Wednesday, March 03, 2010

Jim Hines fails to defend secrecy jurisdictions

Jim Hines from Michigan Law made a less than convincing defence of secrecy jurisdictions at a meeting sponsored by STEP this afternoon.

But let's start with the positives.

First, he was right when he said "if a jurisdiction provides secrecy, lax regulation and encourages tax avoidance, that's clearly not a good thing." Well, yes, indeed; that's precisely our concern about these places. Secrecy is the core service they provide, which is why the term secrecy jurisdiction more accurately describes these places than the rather vague catch-all title 'international financial centre' (IFC).

Second, Hines was also right to criticise the lack of cooperation from Washington in providing tax information to other countries about residents with assets held in US banks. We have already identified the USA as a secrecy jurisdiction, and Hines argued, reasonably, that while Washington takes a strong line with the Swiss authorities over the UBS affair, the US would be unlikely to reciprocate.

Third, he was correct in his assertion that international investors put a huge amount of effort into constructing financial schemes that have tax avoidance as a major or principal goal. Tax and regulatory arbitrage shapes a huge proportion of cross-border investment and trade, making it very much more difficult to understand what is happening, who owns what, and who is responsible for its regulation. I would have liked some acknowledgement of our concerns that tax avoidance and tax subsidies also distort markets, but he failed to raise the issue: another case of the dog that didn't bark.

But most of what he said left this blogger astonished and, ultimately, disappointed.

At the core of his defence of secrecy jurisdictions is the argument that they enable the 'efficient' flow of cross-border portfolio and direct investment flows. 'Efficient' in this context means 'tax efficient'. Now there is a term that needs unpacking. As Richard Murphy (who also attended the Hines meeting) notes in his blog:

"if tax abuse is needed to ensure an investment is viable it’s a misallocation of resources to do it."

Quite so. In a world in which tax treaties exist between the vast majority of states, this means that in practice the investors - often banking syndicates, hedge funds and suchlike - are able to create structured finance packages that maximise their tax avoidance possibilities. When discussing this issue with practitioners, they invariably focus on double taxation issues - as Hines did this afternoon - but the problem of double non-taxation is ignored or down-played. This is, of course, the name of the game: the shifting of profits to zero or low tax areas.

Hines' claims for the the good governance of IFCs were even less persuasive. For over a decade Offshore Watch has been drawing attention to the dark side of globalised financial services, so any suggestion that secrecy jurisdictions are models of good governance due to "the absence of corruption" cannot be taken seriously. If you want to read more, take a look at this, and this, and this. And read Transparency International's take on this in their 2009 report on Corruption and the private sector. The terms of the debate have shifted, dramatically, and the all-public-sector-bad, all-private-sector-good mantra just sounds, well, like bad old dogma.

In November 2009 we published the Financial Secrecy Index precisely to turn the spotlight on how the services provided by secrecy jurisdictions encourage and enable corrupt practices. And there is absolutely no way that anyone with an interest in this subject area could have failed to notice media reports about the USA topping the index. Hines ignored this.

Which brings us to his discussion of the Enron affair, which, irritatingly, Hines tried to explain away as a simple case of bad apples in a barrel of otherwise tip-top fruit. Ironically, he made this claim less than 500 metres from a building where, approximately 10 years earlier - just months before Enron blew up in the collective faces of investors, regulators, auditors, financial journalists and, yes, economists - this blogger attended an international conference where one American and British expert after another extolled that company's role as the business model for the 21st century.

No, Enron, which had several hundred subsidiaries in the Cayman Islands and other secrecy jurisdictions, cannot be dismissed as an exception. Lack of transparency, lack of accountability, widespread use of off-balance sheet accounting, failed audits, weak governance, tax scamming, and a general lack of integrity and business ethics have spread like wildfire, and secrecy jurisdictions have played a major part in this contagion. These are systemic problems, and lax regulation - a swamp which Hines avoided entirely - combined with opaqueness were heavily implicated in the crisis which has engulfed capitalism.

And finally, we come to the Q & A session. Having side-stepped questions from Richard Murphy (who was representing Britain's Trades Union Congress, TUC) and fumbled his answers to Action Aid's Martin Hearson, Jim made the cardinal sins of telling this blogger that he had asked "the wrong sort of question" and, worse, that others with whom he disagrees are not objective in their use of evidence. The latter point was made in reference to the research findings of the 2009 Norwegian Royal Commission of enquiry on capital flight from developing countries. Yes, you read that right: the speaker simply dismissed the entire team of economists involved in this commission of enquiry because his data (which data? he didn't say) doesn't support its findings. The arrogance was breath-taking.

Listening to Hines reminded me of the old joke about economists being people who have studied 69 different ways of making love without ever having had a partner. He boasted a track record of 20 years of research into offshore finance and international tax, but when questioned on matters of detail, such as the relative effectiveness of different forms of information exchange, admitted that he was not in a position to make an assessment.

Lack of data is a huge barrier to research into the role of secrecy jurisdictions. This blogger, whose close interest in these places goes back nearly 35 years, and who has worked at very senior levels in a major secrecy jurisdiction for a cumulative period of almost 15 years, was struck by the way that Hines drew on weak empirical evidence, larded with unrealistic assumptions, to arrive at rather strong assertions about their positive impact on development processes.

And the fact that Hines conspicuously avoided mentioning the work of researchers at Washington-based Global Financial Integrity, whose data was described by the Danish Institute for International Studies as "very credible" and "highly reliable", did not strengthen his argument. And though we don't take these things personally, it is also surprising that no mention, not a single word, was made of the findings of the Mapping the Faultlines research, probably the most in-depth study of the facilities provided by secrecy jurisdictions.

This event was clearly intended as a rebuttal of recent research, such as that by Global Financial Integrity and Christian Aid, which suggests that the illicit financial flows and tax avoidance enabled by secrecy jurisdictions undermine the development efforts of poorer countries. The event sponsors, the Society for Trust and Estate Practitioners, is an organisation whose members use the facilities of secrecy jurisdictions. This blogger has himself met with STEP members on many occasions when working in Jersey. The event seemed very much like a lobbying exercise, dressed up in academic clothes.

Looking around the audience I spotted a number of familiar faces, including representatives from STEP, Jersey Finance and their public relations firm, London-based Brunswicks. To put it bluntly, they looked pretty grim as they watched their boy go down in flames.


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