When is blacklisting effective? Stigma, sanctions and legitimacy: the reputational and financial costs of being blacklisted

ABSTRACT

Blacklisting is a policy tool that is used extensively in the international political economy, and blacklists have been invoked following the Panama Papers scandal, Russia's annexation of Crimea and the Democratic Republic of North Korea's proliferation activities. To analyse the principal mechanisms at work in what is an understudied tool of global governance, this paper compares the Organisation for Economic Co-operation and Development’s and the Financial Action Task Force's blacklisting of secrecy havens in the years 2000–2009. We show that blacklisting can be used to impose both reputational and financial costs on a state and highlight three factors that contribute to a blacklist's effectiveness: the stigma attached to the act that led to the blacklisting, the nature of any sanctions that it imposes and the blacklist's legitimacy. The blacklisting of Liechtenstein and Nauru highlight the interplay between these factors, but they also raise questions about the legitimacy of blacklisting itself.

KEYWORDS:

• Blacklisting
• tax havens
• international organizations
• international political economy
• global governance
• financial sanctions
• OECD
• FATF

Acknowledgments

This paper benefited from comments and discussions with Patrick Emmenegger, Richard Woodward, Joseph E. Stiglitz, Klaus Schwab, Joseph S. Nye Jr., Robert O. Keohane, Rawi Abdelal, Daron Acemoglu, Robert T. Kudrle, Ronen Palan, Kishore Mahbubani, Lukas Hakelberg, Klaus Dingwerth, Pascal Saint-Amans, Jeffrey Owens, Rick McDonell, Gordon Brown, José Manuel Barroso, Wolfgang F. Danspeckgruber, Adrian Hasler, Klaus Tschütscher, Otmar Hasler, Mario Frick, Hans Brunhart, Simon Tribelhorn, Philip Schädler and Heinz Frommelt. I thank the three anonymous reviewers for their excellent comments. Part of this work was undertaken whilst I was visiting Princeton University. I acknowledge the support of the Woodrow Wilson School of Public and International Affairs and its Liechtenstein Institute on Self-Determination.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. See also Adler-Nissen (2013, 2014), Fougner (2008), Heng and McDonagh (2008), Kelley and Simmons (2015), Larner and Le Heron (2004), Löwenheim (2008).

2. Baldwin (1985), Barber (1979), Galtung (1967), Haass (1997), Pape (1997), Peksen and Drury (2009), Wallensteen (1968).

3. Drezner (2000, 2015), Arnold (2016), Loeffler (2009), Torbat (2005), Zarate (2013).

4. The inaugural EU blacklist contains 17 countries that fail to meet good governance tax standards. A further 47 countries, including Liechtenstein and Switzerland, have been put on a ‘grey-list’ (European Commission, 2017).

5. See also Hansen (2012), O'Callaghan (2007), Gillies (2010), Power, Scheytt, Soin, and Sahlin (2009), Sharman (2009).

6. Other authors who study stigma include: Chwieroth (2015), Tannenwald, (2005), Zarakol, (2011).

7. Other authors include: Baldwin (2000), Bapat and Kwon (2015), Drezner (2003), Pape (1997), Peterson (2013), Swedlund (2017).

8. See Arnold (2016), Loeffler (2009), Masciandaro (2005), Torbat (2005), Zarate (2013).

9. A few of the OECD's instruments can be described as ‘hard law’, such as the Codes of Liberalisation of Capital Movements. It obliges member states to remove barriers to the movement of capital, yet there is no formal sanctioning mechanism for breaches of it and sometimes no mechanism for even determining breaches (email Angel Gurría, August 2017).

10. The OECD's 1961 Convention does not mention tax.

11. Six were found not to qualify and another six committed just before the blacklist was published.

12. The G20 called on Angel Gurría, Secretary-General of the OECD, to step up the fight against banking secrecy (author's interview José Manuel Barroso, November and December 2015).

13. The interpretive note to Recommendation 19 provides examples, including refusing the establishment of subsidiaries, branches or offices of financial institutions from the state concerned and limiting business relationships and transactions with the state and its persons (FATF, 2012).

14. For instance, Singapore forbade some Liechtensteinian banks from opening branches due to the OECD's blacklist (Sharman, 2006).

15. GDP per capita adjusted to purchasing power parity (Central Intelligence Agency, 2017).

16. Liechtenstein's banking secrecy laws date from January 1923 and evolved from the distrust of national authorities that came from the atrocities, rights failures and expropriations of the inter-war period (Landesverwaltung Fürstentum Liechtenstein, 1923).

17. An exogenous event that can trigger a regulatory change process (Mattli & Woods, 2009).

18. G20 Summit Chair and Prime Minister Gordon Brown said that Nicholas Sarkozy threatened to storm out of a tense meeting over differences within the G20 over tax issues. France wanted sanctions to be imposed on non-compliant states but the People's Republic of China was highly resistant (author's interview Gordon Brown, September 2016).

19. Whilst Liechtenstein avoided being on this third blacklist, they were placed on a ‘graylist’ of 38 jurisdictions that had committed to, but not substantially implemented the OECD's standards (Lawrence, 2009).

20. Previous standards provided information on request, but the Automatic Exchange of Information requires information to be sent yearly without a specific request (Eggenberger & Emmenegger, 2015).

21. Letter from President Harris to Secretary-General Johnston, 3 December 2003, Re: OECD Harmful Tax Initiative.

Additional information

Notes on contributors

Katrin Eggenberger

Katrin Eggenberger is a PhD candidate in the Doctoral Programme in International Affairs and Political Economy at the University of St. Gallen, Switzerland. Her current research revolves around the fight for international tax standards, tax evasion and anti-corruption practices as well as International Organizations and the political technologies of global governance.