Light in the darkness

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I wrote this for the Guardian, yesterday:

This is the time to reform Bretton Woods: to recreate a new international architecture for global finance. I have read what Jeffrey Sachs has had to say on this: I would not disagree with him, and yet there is much to add.

First, we have to recognise that there is considerable regulation of the financial services sector in place, much of it introduced over the last few years. Perversely, some of those who claim to be most compliant with that regulation are in fact some of the most abusive tax havens in the world. There is an important lesson to learn from that simple observation: much of the regulation we have is applied to the wrong people, in the wrong place, asks the wrong questions, and fails to identify the risk that the regulation is meant to control. As a result, the most important thing we must do now is undertake a very rapid gap analysis of the existing regulatory structure of the world's financial system. We must resist the temptation to better regulate what is unimportant and instead regulate the difficult things we have so far ignored.

By far the most important issues that will arise relate to tax havens, or secrecy jurisdictions as I prefer to call them. These are the international financial system's "get out of regulation free card". In the past international corporations have faced down regulation by suggesting any attempt to impose it is contrary to international competitive pressure, largely promoted by tax havens as part of an international regulatory race to the bottom. We have to change that. If we do not then there is no prospect of any other regulatory reform being successful.

This reform can be done. We must demand that all abusive tax havens place on public record details of the beneficial ownership of all companies that operate within their domain, put the accounts of all companies on public record, and do the same for trusts. And of course we must lead the way by doing this ourselves. Then we will have created the information that is needed to operate a market on a level playing field. And we must impose sanctions on those countries that do not cooperate, which could be simply done by deducting tax at source from all payments made to those places that did not put this information on record. Barrack Obama is already proposing that in the USA.

Next, we have to ensure that we know which companies are doing what activity where. This might sound a simple objective but the current accounting systems of the world make it almost impossible to find this out. Consolidated accounts are in practice little better than a work of fiction when it comes to finding out what happens within a multinational company because all the transactions between companies within the group are removed from view in those accounts. It is, however, those intra-group transactions that are used to undermine regulation, to avoid tax by relocating profit, and to hide assets from international regulators who might have reason to know about them.

We do, therefore, urgently need reform of international accounting standards so that every multinational company is required to report its transactions on a country-by-country basis so that we know where it makes its sales, and how much is to genuine third-party customers and how much is intragroup; where it makes its profit; where it pays its tax and where it locates its assets. Again, without this most basic information no amount of regulation will work because we will have no way of locating the trades we are trying to regulate and will have no yardstick to measure success.

Finally, in this very short list of additional recommendations, there needs to be radical reform of the world's auditing systems. It is very clear that the Big Four firms of auditors completely failed to appraise the risk inherent within the financial structures of their major audit clients and issue appropriate risk warnings - as is their duty. This is unsurprising; they have been principal architects of the world's offshore finance system. They all operate in all the world's major tax havens. This has created a fundamental conflict of interest within their core structure which cannot be addressed unless they are forced to split their auditing activities from all their other commercial roles. If this is not possible new state labour auditing systems have to be created.

So let us move forward with haste, but start from the basic issues that need to be addressed if we are to succeed in achieving an effective regulatory regime.