Thursday, June 10, 2010

Transparency and leadership, and the 2001 U.S. PATRIOT Act

We blogged yesterday about a series of articles in The American Interest, including one by Raymond Baker entitled Transparency First, which examines transparency in the international financial system. We now have the full document, and although for copyright reasons we cannot reproduce it in full, we can make a few observations.

The first part of the article examines the shameful behaviour by Citibank and other U.S. banks following the September 11, 2001 attacks on the United States by Al-Qaeda. They bitterly opposed stronger money-laundering provisions in the U.S. PATRIOT Act, particularly as regards offshore shell companies, a standard tool for sheltering, managing and keeping secret the loot of foreign dictators, war criminals and plain-vanilla wealthy tax evaders.

"Civility collapsed; shouting matches between Citibank officers and congressional staffers erupted in the halls of Congress."

In the end, after some brinkmanship, some Republican and Democrat senators - notably Carl Levin, Chuck Grassley, John Kerry, Paul Sarbanes, Bill Nelson, Jon Kyl, and Mike DeWine -- stuck to their guns and got a remarkable set of provisions:

"Among its provisions, Title III decrees that no bank registered in the United States can receive a transfer from a foreign shell bank and that no foreign bank can transfer money to the United States that it has received from a foreign shell bank, including wire transfers that might only momentarily touch New York City before speeding off elsewhere."

The results were stunning.

"The thousands of shell banks that used to run loose have been reduced to perhaps a few dozen."

Baker uses this story to illustrate three core points.

First, eliminating secrecy curtails financial risks; second, banks will lobby violently against transparency. Third, and most importantly:

"With a stroke of the legislative pen, a major threat to economic integrity has been almost completely removed from the global financial system.
. . .
Elected officials . . . have the power to require transparency in the global financial system if they choose.

We would add another point: it shows what determined leadership can achieve. There is far more in this excellent article: on the composition of G20 working groups, stuffed with representatives of the international financial establishment, which watered down transparency proposals; on the perils of regulatory and tax competition, and on vast differences between regulatory oversight, on the one hand, and transparency, on the other hand:

"The regulatory and oversight approach operates largely within the norms of the community being regulated. The transparency approach establishes norms on the basis of an authority above and beyond that of the community being regulated, and it relies on the bright light of day to enforce those norms."

What an excellent point to make. It is elaborated in great detail, making this one of the must-read articles of the moment.


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