I've written quite a bit about the NAO report on the Crown Protectorates over the last few days. And having read the detail I've now had time to reflect on it. Put simply, I think this the most important official report on tax havens we have had for years.
Such a claim need justification. Most important of all, this report makes clear what is actually happening in these places. I mentioned recently that accountability is not as far as I am concerned a noun used to describe a process, it is a verb used to indicate action. It's the same with regulation in the tax havens. Since the OECD, EU, IMF and others began their various processes of seeking to regulate tax havens there has been much legislation, many rule books and lots of paper shuffling to provide the appearance of regulation. But we can now say with certainty that this process has been ineffective. That's because suspicious activities are not reported, deliberately;when they are they are not investigated and when they are investigated they are not prosecuted.
The message is simple, and resoundingly clear. Continued focus on the paper trail of regulation will not change this. Nor will better inspection of that paper trail. The reality is that focus has now to be on the capacity to implement regulation, and the will to do so. Any amount of paper is irrelevant without these and it is clear neither is present. This is where the focus of attention must be.
And to ensure that is possible another issue has to be addressed. That is the obvious lack of financial resources to address this issue: a lack that is undermining the taxation revenues of the populous states of the world and threatening collapse of the world's financial systems. Why is there a lack? Most obviously because these tax havens don't tax: it's the core of their philosophy not to regulate and not to charge for doing so. And it has to be said, this is a choice.
The UK's desire not to provide the resources to regulate these financial services sectors is a second choice, and a conscious one. The UK chooses to foist this risk upon the other governments of the populous world. As the report notes (page 4):
Other areas, such as the regulation of offshore financial services, clearly pose important and growing risks, though these have not yet resulted in direct costs to the UK.
Note the 'yet'. In August it could have been said that there had yet to be a run on a bank in the UK in the era of modern financial regulation. But it happened. And a massive failure of one of the tax havens is as certain as a run on a bank given the systemic failures that this report exposes, systemic failures as significant as those that existed in the not wholly unrelated credit markets.
So why does the UK do this? Why turn a blind eye to tax evasion? Why ignore the risk in the systemic faults that exist in these havens, and doubtless in others as well? Could the same complete indifference be tolerated in any other industry ? I doubt it. So this has to be choice.
It's the wrong choice. And this report shows it not only is creating risk but that the scale of failure is so significant that the risk must be substantial. Now we know what financial failure can cost. The cost of the Northern Rock debacle may be recoverable but we can be quite sure that recovery in the anonymous world of offshore will not be.
Isn't it time to stress test to destruction the financial model of the world economy based on offshore? This is, after all, what is being asked of banks right now. And if we find that the system breaks when tested shouldn't we take real steps to reform it before it's too late?
So, in summary, this report is the unambiguous warning that action is needed. Now.