Yesterday’s news that a senior partner in international accountants PKF has been arrested on charges of blatant tax evasion is, I regret, a matter of little surprise. It does however draw attention to a major deficit in the whole initiative to stop tax haven abuse.

Tax havens are best described as ‘legislative spaces’. That means they are locations that deliberately create legislation to facilitate transactions undertaken by people who are not resident in their domain, with those international transactions being subject to little or no regulation and being offered, in most cases, considerable legally protected secrecy to ensure that they are not linked to those undertaking them. These transactions are ‘offshore’ i.e. they are not undertaken in the location that facilitates them. I stress, offshore is defined in this way; it has nothing at all to do with geography, let alone small islands.

The vast majority of the initiatives taken to tackle offshore abuse address the tax haven issue. In other words, they have been designed to promote better regulation of transactions within the locations that are identified as creating legislation to facilitate offshore transactions. This is true whether the action in question has been taken by the OECD, FATF, FSF, EU, IMF or anyone else who has tipped in on this issue. The result has been predictable. These places now have first rate rules and regulations in place which tick all the regulators boxes. This has given some of them the opportunity to claim that they are better regulated than many onshore spaces.

There’s a problem with that though. Even if this were true (and there is ample evidence that the existence of the right bits of paper does not mean that effective regulation is in place), the offshore world is a double headed Hydra. Tax havens are one of the heads. The other head is that of the offshore financial centres (OFCs), and the commercial firms that make them up. I stress, tax havens and OFCs are distinct, and different. Those firms that make up the OFCs are, of course, accountants, lawyers and bankers in the main, plus their associated trust and corporate services companies. This is inevitable since tax havens are not created to facilitate transactions that take place within their domain, but only to facilitate the recording of transactions there that actually take place elsewhere.

The OFC community is expatriate, and mobile. I commented upon this recently with regard to Cayman, for example. This characteristic makes the OFC community quite different from the tax haven community, and leaves the in real potential conflict. The tax haven community is local and committed to a geographic space. The OFC community is international, transient and only interested in following the money. If money does, for any reason, leave a tax haven you can be fairly sure that the OFC community will follow it very rapidly. The tax haven community, who are the real local populace, will be left behind to tend the wreckage.

There’s another difference between the two. The OFC community understands finance. The local community do not. The States of Jersey provides perfect example of this. Few, if any, members of the States of Jersey probably have any real understanding of how the offshore finance community work, or of what they really do. They are simply a legislature for hire, doing what is asked for them. So, for example, Jersey’s obnoxious Trust Law of 2006 was passed without a vote in the States of Jersey since no one objected, or as far as I can tell even commented upon it in that assembly. They did what was asked of them. In exchange they collect tax revenues from some of the activities that the offshore community brings to the island. The same is true of other places. The Society of Trust and Estate Practitioners has, for example, claimed credit for writing the equally offensive VISTA trust arrangements in the British Virgin Islands. That’s another legislature that is put out to hire in exchange for the revenue that community bring to the local populous.

But if this is the case then the focus of attention in regulating the offshore world, with all the abuse and harm that it causes, cannot solely be on the tax havens. The OFC community is vagrant. The perfect examples are the Big 4 accountants, present in all the world’s significant tax havens, including the most abusive. The people who service these firms are rarely local, they rarely integrate in the local community, they service a client base that is almost never local (unless it be the local lawyers, who are, however all servicing offshore clients), and their reason for being there has nothing to do with geography, and all to do with the money flows they are managing. PKF is, of course, part of this structure.

Precisely because these people are transient they need have little regard for local regulation. They can pay lip service to is as part of their cost of operation, and no doubt they do. But they can also afford to ignore it, as they so obviously do, as evidence from Jersey shows. If a problem of compliance arises they know they can simply move on from it. That’s why compliance is not a real issue for them, and why it is so obviously the case that despite the apparent quality of the local systems compliance rates are so low.

This means that for effective regulation of the offshore world to happen its not just the tax havens that have to be regulated. So do the OFC operators have to be regulated, properly. We know they resist this. We know, for example, that the UK’s high street banks fought tooth and nail to not disclose information on accounts they held in the Channel Islands, and we know many of those account were used for tax evasion (which they too must have known, in my opinion). Yet most of these organisations are global. They are the major accountants, lawyers and banks of the world. If they aren’t owned in the largest countries of the world they are staffed by people who are trained there, should be regulated there, and who eventually have their allegiance there. And that means we have to regulate those bankers, lawyers and accountants on an international basis as well as regulating the tax havens from which the operate. If we don’t we will retain the problem that offshore poses for all decent people in this world. That problem is that they undermine democracy and the rule of law, and harm developing countries to the extent that they are directly responsible for deaths in those places.

That’s why we call for a Code of Conduct for Taxation. But ultimately we’ll need to do more than that. The UN will need to adopt its own Code on this issue (and there is real prospect of that) and we’ll need a new financial architecture that recognises this dual headed Hydra and regulates both parts of it. Then we have a prospect of tax compliance becoming the norm, and that democracy can flourish, tax will be paid in the right place at the right time, and that people in the developing world can see their countries flourish using their own taxation resources managed by their own democratically accountable governments.

Some of live in hope. Many in the professions seek to destroy that hope. It’s a pretty simple dispute.