Pirates of the Caribbean

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What follows comes from The Australian. It was published with the above title. It reflects comments I made to a packed meeting at the Foreign Press Association yesterday. Since I provided most of the story I haven’t edited it.

WHEN Gordon Brown invited journalists from the G20 nations to 10 DowningSt to explain his plans for next Thursday's London summit, he sat beneath a portrait of Elizabeth I to spell out his grand vision.

"We have got to deal with the problems of offshore tax havens and we have got to deal with the cross-border supervision that is necessary in a global economy," he said.

"I believe that we can, for the first time, agree the big changes necessary for co-ordinated action that will signal the beginning of the end for offshore tax havens and offshore centres," he added later.

The British Prime Minister's ambitions seem as global as those of the Virgin Queen, who dominated the seas thanks to seafarers such as Walter Raleigh and Francis Drake. But one nation's heroes can be another's pirates. To much of the rest of the world Raleigh and Drake were murderous brigands rather than noble adventurers, and Brown's own record on financial and banking laws has helped to maintain Britain's reputation elsewhere in Europe as a financial pirate nation.

It was Brown, during a decade as chancellor, who boasted of his "light touch" regulation of London's financial district, stubbornly staving off European calls for greater regulation so that the freewheeling city could overtake New York as the most important financial centre. And it was under Brown, today's scourge of tax havens, that Britain consolidated its position as the greatest operator of tax havens.

Places such as Switzerland, Singapore, Hong Kong, Belgium, Luxembourg and Austria are widely recognised as secretive offshore finance centres and the Organisation for Economic Co-operation and Development has published a list of 38 smaller territories that have the low tax rates, secrecy and poor regulation that make a tax haven.

What Brown never mentions is that most of the financial centres listed by the OECD, from the Channel Islands to the Caymans or the Cook Islands, are or were British territories. Half of them still have the Queen as their head of state. Britain, Canada and Australia account for 90 per cent of the combined population of the 16 independent nations ruled by the Queen. Most of the other 13 are defined by the OECD as tax havens.

Together the world's tax havens allow rich individuals to hide trillions of dollars from national tax authorities. The OECD estimates that $US7 trillion ($10 trillion) has been stashed away, while anti-haven campaigners say the true figure is at least $US11.5 trillion.

Richard Murphy, a British tax accountant who has become one of the world's leading anti-haven campaigners, estimates the cost in lost taxes at $US255 billion a year.

The Australian Taxation Office says that about $5 billion flows from Australia to tax havens each year, and aid groups say that in Africa alone the lost public resources could save hundreds of thousands of lives each year.

France and Germany have warned for years that only concerted international action could stop parasitic havens siphoning off taxes but they have found little sympathy in the two biggest financial centres, London and New York. Murphy says Britain could shut down the havens in its territories by directly intervening or by banning its own banks from operating there, but instead it has been "a deliberate British policy" to create tax havens to support its own financial industry.

"London is the biggest tax haven in the world because all these other places are just branches of London," he says.

"Most of them were deliberately created by Britain as tax havens. That was not true of Jersey, Guernsey and the Isle of Man - they actually happened by accident in the 1920s - but by the time we got to the 1960s we had a lot of these little islands (that) were a burden on the Foreign Office budget and we had to find something for them to do.

"Britain went out of its way to help a lot of these places, like Bermuda and the Caymans, become tax havens, and sometimes with the direct opposition of other places; for example, Vanuatu in the Pacific was created by Britain with the direct opposition of the Australian government, who said: 'This is going to harm our tax revenues', and Britain carried on anyway with complete indifference for the Australians. We like to live with the fiction that these places are sort of independent, but have a look at the Turks and Caicos Islands right now." The British Government last week sacked the Caribbean territory's government after it was reported the local premier's personal assets grew during his five years in office from $US50,000 to a fortune estimated at up to $US180 million.

The constitutions of all the British overseas territories can be changed by Britain "whenever we like", Murphy says. "Every single law passed in the Cayman Islands, the British Virgin Islands, Guernsey, Jersey, the Isle of Man and so on has to be signed by the Queen, meaning it is actually signed by our ministry of constitutional affairs."

Maintaining the havens were "deliberate economy policy" under Brown "because by having the tax havens he had a conduit to bring the hot money of the world into London to keep the City growing, to keep the value of sterling high, to keep our exchange rate very favourable. And it kept the flow of tax from the City of London coming in, so as long as that was coming in he was very happy to have the tax havens there ... which meant he was at the top of the pile of the world's financial centres.

"Now the hot money isn't there any more. He now needs every cent of taxation revenue he can get his hands on because he has got to pay for a bailout of the banks, so suddenly the tax havens are a problem instead of being a solution. And so he simply changed his mind but there is no major conversion, he has not suddenly become a moral convert ... he just wants money."

The tax haven issue has generated the strongest consensus during planning for the G20 summit, prompting criticism it is a relative side issue because the financial crisis was caused by the collapse of the US sub-prime mortgage market rather than tax evasion. But Murphy says the havens play an important role in amplifying the crisis because they are regulatory havens as well as tax havens, offering a dangerous veil of secrecy.

Most of the world's hedge funds are based in the Caymans and the shadow banking system at the heart of the credit bubble was largely conducted offshore. Many of the most complex debt instruments were handled through havens and the big international banks that got into trouble did much of their business through opaque offshore subsidiaries.

That secrecy undermined stability and British banks relied more heavily than any other banks on subsidiaries in tax havens, Murphy says. "Then they realised that the assets hidden off bank balance sheets were of pretty dubious value and they could not assess the value of those assets. They all lost confidence in each other's balance sheets. This is a direct contributor to why in August 2007 they stopped lending to each other. They suddenly realised they had all got pretty likely a pile of crap ... hidden away somewhere.

"And when we got to hedge funds we had absolutely no idea what was where and how they were being valued. So the opacity that was created ... was fundamentally harmful."

The threat of G20 action has prompted a wave of concessions by havens during the past two weeks, with Switzerland leading a rush of offers to exchange tax information with other governments. Those offers seem to have been enough to prevent the summit from drawing up a threatened black list, but Murphy says the G20 has been suckered.

"These agreements to exchange information are useless; the secrecy will be completely intact," he says.

Countries seeking information would need to have specific proof of tax fraud and to know the accounts and people involved, a system that falls well short of the automatic exchanges of information that may allow poorer countries to properly police their tax losses. Switzerland will take perhaps six years to negotiate and legislate for the agreements and its banks will use that time to find new structures and perhaps new bases.

The summit is unlikely to produce much further action on havens, Murphy says. "There will be a reference in the communique, but it will be to an ongoing process of some sort, and there will be a request to the OECD to undertake further work on preparing a list of tax havens and potential sanctions against those who are not willing to co-operate in thefuture."

More optimistically, Murphy thinks the financial crisis will create new pressure on havens simply because governments will need the tax revenues.

"The need for taxation dollars to pay for the deficits that governments are running is what is going to shatter tax havens at the end of the day," he says. "In 10 years ... I think we will only have a handful of places left; it will be too expensive for the rest to comply with the conditions of being a tax haven any more. The ones that are left will probably be quite well regulated, there will be substantially more transparency and there will be a lot more information exchanged."

The survivors, he says, could include Hong Kong, Singapore - which he cites as the biggest problem for Australia - Dubai, Jersey and perhaps Bermuda. "Switzerland will be a transformed place because eventually other countries are going to say enough is enough, this is economic warfare."