Creating Turmoil: why it was written; what it says.

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The Treasury Committee (TC) announced on 30 April 2008 that it had “decided to undertake an inquiry into Offshore Financial Centres, as part of its ongoing work into Financial Stability and Transparency” and asked for written evidence to be submitted .

Writing a 73,000 word submission was not on my agenda at the time. In fact, I was meant to be completing the text of the book I am co-authoring for Cornell University Press (the 100,000 word text of which will go in, on time, today). And yet there appeared to be no choice but respond to the call with a comprehensive submission. As we in the Tax Justice Network were immediately aware, many of the tax havens would submit evidence about what wonderful places they are. We suspected some major financial services companies might want to say much the same thing. The result was I set to work, with remarkably little overlap arising between the two volumes on which I was working.

The result is a major new work on tax havens in which I argue that it is a mistake to confuse the term ‘Offshore Financial Centre’ (OFC) with ‘tax haven’. These two are quite separate and distinguishable if intimately related phenomena that jointly make up the offshore economy.

The power in this relationship lies with OFCs and the companies that work within them, not the tax havens, so the focus of regulation must shift onto limiting the powers and impact of OFC operators within the global economy.

Tax havens are places that create legislation designed to assist persons – real or legal – to avoid the regulatory obligations imposed upon them in the place where they undertake the substance of their economic transactions. This is not by accident or chance: there is clear evidence that these places, some of them countries, some not, but all with the power to pass legislation, set out to undermine the impact of legislation passed in other jurisdictions. These are deliberate acts of economic aggression targeted at sovereign states.

Offshore financial centres are not the same as tax havens. OFCs are the commercial communities hosted by tax havens which exploit the structures that can be created using the tax haven’s legislation for the benefit of those resident elsewhere. In other words, the offshore financial centre is made up of the accountants, lawyers, bankers, plus their associated trust companies and financial intermediaries who sell services to those who wish to exploit the mechanisms the tax haven has created.

Until now all attempts to regulate the offshore economy have been focused on tax havens. This has been a mistake. Tax havens are geographically located and have fixed spheres of influence. OFC operators, many of them multinational companies or banks, and some like the Big 4 firms of accountants present in every major and most minor tax haven jurisdictions around the world, can move their operations to wherever they want at a moments notice. They have used this power to threaten to leave any jurisdiction that does not comply with their wish to secure the legislation they desire. This has recently been used as a tactic in the UK, itself a tax haven.

The result has been that in the last decade new and highly abusive forms of offshore company and trust have been developed. These evolutions have been little documented and much less understood, but have allowed both companies and trusts to float free of almost any regulatory control. Again, this did not happen by chance. It is the OFC operators who have demanded and secured this benefit on behalf of their clients.

The consequence is obvious: whilst tax haven regulation is important it is impossible to expect the tax haven states to regulate the OFCs that operate from within them. Those OFCs hold all the power in this relationship. In effect they have taken these states captive, showing in the process complete indifference to the local populations of these places and their elected representatives. It is not by chance that the degree of compliance with tax haven regulation that OFC operators demonstrate in their behaviour is astonishingly low, since they appear to consider themselves beyond the law of these places.

But this is not only the case in the archetypal micro-states that populate the tax haven world in popular perception. As we are now seeing this behaviour is being replicated in the world’s major tax havens, of which, the UK is without doubt the most important. It is no longer possible for any objective person to deny the obvious fact that the UK is a tax haven and that the City of London is an OFC seeking to exercise control over our state. The evidence also shows that the City of London is also intricately connected to a web of satellite tax havens spread across the globe, including Crown Dependencies, British Overseas Territories and various members of the Commonwealth, which have served as conduits for capital flows into London whilst also providing facilities for tax evasion on an industrial scale.

The consequences are easy to see. The developing world is denied the capital resources it needs to establish stable, self supporting democracies. The UK’s tax base is eroded and in the process its own democracy is threatened as electors note that large corporations representing nothing but the power of money seem more important to those holding office than their constituents. Corruption is enabled. Crime can take place almost unimpeded. These are the realities of tax havens, even if, as I acknowledge, the race to the bottom in taxation has been averted (as yet) as a consequence of the sheer exuberance of the boom economy we have enjoyed until recently.

That boom has now passed though and exuberance has given way to turmoil. Hard times are upon us, just at the very moment when the consequences of tax and regulatory avoidance are impacting most heavily on the UK economy. The cost of tax havens is now becoming very apparent indeed.

Thankfully this is a problem for which there are solutions. I will be tackling those that we recommend during the rest of this week.