Tax Havens Will Sabotage Attempts to Re-Regulate Global Finance. Democracy Demands We Tackle Them
by Richard Murphy and John Christensen
[Richard Murphy is a chartered accountant and founder of Tax Research LLP and Tax Justice Network; John Christensen is an economist and director of Tax Justice Network taxjustice.net]
The global economic crisis means financial re-regulation is, finally, on the agenda. Most 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 if we look at the context in which regulation is embedded. There we find the essence of the problem: tax havens. The offshore world created the conditions that led to this crisis, and unless the offshore world is tackled, it will undermine all 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, trying to outdo them on ever lower corporate taxes and laxer regulation. As we said in our June submission to the Treasury committee on offshore financial centres, tax havens set out deliberately to "undermine the impact of legislation passed in other jurisdictions". This is their core business, and this is the threat they pose to the world.
The impact of this is now visible in the economic crisis. The banking system has ceased to function because banks do not 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. First, they offer secrecy. All major banks have taken advantage of this, assisted by the "big four" firms of accountants who operate in all the world's significant tax havens.
Second, they create uncertainty about who owns what. Offshore entities were used to isolate ownership of financial vehicles from onshore parents to secure higher credit ratings. The arrangements are often abusive, involving trusts and supposed charities. The result was, for instance, that when Northern Rock was nationalised, the Commons did not know whether this meant its Jersey-based shadow, Granite, was too. Its £40bn of assets apparently existed in limbo. In consequence it is often the case that nobody knows who will honour the debts of what are, legally, separate entities. All of the victims of the current crisis had plunged very deep into this style of offshore operation.
Third, they generate complexity, a form of opacity. Complexity has without doubt been used to shift risk from big institutions to society. Companies have spread complex structures across jurisdictions to exploit regulatory gaps. Even if each haven's claim to be properly regulated were true, the regulation of such firms falls between stools, since each jurisdiction only accepts responsibility for what happens in its domain. Regulation cannot function in such a world - a fact the failing banks exploited. 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 havens are not just the palm-fringed islands of popular imagination. They are also places at the heart of the global economy. In particular the City has many offshore features. The IMF thinks London is offshore. When coupled with links to satellite 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. As a result they have knowingly permitted the harm which secrecy jurisdictions wreak on the poor at home and abroad. Unless they are tackled, tax havens will sabotage any efforts to build global governance and international cooperation.
That is why we must gear up for a global fight against tax havens. In the long term this push must stop regulation being embedded in a context riddled with powerful actors deliberately aiming to undermine it. More immediately, it must help policymakers address the crisis's fallout by giving them back powers to tax wealth and capital properly, and constrain what is a hothouse for cross-border crime.
Tackling the increasing tension between global integration and a lack of credible international governance is impossible while these jurisdictions and their financial and criminal communities thwart attempts to deploy democratic controls. We emphasise, the secrecy jurisdictions' role in this is generic. Undermining democratic accountability is what they do for a living.
Politicians can, and must, be braver now - public interest demands it.
