Thursday, October 09, 2008

Gazprom and bean-counters without a conscience

Edward Lucas has an interesting piece in the FT about Russia's geo-political ambitions. It starts like this:

"When I first published The New Cold War last February, many contested my title. But what once seemed eccentric now looks mainstream."

He argues forcefully, as many others have done, for a useful European energy policy.

"We can . . . make it harder for Russia to do the things that endanger us. The overwhelming need is to rethink energy policy. At the moment, the push inside the EU is for greater liberalisation. That would be fine, if we were not dealing with highly politicised monopolists as our energy suppliers."

Quite so. Liberalisation must certainly not be implemented willy-nilly, as it has been. And what is required is international co-ordination, in this case particularly within Europe. We agree, though energy policy is not our core area. However, what he says next is exactly our kind of thing:

"Even more important is restricting the flow of dirty money (not only from Russia) into our banks and markets. Instead of being bean-counters without a conscience, accountants must be guardians of financial probity, with a demanding test for clients whose business model is based on rent-seeking and cronyism. Some of the energy trading companies with close Kremlin ties based in Europe are little more than conspiracies to loot from the Russian taxpayer, gaining oil and gas cheaply and selling it dearly.

The same goes for bankers. If they conceal the beneficial ownership of these phoney companies they are an accomplice to theft. Perhaps one of the benefits of the credit crunch will be a more sceptical response to financiers who maintain that their critics are Luddites. The west has done well to impede the crudest kind of money-laundering. It is no longer possible to turn up at an Austrian bank with a suitcase full of cash, open an account, and make some transfers. We should apply the same principle to asset-laundering: using western capital markets to sell shares and bonds in phoney companies."

Well said! This highlights that there are two main ways to hide dirty money: through bank secrecy (such as in Switzerland or Liechtenstein) and through hiding beneficial ownership such as through phoney companies, which is the more British way (and typically, offshore structures involve a mixture of both spread across different jurisdictions.) Asset-laundering: it is an accurate term.

This reminds us of a recent call by Misha Glenny, the Balkans expert. As we blogged not so long ago:

"Glenny ends with a call for action. The task, which no government wants to confront, is to regulate the global markets and above all the financial markets. National governments (including the British) which issue sanctimonious statements about global crime must start by closing down their offshore banking centres (the Caymans, the British Virgin Islands and so on), which are the world’s laundries for dirty money. There was a moment in the 1990s when regulation seemed possible. But nothing happened. Misha Glenny’s closing words are despairing: ‘Since the millennium . . . a hostile United States, an incompetent European Union, a cynical Russia and an indifferent Japan have combined with the unstoppable ambition of China and India to usher in a vigorous springtime both for global corporations and for transnational organised crime."

Back to today, and Luce's article:

"We need to hurry. It will not be too long before financial centres such as Dubai, Shanghai and Mumbai are competing so effectively with London that clients that we find too dodgy will go elsewhere. What our financial centres sell, above all, is respectability. We have priced it too cheaply in the past few years. It is time to be choosier, while we still have some left in stock."

Exactly. Now is the moment to build global financial governance. Everything during, and in the immediate aftermath of, the current market turmoil, is up in the air. Those with a conscience, and those worried about our security, need to act now to make sure the pieces are in place. Powerful foreign governments will be sympathetic to a request for co-ordinated actions, not least those that will lead to more stable markets and stronger tax systems.

Some of our governments have been captured by the finance industry, and this is endangering our national security. These two authors are experts in their geographical fields, and they are worried about our security. And they are dead right.

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