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Socially Responsible Finance and Investing: Financial Institutions, Corporations, Investors, and Activists by John R. Nofsinger, H. Kent Baker

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CHAPTER 15

Use and Misuse of Financial Secrecy in Global Banking

INGO WALTER

Seymour Milstein Professor of Finance, Corporate Governance and Ethics, New York University

MICROECONOMICS OF FINANCIAL SECRECY

Financial confidentiality involving nondisclosure of financial information concerning individuals, firms, financial institutions, and governments, represents an integral part of the market for all banking and financial services, fiduciary relationships, and regulatory structures. It also constitutes a “product” that has intrinsic value, and that can be bought and sold separately or in conjunction with other financial services. At the same time, financial nondisclosure can also be used in a multitude of ways that damage society as a whole. For example, confidentiality is required for tax evasion, money laundering, evading national currency policies, political corruption, and a host of other activities that generate negative externalities and cause damage to society.

This chapter examines financial secrecy as a business policy engaged in by international financial institutions, as well as countries seeking to benefit from their role as secrecy havens. It begins with a discussion of the microeconomics of secrecy—demand, supply, equilibrium, and consumer and producer surplus—which are some of the most familiar concepts of economics in a rather unfamiliar guise. The chapter proceeds to discuss the two important applications of financial secrecy: money laundering and tax evasion. The ...

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