Russia = Putin = Corruption = Disaster

and how to “PEP” up sanctions

 

Ben Judah has a great article on the Russian problem in today’s (July 27, 2014) Sunday Times which can be summarized as a set of simple equalities:

 

Russia = Putin = Corruption = Disaster

 

In Stalin’s time, the USSR (especially in the period after the Second World War to his death in 1953) was equated with one man – Stalin – and he ruled through intense fear. When Gorbachev succeeded in the destabilization of the Soviet Union, the West believed that the tumbling Berlin Wall symbolized the breakdown of Soviet norms, the ending of Communism and the establishment of democracy.

 

What was misunderstood (and remains misunderstood) was that the intrusion of market economics into an historically centralized set of nations that made up the USSR had massive risks. The risks were not considered by the libertarian economists that ruled in the 1980’s and for some time after that. In mature economies, the rivalry between Keynes and Hayek could be maintained with pendulum swings from one to the other as decades passed. Indeed, as we now know (or some of us know) the drive towards economic equilibrium is a fantasy but mature economies can adjust regularly and maintain decent GDP growth (even if the measure if substantively flawed).

 

In the newly emerging states that had formed the Soviet Union, the drive for libertarian economies in states that were predominantly centralized in terms of power and decision-making led (without any real checks and balances) to an elite ownership of resources (mainly natural resources) through which wealth in such under-developed economies was generated. Thus, the oligarchs were formed – and they have dominated those states ever since.

 

The oligarchic state is driven by elites and supported by fear, corruption and domination of those not in power. To many in those countries, this is just another chapter in their history of such elite domination. The incipient middle class (as Ben Judah points out), which had been promised a new world order, is now dispossessed. The working class sees no change and as long as jobs are there for them cannot force themselves to complain.

 

Into this oligarchic domain, Vladimir Putin has risen to the top. He is no more than the prime oligarch – the most elite in a country of corrupt elites. His ability to clean up the chaos after Yeltsin and to show who’s boss in a country that always seemed to prefer strong, central leadership (an ingrained characteristic made part of the Russian DNA for centuries) meant that he could dominate political and economic levers. Those who he considered risks were quickly destroyed (sent to prison or even killed). He is not Stalin and he does not control the masses because of a communist-type brainwashing. There is no-one in Russia who believes he has a moral suasion. It is the immoral suasion of power through corruption that keeps him in power and he is tolerated by many and venerated by many others for just that.

 

This power through corruption showed itself in a country like Ukraine. Yanukovych was simply Putin’s oligarch in situ – his corrupted vassal in Russia’s little sister. The danger to Putin that began with Yanukovych’s downfall was stark and a risk to his strategy of power through corruption. When people (some who may well be of the extreme right and no better for that) rise up and force out one strand of corruption in a vassal state, it is a danger for Russia and Putin in particular. This could not be tolerated.

 

It has led directly to the deaths of 298 passengers on Malaysian Airways flight MH-17, most likely hit by missiles from a Russian Buk anti-air missile system stationed in Eatern Ukraine and manned by Ukrainian dissidents. This disaster is a natural outcrop from the corruption at the heart of Russia and Ukraine. In my earlier paper on this I showed the Triangle of Misrule at the heart of such societies:

 

 Slide1

 

This triangle which engulfed Russia and several of its ex-Soviet Union states, now impinges on the West. The deaths of 298 people from across the world as a direct result of Russian corruption provides a shocking example of the risks. Putin has put himself above the law in Russia in a similar way to the Chinese politburo in China and the dos Santos family in Angola (and many others around the world).

 

The UK has played its part in that London has acted as the money-launderer for many oligarchs that have bought properties here and used the banking system to wash money corruptly (although not illegally under Russian law – until Putin changes the implementation of those laws) gained.

Sanctions

As the West considers its next move, it should be ensuring that each and every wealthy Russian seeking to move money outside of Russia is seen as a PEP (politically exposed person). Banks have to treat individuals that are politically entrenched in their own countries and have to seek assurances that their money is not the result of illicit political activities.

 

In Russia, every oligarch has been involved politically – that is how most obtained the “rights” to natural resources or phone systems or whatever in order to make their money. Why not do the obvious and require each bank world-wide that is asked to deal with such individuals to treat them all as PEP’s unless they can prove otherwise? FATF (Financial Action Task Force) produces guidelines on PEPs which describe them as people who have had or have a prominent position that can be abused. In endemically corrupt nations, all senior corporate positions are such – you don’t have to be a government minister or civil servant to have a prominent position that can be abused (or where the prominent position was the result of such abuse).

 

Make all such oligarchs and their staff and their lawyers and accountants PEP’s. It won’t stop them doing business but it could reduce their ability to flow their corrupt money around the world – and money is the basis for their power. It is also the basis for Putin’s – a PEP if ever there was one who has used the banking system and hidden behind the opacity of trusts and companies seemingly owned by others to stash billions outside Russia. Now is the time for Governments to deliver on better transparency in international cash flows and identities of companies and trusts.

 

Opacity = corruption = elites = Putin = Disaster

 

 

Cutting through the Fog – Corporate Secrets and Beneficial Ownership

David Cameron promised last week at the Open Government Partnership Summit that companies registered in the UK would be obliged to reveal their ultimate ownership and that the public would have access to those records.

This was a major statement of intent: evidence that the UK was not going to condone the opacity of companies or owners that could possibly be engaged in criminal dealings or those who are perfectly innocent but choose to inhabit the same smog-bound territory of corporate secrecy.

Why the secrets?

More accountability is a hard-won struggle in an era where our secrets are open to secret services like the NSA and where government secrecy is hard to lessen, Through all this opening up, companies (and Trusts) operating on an international level have reatained an unwelcome ability to shield themselves from public view. At a time of real debate about privacy (Snowden, The Guardian, the NSA, Angela Merkel’s mobile), companies that seek privacy have remained relatively immune.

Companies are treated as individuals under the laws of most countries yet have the ability to hide their ownership and deal with their taxation (if operating multi-nationally) wherever they choose. This means, of course, that they usually choose what is right for them not for the wider society in which they operate. That is their remit. The recent shake-down of Starbucks, Google and others over taxation – which, to date, has yielded not much more than the voluntary promise of payment of a few tens of millions by Starbucks – was a tip of the iceberg moment. With corporate taxation in the UK heading downwards, the current government coalition seems determined to accept the Institute of Directors’ call for companies not to be taxed on their profits at all!

However, one thing about tax is that we can all see how much a large corporate pays in the UK (about a year after the event when it publishes its accounts). What we don’t see easily is where a company has overseas affiliates with which it “trades” – such as paying royalties for the use of its name – in secret jurisdictions where tax is often negligible.

This nonsense of transfer payments and royalties (which HMRC showed last week to the Public Account Committee it has no real understanding over) shifts massive amount offshore and out of the country where real business was done to tax havens.

The fear often cited that proper taxation would force companies out of the UK is nonsense. They do real and profitable business here – the UK is the world’s seventh biggest economy (or thereabouts). Why on earth does anyone believe that they would move away from doing business here? Can anyone imagine that Apple would close its Covent Garden store if they had to pay real tax in the UK rather than shift profits to where the name “Apple” is deemed by a tax expert to reside? Being afforded the space to sell its (excellent) products in the UK, to use our roads, lights, take on people educated here and all the other benefits of selling in the UK (which includes the iconic area of Covent Garden in London) are well worth the entrance fee of corporate taxation.

Offshoring the owners

However, David Cameron’s speech was not specifically about offshoring taxation – it concerned beneficial ownership issues and these are, of course, linked to taxation in a major way but it is much more than that.

The fog of hidden beneficial ownership means that companies are set up which can channel profits or simply flows of revenue to places where tax does not apply and where no-one knows the beneficiary. This is a typical and easy-to-organise ruse of the criminal world. For many years, criminal networks have laundered their revenues offshore – it used to be through the transportation of suitcases full of notes; these days, it is a little easier. This not just saves tax – it transforms illegal earnings into clean money that can then be brought back again into the real economies via the normal banking system.

With the improved ease of transmission of money across the world, it just takes complicit banks to enable the movement (along with some accountants and lawyers to get things under way) and, hey presto, money surfaces wherever it is wanted without anyone knowing.

Just watch the antics of Breaking Bad attorney Saul Goodman – now getting his own series. The essence of monetary manipulation is built around secrecy and contacts. Governments cannot easily stop the development of the latter, but they can do much to stop the former – making beneficial ownership transparent.

Lining Up for Secrecy – the Fog of War

To the vast majority of us, this is obvious, but to many it is a declaration of war. Many secrecy-led jurisdictions are concerned about their future. It is not just Cyprus where the dominance of “financial services” is far too big for the country – Cyprus became completely over-dependent on banking, Russia and lack of due diligence. According to the Tax Justice Network there are 73 secrecy jurisdictions around the world that they analyse.

Of these, a staggering 35 have some substantive connection with the UK. One of those is Jersey and Jersey Finance’s CEO, Geoff Cook, voiced his concern on Friday when he heard David Cameron’s pitch. In his blog he refers to the public register:

It is not yet clear what will be on such a register but unless this is adopted by the G20, I would confidently predict that  Mr Cameron is likely to have lots of friends in the AID world and insufficient food on the table at home.
Protecting business interests, trade secrets, safeguarding personnel from fringe, sometimes violent campaigning groups, from corrupt political elites and from criminals are all real and weighty concerns.  It is telling that the NGO community are happy to  subject those who have worked hard and done the right thing to a much greater degree of scrutiny than almost any other constituency in society.
There is little difference from opening up the private company arrangements of business owners to the public glare of NGOs, journalists, cyber criminals and the assorted flotsam and jetsam of the worldwide web, than for ordinary bank accounts. If the logic holds good do we not need to know the balance publicly of all personal bank accounts so that all can be sure we came by our cash by legitimate means?
We have nothing to hide in Jersey and we have been active supporters of government to government information exchange. However, the voyeuristic tendencies of politically correct elites should not be indulged and indeed will not be by the vast majority of countries, leaving the UK out on an uncompetitive, uncomfortable and potentially impoverished limb.

It is extraordinary that arguments for secrecy over beneficial ownership are now wrapped up in screams about safety from “violent” campaigning groups and cyber criminals. These are the words of fear – fear for a future that may have been predicated on the Cyprus model and lack of such due diligence.

Secrecy over beneficial ownership allows vast amounts of money to be electronically channeled out of not just the UK developing nations. That cannot afford the losses. Huge amounts of wealth properly owned by citizens of countries such as Guinea, DRC, Angola and others are secretly moved and laundered – often with the help of banks (who are now in the firing line of authorities especially in the USA). As TJN itself states:

Secrecy jurisdictions facilitate illicit financial flows.

Illicit financial flows stem from three major sources: bribery (corruption in its narrow sense), criminal activity and cross-border tax evasion. In doing so, secrecy jurisdictions and the secrecy providers operating through them play not only a major role in preventing the poorest countries from developing out of a state of dependency and poverty, but they help creating a criminogenic environment in which all sorts of crimes can thrive and feast on the fruits of breaking the law.

The crimes that are facilitated and whose financial reward is secured by financial opacity and the resulting secrecy comprise, but are not limited to: tax evasion, aggressive tax avoidance, money laundering, terrorist financing, drug trafficking, human trafficking, illegal arms trading, non-payment of alimonies, counterfeiting, insider dealing, embezzlement, fleeing of bankruptcy orders, illicit intelligence operations, insider dealing, all sorts of fraud, and many more.

Clearing the Fog

David Cameron has made a real commitment but there are real obstacles to further progress.

The first is implementation.

Those involved in celebrating the introduction of the Bribery Act in 2011 are rightly concerned that its implementation is suspect. As Jack Straw, then Minister of Justice, said in the original White Paper, there was unlikely to be many cases brought before judges as a result of the Act. This has been borne out in practice along with insufficient funding of investigations, low numbers of court actions and Bribery Act guidance that was aimed at stifling the Act’s powers. Proper and funded implementation of real transparency and public availability of that information is now key to ending secret beneficial ownership for UK-registered companies.

The second issue is around Trusts. These are not covered by the PM’s statement or commitment yet Trusts are a key secrecy weapon for criminal activity across the globe.

The third issue is that the commitment only applies to the UK. This will serve some purpose in helping to clear money laundering from this country but the UK should now use its leadership wherever it has influence. This is direct in the 35 secrecy jurisdictions mentioned above but also in other forums where the UK has any influence – such as the G20, EU, FATF (Financial Action Task Force).

The fog remains but the UK is beginning to spy a way through – taking a lead on an issue on which millions of lives depend outside the UK. It is not the problems of those in Jersey’s Finance Ministry we should most be concerned with but the problems of those in countries where massive corruption by those in power is facilitated by banks and secrecy jurisdictions – resulting in billions leaving the countries (far higher than Aid going in) and that means millions having to survive on a $ a day with no medical facilities let alone schools or economic opportunities.

Time to see above the fog.

And Quiet Flows the Money (Apologies to Sholokhov and the Don)

We have recently heard how HSBC have been guilty of extraordinary money laundering that allowed the corrupt and the criminals to export “their” money around the world with impunity.

We are also told by the Tax Justice Network that tax havens contain over $21 trillion of funds – much of that the result of money laundering, all of it hidden from sight.

Money flows around the world in amounts that make ordinary people dizzy – yet, governments are scared to remedy the essential problem that the “hear no evil, see no evil, speak no evil” banks and the laws that allow tax havens permit: at best, a gross distortion of the economic well-being of the vast majority (99.5% or more) of us that don’t work the system; at worst, a criminal shadow state that has the power to dictate our lives because of its financial muscle.

HSBC – dark deception

US Senator Carl Levin called HSBC misdeeds “stunningly unacceptable”. The broad acceptance that money can flow around the banking system no matter where it comes from and no matter where it is going strikes at the heart of a system mired in 19th Century but caught up in the plundering of the 21st.

Mexican drug cartels have (amongst many others) been able to syphon billions of dollars of their income (derived through murder and extortion and leading to the deaths of thousands, the misery of hundreds of thousands and the cost of those nations where demand for their drugs exist) as if they were the local car rental firm.

Regulators (see: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9413299/HSBC-money-laundering-where-was-the-regulator.html) were inept at …regulating. The laws were broken time and time again and there is no question that HSBC’s guilt is equivalent to a conspiracy to flout the legal system.

As the Senate investigation found, between 2007 and 2008 there was around $7bn moved from Mexico into the US via HSBC. Mexican authorities pointed out to regulators and the bank that this was highly suspicious but no action was taken.

Above this, banks in Saudi Arabia and Bangladesh were provided with accounts despite their alleged terrorist connections.

This deception by the banks – where they know all the problems that being found out would cause – cannot be deemed to be a simple error of judgment. The dark deception practiced by HSBC goes to the very core of not just banking but the whole way nations work. HSBC has torn at the very heart of natural justice and ethics by thinking that the banking system is, somehow, not part of the world. The flow of money to them is something else – not the prime culprit and with no one hurt by their deceitful acts. They are, of course, completely wrong!

Banks’ dark deception is the same deception as any launderer of stolen goods. While we prosecute the small criminals, the huge criminal acts are allowed to escape. This costs us all. How?

Money flowing out of control

Without the ability to transfer their huge “wealth”, drug traffickers, corrupt politicians, the mafia and the rest would not be able to use that “wealth”. If an Angolan politician (and I use that country as an example advisedly) wants to gain any benefit from the oil wealth generated and passed into his or her bank account in Angola, the money has to be transferred to another country – somewhere that money can be invested or to buy goods (like mansions or yachts) that effectively launders that money. When Denis Christel Sassou-N’Guesso, the son of the President of the Congo, was shown by Global Witness in 2007 to have spent $35,000 on designer goods and other items (and went to court with them and lost), it may have seemed trivial – even to someone who earns much less than that a year from his “job” in his country. When he failed to pay his court costs, I had to pursue him into France (I was working with Global Witness at the time) and we found his expensive apartments in Paris and threatened him with bailiffs. He paid up!

But, how did he get his money out from a country where the vast majority is completely impoverished – under $2 a day income?

Through the banks, of course. Banks that are supposed to take account of PEP’s – politically exposed persons – and run checks on them to ensure that the money is obtained properly.

So, money flows without barriers around the world – banks appear oblivious to the terrors that their inactions cause.

Dark regulation – FATF

Of course, our guardians are supposed to be the regulators – people and systems entrusted by the “free world” to guard us against the corruption of the banking system.

Under the framework of the Financial Action Task Force – FATF (see:  http://www.fatf-gafi.org/pages/aboutus/) we are supposed to be provided with safety.

FATF’s objectives are stated as:

The Financial Action Task Force (FATF) is an inter-governmental body established in 1989 by the Ministers of its Member jurisdictions.  The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.  The FATF is therefore a “policy-making body” which works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.

It is up to each country to develop its own safeguards and laws, but the system is failing. FATF make recommendations and while they have in recent years opened themselves up to more scrutiny and NGO participation, they are slow to act as any centralized, world organization can be.

If FATF was working, then the HSBC’s “stunningly unacceptable” inactions would not have occurred.

In each country, the laws and practices are separately developed. The US regulation of HSBC has been found to be appalling.  The Office of the Comptroller of the Currency (OCC) had 50 investigations into HSBC between 2005 and 2010 in areas of anti-money laundering and found 80 problem areas. However, in not one of those cases did it require any major changes to take place. This laissez-faire attitude to such a serious problem again strikes at the heart of governance – banking and nation.

This then means that the Compliance management system within the bank was flawed and unable to resist the calls to make money. Compliance officers are weak and under pressure from the moneymaking machine that is the bank. The fact that David Bagley (HSBC’s Head of Compliance) resigned from his role is no surprise – who knows that he will remain in HSBC in a different role????

So, failure at international level (FATF); failure at national level (OCC); failure at HSBC (Bagley) – the whole system is designed to fail and meets that objective.

Darker than dark – islands of tax heaven

If that was all, it would be bad enough, but it gets so much worse. The Tax Justice Network reports that $21 trillion is held in tax havens. Anyone who had read Nicholas Shaxson’s excellent book – Treasure Islands (http://www.amazon.co.uk/Treasure-Islands-Havens-Stole-World/dp/0099541726/ref=sr_1_2?ie=UTF8&qid=1342962917&sr=8-2) will be familiar with how dark and dangerous the world’s elicit affair with tax havens is. $21 trillion of unseen “wealth” is stored away from taxation and from sight.

The USA and UK are especially complicit in this as the UK has its own tax havens in London, Jersey, Guernsey and its protectorates in places like the Cayman Islands. Because it supposedly provides wealth to important people who influence our affairs, successive UK governments have been scared to interfere. Recently, as much to do with the involvement of the Liberal Democrats in government as anything, small steps have been started to end many tax avoidance schemes and the use of moral judgment has entered our language. This is causing such a fuss that the good citizens of Jersey are threatening to break off from the UK – horror of horrors. It is but a small start.

The USA is not exempt from blame as Shaxson shows so well. Delaware – the Blue Sky State – makes its money from tax evasion. Offices in Delaware are home to hundreds of companies located there for tax reasons.

This costs us (the 99.5% who don’t have the opportunity to avoid tax in this way) a fortune. We end up with higher VAT, higher social security, higher income tax, corporation tax, inheritance tax and other sales taxes as a result.

As reported in the Guardian yesterday concerning the $21 trillion

This gargantuan sum is difficult to comprehend, but it becomes more understandable at a parochial level. According to an earlier report by the PCS union, the Tax Justice Network and War on Want, the use of tax havens costs the UK taxpayer at least £16bn a year, double the annual budget of the Department for International Development.

The River of Hades around the world

The confluence of the HSBC horrors combined with the system of tax havens that operate is of a worldwide network of money flows that are outside the law and jurisdictions. While we berate the investment banks for their sub-prime disasters of 2007 and for Diamond’s culture problems at Barclays, the basic banking systems are at fault in a worse way.

For, it is basic banking on which we trust to get money from one account to another. Nat West’s recent debacle in the UK, when its IT systems went haywire, shows what can happen when the basic system goes wrong.

How much worse it is when the basic system of banking and our international management of that system and to where we allow money to flow is completely abhorrent – it is a very dirty hell-hole that allows bad money to flow wherever it wants and to wherever it wants. The international banks are not just bystanders in this – they are culpable and implicit in crime, in corruption and in impoverishing millions (and making all of us poorer).

Banks have had a very bad press but in the 21st Century as digital technology rules our lives, it is too easy for banks and their staff to evade controls.

What should be done?

FATF should have teeth and should be allowed to go beyond recommendation to sanctions.

National governments should ensure that their OCC equivalents are given the means (financially, technically and with highly skilled and well-paid management) to do the job.

Compliance Managers in banks should have complete independence from their senior management and be subject to independent audit (outside the main financial audit and by different audit firms). Independence means that they should report to compliance board which, in banks, should have independence from the main Board and include only non-execs.

Tax havens should be outlawed – tax should be payable where profits are made and any scheme set up to avoid tax should be illegal. We have made a very small start in the UK- but only a tiny one. The moral crusade which happens at a time of worldwide recession is the time to get this in motion so that money can no longer flow illicitly and quietly.

Locked out of Power and Making a Noise

How do we contribute to society and how do we influence the future?

 

There is a dangerous gap opening up between people and institutions that current forms of democratic parties and other organisations set up to channel views to those instruments of power are not able to bridge. The problem is manifold:

Political parties which dominate most democratic societies are filled with professional politicians who have little (or at best moderate) understanding of the real world outside of politics;

Civil service bodies and public sector institutions are (as they have always been) full of careerists who are no longer “tempered” by the social reality that broadly based political parties would provide;

Campaign organisations are also full of careerists who work their way up the system internally and may have little real association with society outside their own silo of interest.

Corporations (especially large, multinationals) have a tremendous power in a world dominated by numbers – growth objectives – and can fund large campaigning groups of their own.

Ever-Changing society

There is no equilibrium in society although it feels like stasis has been reached. Different bodies are continually evolving as the environment changes politically and socially and economically. The problem is that entrenched interest groups (drawn from those sectors above) continuously work to make their positions more secure.

In the past, four, main sources of change were developed to open up society to change:

Political parties

Campaign groups

The media

Communications

But, mainstream sectors have succeeded, in the main, in wrapping the first three groups into that mainstream. There is a dependency on each other and a difficulty in breaking through with new ideas and attempting to force through decisions on even the most important issues.

The global economy has exacerbated this problem – as international needs lead to massive international organisations that succeed always in taking decision-making away from the individual.

Improved communications have through history succeeded in transforming the ability of individuals to learn more and have a greater say. The printing press was followed by the telephone, which was followed by the fax machine and the mobile telephone and the internet. Mass communication is now available that provides the ability for all of us to understand more of what is being done in our name. Social systems such as Twitter enable communication in an instant; mobile telephony and digital technology allows information in microseconds. This has had repercussions in events like the Arab Spring but the rigidity of social norms fights back most often.

Society’s complex underpinning will see some new emergence develop from this – but, what is it likely to be and how can the individual become involved rather than be part of a sector that more clearly matches that of Orwell or Huxley’s nightmares?

The drift to Centralised control

Maybe it’s a natural occurrence – that as organisations develop, they coalesce and form groups and associations that begin to meld into international committees that appear completely remote from most of us.

This is certainly true of political parties, true of sports associations (like FIFA or the International Olympic Committee), true of international organisations (like the UN, WTO), major NGO’s and charities, political groupings such as the EU, international corporates (such as the banks). Most people don’t know most of these organisations and many (like FATF – the Financial Action Task Force) have for years seemingly gloried in their anonymity.

With the rise of the internet, we were meant to discover more but that same rise has meant that less spending goes into traditional media organisations like campaigning newspapers. This has meant a reduction in in-depth investigations and analysis and much-reduced investment by newspapers and other media outlets in providing the type of information we need as individuals in society to keep the massive organisations on their toes.

In a major sense, the rise of the internet has had consequences that were not envisaged and has led to a major centralization of power structures – more immune from investigation than before.

We must not be misled by the closure of the News of the World in the UK after the hacking enquiry – the NotW was a scandal rag that was part of the new world of celebrity. Its loss is not great.

The loss of whole departments where the main task was to investigate and analyse how society works (and where it does not) and the rise of the internet as a news medium (and comment in 140 characters) shows that, so far, what has emerged is leading to centralization not the reverse.

Does Centralised control matter?

Democratic society is supposed to provide individuals with the ability to influence the way our society is run. So, centralized control does affect us all. While the drive to consumerism may suggest that we would not mind if we were ruled like in China (more goods supplied to keep the population quite), I suspect that this tendency does not appeal to all of us. Centralised control does not stop at Tiananmen Square – it has no controls. “”Unlimited power is apt to corrupt the minds of those who possess it” (William Pitt the Elder) is borne out through history and the idea that we can allow others complete freedom to guide us through life is obnoxious to most of us I suspect.

What are the options for decentralising?

The centralization of sectors of society needs to be continuously prodded. That can be done both internally (i.e. within those instruments of power) but mainly externally (from other organisations and / or individuals).

Working within is tough – the structures bind staff to their culture and it is very difficult to break out. A feature of British politics has been how the Liberal Party (a party for the individual within a coherent society and always opposed to centralization and totalitarianism) has become (especially since it became the Liberal Democrats) so bound up with the EU project – a centralizing force that is now seen to be breaking up.

External pressure may now be the only way to elicit change and to change the environment so that something less centralized can emerge.

The Centre for Civil Society in Australia is a good example of an organization that has been set up to prod society. www.civilsociety.org.au

The Centre for Investigative Journalism in London is another. http://www.tcij.org/

NGO’s like Global Witness are important contributors. www.globalwitness.org

All such organisations are set up to prod (some quite heavily) the existing structures – they are all dependent on external funding.

We need some creative destructionism – in the same way that Apple created new products that tore at our desire for more than pure functionality (although Apple is now part of that central structure); in the same way that Google tore into the online world and is now a core of that central structure – within the non-economic sphere, the way we live outside of numbers and products.

There are some options that remain that can assist in developing society so that we learn the lessons of the 20th Century – where communism and fascism drove the world to and then away from totalitarianism. Those lessons are now in danger of being unlearned – where the danger of unbridled centralism of society is occurring without (thankfully) war, but just the same potential results. We could wake up and find the world run from the centre. Maybe it is already and the drift to unequal wealth distribution a symptom.

That suggests more of an effort is needed to point a finger at our structures and the best way to do this is through our participation – and through some independent organisations, especially in investigative journalism, which can expose, fight for freedom of speech, help to analyse the impact of centralised decisions on society and expose fraud and corruption: many groups, many individuals wanting to open up the closed doors.

Does a tree that falls in a forest make a noise?

Good Global Citizenship and Tax Havens

Barclays was cornered this week in the UK by Her Majesty’s Revenue and Customs into paying back around £500 million for entering into a tax avoidance scheme – despite signing up to a Government scheme not to do such things. Bob Diamond now looks foolish after his vow to make Barclays a good citizen.

For many years, it has been “OK” for companies and high income earners to shield their earnings behind tax avoidance schemes. Since the introduction of welfare states across the world, companies and individuals have sought to minimize the tax that society needs to work through the system. They have systematically sought to challenge the efforts of democracies to manage the tax base. In some countries like Greece, there has been a tacit buy-in by Governments (and those in Government with their fingers in the till) to allow tax to go unpaid. This leads inexorably to financial chaos and, as we now see in Greece, to progressive civil strife and poverty. This is what has happened in Africa for so long – the wealthy shield their income from the State (who are paid off to look away).

In those countries which do make a real effort to collect taxes, the best tax avoidance comes through the use of tax havens and the real killer for economic equity is the way the world accepts tax havens as a reasonable and acceptable part of our global economy.

David Cameron and many others talk a lot about fairness: the fairness that makes bankers bonuses almost a criminal offence. But, this is two-faced. While George Osborne says that the HMRC will work towards killing off general tax avoidance schemes, we have in our midst a main centre of tax avoidance – the City of London.

Nicholas Shaxson wrote brilliantly in his book “Treasure Islands” about the tax havens that bedevil the world of finance and economics. Tax havens distort, they do not equalize.  Tax havens provide the wealthy (individuals and corporates) alongside the wealthy criminals and wealthy terrorists with the ability to shield themselves from legitimate taxation. Providing a legitimacy to tax havens (and allowing them to proliferate worldwide – even shielding them as the UK does the Cayman Islands and elsewhere) creates massive market distortions and inequalities. Legitimate and democratic tax collection is continuously stymied by the tax havens – just a step from the wealth-grabbing in Angola or the tax avoidance mentality that is Greece.

Taxation is a central plank of democratic society.  While the Tea Party and similar libertarians might rage against central government tax and tax collections as a scourge of society, we know that society is centred on a democratic ideal of the wealthy properly financing the society on which it depends to provide a basic source of welfare to the poor and sick, for defence, for infrastructure. Society is more than just the wealthy and privileged creating an elite life. Angola is a good example of how fortunate elites manipulate the wealth of a nation to appropriate its total wealth and Sonangol (its so-called publicly owned oil company – really commanded by its country’s leadership who reap its financial benefits) has been built to achieve the grabbing of oil and energy wealth from the citizens.

The nations that democratically elect their leaders (and, it is to be hoped the new rich of China and Brazil and others) should take heed to the dangers posed by the examples of the wealth grabbers in the energy-rich nations. It is here, in the UK (City of London, Jersey), the USA (such as the state of Delaware) as well as the better known haunts of the Dutch Antilles or the Cayman Islands, where huge financial flows (from the legitimate wealthy alongside the illegitimate) travel in order to reduce the legitimate tax take of the countries in which the wealth is created. Tax havens are wealth destroyers.

Wealth is destroyed by tax havens because they eat away at the main body of a nation – its mass of people, its true wealth creators. Education and education systems suffer dramatically because taxation is unavailable to finance schools. Health systems suffer for the same reasons – in the UK, where we have moved vast sums to the NHS in the last Government, cut-backs are now biting as the tax take is diminished along with economic growth. In poorer countries, the wealth shift is much more dramatic.

Ambassador Nancy Soderberg (appointed by President Obama earlier this year) was in London this week to campaign for Argentina to live up to its duties in economic areas. She mentioned its lack of adherence to the Financial Action Task Force  (FATF) requirements for responsible national supervision of illegal financing – Argentina was placed on FATF’s grey list over corruption issues. But, FATF and other international bodies have failed to oversee a sustained reduction in how financial flows travel the world and to institute a level of good citizenship on a worldwide scale amongst our companies and wealthy individuals.

While steps have been taken to reduce terrorist financing and, to a much smaller extent, the benefits of illegal drug trafficking and gambling and prostitution, very minor shifts have been made in (a) defining what global good citizenship means (b) reducing tax havens and the financial flows through them.

The G20 states from time to time that tax havens are to be reduced in scope but the battle against them has hardly started. Tax avoidance on a grand scale is as bad as grand corruption (maybe bigger in scale): two sides of the same coin. Good global citizenship requires a new definition to be made – where a global consensus is sought to reduce hugely the ability of companies and individuals to create their wealth in one place and move it offshore to save tax. This simple example of good global citizenship is a cornerstone to increasing wealth creation on a wider scale. It is not socialism but realism and pragmatism. It is good citizenship.