Thursday, August 28, 2008

Sarkozy on tax havens, and more


French President Nicolas Sarkozy has just delivered a speech to assembled ambassadors about, well, the state of the world.

We recently noted how Joseph Stiglitz has been talking about the damage that tax havens cause to the world economy. Now it seems Sarkozy is on the case. Here's an excerpt:

"The first factor that has marked the past year is of course the financial crisis that began with the "subprime" scamdal, serious -but still unpunished- mistakes by rating agencies and, in a general way, the excesses of financial capitalism which has experienced serious abuses: concealment of risks, uncontrolled sophistication of financial instruments, gaps in regulation and persistence of tax havens capturing a part of global savings that would be more justly employed financing investment and growth."

While we will wait to see concrete actions from Mr. Sarkozy's government before getting too excited, it is nice to see him saying just the sort of thing that we have been saying for some time. People are beginning to notice the central role of tax havens in this ghastly global economic mess. Many people haven't yet noticed much so far - because of the secrecy jurisdictions' remarkable ability to shift the blame "elsewhere" - and nowhere.

While on the subject of France, the French speakers among you may be interested to hear of a radio programme, soon to be aired (in French), on the subject of tax havens. Featuring TJN and several of its allies.

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Macavity and the hitch-hiker's guide to nowhere

TJN has been thinking about secrecy jurisdictions, and what they do. Its director John Christensen and senior adviser Richard Murphy have been pursuing approaches to the problem that have converged in important ways. John's recent keynote speech to the Alpbach Forum (which we blogged recently) was entitled "The Hitchhiker’s Guide to Nowhere: A journey into economic anarchy."

Why "nowhere?" Bear with us.

John was previously economic adviser to the states of Jersey:

"Working in Jersey for 14 years helped me understand how secrecy jurisdictions facilitate capital flight and tax evasion. Most of my work involved creating elaborate structures for shifting profits out of producer countries and consumer countries into offshore structures. Tax evasion, typically dressed up as tax avoidance, was the principal motive."

And then he added:

"I was trained to create tax dodging schemes spanning three, sometimes four or even five different jurisdictions, each scheme carefully designed to prevent investigation by external authorities. . . . reading through the files of clients from all over the world revealed indisputable cases of insider trading, market rigging, non-disclosure of conflicts on interest, fraud, bribe paying, international sanctions busting, and, of course, tax evasion on a epic scale. These crimes are seldom exposed because they occur in a milieu of legal secrecy and judicial non-cooperation."

It goes on to provide much fascinating detail. But this blog focuses one aspect: as he put it,

"Most offshore tax evasion schemes employ multi-jurisdictional structures carefully designed to avoid regulation, by ensuring that transactions occur on paper outside the scope of the regulatory authorities of the jurisdictions in question."

In our offshore dictionary, following our editorial in the newsletter Tax Justice Focus which looked at the role of tax havens in helping create the global environment of lax regulation underpinning the current credit (and economic) crisis, we translated the phrase "This should be regulated elsewhere" into what it really means: "This will be regulated nowhere."

Richard Murphy is currently in Montreal to give a presentation on this. In a TJN presentation he wrote for the UK Treasury Select Committee on tax havens, called Creating Turmoil, he explored this question in some depth. His Montreal presentation (with a longer paper here) expands on this, and contains an excerpt from one of this blogger's favourite poems from childhood:

Macavity's a Mystery Cat: he's called the Hidden Paw -
For he's the master criminal who can defy the Law.
He's the bafflement of Scotland Yard, the Flying Squad's despair:
For when they reach the scene of crime - Macavity's not there!

How appropriate. As Richard puts it: the secrecy jurisdiction creates (lax) regulation and a veil of secrecy for the benefit of non-residents: its legislation is designed for use "elsewhere" - a ring fence is created between the secrecy jurisdiction's domestic economy and the "elsewhere." Page 29 of his presentation provides a dramatic illustration of what can happen: it shows an offshore arrangement with the UK as the investment location, Guernsey as the secrecy provider, then it has an unregulated settlor located in the UK, a trust located in the British Virgin Islands, a company located in Jersey, with directors located in Cayman.

Who regulates this arrangement? Clearly nobody does. This is why secrecy jurisdictions have been able to say, without even feeling the need to put tongue too far into their cheek, things like:

"Jersey is well known . . . . as a Crown Depencency with a well regulated Finance Industry."

It's a big confidence trick. Technically, such a statement may (or may not) be true. As Richard puts it, the issue is not the finance industry in the secrecy jurisdiction. It's the finance industry in the secrecy space. And where is this secrecy space? It is, of course . . . . nowhere.

"It is in the grey secrecy space that the unregulated market exists," Richard said. Secrecy providers move transactions from the regulated "here" into the "unregulated spaces that are mythical locations 'elsewhere' or maybe 'nowhere' at all . . the secrecy space surrounds, but is not in, any secrecy jurisdiction."

The challenge is to extend regulation into the secrecy space. Efforts to regulate only the secrecy jurisdictions, then, will face a monumental challenge. Regulation has to move way beyond the secrecy jurisdictions, and into secrecy spaces exploited by the accountancy, banking, and legal professions, among many others. In the relationship between these secrecy providers and the jurisdictions, the providers have all the power: they can simply relocate elsewhere if they don't like the regulation (and this, incidentally, provokes the race to the bottom on regulation.) So it's them, more than the tax havens themselves, that Richard says must primarily be targeted.

What tools can be used in this respect? There are several, and this is a work in progress for TJN. One major one, again developed by Richard Murphy, is Country by Country reporting (also available in French and German). This is important: the World Bank and others use a figure for $1-1.6 trillion of dirty money flowing annually across borders through the secrecy space, half from developing and transitional economies, and Richard notes that even though an estimated 60% of cross-border world trade happens within corporations (it is sometimes called "intra-group" trade):

"The secrecy disappears from view in consolidated accounts. . . not one cent is in published glossy accounts."

Country-by-country reporting would bring the secrecy space out into the public domain.

It's also worth noting that the $1-1.6 trillion is just part of the picture (see more here), for it focuses on illicit flows. Tax avoidance structures, amply using the secrecy space, are an additional, and very large, problem (by definition, tax evasion is illegal while tax avoidance is legal - though alo by definition it seeks to bypass the wills of elected legislatures - and there is a very large grey area between avoidance and evasion.)

We have already shown how we need to re-think the geography of corruption. We also need to re-think the geography of regulation.

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Wednesday, August 27, 2008

International News - August 27

** Also see here for a permanent list of past story summaries; see here for the latest offerings, and Offshore Watch for more stories. **

In Africa, pay more attention to tax - IMF
Aug 25 (TJN) – The IMF makes the case for paying more attention to domestic taxation in Africa, and draws contrasts with foreign aid. Tax “creates pressure for more accountability, better governance, and improved efficiency of government spending,” it curbs “Dutch Disease” effects; it contributes to economic stability; it helps countries adapt to globalisation. And more.

Stiglitz calls for tax havens to be closed down
Aug 25 (TJN) - Germany's Suddeutsche Zeitung has carried an interview with Joseph Stiglitz, a former chief economist for the World Bank and controversial best-selling author. In an article entitled "Wall St. has lost the war of words", Stiglitz calls for coordinated worldwide action against tax havens because single actions against jurisdictions such as Liechtenstein or Monaco may simply make money move to other havens.

Fireworks at Jackson Hole
Aug 25 (TJN) - Stanley Fischer, a former IMF Deputy Managing Director and now Bank of Israel governor, made a dramatic gesture at the US Federal Reserve's annual symposium in Jackson Hole, after a hard-hitting speech by Professor Willem Buiter of the London School of Economics. "I asked the organizers for some technical assistance in dealing with this discussion,'' Fischer said, holding up a fire extinguisher.

Corruption and The American Interest - Part II
Aug 22 (TJN) - We recently highlighted a long article about corruption in The American Interest magazine, written by TJN's director John Christensen, Raymond Baker and Nicholas Shaxson, a consultant to TJN. We are now able to provide a link that will give readers access to the full article - http://www.the-american-interest.com/ai2/article-bd.cfm?Id=466&MId=21 .

Dr Doom and the offshore dictionary
Aug 20 (TJN) – A New York Times profile of Nouriel Roubini, economics professor and purveyor of gloomy economic predictions. But the predictions of this “permabear” are surprisingly close to the mark, and this may be due to the rise of “negotiable language,” or what the TJN terms offshore obfuscation. Featuring TJN’s expanding offshore dictionary.

Swiss close case against Zardari; $60 mln unfrozen
Aug 26 (Reuters) - Swiss judicial authorities said on Tuesday they had closed a money-laundering case against Pakistani presidential candidate Asif Ali Zardari and released $60 million frozen in Swiss accounts over the past decade.

Opportunity makes the thief
Aug 21 (TJN) – TJN’s John Christensen has been speaking at the high-level Alpbach Forum in the Austrian Tirol. He gave the key note speech at a panel discussion on Tax Havens and Tax Evasion, sharing the podium with Prinz Nikolaus von und zu Liechtenstein. See John’s speech here: http://www.taxjustice.net/cms/upload/pdf/Alpbach_0808_-_JC_speech.pdf

Secrecy jurisidictions are an abuse of the market

Aug 25 (Tax Research UK) – Richard Murphy muses on some right wing blogs, their somewhat loose grasp on reality, and their offensiveness.

Switzerland can’t have it both ways
Aug 25 (Tax Research UK) – Richard Murphy: don’t underestimate the significance of what is happening here: what is developing is a test of whether a country has the right to impose its tax law on its own citizens. If Switzerland refuses to co-operate we have a breakdown in international law and order. More than that, we have one OECD member states effectively declaring economic warfare on another.

Feeble Labour folds in the face of anti-tax paranoia
Aug 26 (Guardian) – The UK Labour party should be taking on the cheating and avoidance of the super-rich. Instead they cower in their caves. Even in high times, Labour had no backbone for facing down business interests or anti-tax lobbies. Massed ranks in the City warn that windfall taxes will frighten companies into relocating. Revenue & Customs, though, is more sanguine.

Siemens may settle with SEC in $1.9B bribery scandal
Aug 21 (CFA Institute Financial NewsBrief) - Siemens may be close to settling with the Securities and Exchange Commission after an investigation into a $1.9 billion bribery scandal. The investigation looked into possible illegal payments by the German electronics firm, mostly to gain foreign contracts.

The Institute for Fiscal Studies fisked
Aug 19 (Guardian) - A thinktank that claims to be unbiased is promoting dangerous tax policies that will widen the gap between rich and poor. By Richard Murphy.

Hogan's secret is out in tax probe
Aug 21 (Sydney Morning Herald) - Paul Hogan and his tax accountant have lost their battle to keep their identities secret in their legal stoush with the Australian Crime Commission. Hogan and Tony Stewart are the subjects of Operation Wickenby, an investigation into serious tax fraud and money laundering by wealthy Australians using offshore accounts.

Buiter Provokes Wrath at Jackson Hole, Says Fed Too Close to Wall Street
Aug 24 (Naked Capitalism) - The London School of Economics prof and former Bank of England and European Bank for Reconstruction and Development official has been saying for some time that the Fed suffer from s "cognitive regulatory capture" and has been far too responsive to the needs of Wall Street.

Repositioning of Labuan as IBFC set to gather steam
Aug 13 (The Edge) - An all-out effort is underway to reposition Labuan as the preferred offshore business and financial destination in the Asia-Pacific region for international investors.

Tax crackdown on offshore mortgages
Aug 23 (FT) - The once-popular practice of taking out interest-only mortgages offshore to purchase UK properties is losing its appeal for foreigners who have lived in this country for seven or more years, accountants say.

The global consensus on trade is unravelling
Aug 24 (FT) - With two wars still continuing and violence in Georgia dominating the foreign policy debate; and with the financial crisis and economic insecurity for families dominating the domestic debate, US international economic policy is receiving less attention in this presidential election year than usual.

"Wall Street has lost the war of words"
Aug 22 (Suddeutsche Zeitung) - Nobel laureate Joseph Stiglitz on the strong state, tricks of the investment banks - and a new licensing authority for financial markets. In German. An English translation appears below.

The return of the state: How government is back at the heart of economic life
Aug 21 (FT) - After the collapse of banks and against the current background of mounting speculation about the viability of Fannie Mae and Freddie Mac, the Anglo-American approach to capitalism appears badly flawed. So is a more intrusive state about to stage a comeback at the free market’s expense, emulating the 1930s?

Paul Perraudin, juge d’instruction fédéral, a annoncé sa démission pour le 31 octobre 2008. Il rejoint l’économie privée.
Paul Perraudin, a Swiss crime-fighting magistrate, is leaving his job to join the private sector. In French.

Tax evasion from Danone executives thought provoking
Aug 21 (People’s Daily Online) - According to a Xinhuanet report dated July 23: the NPC Financial and Economic Committee proposed to increase the individual income tax threshold and lower the interest tax. The news stirred up a widespread concern and discussion among main force of taxpayers.

Offshore search nets $50m in unpaid tax
Aug 14 (Sydney Morning Herald) - Tax audits of Australians who have held bank accounts in the tax haven of Liechtenstein have already netted $50 million in unpaid tax and penalties, the Australian Taxation Office has revealed.

How did Merrill Lynch miss the red flags?
Aug 21 (Finance Asia) - A look at Merrill’s role in the transfer of large amounts of money on behalf of family members of Taiwan’s former president Chen Shuibian into Swiss bank accounts.

Probe into Taiwan ex-president leads to Singapore: report
Aug 21 (AFP) — A Taiwanese prosecutor is due to head to Singapore to investigate alleged money-laundering by former president Chen Shui-bian and his family, a report here said Wednesday.

Uganda: Kampala Tops in Tax Fraud, Smuggling
Aug 19 (The Monitor – Kampala) - Central region and Kampala in particular have been identified as the most notorious for tax evasion and smuggling of goods. In an annual report ending June, Uganda Revenue Authority (URA) reports that of all the regions in the country, the central has 49 per cent revenue risk.

Interpol seeks Liechtenstein tax mole
Aug 19 (Telegraph) - A former Liechtenstein bank worker who sparked an international tax evasion probe after allegedly handing over stolen information on ex-clients is now wanted by Interpol himself.

Brit eyes change of domicile
Aug 18 (FT) - Brit Insurance, the Lloyd's of London insurer, has appointed Ernst & Young to advise it on a possible move out of the UK. Brit has been weighing up a move out of the UK for the past few months has has asked the accountancy firm to review a number of alternative jurisdictions that could offer a reduced rate of corporation tax.

Russian Finance Ministry plans to raise taxes and pensions
Aug 17 (IHT) - The Russian Finance Ministry presented Sunday a draft 15-year fiscal strategy that proposed to raise social security taxes from 2010 and reorganize the $162 billion oil wealth fund to back up the pension system.

Opinion: corruption as a popular culture
Aug 24 (San Fracisco Chronicle) - Impunity is a word that comes up over and over in Cambodia, but the blatancy at which corruption occurs is astonishing.

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Monday, August 25, 2008

In Africa, pay more attention to tax - IMF

We would like to highlight a new report in the IMF's quarterly Finance and Development magazine, which says many sensible things. For years the IMF has pursued policies often in line with the tax-cutting "Washington Consensus" which has paid little or no attention to factors such as the crime-generating features of tax havens, the democracy-building functions of taxation, and more. While we don't agree with everything in this paper, it is a breath of fresh air and appears to be part of a broader shift in thinking in the right direction.

It starts by highlighting how aid flows have risen, but have been insufficient.

"The average tax-to-GDP ratio in sub-Saharan Africa increased from less than 15 percent of GDP in 1980 to more than 18 percent in 2005. But virtually the entire increase in tax revenue in the region came from natural resource taxes, such as income from production sharing, royalties, and corporate income tax on oil and mining companies. Nonresource-related revenue increased by less than 1 percent of GDP over 25 years. . . . a growing share of current spending is financed by aid."

The authors then dance around the question of whether scaling up aid further would help, and make the case for focusing more on tax. Here are their main points, (edited, in our own order of preference):
  1. "Tax increases incentives for public participation in the political process and creates pressure for more accountability, better governance, and improved efficiency of government spending. Domestic revenue mobilization can help strengthen fiscal institutions." This is just what we, and others, have been arguing for some time. Stable and predictable revenue, the report argues, helps medium-term fiscal planning; and the efficiency of social spending has a strong positive correlation with the quality of fiscal institutions
  2. "Stronger revenue mobilization (tax) contributes to economic stability, particularly in countries dependent on external financial flows."
  3. "Greater reliance on domestic revenues reduces the risk of Dutch disease," which occurs when capital inflows from aid and other inflows cause the exchange rate to appreciate, making a country’s exports less competitive. . . "This is an important, often-overlooked matter, and we will be blogging more about it in due course.
  4. "Aid-financed projects give rise to additional spending, such as on operations and maintenance, which will need to be covered at least partly, if not wholly, from domestic resources. " The country must then raise revenue to pay for this.
  5. "Expanding domestic revenue could also help Africa address the challenges arising from globalization. These countries are feeling the pressure to further liberalize their trading regimes, because their average tariff rate is higher than in other regions. Also, tariff rates in sub-Saharan Africa are expected to fall as a result of the formation of free trade areas and customs unions within the region as well as with other regional trading blocks, including the European Union. Currently, about a third of nonresource tax revenue in the region comes from trade taxes—about 4 percent of GDP—indicating that revenue loss from further trade liberalization would be significant. Strengthening the domestic revenue base could help recoup at least some losses from trade taxes." The report also notes that "African countries are also confronted with increasing tax competition on corporate income tax (CIT), as countries compete more aggressively to attract foreign investment."
In the context of the last point, the IMF also notes that African countries widely used tax incentives (spurred further by harmful Washington Consensus-style thinking), when as we have argued before, these are often highly damaging. The new IMF report has this to say:

"There are many large taxpayers who are benefiting from rising commodity prices, but they are not paying taxes commensurate with their income."

Well said, of course. It goes on:

"Tax incentives in sub-Saharan Africa are now used more widely than in the 1980s, with more than two-thirds of the countries in the region providing tax holidays to attract investment. The number of countries using free zones that offer tax holidays has also dramatically increased. Moreover, low-income countries in the region use such incentives more extensively than do middle-income countries—yet foreign direct investment in sub-Saharan Africa, other than in the resource sector, has increased very little over the past two decades. Such incentives not only shrink the tax base but also complicate tax administration and are a major source of revenue loss and leakage from the taxed economy. . . . investment decisions depend on a host of factors that often carry more weight than tax incentives."

All in all, a welcome report. Read the whole article - it's not that long, and it contains fresh data bolstering the case for more focus on tax in international development. We hope this kind of thinking - at least the bits we've highlighted here - continues to spread.

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Stiglitz calls for tax havens to be closed down

Germany's Suddeutsche Zeitung has carried an interview with Joseph Stiglitz, a former chief economist for the World Bank and controversial best-selling author.

In an article entitled "Wall St. has lost the war of words", Stiglitz calls for coordinated worldwide action against tax havens because single actions against jurisdictions such as Liechtenstein or Monaco may simply make money move to other havens.

He also places much of the blame for the current credit crisis on tax havens, in a statement that is exactly what was being described in our lead article and editorial in the latest edition of our newsletter, Tax Justice Focus. Stiglitz said:

"The banks have mercilessly exploited that there are big differences in regulation. They have taken their business to where supervision is the least and taxes are the lowest. There is, in addition to the actual banking system, a second shadow banking system. The banks have shifted their debts and transactions into special purpose entities in tax havens."

Stiglitz isn't everyone's cup of tea. As one respected economist recently put it: "Joe is fine on taxation, as on most other specific issues. The trouble is that he insists on mixing that up with a load of general philosophical points that lose all sense of proportion."

Which may be fair comment (you decide). But Stiglitz is spot on in this case. In the interview, he also warns that Wall Street might have lost the battle of words, but not of reality: they might rhetorically welcome tighter international financial regulation now, but then either avoid this regulation or water it down during the legislative process. "Lamentably," Stiglitz said, "the devil is in the details." We are all too aware of the power of Wall St. in influencing policy in Washington (and in many other countries) as our previous blog notes. Interestingly, Stiglitz also mentions an idea by Robert Shiller on integrating into the tax system an automatic adaptation tool which adjusts annually for changes in inequality.

"Robert Shiller has a very good idea developed and suggested that our tax system should adapt to inequality each year. We change tax rates so irregularly. Why sdhould we not build it into the tax system so that it happens automatically?"

Interesting point, and here is the Shiller paper (from 2006, co-authored by Leonard Burman and Jeffrey Rohaly.)

Here are some excerpts from the interview. (We've used a translation programme, and some German knowledge, to turn this into usable text. Apologies for any awkward phrasing.)

Suddeutsche Zeitung (SZ): Should the supervisors destroy the shadows?
Stiglitz: Quite clearly, yes. Our banking system is regulated because it is so important for the functioning of our economy. For this reason we buy banks out when they collapse. The state provides the banks with security - it is like fire insurance conditions, for example, require that every house has a sprinkler.
SZ: The banks want fire insurance but do not want to pay for it.
Stiglitz: This is the problem. The banks are calling instead for the state to build more hospitals to provide for burns victims. They also want that their nice little fires to keep burning in tax havens like the Cayman Islands or Bermuda. These tax havens should be closed down.
SZ: The U.S. actually just put the Swiss under pressure, but not the Caymans, where most hedge funds on Wall Street are registered.
Stiglitz: There is no result, if you close down Monaco or Liechtenstein and then all the money flows into another tax haven. That is why we must proceed around the world, without exception.

As we've said, for more information about how tax havens have contributed to the emerging financial and economic crisis, read our newsletter.

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Fireworks at Jackson Hole

Stanley Fischer, a former IMF Deputy Managing Director and now Bank of Israel governor, made a dramatic gesture at the US Federal Reserve's annual symposium in Jackson Hole, after a hard-hitting speech by Professor Willem Buiter of the London School of Economics. Buiter is a widely respected economist and author of regular FT columns with headlines such as Blockade the Tax Havens. "I asked the organizers for some technical assistance in dealing with this discussion,'' Fischer said, holding up a fire extinguisher.

The controversy was surprising given that Buiter had, once again, been stating the rather obvious. Bloomberg put it like this:

Former Bank of England policy maker Willem Buiter sparked the biggest debate at the Federal Reserve's annual mountainside symposium, saying the central bank pays too much heed to the concerns of financial institutions. "The Fed listens to Wall Street and believes what it hears,'' Buiter said. "This distortion into a partial and often highly distorted perception of reality is unhealthy and dangerous.''

Buiter had been saying this kind of thing for some time; in a recent paper he described the problem as

"excess sensitivity of the Fed to Wall Street concerns, reflecting (cognitive) regulatory capture of the Fed by Wall Street"

One widely read blogger called "Naked Capitalism" pointed to the Wall Street Journal's economics blog, which said:

"Mr. Buiter slams the Federal Reserve, European Central Bank and Bank of England for what he says was a mishandling of the financial crisis and monetary policy over the past year. He gives the worst marks to the Fed, saying it’s too close to Wall Street and financial markets — responding to their needs to the detriment of the wider economy."

The WSJournal blog went on to opine that "Few participants at the Jackson Hole event appeared to support Mr. Buiter’s view." Many of the comments underneath the blog were vitriolic about Buiter. Try this one:

"Absolutely f…king shocking, this dude must be on drugs and a traitor (though he is English)"

But another commentator on the blog had a more appropriate response to Buiter's critics, including the economist Alan Blinder:

"Did Blinder or anyone else systematically address Buiter’s points?"

And Naked Capitalism went on to say this:

"Even though Buiter is Dutch by descent and dislikes the idea of national identity, his writing style often echos the cut and thrust of Parliamentary debates, a posture that is also well received in English academe and drawing rooms but not well received in the US. So his bluntness is over-the-top by US standards. Buiter has taken a bold position, The Fed needs to be able to explain why what is good for Wall Street is also good for the economy as a whole. The sort of questions that Buiter is raising are notably absent from the media and US-based first rank economists. The Bloomberg story may not give a full enough account to be certain, but the responses to Buiter's charges do not seem persuasive. They amount to disputes over analytical methods and assertions that everything is working fine."

What Buiter was saying, in essence, was that Wall street has too much influence on policy-makers. What's wrong with saying that? It is widely known. It's a bit like all the fuss that was raised when Alan Greenspan said: “I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil."

All this follows comments by a former IMF chief economist, Ken Rogoff, that there is currently an "excess supply of financial services." We'll see where this economic downturn goes. But it seems all too likely that the Icarus-like titans of finance may have been flying too close to the sun.

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Friday, August 22, 2008

Corruption and The American Interest - Part II

We recently highlighted a long article about corruption in The American Interest magazine, written by TJN's director John Christensen, Raymond Baker and Nicholas Shaxson, a consultant to TJN. We were only able to provide a subscription-only link to the article. We are now able to provide a link that will give readers access to the full article.

Enjoy.

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Thursday, August 21, 2008

Opportunity makes the thief

John Christensen, director of the TJN international secretariat, has been speaking at the high-level Alpbach Forum in the picturesque Austrian Tirol. (See the picture; his speech is here and his Power Point presentation here.)

He gave the key note speech at a panel discussion on Tax Havens and Tax Evasion, sharing the podium with Prinz Nikolaus von und zu Liechtenstein - widely addressed as Mr Liechtenstein by the German-speaking audience - and Michael Frank of Suddeutsche Zeitung. The large audience including a wide range of politicans, academics and other specialists, including Professor Vito Tanzi, formerly head of the IMF Fiscal Affairs department.

John's speech seems to have been well received: several audience members stressed that they had never heard anything like his critique of global finance, and Professor Tanzi commented that he had learnt much from it. The speech is well worth reading; so is an interview with him in the Alpbach News (scroll down to find the interview which is in English, despite the German text at the top. It also carries an interview with Mr. Liechtenstein, though this is published in German only).

Commenting from the perspective of a journalist with a general interest in the conflict that emerged earlier this year between Germany and Liechtenstein as a result of the LGT affair, Michael Frank suggested that German society has not yet developed "a spirituality of prosperity" and lamented that the management class generally "has bought into a culture that tax payments are a loss" rather than a distribution to society to compensate for the services they use. As far as tax havens are concerned, Michael felt that this is a clear case of "the opportunity making the thief", which perfectly captures TJN's analysis that bankers, lawyers, accountancy firms and secrecy jurisdictions provide an enabling environment for grand corruption.

Tax competition is a live issue in the upcoming elections in Austria, and there seems to be a consensus in that country that little can be done to resist this pressure. Other speakers at the Forum had advocated flat taxation, which we have addressed elsewhere, but John vigorously challenged the idea that tax competition serves the interest of anyone other than the business community: it certainly does not promote efficient public spending, and invariably switches the tax charge from business to consumers and the less well-off. Interestingly, no-one in the audience, not even Vito Tanzi, rose to challenge John on this issue. It's hardly surprising: there are no good arguments -- read more here.

The Prince himself made a rather interesting point, too: "People might call into question the overall context (of the current situation with Liechtenstein under the spotlight) - privacy is more protected in the USA." That may seem odd, given Liechtenstein's legendary bank secrecy, which is not matched in the US. But his statement is true. The USA - and notably its own dirty little secrecy jurisdiction of Delaware - simply uses different, more devious mechanisms to achieve exactly the same ends - such as by allowing companies easily to disguise who the real beneficial owners of an asset are. So there is certainly a measure of hypocrisy in the U.S. attacking bank secrecy, while Delaware provides an even more pernicious form. That said, that is simply no excuse for Liechtenstein's long-held stance. Two wrongs don't make a right: a plague on both their houses, we say.

The Prince also argued that a principal attraction of Liechtenstein is tax stability - "the tax system in Liechtenstein has not changed for many years", but conceded that banking secrecy was an important advantage, adding that "banking secrecy has increasingly been used for tax dodging purposes", and that "tax evasion is something that everybody tries to do: it is a sort of sport". But he emphatically rejected the suggestion that Liechtenstein supports tax evasion, arguing that bank codes of conduct mitigate against them, and cited the IMF report of March 2008 to support the argument that Liechtenstein is cooperative in anti money-laundering (AML) efforts. Nonsense. The IMF's Financial Action Task Force (FATF) and others that have exonerated Liechtenstein, as we recently argued in the pages of the Financial Times, have simply legitimised the illegitimate.

Banking secrecy plays a major part in Austrian banks' marketing strategies to promote private banking to high net-worth individuals in Eastern Europe (a major growth area for these services). Judging from the discussions at Alpbach, Austrian civil society is troubled by the culture of tax evasion, and putting these activities into the global context makes it simply impossible for the users of secrecy jurisdictions to mount a credible intellectual defence of their poisonous activities.

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Wednesday, August 20, 2008

Dr Doom and the offshore dictionary

The New York Times is carrying a fascinating profile of Nouriel Roubini, a Turkish-born economics professor and purveyor of gloomy economic predictions. Some have called him Dr. Doom, and others have described him as a "permabear." The article begins:

"On Sept. 7, 2006, Nouriel Roubini, an economics professor at New Yorks University, stood before an audience of economists at the IMF and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac."

It was boom times in global financial markets and the audience was skeptical, even dismissive, but as we now know, his predictions were, unlike those of most other economic forecasters, close to the mark. The NYT continues:

"When Roubini returned to the I.M.F. last September, he delivered a second talk, predicting a growing crisis of solvency that would infect every sector of the financial system. This time, no one laughed. “He sounded like a madman in 2006,” recalls the I.M.F. economist Prakash Loungani, who invited Roubini on both occasions. “He was a prophet when he returned in 2007.”"

Economics forecasting is a perilous business - the article cites a recent study looking at “consensus forecasts” (the predictions of large groups of economists) that were made in advance of 60 different national recessions around the world in the ’90s: in 97 percent of the cases, the study found, the economists failed to predict the coming contraction a year in advance. Nevertheless, this blogger has a bad feeling in his stomach about what may be on its way.

What has brought us here? Many factors, of course, but one of the most important has been what we recently noted was described by former IMF chief economist Kenneth Rogoff as an "excess supply of financial services." And one of the chief drivers of this is what has become a catch-all term: "financial innovation."

The key cheerleaders of "financial innovation" include the hugely well-funded Cato Institute, about which we blogged recently. Cato recently hosted former US Federal Reserve chairman Alan Greenspan who had this to say about financial innovation:

"If we wish to foster financial innovation, we must be careful not to impose rules that inhibit it."

Greenspan, once hailed as a sage, is now seeing his reputation badly tarnished. Bankers were basically allowed to do what they wanted - often using complex offshore structures to evade and avoid regulations they didn't like (watch how some of them did it here) - and now just look at the fine mess they have created for all of us.

Language is crucial, and this term, "financial innovation," needs to be unpicked for what it is. Innovation is, generally, taken to be a good thing, especially in terms of technology, production efficiency, and so on. But financial innovation is very different. Some aspects of it are surely good. But so much of this "innovation" was about escaping national laws and regulations - which as we recently argued - are there for very good reasons. (As regards language, there is an analogy here: the phrase "tax competition" is widely assumed by many people to be good because market competition is taken to be a good thing and people lazily conflate market competition with tax competition; in fact, as we have demonstrated, the process is highly pernicious.)

It is for these reasons that we have created a TJN dictionary of Offshore Obfuscation. It's currently a very short dictionary, but we will be adding to it over time. It's posted at the top of the blog (it's a bit small; if you can't read it, it is tucked away near the bottom of the latest edition of Tax Justice Focus, on page 17.)

P.S. if you want to see Bono using the language of offshore obfuscation, look no further than here.

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Tuesday, August 19, 2008

International News - August 19

Also see Offshore Watch and see this longer list of news stories here.

Country-by-Country reporting: UNCTAD supports it

http://taxjustice.blogspot.com/2008/08/country-by-country-reporting-unctad.html

Aug 19 (TJN) – UNCTAD states that: "Indicators should be reported on a nationally consolidated basis, so that they are useful to stakeholders within a specific country, and so that the indicators can be understood within the context of a specific country. . . . National data, rather than globally consolidated data, should also improve the usefulness and comparability of information" This is just what we have been arguing.

Offshore: is it growing, or shrinking?
http://taxjustice.blogspot.com/2008/08/offshore-is-it-growing-or-shrinking.html
Aug 18 (TJN) - "The wealth of the world's high-net-worth individuals (HNWIs1) increased 9.4 percent to US $40.7 trillion in 2007. There are no consolidated figures for the growth in offshore assets - but for those that do, it is clear that the rate of increase in banking, trust and fund assets dramatically outpaces McKinsey's global figure.

Are investment banks bad taxpayers?
http://taxjustice.blogspot.com/2 008/08/are-investment-banks-bad-taxpayers.html
Aug 18 (TJN) – A look at the problem of carried-forward losses, and the creation of corporate non-doms.

Is the penny dropping?
http://www.taxresearch.org.uk/Blog/2008/08/18/is-the-penny-dropping/
Aug 18 (Tax Research UK) - Richard Murphy looks at consolidated financial statements

The OECD Harmful Tax Competition Report: A Tenth Anniversary Retrospective
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1194942
Aug 1 (SSRN) By Reuven S. Avi-Yonah - Ten years ago the OECD published its report on Harmful Tax Competition: An Emerging Global Issue. The OECD initiative has met considerable resistance and in some ways has fallen short of its goals. This paper argues that it has been worthwhile and has achieved some success. The paper outlines some future directions for the project.

The Institute for Fiscal Studies fisked
http://www.guardian.co.uk/commentisfree/2008/aug/19/tax.taxandspending?gusrc=rss&feed=politics
Aug 19 (Guardian) – The media often seeks comment from the Institute for Fiscal Studies (IFS) and often call it "independent" or "non-partisan". Richard Murphy examines its latest report, which suggests abolishing tax on all corporate profits, on interest, on wealth and on half of all dividends (as is likely) whilst at the same time suggesting VAT be charged on all food and promoting a massive increase in VAT in general, when that tax is known to be heavily regressive.

Investment banks are bad taxpayers
http://www.ft.com/cms/s/0/ca21f172-6c87-11dd-96dc-0000779fd18c.html
Aug 17 (FT) - The penny has dropped in London and New York that banks are not reliable sources of tax revenues. Losses from the credit crisis means that some investment banks may not pay taxes, as Michael Bloomberg, mayor of New York, gloomily phrases it, "for years".

OECD attacks UK failure on corruption
http://www.ft.com/cms/s/0/89c2ba46-6c71-11dd-96dc-0000779fd18c.html
Aug 17 (FT) - Leading industrialised nations have fired a stinging broadside at Britain over its failure to tackle corporate bribery overseas, at a time when other countries are pursuing big-name multinationals.

Das Libretto vom Netto
http://www.freitag.de/2008/22/08220601.php
German politicians and media repeat that about 90% of income tax is paid by the rich. This is used as an argument for lowering the top tax rate. The author of this article makes a different calculation, including not just income and capital gains tax but also social security contributions and VAT. [slightly old article, in German] Reminiscent of a recent report from Citizens for Tax Justice: http://www.ctj.org/pdf/taxshares.pdf

The road to restitution
http://www.ft.com/cms/s/0/bd4c94ee-68d0-11dd-a4e5-0000779fd18c.html
Aug 15 (FT) - Ten years ago this week, a US senator, read out a brief statement announcing that UBS and Credit Suisse, the two biggest Swiss banks, had agreed to pay $1.25bn to Holocaust survivors. The story of the fight to gain restitution for Holocaust survivors, and the struggle to disburse the money.

Liechtenstein to act on banking secrecy
http://www.ft.com/cms/s/0/ef389a84-6ae7-11dd-b613-0000779fd18c.html
Aug 15 (FT) - Prince Alois, hereditary ruler of Liechtenstein, confirmed on Friday that his tiny Alpine state was poised to seize the initiative after mounting international challenges to its financial sector's controversial bank secrecy.

Liechtenstein to lift some bank secrecy over tax
http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSLF10033620080815
Aug 15 (Reuters) - Liechtenstein bowed to international pressure on Friday to lift some of the veil of secrecy on its banks and make it harder for wealthy foreigners to hide money there after a German scandal over tax dodgers.

Money heads for offshore havens
http://www.ft.com/cms/s/0/58980744-6aed-11dd-b613-0000779fd18c.html
Aug 15 (FT) - Tax dodgers are transferring money from Liechtenstein to Panama, Singapore and other secretive offshore centres, intelligence from foreign tax authorities shows. One official said the switch had been prompted by the greater focus on evasion after the theft of client details from LGT and Liechtensteinische Landesbank.

UPDATE 4-Influx of rich clients lift Vontobel net new money
http://in.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idINLC58794020
Aug 13 (Reuters) - Vontobel Chief Executive Herbert Scheidt said Germany's probe into tax evasion by Germans in Liechtenstein had led to withdrawals in the "double-digit millions". Scheidt said customers had become increasingly sensitive, but the probe had not changed its Liechtenstein strategy.

Merrill set to avoid UK tax after $29bn loss
http://www.ft.com/cms/s/0/369b723e-6a52-11dd-83e8-0000779fd18c.html
Aug 14 (FT) - Merrill Lynch is unlikely to pay corporation tax in the UK for several decades after $29bn (£16bn) of losses suffered by the US investment bank were charged to its London-based subsidiary. The figures, published in Merrill's regulatory filings, emphasise how the meltdown in the US subprime mortgage market is undermining tax receipts for governments far beyond America's borders. They also offer a rare glimpse into the tax management policies of a global financial institution.

Hunting tax dodgers
http://www.ft.com/cms/s/2/57d15f72-69da-11dd-83e8-0000779fd18c.html
Aug 14 (FT) - The hunt for tax dodgers is certainly laudable, but sweeping judgments serve little purpose, save the political kind. Tallying with Richard Murphy’s analysis.

Study Tallies Corporations Not Paying Income Tax http://www.nytimes.com/2008/08/13/business/13tax.html?_r=1&scp=1&sq=tax&st=cse&oref=slogin
Aug 12 (NYT) - Two out of every three United States corporations paid no federal income taxes from 1998 through 2005, according to a report released Tuesday by the Government Accountability Office, the investigative arm of Congress.

Assembly likely to pass tax hike for millionaires
http://www.pressconnects.com/apps/pbcs.dll/article?AID=/20080819/NEWS01/808190329/1001
Aug 19 (pressconnects) - Assembly Democrats are set to approve higher taxes on millionaires and tie property taxes to household incomes when they return to Albany today.

California Budget Impasse Persists As GOP Refuses Income-Tax Rise
http://online.wsj.com/article/SB121910788425051709.html?mod=googlenews_wsj
Aug 19 (WSJ) - California's months-long budget standoff hit a low when an emergency State Assembly meeting failed to produce a compromise between Democrats and Republicans over how to compensate for a shortfall exceeding $15 billion. At issue is the Democrats' proposal to make up for the deficit largely by increasing taxes on California's wealthiest residents -- a plan that Republicans oppose.

Nigeria: Jang Decries Abuses of Tax Matters
http://allafrica.com/stories/200808181142.html
Aug 17 (Leadership [Abuja]) -Governor Jonah Jang of Plateau State has decried the abuse of taxation matters with the result that the tenets of social contract between government and the tax payers are largely been overlooked.

Protests in London over Thaksin
http://news.smh.com.au/world/protests-in-london-over-thaksin-20080819-3y1p.html
Aug 19 (SMH) - Thousands of Thai protesters have marched on the British embassy in Bangkok to demand Britain refuse asylum to former prime minister Thaksin Shinawatra and his wife, Pojaman, who fled to London last week to escape pending corruption charges.

Compliance burden is far too taxing for individuals
http://business.smh.com.au/business/compliance-burden-is-far-too-taxing-for-individuals-20080815-3wcj.html
Aug 16 (SMH) - Despite the bleating from business groups, individuals are by far the biggest contributors to the Government's tax coffers. So it is only fair that something desperately needs to be done to reduce the burden of tax compliance on individual taxpayers.


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Country-by-Country reporting: UNCTAD supports it

We have on several occasions stressed the enormous importance of country-by-country reporting. Attention has just been drawn to this document from the UN Conference on Trade and Development (UNCTAD) which, in the context of corporate responsibility indicators in annual reports, states that:

"Indicators should help to analyse positive corporate contributions to the economic and social development of the country in which it operates. For this reason, indicators should be reported on a nationally consolidated basis, so that they are useful to stakeholders within a specific country, and so that the indicators can be understood within the context of a specific country. . . . The use of national data, rather than globally consolidated data, should also improve the usefulness and comparability of information"

This is just what we have been arguing.

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Monday, August 18, 2008

Offshore: is it growing, or shrinking?

Recent news from Liechtenstein and Switzerland, where bank secrecy has been coming under serious fire and seems to be prompting some changes, have led some to wonder whether the world of tax havens is shrinking. It's a problem, some would love to conclude, that no longer needs tackling.

If you think that, think again. Look at this recent report from a tax haven website, lowtax.net (no friend of TJN's; see the longer version of their report here.) Here are a couple of excerpts:

"According to the 12th annual World Wealth Report, released in June 2008 by Merrill Lynch and Capgemini, the wealth of the world's high-net-worth individuals (HNWIs1) increased 9.4 percent to US $40.7 trillion in 2007. The number of HNWIs in the world increased 6 percent in 2007 to 10.1 million, the number of ultra-high-net-worth individuals (Ultra-HNWIs2) increased by 8.8 percent, and for the first time in the history of the Report, the average assets held by HNWIs exceeded US $4 million."

Since civil society campaigners like the Tax Justice Network began using data from McKinsey's, Boston Consulting Group, and others estimating the scale of global offshore assets, and the resulting tax losses, this kind of information appears to have rather dried up. Perhaps they're embarrassed about it. Perhaps there are other reasons for not disclosing. But we, like Raymond Baker (who canvassed thousands of top people for his book Capitalism's Achilles Heel) think the trend remains firmly upwards. The report continues:

"There are no consolidated figures for the growth in offshore assets - many jurisdictions simply don't release figures. But for those that do, it is clear that the rate of increase in banking, trust and fund assets dramatically outpaces McKinsey's global figure. In Jersey, for instance, banking and investment fund assets were approaching GBP500 billion at mid-year, up 40% in the last two years. In Guernsey, bank deposits rose 14% last year to GBP92 billion, and fund assets rose 45% to GBP210 billion in the year to June, 2008."

Lowtax.net says this too:

"So where does it all come from? From rich people, stupid! They are the new kids on the block, the new rulers of our world. They are going to get richer, and there are going to be more of them. There are already more than 10 million dollar millionaires in the world, and that number has seen more than 10% annual growth in the last few years. It is estimated that the assets of these 10 million rich people top US$50 trillion. And beneath them are tens of millions of 'mass affluent' people with free, investible assets in excess of US$100,000. And beneath them . . ."

The report then dives off into a celebratory romp through the strategies that wealthy people can use to deprive governments of their tax revenues. We prefer other analyses which express concern about this phenomenon, such as from David Rothkopf, whose recent book Superclass was written very much from an insiders' perspective.

"the combined net worth of the world’s richest thousand or so people -the world’s billionaires – is almost twice that of the poorest 2.5 billion . . . setting aside both the fanciful and the insidious theories of puppet masters and their cabals, we must recognise that there is something new afoot, a huge imbalance in the global distribution ofpower"

TJN is one of the first civil society groups to address these challenges head-on. Slowly, people are starting to wake up.

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Are investment banks bad taxpayers?

An editorial piece in the Financial Times starts with this sentence:

"The penny has dropped in London and New York that banks are not reliable sources of tax revenues. Losses from the credit crisis means that some investment banks may not pay taxes, as Michael Bloomberg, mayor of New York, gloomily phrases it, “for years”."

The reason is that companies can, under accounting rules, "carry forward" losses into future years so as to offset their tax bills for those years. In this case, Merrill Lynch is in the headlines (the picture is of the Merrill Lynch bull on Wall Street) . The American bank booked $29 billion of losses from its involvement in trading fancy collateralised debt obligations (CDOs) to its London subsidiary for accounting purposes, even though many of the deals were done in New York (be sure to read to the end of this blog; TJN's Richard Murphy offers an interesting perspective.)The FT continues:

"As a result, London and the UK can forget Merrill paying any tax on its local profits for a very long time. Merrill Lynch International has accumulated tax losses that it will be able to carry forward indefinitely."


The investment bank has become, as the FT says, the institutional equivalent of a “non-dom”, one of the lucky global elites who can escape most of their taxes by becoming "domiciled" in the UK - the result of a morally repugnant strategy by the British authorities to lure wealthy people to the country.

There is more good stuff in the FT editorial.

"For Merrill and for the UK, this is an unintended consequence of the low rate of corporate taxation. The UK corporation tax rate of 28 per cent meant it made sense for Merrill to book the deals in London rather than the US, where the federal rate is 35 per cent and state taxes add a few percentage points. Low taxation has now become zero taxation, which will further add to the incentive for Merrill to do (or to book) business in London. . . . After a period in disgrace with their shareholders and changing their senior executives, investment banks will be able to get on with business. But the hangover from the credit crisis will affect cities for years to come. They will have to find other sources of revenue to make up for the absence of taxes from financial institutions."

It's astonishing, isn't it? It reminds us of a recent comment by the FT's chief economics commentator, Martin Wolf:

"I may like many bankers, but I rather dislike banks. I recognise their necessity, but fear their irresponsibility. Worse, they are irresponsible partly because they know they are necessary. No industry has a comparable talent for privatising gains and socialising losses. Participants in no other industry get as self-righteously angry when public officials – particularly, central bankers – fail to come at once to their rescue when they get into (well-deserved) trouble."

The FT continues:

"Investment banking is not dead but it is in a cyclical downturn. It has occupied an outsized role in western economies in the past decade and is now shrinking. This cyclicality, and its tendency to make losses every few years, make it an unreliable financial partner. Let the taxman beware."

Mervyn King, governor of the Bank of England, adds important context to this sad British story:

"I do think it is rather unattractive that so many young people, when contemplating careers, look at the compensation packages available in the City and think that these dominate almost any other type of career. It’s not a very attractive situation that such a high proportion of our talented young people naturally look at the City and think it is the only place to work in. It shouldn’t be. It should be one of the places, but not the only one."

A recent article about Denmark in the authoritative U.S. publication Foreign Affairs, examining Denmark's remarkable economic and political success (and very high taxes) highlighed one aspect of its economic model, which was:

"fairly equal wages among different sectors, so that a shift from manufacturing to service-sector work does not typically entail a pay cut . . . Danish respondents reported that they had changed employers an average of six times, the highest figure in the European Union. One in three Danes changes jobs every year. And with employers free to deploy workers as they wish and all Danes eligible for generous social benefits, there is no inferior “temp” industry, because there is no need for one. As precarious short-term contract employment has grown in most other countries, the number of Danes in temporary contracts has decreased since the mid-1980s. Where most other OECD nations have a knot of middleaged people stuck in long-term unemployment, in Denmark, the vast majority of the unemployed return to work within six months, and the number of long-term unemployed is vanishingly small."

Now Britain is different, of course, but there's a lesson here: the country has become massively dominated by financial services, which have crowded out other sectors and badly (and very harmfully) distorted Britain's employment market and its overall business environment. And that's not to mention the economic lobbying and political capture of British politics by the financial services industry. It's high time to rebalance the British economy - and significantly so.

Ruth Sunderland writing yesterday in The Observer (in an article that also quotes TJN's Richard Murphy) tends to agree:

"The UK has courted Big Capital - and big capitalists - by offering tax concessions, without asking whether it is necessary or desirable to excuse them from contributing to our social wellbeing. But there are better ways of selling Brand Britain to wealthy firms and individuals than tax bribery. To name just some: the English language, an advantageous time zone for business, our top universities, our legal system and secure property rights, and the cluster of expertise and skills that have grown to service financial firms. Over the past decade our economy has become unbalanced. Politicians have lionised the City and allowed themselves to be influenced and even cowed by it. Manufacturing has shrunk, with more than a million jobs lost since Labour won office."


It's not only a British problem. Kenneth Rogoff, former chief economist of the IMF, weighs in with this:

"Is it not now clear that the main macroeconomic challenges facing the world today are an excess demand for commodities and an excess supply of financial services? (italics added.)"


Back to Merrill Lynch, however, and a last word from our Richard Murphy, who, as far as we are aware, is the only commentator actually to look deeply into Merrill Lynch's UK accounts and highlight the real technical issues involved in the latest story. Richard, in fact, offers a ray of hope for the beleaguered British taxpayer:

"It takes very little change in what you do for loss carry forwards to be disallowed. For example, a company who made losses on making medical equipment using rubber who then switched to using plastic was deemed to have started a new trade and was denied loss carried forward. . . What’s the chance (Merrill Lynch International) will ever use all these losses in that case given the simple volatility of the volume and type of this trade? Very little if there’s anything like a good tax inspector on the case in my opinion. Which is pretty good news, I think."

We hope he's right. The bankers' lobbyists and tax tricksters will certainly try to make sure he isn't. And note this comment underneath Richard's blog:

"What presumably follows is whether the preservation (or otherwise) of the tax losses then becomes a bargaining tool in the UK, with MLI using any threat of their denial as a reason to reduce their UK activities (with the usual arguments about loss of UK investment, jobs, spending etc.)"

And we also need to ask the question: it's hard enough for (relatively) well-funded and experienced tax inspectors in countries like the UK to get wily multinationals to pay their fair share of taxes. How easy is it for poorly resourced, political vulnerable, and often inexperienced tax authorities in developing countries to fight these kinds of battles?

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Wednesday, August 13, 2008

Corruption Phase Two - TJN in the American Interest

The latest edition of the American Interest carries a long article about corruption by TJN's director John Christensen co-written by TJN consultant Nicholas Shaxson and Raymond Baker, director of Global Financial Integrity in Washington (and author of the groundbreaking book Capitalism's Achilles Heel). We highly recommend our new article - but then we would, wouldn't we?

This article comes at the leading edge of a significant mood shift in international debates about corruption. Note, for example, new developments at the United Nations and in the IMF, even in the last few weeks, which we described in yesterday's blog. The full article isn't available online without a subscription, so you'll have to buy a hard copy to read it in full. But some key paragraphs will give you a feel for our arguments:

It took long enough for corruption to be accepted in the field of international development: it was rarely mentioned before the 1990s. Part of the problem was a bias towards things that could be easily measured - which effectively ruled out corruption as a serious field of enquiry. In addition, as the article explains:

"To this bias was soon added what can only be called a condescending deference to newly independent countries: It was considered impolite, as well as unhelpful to certain parochial institutional interests, to delve too deeply into untoward behavior by the elites of newly sovereign and proud countries. "


All sorts of bogus justifications were given publicly for tolerating corruption: one of the most corrosive was that corruption "greased the wheels" of international trade and allowed deals to get done. This argument, thankfully, has largely fallen by the wayside - but similar arguments remain to plague us: take, for example, last year's dishonest, ideologically-driven survey of tax havens by The Economist magazine (we demolished it here and here and here) which argued that tax havens oil the wheels of the international economy - all but ignoring how they foster crime, market-rigging, tax evasion, traditional forms of corruption, and so on.

Now, thankfully - in a push for which Berlin-based Transparency International must take much credit - corruption is firmly on the international agenda as a central, if not the central, obstacle to development in many countries. But our new article in The American Interest argues that the time has now come - using a phrase coined by the crime-fighting former Paris-based magistrate Eva Joly - for a Phase Two in the battle against corruption. It involves expanding our understanding of what corruption is. In this respect, Transparency International is now only in an intermediate position: as we have long argued - its famous Corruption Perceptions Index (CPI) is symptomatic of the old school. As our article explains:

"(The CPI) draws heavily on opinion within the business community. While it does provide an invaluable ranking for investors trying to assess country risk, it is of little use to the citizens of oil-rich Nigeria, for example, to be informed by the CPI that their country is among the world’s most corrupt. Nigerians and others like them want to know where their money has gone."


How should we progress from here? Our article raises a number of crucial issues: why, we ask, are kleptocrats like Nigeria's late former President Sani Abacha, or the former Kenyan president Daniel Arap Moi, considered the only part of the corruption equation? They diverted vast hauls into their pockets through shell companies, secret trusts and other evasive structures, notably in Switzerland and the UK. What about those British and Swiss bankers who harboured the stolen funds? Or the lawyers who created and maintained those structures? And what of the jurisdictions themselves? Transparency International's CPI ranks the UK and Switzerland as among the world's "cleanest." Really?

"The task is not just to recognize the importance of a “supply side” to corruption, involving bribegivers as well as bribe-takers; it is also about dramatically expanding our understanding of what the supply side has come to include in a rapidly changing, globalizing world. Only after our understanding has caught up with reality will we be able to adequately answer a question that has long puzzled economists: Why does so much money flow from poor countries to rich ones when, for both rational and ethical reasons, it ought to flow the other way?"

In other words, it is necessary to entirely rethink the geography of corruption (for a fuller exploration of this issue, look here, for John Christensen's seminal piece Mirror, Mirror, on the Wall, Who's the most Corrupt of All?).

We also think it's important to go right back to basics and revisit the very definitions of corruption used by TI, the World Bank, and others.

In essence, there are two major dimensions to corruption. One concerns individuals and individual behaviour, and this is basically captured by the traditional definition such as TI's "the misuse of entrusted power for private gain." But there is another aspect to corruption - the systemic aspect - which is not captured by this definition. It might help to think of this in terms of a line of hungry people queueing up for bread. First, disrupt the line - say with a firehose - and people will get angry but the chances are that order will eventually reassert itself. But there is a second, much more damaging, way to harm the queue - and that is when people start pushing in at the front. A little bit of this may be smartly dealt with - but once it gets out of hand, a free-for-all develops, at which stage there is no easy way to rebuild it. In the first instance, the line was simply disrupted; in the second instance, it was corrupted. This is a systemic issue - what matters here is not so much individual behaviour, as people's perceptions of others' behaviour. Once people get to the stage where everyone starts to think "only a fool would hold back" (as has become the case with tax dodging) then you have the conditions for a systemic problem. This is a much bigger, more difficult, aspect of corruption. We need a definition that will address both aspects of corruption.

So our article continues:

"Beyond scaling up our perspective to the global level, we also need to pay attention to systems and processes, not just individuals. And we need to include consequences, not just methods. Corruption always involves narrow interests abusing the common good. It always includes insiders using guarded information operating with impunity. And it always corrodes institutions, worsens absolute poverty and inequality, and ultimately undermines faith in the rules and systems that are supposed to promote the public interest. Thus, a better basic definition of corruption would go something like this:

Corruption is the abuse of public interest and the undermining of public confidence in the integrity of rules, systems and institutions that promote the public interest.

This definition is not limited to developing country kleptocrats and rogue officials, but makes room for a much broader array of actors and their facilitating activities. It also suggests a rubric for rich and poor to find common cause in fighting this global scourge. That said, it helps to use the noun “corruption” sparingly and instead to emphasize the verb “to corrupt.” Using the verb shifts our focus away from situations, people, isolated acts and finger-wagging, and toward examining underlying systems, relationships and processes. Markets and governments are built on trust, and the undermining of trust is arguably the greatest danger that confronts global markets today."

One consequence of redefining corruption will be that tax evasion will be recognised as a form of corruption. As our blog yesterday confirmed, we have been pushing for (and the UN is taking notice of) the idea that tax evasion should constitute an act of corruption under the UN Convention Against Corruption (UNCAC.)

All of this, we note, transcends the old left-right ideological divide. In the United States, Republicans as well as Democrats are backing the Stop Tax Haven Abuse Act, and you don't have to have any ideological positions to be horrified by some of the abuses being perpetrated in the offshore world. This is one of the several reasons our article mentions as underpinning a current sea change in global attitudes about corruption and the problem of tax abuse and offshore. Our article finishes like this:

"Of course, it won’t be easy. Powerful vested interests have a lot to lose from cleaning up the current state of global capitalism. But the rest of us have even more to lose if we don’t. If global capitalism cannot be rendered essentially fair, then it is unlikely to be sustainable in a world where formerly marginalized people are rapidly emerging from eons of political ignorance and passivity. We either join together to fix this problem, or it will surely “fix” us."

Makes sense to us. But then it would, wouldn't it?

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