurisdictions. The
results of Johannesen and Zucman (2014) show that pressuring secrecy jurisdictions to
agree to information exchange has the desired effect of tax evaders pulling funds out
of jurisdictions covered by these treaties. However, one needs to avoid leaving many
jurisdictions not covered by these treaties by ensuring that the secrecy jurisdictions agree
to a comprehensive network of treaties, not just bilateral treaties with a few countries.
According to Zucman, there is an important lesson to be taken from the G20 initiative:
[A] partial fight against tax havens is actually counterproductive because it in-
creases the incentive of the remaining havens not to cooperate; to be effective,
a fight against tax evasion has to be truly global. (2015:61-62)
A comprehensive network of treaties is therefore necessary, to make sure that all secrecy
jurisdictions are covered by tax treaties with other countries.
Zucman (2015) also points to another weakness with the G20 approach: the on-
demand exchange of information. The on-demand approach entails countries wishing
to obtain banking information from a secrecy jurisdiction, must have well-founded
suspicions of fraud, which in many instances is almost impossible to prove. To be
effective, the exchange of information should be expanded by increasing the scope for
these treaties to provide for automatic exchange of information (Gravelle 2009:746).
Luckily, both the United States and the Organization of Economic Cooperation and
Development (OECD) have acknowledged this, and recognized the automatic exchange
of data as the goal to be reached (Zucman 2015:62-64).
Increasing the scope of tax treaties, both in numbers and regarding automatic ex-
change, would be an important step toward greater financial transparency. According to
Johannesen and Zucman, “A comprehensive network of treaties providing for automatic

exchange of information would put an end to bank secrecy and could make tax evasion
impossible” (2014:89).
Second, in addition to the provisions of exchange of information, secrecy jurisdic-

tions should be expected to keep registers of beneficial ownership. Many financial and
business registers do not record the names of the real owners—the beneficiaries—of
funds or companies in their registers. In financial registers, the names of the financial
intermediaries is often recorded (Zucman 2015:96), while in company registers, trusts,
foundations and ‘nominated owners’ are often recorded as the owners (Jacobsen and
Ringstad 2014:20-22). This prevents tax authorities, or other institutions, from being
able to identify the real owners of funds and corporations. A register of beneficial
ownership would remove the cloak of secrecy individuals and multinational corporations
make use of, and would make it impossible for tax dodgers and others to hide behind
different names and structures when relocating their funds and companies to secrecy
jurisdictions.
8.2.2 Internationally coordinated efforts
With a couple of suggestions of the measures the secrecy jurisdictions themselves can
take to reform, the following question is what other countries can do to push secrecy
jurisdictions to implement these kind of measures.
First of all, fighting secrecy jurisdictions demands coordinated efforts on the inter-
national level. These issues need a multilateral, collective approach from a coalition of
countries, not just unilateral approach from a few countries committed to the cause.
According to Kudrle and Eden, “[M]eeting the secrecy haven challenge will require
[international] cooperation well beyond anything yet actively considered” (2003:68).
While an extensive network of bilateral tax treaties with extended scope and provisions
for automatic exchange of information would be a welcome development, multilateral
information sharing would be an even more effective way of fighting secrecy jurisdictions
(Gravelle 2009:746; Zucman 2015:5). With a network of multilateral agreements,
few secrecy jurisdictions would be left uncovered by treaties allowing for exchange of
information.
Nevertheless, multilateral efforts, however well coordinated, without the ability to

force countries to abandon their practices of financial opacity, are not likely to be
successful in putting an end to financial secrecy. The countries trying to push secrecy
jurisdictions to reform need powerful tools at their hands. A possible solution to this, is
for countries to start levying sanctions on secrecy jurisdictions proportional to the cost
they impose on other countries. Zucman claims,
Calls for transparency, new laws, or more bureaucrats are insufficient. Only
combined international pressure can truly have an effect, by shifting the in-
centives of tax havens. (2015:5)
Zucman goes on to propose the levying of financial and commercial sanctions on unco-
operative countries. By imposing sanctions, the incentives of the secrecy jurisdictions
could be shifted, and the price of remaining a secrecy jurisdiction deemed too high. The
Foreign Account Tax Compliance Act passed by the US Congress in 2010, allows for
economic sanctions on foreign banks refusing to disclose accounts held by US taxpayers.
The threat has been very effectiv in securing the cooperation of most of the world’s
secrecy jurisdictions, proving that secrecy jurisdictions “can be forced to cooperate if
threatened with large-enough penalties” (Zucman 2015:64). When unilateral sanctions
from the US have proved so effective, multilateral sanctions from a wide range of
countries working together should be expected to be even more potent.
To sum up, the implications of the findings of this thesis are to keep focusing on
the domestic political factors that the secrecy jurisdictions can change themselves—such
as exchange of information agreements and registers of beneficial ownership—and to
push the secrecy jurisdictions to reform through coordinated, international efforts with
powerful enough tools to shift the incentives of secrecy jurisdictions toward cooperation.
Chapter 9
Conclusion
Individually, tax havens may

appear small and insignificant,
but in combination they play an
important role in the world
economy. (...) [T]ax havens are
at the very heart of
globalization.
Palan, Murphy and

Chavagneux
The recent release of the Panama Papers has once again put the issue of secrecy juris-
dictions on the agenda.1 While secrecy jurisdictions are receiving much media attention
right now, they have been around for a long time, and have over the years become
integral parts of the global economy. It is this global aspect of secrecy jurisdictions that
has been the focal point of this thesis, as I set out to investigate whether international
political factors could explain which countries become secrecy jurisdictions, as well as
the degree of financial secrecy in these jurisdictions.
1 Chapter quote from Palan et al. 2010:3
141
142 CHAPTER 9. CONCLUSION
In this thesis, I have explained why we should expect international factors to play
a role in the development of secrecy jurisdictions. Being “at the very heart of
globalization” (Palan et al. 2010:3), it seems plausible that international factors, by
creating structures and an environment countries can take advantage of, could act
as determinants of both secrecy jurisdiction status and degree of financial secrecy.
I identify five international political factors, and—based on theory—I derive five
hypotheses stating that countries in a weak hierarchical position, dependent territories,
countries surrounded by high-tax countries, countries located close to a major finan-
cial center, and countries surrounded by other secrecy jurisdictions are expected to
have a high likelihood of being a secrecy jurisdiction and a high degree of financial secrecy.
Through systematic testing, I do not, however, find strong evidence to support

these hypotheses, although some evidence that they improve predictive ability. The
analyses performed in this thesis mainly give credit to the domestic political factors and
the non-political country characteristics. I find that countries that are well-governed,
have a legal system of British origin, and have a small population have a high likelihood
of being a secrecy jurisdiction. Comparing the secrecy jurisdictions with each other, I
find that being well-governed and having a small population is associated with a high
degree of financial secrecy, while being an island and being affluent is associated with a
low degree of financial secrecy. I explain the effect of governance quality and legal system
by their non-interventionist features, which is adventageous for finance and capital
escaping rules and regulation, and the effect of having a small population is connected to
features of being a small economy and a small polity. The negative association between
island status and degree of financial secrecy can be explained by mainland countries
increasing their financial secrecy provisions to offset the comparative advantage of island
states, while the negative association between affluence and degree of financial secrecy
can be explained by poor countries doing the same to attract more capital in order to
become richer.
143
There may be several explanations of the non-findings regarding international po-

litical factors of this thesis. I point to potential methodological explanations related to
limited data availability, cross-sectional analysis, having few observations, measurement
errors, and the challenges that arise from making use of proxy variables. In addition,
I offer a more theoretical explanation related to the distinction between domestic and
international political factors, which may be more blurry than is assumed in this thesis.
While I do not find support for international political factors as determinants of

secrecy jurisdiction status and degree of financial secrecy, I do find that including
international political factors increases the ability of predicting which countries could
become secrecy jurisdictions in the future. Hence, although international political factors
are not statistically significant in multivariat regression models, they could still offer
important insights through their ability to predict potential future secrecy jurisdictions.
The findings of this thesis merit further research on the association between inter-
national political factors and secrecy jurisdictions, and question how fruitful the
clear-cut distinction between domestic and international political factors really is. The
fact that I identify effects of domestic factors as important determinants in this thesis,
underscores the importance of countries to keep pushing secrecy jurisdictions themselves
to reform and to take domestic measures to ensure greater financial transparency, as well
as the need for a more coordinated effort at the international level to make this happen.
Although the full repercussions of the release of the Panama Papers remain to be
seen, the revelations have already lead to suggestions of policy change in order to
increase financial transparency in many countries, including in the United States.
Recognizing its own role as an important actor in the system of secrecy jurisdictions
through its states, such as Delaware, Nevada and Wyoming, the US Secretary of the
Treasury in the beginning of May 2016 announced several actions to “strengthen financial
transparency and combat the misuse of companies to engage in illicit activities” (United
144 CHAPTER 9. CONCLUSION
States Department of the Treasury 2016). These regulations and legislation include,
among others, beneficial ownership legislation, the strengthening of the information
exchange with other countries, and an increase in the number of bilateral tax treaties. If
other secrecy jurisdictions follow in the footsteps of the United States by implementing
these kind of regulations and legislation, and if other countries join in on a coordinated
international effort to push other secrecy jurisdictions to implement these kind of mea-
sures as well, this would be a giant step towards the elimination of illicit activities taking
place in secrecy jurisdictions, and a giant step towards greater financial transparency.
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of Public Economics 93(11), 1261–1270.
Starr, H. (1991), ‘Democratic Dominoes Diffusion Approaches to the Spread of Democ-

racy in the International System’, Journal of Conflict Resolution 35(2), 356–381.
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//bit.ly/1qpLnr0 [Accessed January 21, 2016].
Tax Justice Network (2015a), ‘Financial Secrecy Index 2015’. Available at: http:
//bit.ly/1Q8xczZ [Accessed January 15, 2015].
Tax Justice Network (2015b), ‘Financial Secrecy Index 2015 Methodology’. Available at:
http://bit.ly/1MuJh3y [Accessed January 21, 2016].
Tax Justice Network (2015c), ‘Financial Secrecy Index: Methods and Concept’. Available
at: http://bit.ly/23vyfTg [Accessed February 11, 2016].
United States Department of the Treasury (2016), ‘Treasury Announces Key Regulations
and Legislation to Counter Money Laundering and Corruption, Combat Tax Evasion’.
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8, 2016].
BIBLIOGRAPHY 153
Vlcek, W. (2007), ‘Why Worry? The Impact of the OECD Harmful Tax Competition
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Ward, M. D., Greenhill, B. D. and Bakke, K. M. (2010), ‘The perils of policy by p-value:
Predicting civil conflicts’, Journal of Peace Research 47(4), 363–375.
Zoromé, A. (2007), Concept of Offshore Financial Centers: In Search of an Operational

Definiton, Working paper 07/87, International Monetary Fund. Available at: http:
//bit.ly/1Vmr0YK [Accessed February 9, 2016].
Zucman, G. (2015), The Hidden Wealth of Nations, The University of Chicago Press.
154 BIBLIOGRAPHY
Appendix A
A.1 Interaction effect

Figure A.1: Interaction effects
ct
edi
Pr i
l
obabi
edpr tes
i
Geogr
aphi
cdi
ffus
ion
Note: All plots include 95% confidence intervals and are based on model 4 in table A.1. In all plots degree of geographic
diffusion varies from its minimum to its maximum (0-90), while in panel A-C distance is set at, respectively, its minimum,
median and maximum values, keeping the other (continuous) variables at their means (binary variables at zero).
155
156 APPENDIX A.
Table A.1: Logit estimates of determinants of secrecy jurisdiction status — interaction
(1) (2) (3) (4)
∗ ∗∗
Log of distance 0.644 1.074 1.203 1.440∗∗∗
(0.447) (0.572) (0.486) (0.555)
Diffusion 0.085∗∗∗ 0.082∗∗ 0.121∗∗∗ 0.131∗∗∗
(0.031) (0.034) (0.037) (0.039)
Log of distance*Diffusion –0.020∗ –0.024∗∗ –0.046∗∗∗ –0.052∗∗∗
(0.010) (0.012) (0.014) (0.015)
Governance quality 1.384∗∗∗ 0.996∗
(0.370) (0.562)
System of government 0.252 0.642
(0.473) (0.585)
Legal system 1.622∗∗∗ 1.459∗∗
(0.556) (0.678)
Log of population –0.602∗∗∗ –0.646∗∗∗
(0.142) (0.152)
Island 1.812∗∗ 1.273
(0.727) (0.788)
Log of GNI per capita 0.901∗∗∗ 0.375
(0.322) (0.407)
Regional dummies? Y Y Y Y
Observations 202 202 202 202
Log Likelihood –90.769 –71.806 –58.419 –51.536
Akaike Inf. Crit. 197.537 165.612 138.839 131.072
Note: This table reports estimated coefficients from logit models

in which the dependent variable equals one for secrecy juris-
dictions and zero otherwise. Data for all models is from 2014.
*p<0.1; **p<0.5, ***p<0.01
A.2. EVALUATING PREDICTIVE POWER OF THE OLS MODELS 157
A.2 Evaluating predictive power of the OLS models
Table A.2: Evaluation of predictive performance of the models
In-sample prediction Out-of-sample prediction

Model MSE Improvement MSE Improvement
Null model 199.5 – 201.5 –

Baseline model 103.1 96.4 111.5 90
Domestic model 100.0 99.5 111.2 90.3
International model 95.6 103.9 111.8 89.7
Note: The columns MSE reports the MSE values of all of the models, and the columns Improvement reports
the model’s improvement in MSE values compared to the null model. The null model contains only the
intercept. The baseline model includes the non-political country characteristics (population, island and GNI
per capita). The domestic model includes the variables of the baseline model, in addition to the domestic
political factors (governance quality, system of government and legal system). The international model
includes the international political factors (dependency status, regional tax rates, distance and diffusion), in
addition to the variables of the domestic model.
158 APPENDIX A.
Figure A.2: In-sample MSE
105.0
102.5
MSE
100.0 ●
97.5
95.0
Baseline Domestic International

model model model
Note: The baseline model includes the non-political country characteristics (population, island and GNI per capita). The
domestic model includes the variables of the baseline model, in addition to the domestic political factors (governance
quality, system of government and legal system). The international model includes the international political factors
(dependency status, regional tax rates, distance and diffusion), in addition to the variables of the domestic model.
A.2. EVALUATING PREDICTIVE POWER OF THE OLS MODELS 159
Figure A.3: Out-of-sample MSE
112.00
●
111.75
●
MSE
111.50
111.25
●
111.00
Baseline Domestic International

model model model
Note: The baseline model includes the non-political country characteristics (population, island and GNI per capita). The
domestic model includes the variables of the baseline model, in addition to the domestic political factors (governance
quality, system of government and legal system). The international model includes the international political factors
(dependency status, regional tax rates, distance and diffusion), in addition to the variables of the domestic model.
160 APPENDIX A.
A.3 Countries included in dataset

Table A.3: List of countries included in the dataset
Afghanistan Albania Algeria Andorra†

Angola Anguilla†Δ Antigua and Barbuda† Argentina
Armenia Aruba†Δ Australia Austria†
† †
Azerbaijan Bahamas Bahrain Bangladesh
Barbados† Belarus Belgium† Belize†
†Δ
Benin Bermuda Bhutan Bolivia
Bosnia and Herzegovina Botswana Brazil Brunei
Bulgaria Burkina Faso Burundi Cambodia
Cameroon Canada Cape Verde Cayman Island†Δ
Central African Republic Chad Channel Islands†Δ Chile
China Colombia Comoros DR Congo
Republic of Congo Cook Island†Δ Costa Rica† Côte d’Ivoir
Croatia Cuba Cyprus† Czech Republic
Denmark Djibouti Dominica† Dominican Republic
Ecuador Egypt El Salvador Equatorial Guinea
Eritrea Estonia Ethiopia Fiji
Finland France Gabon Gambia
Georgia Germany Ghana Greece
Grenada† Guam Guatemala Guinea
Guinea-Bissau Guyana Haiti Honduras
Hong Kong SAR†Δ Hungary Iceland India
Indonesia Iran Iraq Ireland†
Isle of Man†Δ Israel Italy Jamaica
Japan Jordan Kazakhstan Kenya
Kiribati Korea, Dem. Rep. Korea, Rep. Kuwait
Kyrgyz Republic Laos Latvia† Lebanon†
Lesotho Liberia† Libya Liechtenstein†
Lithuania Luxembourg† Macao SAR† Macedonia, FYR
Madagascar Malawi Malaysia† Maldives†
Mali Malta† Marshall Islands† Mauritania
Mauritius† Mexico Micronesia Moldova
Monaco† Mongolia Morroco Mozambique
Myanmar Namibia Nauru† Nepal
Netherlands† Netherlands Antilles†Δ New Zealand Nicaragua
Niger Nigeria Norway Oman
Pakistan Palau Panama† Papua New Guinea
Paraguay Peru Philippines Poland
Portugal Puerto Rico Qatar Russian Federation
Rwanda Samoa† San Marino São Tomé and Principe
Saudi Arabia Senegal Seychelles† Sierra Leone
Singapore† Slovak Republic Slovenia Solomon Islands
Somalia South Africa Spain Sri Lanka
St. Kitts and Nevis† St. Lucia† St. Vincent and the Grenadines† Sudan
Suriname Swaziland Sweden Switzerland†
Taiwan Tajikistan Tanzania Thailand
Togo Tonga Trinidad and Tobago Tunisia
Turkey Turkmenistan Turks and Caicos Islands†Δ Tuvalu
Uganda Ukraine United Arab Emirates† United Kingdom†
United States† Uruguay† Uzbekistan Vanuatu†
Venezuela Vietnam US Virgin Islands†Δ Yemen
Zambia Zimbabwe
†
Secrecy jurisdictions
Δ
Dependent territories, special administrative regions etc.
Appendix B
Robustness checks
B.1 Model specification
Table B.1: Link test logit models
Hierarchy Dependency Tax rates Distance Diffusion Interaction
(1) (2) (3) (4) (5) (6)
Predicted value 10.333∗∗∗ 8.727∗∗∗ 9.160∗∗∗ 9.101∗∗∗ 9.321∗∗∗ 7.142∗∗

(2.844) (2.647) (2.642) (2.662) (2.673) (2.805)
Squared predicted value –5.221∗ –2.995 –3.388 –3.415 –3.578 –0.900
(3.109) (2.781) (2.746) (2.770) (2.763) (3.078)
Observations 188 202 202 202 202 202
Note: Each model consists of the predicted and squared predicted value of the dependent variable
from the original model (i.e. the full models presented in tables 6.1 and 6.2.)
*p<0.1; **p<0.5, ***p<0.01
161
162 APPENDIX B.
Table B.2: Linear model hierarchy
Hierarchy 0.002
(0.002)
Governance quality 0.076
(0.049)
System of government 0.058
(0.065)
Legal system 0.175∗∗∗
(0.063)
Log of population –0.072∗∗∗
(0.019)
Island 0.153∗∗
(0.077)
Log of GNI per capita 0.022
(0.036)
Observations 188
Log Likelihood –51.975
Akaike Inf. Crit. 127.949
∗
Note: p<0.1; ∗∗ p<0.05; ∗∗∗ p<0.01
B.1. MODEL SPECIFICATION 163
Table B.3: Tobit estimates of degree of financial secrecy
(1) (2) (3) (4) (5)
Hierarchy –0.006
(0.095)
Dependency –5.025∗∗
(2.010)
Tax rates 0.154
(0.172)
Distance 0.033
(0.057)
Diffusion 0.040
(0.041)
Governance quality 6.524∗∗ 4.623∗∗ 3.816∗ 3.586 3.199
(2.985) (2.219) (2.223) (2.209) (2.238)
System of government 0.879 1.827 2.730 2.374 2.235
(2.184) (1.760) (1.833) (1.778) (1.774)
Legal system –2.025 1.106 1.692 1.731 0.930
(2.840) (2.095) (2.149) (2.210) (2.168)
Log of population –3.845∗∗∗ –3.894∗∗∗ –3.561∗∗∗ –3.492∗∗∗ –3.392∗∗∗
(1.012) (0.473) (0.457) (0.450) (0.460)
Island –8.870∗∗∗ –9.616∗∗∗ –10.251∗∗∗ –10.498∗∗∗ –10.677∗∗∗
(2.665) (2.293) (2.308) (2.334) (2.336)
Log of GNI per capita –4.405∗∗ –3.817∗∗∗ –3.973∗∗∗ –4.064∗∗∗ –4.301∗∗∗
(1.847) (1.379) (1.401) (1.396) (1.403)
Regional dummies? Y Y Y Y Y
Observations 152 200 200 200 200
Log Likelihood –546.706 –722.460 –725.145 –725.382 –725.067
Wald Test (df = 11) 194.040∗∗∗ 195.343∗∗∗ 185.187∗∗∗ 184.339∗∗∗ 185.567∗∗∗
Note: The full models presented in tables 6.3 and 6.4, estimated using a Tobit model.
∗
p<0.1; ∗∗ p<0.05; ∗∗∗ p<0.01
164 APPENDIX B.
B.2 Multicollinearity
Table B.4: VIF values of logit models
Variables Hierarchy Dependency Tax rates Distance Diffusion Interaction

model model model model model model
Hierarchy 5.75 – – – – –
Dependency – 1.44 – – – –
Tax rates – – 1.82 – – –
Distance – – – 2.78 – 5.94
Diffusion – – – – 1.49 3.39
Distance*Diffusion – – – – – 7.35
Governance quality 3.25 2.95 3.00 2.89 2.98 2.68
System of gov. 1.50 1.47 1.40 1.39 1.40 1.36
Legal system 1.76 1.64 1.60 1.62 1.62 1.72
Population 4.92 1.74 1.72 1.65 1.70 1.92
Island 1.75 1.70 1.66 1.69 1.82 2.24
GNI per capita 3.02 2.78 2.82 2.66 2.77 2.55
Table B.5: VIF values of OLS models
Variables Hierarchy Dependency Tax rates Distance Diffusion

model model model model model
Hierarchy 6.27 – – – –
Dependency – 1.49 – – –
Tax rates – – 1.73 – –
Distance – – – 3.54 –
Diffusion – – – – 2.94
Governance quality 5.22 3.75 3.68 3.62 3.73
System of gov. 1.50 1.35 1.42 1.34 1.33
Legal system 2.65 1.90 1.95 2.06 1.99
Population 7.05 2.19 1.99 1.93 2.03
Island 2.39 2.31 2.28 2.32 2.34
GNI per capita 5.00 3.43 3.45 3.42 3.46
B.3. OUTLIERS AND INFLUENTIAL OBSERVATIONS 165
B.3 Outliers and influential observations
B.3.1 Logit models: Secrecy jurisdiction status
Figure B.1: Studentized residuals and Cook’s Distance for hierarchy model (logit)
Diagnostic Plots
430
426
Studentized residuals
−1 0 −2 1 2
761
430
0.08
Cook's distance
0.04 0.00
0 200 400 600 800
Index
Note: Plot of studentized residuals and Cook’s distance for hierarchy model. Studentized residuals are used to identify
outliers, while Cook’s distance is used to identify influential observations. The observations 430 (Liberia) and 426
(Lebanon) are deemed as outliers, while observations 430 (Lebanon) and 761 (USA) are deemed as influential cases.
166 APPENDIX B.
Figure B.2: Studentized residuals and Cook’s Distance for dependency model (logit)
Diagnostic Plots
3
430
426
−1 0 −2 1 2
430
0.08
761
Cook's distance
0.04 0.00
0 200 400 600 800
Index
Note: Plot of studentized residuals and Cook’s distance for dependency model. Studentized residuals are used to identify
Figure B.3: Studentized residuals and Cook’s Distance for tax rates model (logit)
Diagnostic Plots
3
430
426
−1 0 −2 1 2
430
761
0.08
Cook's distance
0.04 0.00
0 200 400 600 800
Index
Note: Plot of studentized residuals and Cook’s distance for tax rates model. Studentized residuals are used to identify
168 APPENDIX B.
Figure B.4: Studentized residuals and Cook’s Distance for distance model (logit)
Diagnostic Plots
3
430
426
−1 0 −2 1 2
387
0.20
Cook's distance
0.10
430
0.00
0 200 400 600 800
Index
Note: Plot of studentized residuals and Cook’s distance for distance model. Studentized residuals are used to identify
(Lebanon) are deemed as outliers, while observation 387 (Japan) is deemed as an influential case.
Figure B.5: Studentized residuals and Cook’s Distance for diffusion model (logit)
Diagnostic Plots
3
430
426
−1 0 −2 1 2
430
761
0.08
Cook's distance
0.04 0.00
0 200 400 600 800
Index
Note: Plot of studentized residuals and Cook’s distance for diffusion model. Studentized residuals are used to identify
170 APPENDIX B.
Table B.6: Logit models with outliers and influential observations removed
Hierarchy Dependency Tax rates Distance Diffusion
(1) (2) (3) (4) (5)
Hierarchy 0.038
(0.027)
Dependency 0.779
(0.950)
Tax rates –0.037
(0.072)
Distance –0.179
(0.204)
Diffusion 0.007
(0.011)
Governance quality 1.073∗ 1.161∗ 1.054∗∗ 0.992∗ 1.026∗
(0.631) (0.595) (0.533) (0.532) (0.530)
System of government 0.745 1.177∗ 0.507 0.515 0.546
(0.668) (0.663) (0.552) (0.551) (0.553)
Legal system 1.228∗ 1.095 1.366∗∗ 1.350∗∗ 1.324∗∗
(0.729) (0.692) (0.591) (0.588) (0.595)
(0.281) (0.157) (0.133) (0.141) (0.131)
Island 0.928 0.988 0.670 0.524 0.571
(0.725) (0.686) (0.614) (0.643) (0.642)
Log of GNI per capita 0.292 0.386 0.317 0.338 0.319
(0.457) (0.429) (0.387) (0.379) (0.383)
Observations 185 198 202 202 202
Log Likelihood –45.659 –49.206 –59.391 –59.143 –59.341
Akaike Inf. Crit. 115.318 122.412 142.783 142.286 142.682
Note: The full models of tables 6.1 and 6.2 with outliers and influential
observations removed. ∗ p<0.1; ∗∗ p<0.05; ∗∗∗ p<0.01
B.3.2 OLS models: Degree of financial secrecy
Figure B.6: Studentized residuals and Cook’s Distance for hierarchy model (OLS)
Diagnostic Plots
136
4
49
−2 −1 0 1 2 3
136
0.00 0.01 0.02 0.03 0.04
645
Cook's distance
0 200 400 600 800
Index
Note: Plot of studentized residuals and Cook’s distance for hierarchy model. Studentized residuals are used to identify
outliers, while Cook’s distance is used to identify influential observations. The observations 136 (Switzerland 2008) and
49 (Austria 2008) are deemed as outliers. The observation 136 (Switzerland 2008) is deemed an influential case.
172 APPENDIX B.
Figure B.7: Studentized residuals and Cook’s Distance for dependency model (OLS)
Diagnostic Plots
4
136
49
3
−1 0 1
−2 2
136
523
0.010 0.020 0.030
Cook's distance
0.000
0 200 400 600 800
Index
Note: Plot of studentized residuals and Cook’s distance of dependency model. Studentized residuals are used to identify
49 (Austria 2008) are deemed as outliers. The observation 136 (Switzerland 2008) and 523 (Mauritius 2008) are deemed
influential cases.
Figure B.8: Studentized residuals and Cook’s Distance for tax rates model (OLS)
Diagnostic Plots
4
136
3
49
−1 0 1
−2 2
136
523
0.03
Cook's distance
0.01 0.02
0.00
0 200 400 600 800
Index
Note: Plot of studentized residuals and Cook’s distance for tax rates model. Studentized residuals are used to identify
influential cases.
174 APPENDIX B.
Figure B.9: Studentized residuals and Cook’s Distance for distance model (OLS)
Diagnostic Plots
4
136
3
49
−2 −1 0 1 2
136
523
0.010 0.020 0.030
Cook's distance
0.000
0 200 400 600 800
Index
Note: Plot of studentized residuals and Cook’s distance for distance model. Studentized residuals are used to identify
influential cases.
Figure B.10: Studentized residuals and Cook’s Distance for diffusion model (OLS)
Diagnostic Plots
136
49
3
−1 0 1 2
0.06 −2
49
136
Cook's distance
0.02 0.04
0.00
0 200 400 600 800
Index
Note: Plot of studentized residuals and Cook’s distance. Studentized residuals are used to identify outliers, while Cook’s
distance is used to identify influential observations. The observations 136 (Switzerland 2008) and 49 (Austria 2008) are
deemed both as outliers and influential cases.
176 APPENDIX B.
Table B.7: OLS models with outliers and influential observations removed
Hierarchy Dependency Tax rates Distance Diffusion
(1) (2) (3) (4) (5)
Hierarchy –0.023
(0.085)
Dependency –4.389∗∗
(1.831)
Tax rates 0.137
(0.157)
Distance 0.369
(0.789)
Diffusion 0.051
(0.039)
Governance quality 4.302 3.277 2.592 2.243 1.867
(2.667) (2.031) (2.038) (2.040) (2.051)
System of government 0.357 1.291 2.082 1.746 1.619
(1.933) (1.601) (1.666) (1.616) (1.610)
Legal system –0.662 1.886 2.400 2.398 1.602
(2.553) (1.923) (1.969) (2.027) (1.983)
(0.903) (0.432) (0.417) (0.472) (0.420)
Island –8.772∗∗∗ –9.365∗∗∗ –9.902∗∗∗ –9.778∗∗∗ –10.454∗∗∗
(2.387) (2.099) (2.113) (2.155) (2.138)
Log of GNI per capita –3.387∗∗ –3.322∗∗∗ –3.461∗∗∗ –3.416∗∗ –3.815∗∗∗
(1.643) (1.258) (1.278) (1.328) (1.277)
Observations 149 197 197 197 197
Log Likelihood –540.541 –717.968 –720.572 –720.863 –720.072
Akaike Inf. Crit. 1,105.083 1,459.935 1,465.145 1,465.727 1,464.143
Note: The full models of tables 6.3 and 6.4 with outliers and influential
observations removed. ∗ p<0.1; ∗∗ p<0.05; ∗∗∗ p<0.01
B.4. ALTERNATIVE OPERATIONALIZATIONS 177
B.4 Alternative operationalizations
B.4.1 Secrecy jurisdiction status
Table B.8: Logit estimates with alternative operationalization of secrecy jurisdiction status
Dependent variable: Secrecy jurisdiction status (Hines and Rice 1994)
(1) (2) (3) (4) (5) (6)
Hierarchy 0.031
(0.024)
Dependency 0.842
(0.852)
Tax rates 0.032
(0.070)
Distance –0.063 0.886
(0.292) (1.059)
Diffusion 0.014 0.048
(0.013) (0.043)
Governance quality 0.472 0.524 0.610 0.605 0.582 0.646
(0.552) (0.606) (0.594) (0.597) (0.603) (0.609)
System of government –0.228 –0.081 –0.146 –0.182 –0.172 –0.130
(0.635) (0.642) (0.633) (0.632) (0.644) (0.641)
Legal system 1.492∗∗ 1.798∗∗∗ 1.658∗∗ 1.651∗∗ 1.594∗∗ 1.491∗∗
(0.685) (0.688) (0.658) (0.657) (0.659) (0.674)
(0.231) (0.163) (0.158) (0.167) (0.160) (0.170)
Island 0.063 0.473 0.604 0.555 0.384 0.384
(0.725) (0.696) (0.681) (0.688) (0.708) (0.713)
Log of GNI per capita 0.382 –0.041 0.059 0.011 –0.056 –0.059
(0.373) (0.411) (0.417) (0.406) (0.410) (0.412)
Distance*Diffusion –0.011
(0.013)
Regional dummies? Y Y Y Y Y Y
Observations 188 202 202 202 202 202
Log Likelihood –48.248 –48.138 –48.541 –48.625 –48.134 –47.738
Akaike Inf. Crit. 112.496 120.275 121.082 121.251 120.268 123.475
Note: The full models of tables 6.1 and 6.2 with an alternative list of secrecy jurisdictions
(Hines and Rice 1994) as the dependent variable. ∗ p<0.1; ∗∗ p<0.05; ∗∗∗ p<0.01
178 APPENDIX B.
B.4.2 Dependency status
Table B.9: Estimates with alternative operationalization of dependency
Dependent variable:
(1) (2)
Dependent territory 0.760 –5.319∗∗

(1.042) (2.118)
Associated state 0.690 –1.563
(1.337) (4.076)
Governance quality 1.000∗ 4.367∗∗
(0.530) (2.161)
(0.568) (1.713)
Legal system 1.407∗∗ 1.035
(0.601) (2.046)
(0.133) (0.464)
Island 0.612 –9.103∗∗∗
(0.629) (2.279)
Log of GNI per capita 0.306 –3.335∗∗
(0.389) (1.376)
Regional dummies? Y Y
Observations 202 200
Log Likelihood –59.163 –742.041
Akaike Inf. Crit. 144.326 1,510.082
Note: The full dependency models of tables 6.1 and 6.3 with
alternative operationalization of dependency status
∗
p<0.1; ∗∗ p<0.05; ∗∗∗ p<0.01
B.4. ALTERNATIVE OPERATIONALIZATIONS 179
B.4.3 Hierarchical position
Table B.10: Estimates with hierarchy log transformed
Dependent variable:
(1) (2)
Log of hierarchy 1.582 –0.206

(1.243) (3.988)
Governance quality 1.000∗ 6.229∗∗
(0.554) (2.904)
(0.596) (2.113)
Legal system 1.464∗∗ –2.072
(0.651) (2.758)
(0.245) (0.886)
Island 0.604 –8.798∗∗∗
(0.695) (2.658)
Log of GNI per capita 0.230 –4.176∗∗
(0.400) (1.785)
Regional dummies? Y Y
Observations 188 152
Log Likelihood –55.202 –565.480
Akaike Inf. Crit. 134.404 1,154.960
Note: The full hierarchy models of tables 6.1 and 6.3 with the hierarchy
variable log transformed. ∗ p<0.1; ∗∗ p<0.05; ∗∗∗ p<0.01

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A world of secrecy

International political factors and secrecy jurisdictions

Jarle Aarbakke Tollaksen

Department of Political Science

A world of secrecy. International political factors and secrecy jurisdictions.

Jarle Aarbakke Tollaksen

Trykk: Reprosentralen, Universitetet i Oslo

5.4 Control variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

7 Robustness checks 125

4.1 The hierarchy of world cities as core-periphery relations . . . . . . . . . . 38

5.1 Frequency of tax haven listings . . . . . . . . . . . . . . . . . . . . . . . 58

6.1 Predicted probabilities of being a secrecy jurisdiction — position . . . . . 91

4.1 Summary of theoretical framework and hypotheses . . . . . . . . . . . . 50

5.1 Descriptive statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

6.1 Logit estimates of determinants of secrecy jurisdiction status — position 89

Tax havens with their financial

1.1 The research puzzle and its relevance

Whereas domestic political factors relate to the internal structures of a country,

1.1.1 International political factors

factors need to be included in the analysis.

I make a clear distinction between domestic and international political factors,

1.1.2 Research question

1.2 Research design and findings

I find that none of the international political factors identified—hierarchical posi-

acteristics, as well as regional effects. Two of the domestic political factors—governance

When investigating international political factors as determinants of degree of fi-

The analyses of determinants of secrecy jurisdiction status and degree of financial

become secrecy jurisdictions compared to focusing solely on domestic political factors

I proceed by presenting the theoretical underpinnings of the empirical analysis in

In chapter five I present a research design that enables a quantitative analysis of

The provision of legally enforced

2.1.1 Secrecy jurisdictions

Shaxson offers a similar definition of a secrecy jurisdiction2 : “(...) a place that

2.1.2 Financial secrecy spectrum

2.1.3 The different terms of offshore banking

A ‘tax haven’ is normally understood as a country or jurisdiction with no or low

Palan et al. claim,

Sometimes secrecy jurisdictions are understood as a new phenomenon associated with

2.2.3 The use of secrecy jurisdictions

To sum up, secrecy jurisdiction is a multifaceted concept. The essence of secrecy

Some of the characteristics of

Dharmapala and Hines

3.1 Domestic political factors

3.1.1 Governance quality

The quality of governance seems to be an imporant determinant of which countries and

3.1.2 Political stability

Although political stability is included in the measurement of governance quality in the

3.1.3 Size and island status

A considerable amount of the literature on secrecy jurisdictions is centered on the

status and secrecy jurisdictions worth mentioning.

Secondly, Hampton and Christensen (2002) point to a specific culture characteriz-

3.1.4 Level of democracy

Related to another aspect discussed earlier, the double-edged stability requirement

3.1.5 Legal system

3.2 International political factors

3.2.1 Dependency status

An important political factor associated with secrecy jurisdictions is a country’s depen-

Following Baldacchino, the explanation of the association between dependence

3.2.2 Safe haven

The determinants and motivations of being a secrecy jurisdiction can in both of

To summarize, a substantial amount of research has been done on the association

To understand tax havens, one