Wednesday, October 15, 2008

Britain's toxic fiddling

As Larry Elliott says in today's Guardian, the current crisis presents an opportunity for global as well as domestic reform of the financial architecture, and that means also tackling the issue of how to regulate tax havens and the offshore financial markets.

As recently as end-September 2008, prime minister Gordon Brown told the UN General Assembly that: “We must now build a new global financial order founded on transparency not opacity."

The UK has played a particularly dirty game in this arena. British politicians like to parade themselves internationally as being at the forefront of tackling corruption and promoting international development. Yet for decades the UK and US have stood in the way of progress here, undermining the efforts of the OECD, for example, and preventing the United Nations from addressing tax issues by blocking attempts to strengthen the UN Committee of Experts on International Cooperation in Tax Matters (the Tax Committee).

Behind the scenes in the run up to the forthcoming Doha conference on financing for development, British officials (and their willing accomplices from Australia, Canada and the USA) are trying to block discussion of tax matters in Doha - which kind of wrecks the intention of the Monterrey Consensus, upon which the Doha process builds, to focus on mobilising the domestic resources of poorer countries to finance their own development. In particular, British officials object to the proposal to upgrade the UN Tax Committee to intergovernmental status. They apparently like things just the way they are, which leaves the current committee hopelessly lacking resources, research funding, staff, capacity to do anything other than meet once yearly in Geneva to discuss model conventions and other technical matters.

The wily old leopard hasn't changed its spots. As we have argued for years, Britain has a particular responsibility for tackling the tax havens since so many of these toxic fiddle factories are intricately linked to the City of London and politically tied to Britain. The trouble is that Britain has become dependent on flight capital from other countries to cover its yawning current account deficit. And the City of London's satellite tax havens have acted as a conduit for huge inflows from across the world, including massive illicit financial flows from developing countries.

This is not a new occurence. As this article from an Indian magazine points out:

"Since the 1960s the West has created and expanded an entire integrated global financial structure for the purpose of moving illicit money across borders.

The 1960s marked the point at which this took off in earnest for two reasons. First, it was the decade of decolonisation. From the late 1950s to the end of the 1960s, 48 countries became independent, and the political and economic elites of many of these countries wanted to take their money out. The West had created a system that facilitated this illegal flight of capital. The second reason the 1960s marked the point when the development of this structure took off in earnest was that this was the decade when multinational corporations began to spread their tentacles across the globe."


Tax havens like Bermuda, British Virgin Islands, Cayman, Guernsey and Jersey have played a crucial role in enabling these illicit financial flows. Over 30 tax havens around the world are linked to Britain, either through the Commonwealth or as overseas territories and Crown dependencies, but successive British governments have done nothing to rein in their activities. As recently as last week, after all the political pressure to tackle tax evasion following the Liechtenstein affair earlier this year, we heard from a British Treasury official that it would be impractical to extend the European Union's Savings Tax Directive to include trusts. No explanations were given, just a blanket unwillingness to cooperate. Trusts lie at the heart of many, if not most, major tax evasion and avoidance schemes. They are used systematically for this purpose in the majority of British related tax havens.

Once the dust has settled from the current stage of the global crisis -- and we suspect this might take rather a long time -- urgent steps are required to re-establish a functional global financial architecture that places public interest over the interests of the bankers and lawyers. This process should happen within the context of a second Bretton Woods conference. The issue of tax havens musy be high on the agenda: and Britain must finally concede that national self-interest (which boils down to a global game of beggar-thy-neighbour) must be subordinated to the wider interest of global stability, security and peace.

And anyway, as the current crisis in Britain makes clear, all those hundreds of billions of inflows have contributed to the asset bubble which now threatens the livelihoods of millions of households. The party is over, and Britain's dirty secret is revealed for all the world to see.

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