Friday, October 10, 2008

TJN in the news - The Threat Lying Offshore

(Update, Oct 18: IMF, OECD agree with TJN's analysis.)

TJN is in the news again (see here for more recent appearances in newspapers and on television). Today TJN's director, John Christensen and senior adviser Richard Murphy have co-authored an article on the comment pages of The Guardian newspaper, entitled: The threat lying offshore. It builds on recent blogs, notably here (with associated links,) by highlighting the role of tax havens in the current crisis.

Please read the Guardian article, and add to the comments underneath it on the web site. The article was substantially cut back from its original, for space reasons, and some important information was left out. Please also read the original article, which we have pasted in full below this blog. Here we highlighe a couple of points that were excised. Tax havens, we argued,

"have been at the very core of the neo-conservative project. For decades these jurisdictions have forced governments to make endless concessions on tax and regulation to powerful vested interests, backed by lobby organisations financed by neo-con interests in the US. Tax havens have quietly and willingly done the dirty work for those who want to see wealth and capital freed from tax and regulatory constraints. They have proved they can deliver on these objectives: unless they are tackled they will sabotage future efforts to build global governance and international co-operation."

This is crucial. As the published article mentions, tax havens are not just the exotic palm-fringed islands of the popular imagination. They are also places at the heart of the global economy. This is important. Here is another point which we think illustrated our arguments quite well, and which was mostly removed:

"A company incorporated in the Isle of Man may belong to a trust in Jersey, hold its bank account in Luxembourg, with all apparently controlled by nominee directors in the Cayman Islands. Even if each haven's claim to be well regulated were true, the regulation of such a company falls between stools: they are, in effect, regulated nowhere, since each jurisdiction only accepts responsibility for what happens in its domain and none for the entity as a whole. This is deliberate."

Plenty of other points were removed, although on balance it was a decent enough edit, given the space constraints. In any case, here is the original article, which is about 30% longer than the published version.

Tax havens and the financial crisis
By John Christensen and Richard Murphy

The global economic crisis means that financial re-regulation is, finally, on the agenda. Most people now agree it is needed, on a global level. Some say this is impossible in a world of self-interested sovereign states, but we disagree: it is possible, but only if we look at the context in which regulation is embedded. There we find the essence of the problem, which is almost entirely off the global radar screen -- tax havens. The offshore world deliberately created the conditions that led to this crisis, and unless tax havens are tackled it will undermine all future efforts to deal with it.

What do tax havens do? In truth, the term is a misnomer and we prefer the term "secrecy jurisdictions." This is because they offer not one thing but three: low or zero taxes, secrecy, and lax regulation. In doing so they "compete" against reputable countries, with each jurisdiction trying to out-do the others on ever lower corporate taxes and laxer regulation. As we said in our June submission to the UK House of Commons Treasury Committee on Offshore Financial Centres, tax havens set out deliberately to "undermine the impact of legislation passed in other jurisdictions," and to make things appear other than they are. This is their core business, and this is the threat they pose to the world.

The impact of this is now being seen in the current economic crisis. The banking system has largely ceased to function because banks have ceased to trust their peers' finances, structures and accounting disclosure. Opacity has been at the heart of the matter. And it is secrecy jurisdictions that create this opacity, in several ways.

First, and most obviously, they offer secrecy. All major banks have taken advantage of this, ably assisted by the Big 4 firms of accountants who operate in every significant tax haven.

Second, they generate uncertainty about who owns what. Offshore entities were frequently used to isolate ownership of financial vehicles from their onshore parents, so as to secure higher credit ratings. The arrangements are often abusive, involving trusts and supposedly charitable arrangements -- from which no charity ever seems to benefit. The result was, for example, that when Northern Rock was nationalised the House of Commons held late night debates on whether this meant its Jersey-based shadow company, Granite, was also nationalised. The reality was that no one knew. Its £40 billion of assets apparently lived in limbo in a world where no one knew the rules. It is often the case that nobody can be sure who will honour the debts of what are, legally speaking, separate entities. All of the current victims of the current crisis: Lehman, Bear Stearns, HBOS, UBS, Saschen LB, and more had plunged very deep into this style of offshore operation.

Third, they generate complexity, a form of opacity. Complexity benefits the person who is, as an Enron director once quipped, 'the smarter man in the room'. It has without doubt been used to shift risk from big financial institutions to society at large. Companies have festooned their finances around the world, spreading complex structures across jurisdictions to exploit regulatory gaps. A company incorporated in the Isle of Man may belong to a trust in Jersey, hold its bank account in Luxembourg, with all apparently controlled by nominee directors in the Cayman Islands. Even if each haven's claim to be well regulated were true, the regulation of such a company falls between stools: they are, in effect, regulated nowhere, since each jurisdiction only accepts responsibility for what happens in its domain and none for the entity as a whole. This is deliberate.

Regulation cannot function effectively in such a world. The failing banks knew and exploited that. And tax havens will enable many beneficiaries of the years of exuberance to protect their winnings in offshore black boxes, even if law courts wish otherwise.

These tax havens are not just the exotic palm-fringed islands of the popular imagination. They are also places at the heart of the global economy. In particular the City of London has many offshore features. The IMF thinks London is ‘offshore’. When coupled with Britain’s deep links with numerous satellite tax havens like Jersey and Cayman it becomes clear that Britain must be central to a global response to this problem. Gordon Brown and his predecessors have ignored this: we believe they deliberately looked the other way and let tax havens flourish. As a result they they have failed to protect the British public from disasters such as the one currently unfolding, and knowingly permitted the harm secrecy jurisdictions wreak on poor people in Africa and elsewhere.

This has been exploited to the full by the tax havens -- which have been at the very core of the neo-conservative project. For decades these jurisdictions have forced governments to make endless concessions on tax and regulation to powerful vested interests, backed by lobby organisations financed by neo-con interests in the US. Tax havens have quietly and willingly done the dirty work for those who want to see wealth and capital freed from tax and regulatory constraints. They have proved they can deliver on these objectives: unless they are tackled they will sabotage future efforts to build global governance and international co-operation.

That is why we must gear up for a global fight against tax havens. The mood is already shifting. The Liechtenstein Affair and the UBS tax scandal, among many other things, are focusing European and American minds; the Stop Tax Haven Abuse Act in the US has cross-party support. We have noticed Africans, Latin Americans and others protesting recently too.

This push must do several things. In the long term it must stop regulation from being embedded in a context riddled with powerful actors who are deliberately aiming to undermine it. More immediately, it will help policy-makers address the fall-out from the crisis by giving them back the powers to tax wealth and capital properly, and to cushion the losers. And it will constrain what is, in effect, a secrecy-suffused global hothouse for cross-border crime. Tackling the growing tension between global integration and a lack of credible international governance is impossible while these jurisdictions and the financial and criminal communities that populate them thwart our attempts to deploy democratic controls. We stress, the secrecy jurisdictions' role in this is not limited to the current crisis: it is generic. Undermining democratic accountability is what they do for a living.

Politicians can, and must, be braver now. Public interest demands it.

John Christensen is an economist and director of the Tax Justice Network. Richard Murphy is a chartered accountant and director of Tax Research LLP.

Oh, and there are other parts to our analysis of the offshore world and the current economic crisis. We will bring them to you in due course.

We like this comment posted under the story on the web site:

"The real reason that the great powers don;t act is AAaaghh there's a horses head in my be...."

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