Science as a Candle for Democracy

Candle

July 14th celebrates the storming of the Bastille in Paris on that day in 1789. After the War of Independence in America, it was a second revolution to bring democracy to a kingdom, this time in Europe. For Thomas Paine, writing The Rights of Man shortly thereafter (a quote used by the great Christopher Hitchens in his biography of Paine:

“Never did so great an opportunity offer itself to England, and to all Europe, as is prodiced by the two Revolutions of America and France.”

Whether, over two hundred years’ later, the success of the revolutions is properly signalled by the visit to France of the popularist Donald Trump is highly questionable for his visit signifies a distinct darkening of how democracy is faring in the USA, Europe (post-Brexit referendum), Turkey, the Phillipines, India, China, Russia, Saudi Arabia, Israel where serious strains are being felt and ‘strong man’ politics is under way.

It may be straining credibility to equate these dark concerns on democracy with the election of Norman Lamb, a Liberal Democrat Member of Parliament, to the position of Chair of the House of Commons Science and Technology Committee, a Committee whose purpose is to scrutinise the UK Government on its strategy and programmes in this area. Yet, this linking of science and democracy is central to the changes we are currently seeing in the world of politics.

Science in the Soul‘ is a collection of the writings of Richard Dawkins, where he shows his distinct ability to reason and explain to the full.  In the book, Dawkins commends the science populariser, Carl Sagan, as a man that should have won the Nobel Prize: not for science but for literature and it made me re-read his excellent book ‘The Demon-Haunted World‘, published around twenty years ago.

Sagan’s book is about how “scientific thinking is necessary to safeguard our democratic institutions and our technical civilisation” and is so apt in an era of Donald Trump and Brexit (with its Govian taunts about how not to believe experts) that it should be read and re-read by anyone with a desire to understand our current problems and what is needed to extricate ourselves from the hole that we are digging for ourselves. It was also frighteningly prescient. I reprint here, word for word, a sizeable paragraph from the book that accurately forecasts a significant chunk of our world in 2017:

“….science is more than a body of knowledge; it is a way of thinking. I have a foreboding of an America in my children’s or grandchildren’s time – when the United States is a service and information economy; when all the key manufacturing industries have slipped away to other countries; when awesome technological powers are in the hands of a very few, and no one representing the public interest can even grasp the issues; when the people have lost the ability to set their own agenda or knowledgeably question those in authority; when, clutching our crystals and nervously consulting our horoscopes, our critical faculties in decline, unable to distinguish between what feels good and what’s true, we slide, almost without noticing, back into superstition and darkness. The dumbing down of America is most evident in the slow decay of substantive content in the enormously influential media, the 30-second sound bites (now down to 10 seconds or less), lowest common denominator programming, credulous presentations on pseudoscience and superstition, but especially a kind of celebration of ignorance. As I write, the number one video cassette rental in America is the movie Dumb and Dumber. Beavis and Butthead remains popular (and influential) with young TV viewers. the plain lesson is that study and learning – not just of science, but of anything – are avoidable, even undesirable.”

If an afterlife existed, Carl Sagan would be looking down at the events of 2016, and tut-tutting knowingly, shaking his head and pulling at his long, white beard (all sages have long, white beards in heaven, don’t they?): “I did tell you guys!” he would be shouting, hoping that some mystical ripple would resonate from his screams of despair into our heads, deaf and dumb to all sense.

In the so-called developed world, technology moves forward at a great pace so that major phase transition events bypass us with alacrity. The whole ‘fake news’ environment washed over us only in the last few years as the networked world provided everyone with the ability to be journalists and have an opinion that all can see. As always with new technology, those most capable of utilising it to advantage included the criminally-minded who not just sent emails from Nigeria asking for your money, or emails and texts that would lock up your computer or cellphone if you replied but, more subtly, perverted voting systems and swayed voters by their ability to infiltrate the social networks with lies, distortions and manipulations to a precision that a few thousand votes in the right States resulted in a Trump presidency.

Sagan wrote further on this:

“We’ve arranged a global civilisation in which most crucial elements – transportation, communications, and all other industries; agriculture, medicine, education, entertainment, protecting the environment; and even the key democratic institution of voting – profoundly depend on science and technology. We have also arranged things so that almost no one understands science and technology. This is a prescription for disaster. We might get away with it for a while, but sooner or later this combustible mixture of ignorance and power is going to blow up in our faces.”

“The scientific way of thinking is at once imaginative and disciplined. This is central to its success. Science invites us to let the facts in, even when they don’t conform to our preconceptions. It counsels us to carry alternative hypotheses in our heads and see which best fit the facts. It urges on us a delicate balance between no-holds-barred openness to new ideas, however heretical, and the most rigorous sceptical scrutiny of everything – new ideas and established wisdom. This kind of thinking is also an essential tool for a democracy in an age of change.”

Carl Sagan was a sceptic and the book shows how scepticism, used pro-actively, not as a tool to doubt everything for doubt’s sake, is central to understanding. He provided a toolkit for guarding against a fallacious or fraudulent argument. In summary:

  • Where possible, independently verify the facts
  • Encourage debate on this by opponents and proponents of views expressed
  • Discount ‘authorities’ who generally carry no weight; in science there may be experts, not authorities. In politics, beware such experts.
  • Spin more than one hypothesis
  • Don’t get over-attached to an hypothesis just because it’s yours
  • Quantify where you can
  • If there’s a chain of argument, show that every link works
  • Occam’s Razor – if two solutions exist, choose the simplest
  • Always ask if the hypothesis can be disproved (e.g. Brexit will save British taxpayers £350m a week!)

Now, not everyone has the time to go out and do all this. So, we rely on journalists and others to do so. This brings me back to Norman Lamb, a man who has gained tremendous respect across all parties for his honesty and campaigning zeal (in the area of mental life as an example). He is a democratically-elected member of a Parliament often thought of as the home of democracy (Thomas Paine might have doubted that and the first-past-the-post system of elections means that most in the UK are, effectively disenfranchised) and now Chairs a Committee on Science and Technology. We should be using such institutions to galvanise the linkages between science, technology and democracy to challenge ourselves in how we think so that crass assertions made during the Brexit referendum and by Donald Trump and others (that might lead to the USA’s desertion of the Paris Agreement on environment as just one example) are challenged by not just politicians but by all those that should hold us to scientific thinking.

This means that we should understand why those that wish to believe in such perversions of reality actually do so and why scientific thought processes are so easily overturned, that ‘rigorous scrutiny’ is accepted as the norm. A recent article in the Financial Times, by John Gapper on how CP Snow identified the gap in thinking on science by intellectuals in the 1950’s shows that this is not new, but it is not just intellectuals that have the vote in the 21st Century, it is all the people.

So, a plea to Norman Lamb and his Committee, whatever the Terms of Reference have historically been, it is time to challenge our lack of scientific thinking, the lack of awareness of science and technology throughout the population and how this “combustible mixture of ignorance and power is going to blow up in our faces” – if it hasn’t already.

Democracy took many lives and many years to establish in the western world and elsewhere. It is not yet extinguished but, like a candle that has been burning for many hours, the light is in danger of failing. Sagan’s book was sub-titled: “Science as a Candle in the Dark”. On the day the French commemorate its own democracy, we should not let that candle flutter to extinction.

Candle

Don’t Look, Won’t Find

DLN

 

Don’t Look, Won’t Find – Money Laundering in the UK

Transparency International – UK just published “Don’t Look, Won’t Find” which exposes enormous gaps in the UK’s ability to stop illicit money coming into the the country.

The report shows how all sectors, from banking to the enablers of money laundering like the accounting firms, legal firms, company registration firms to the sellers of final products and services like auction houses, private education, fail the test of oversight and reporting on a consistent basis.

This means that huge amounts (tens of billions of £’s) enter the country illegally from China, Russia, Africa and elsewhere – depriving those countries of the money they need and, as a by-product, pumping up house prices in London.

I had the privilege to Chair the Advisory Committee for this report – part of the Corrupt Capital project at TI-UK which aims to uncover how London (a major financial centre) needs to work hard to rid itself of corrupt capital that enters its system here and in the many tax havens to which it is connected world-wide.

Those who have written this report have done an excellent job of uncovering the chaos that exists in oversight and reporting systems in the UK.

 

Don’t Look, Won’t Find

Scotland and the UK’s Democratic Deficit

It was Bogdanov who coined the phrase “the Dictatorship of Democracy” to describe one of the options for a post-Imperialist Russia. It was Mao Zedong who used the term “Democratic Dictatorship” to Orwellianise the role of the Chinese people to attack the Imperialist spirit of Chiang Kai-Shek.

It may be harsh to turn this phrase on to the UK, but the current referendum in Scotland is showing that there is certainly a Democratic Deficit that being used to characterize why Scotland is turning towards independence (or at the least more devolution) and why English regions and Wales are now excited by the prospect of real, permanent and growing change.

The UK has always had a centralized system of government. Based on English and Scottish monarchic government, the gradual transfer of power to a London-based Parliament composed of the Commons and the Lords testifies to the history of nations that willed government to the centre.

Regional challenges have, over the years, been destroyed – at least until recently. Nothing signified this more than Margaret Thatcher’s destruction of the Greater London Council in 1986 after Labour had won the elections and the Conservative Government could no longer stand its independence. The reinvigoration of London in its new formation – under both Labour and Conservative Mayors – served to provide a key opportunity to test whether the political centre could resist.

Devolution in Scotland and Wales (and the cross-party and cross-religion agreements in Northern Ireland) has been seen as the centre’s evolutionary resistance to change. It was not until the Scotland Act 1998 (just 16 years ago) that devolution was allowed there – having failed in the 1970’s because those in favour of devolution counted to less than 40% of those eligible to vote.

Partly because of the system of elections in the UK (which are first-past-the-post), Governments in the UK have tended to be elected with small percentages of the national vote (around 40%). As a result, the largest minorities gain the majority of the seats (except on rare occasions such as in 2010) and form the Government. This means that regions and nations such as Scotland and Wales may be governed by parties and ideals completely at odds with their own leanings.

For Scotland and Wales, this has been especially galling as they are both, in recent years, anti-Conservative. Whatever they stand for, the Conservatives are not seen in either country as their own. In England, the same can be said for many areas – the South-West (Liberal-leaning), Midlands and North (Labour). It is the south of England (centred around the highly prosperous heartland of London) that dominates national thought and population. Interestingly, London itself is not a Conservative heartland with a tendency towards social democratic ideals, but the outer London Boroughs and the rest of the South-East are dominated by Tory blue.

Democractic Deficit

Centralisation of power is the norm in the UK. The Centre makes all the decisions and regions (outside of Scotland) have modest powers. Most local authorities have decision-making authority over budgets for street lighting, refuse collection, local social care, local policing and similar but the assault on education and on local authority funding from the centre has been fierce in recent years and strengthened the stranglehold of Central Government. Education is a good example. The vast majority of state secondary schools are now Academies – outside of local control and reporting directly to the Secretary of State for Education. There is argument on both sides, but the centering of power into the Department for Education shows itself as part of a default mechanism in England. In Scotland and Wales, this has not occurred.

For Scots, the desire for change has been in evidence since the failed referendum in 1979. The recent debates on Independence focus on the “Yes” position as positive and the “No” position as negative (even if it is named “Better Together” the argument of this position has been entirely negative). David Cameron may have punctured the UK by allowing the referendum to be characterised in this way and none of the UK parties have been able to capture the essence of what positively makes the UK worth having apart from a nod to tradition and the past.

The reality, though, is not much different. Scots do not see the Conservative Party as relevant to them and while devolution has provided much decision-making power, the voice of the UK, spoken through Cameron and his ministers, is a daily reminder of the downside of Unionism. That voice speaks from elsewhere.

Before Cameron was Brown and Blair. Blair was characterized by centrist governance, dogma and, although leading Labour, was still seen to represent a distant (by miles and ideas) government. Brown was so dogged by problems (international finance and personal) that despite being Scottish, he fared no better. He was also a “died in the wool” centrist.

This has meant that the desire for self-government is also a desire for real “voice” – one that inspires people. Most Scots are no longer inspired by politicians that they see as remote in terms of distance and in terms of policies. Around half the Scots may well vote that way on 18th September.

Democratising the “Democratic Deficit”

The dictatorship of democracy (that leads to the democratic deficit) by the largest minority is central to UK politics and has been throughout its history in a country that has a relatively benign and social population. Of course, this is not the case in Ireland – a special case. In the rest of the UK (Great Britain), the democratic deficit has not caused national strife since the Civil War in the 17th Century – where there was no democratic ideal even with Cromwell. Apart from skirmishes (such as over the poll tax under Margaret Thatcher), British people have been notably sanguine. There was no Freedom of Information until Tony Blair (and there are many exceptions to this) and ministerial privilege can overturn national accountability such as in the alleged corruption at BAe Systems in Saudi Arabia.

However, the Scots have slightly opened Pandora’s box. Out of this referendum may well come the opportunity to reduce the deficit at least. This has long been a Liberal tradition – blind-sided by the link with Social Democrats in the 1970’s – before the Liberal Democrats came into being. Liberalism was meant to enshrine the spirit of “localism” – against the centrist doctrines of Conservatives and Labour. This localism would have prized a federal Europe (EU) and been at the forefront of devolution for Scotland, Wales and the regions of England.

Devolving as much power as possible to the most local area possible reduces the Democratic Deficit. This is hated by traditional politicians because it loosens power. In a world where national politics is such a profession, it becomes harder to achieve. It is argued that local power begets local corruption – the type of prolonged power that means the same party stays in power for too long and becomes corrupted.

This means that the second pillar of Liberalism, voting by proportional representation, is needed to offset the potential for local dictatorships.

The people of the UK are not naturally inclined to shake up the centre and their desire to maintain first-past-the-post elections shows a desire for little change. It may be that the Scots show the way to change and a reduction in the Democratic Deficit whether they vote “Yes” or “No” on 18th September. It may be a big decision for the Scots – it it already a potential game changer for democracy in the whole of the potentially dis-United Kingdom.

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

 

 

A Bermuda Triangle off the Black Sea

Russia, Ukraine and the Triangle of Mis-rule

 

Everyone knows of the Bermuda Triangle. Not many know of the mysterious area just off the coast of Ukraine that has also suffered a number of strange activities. Various disappearances have occurred in this area which some call the Black Sea’s Bermuda Triangle.

 

Others, not so swayed by superstition, also use a similar phrase to describe the politics of the area. In their paper, “the Black Sea and the Frontiers of Freedom”, Ronald Asmus and Bruce Jackson called that region “the Bermuda Triangle of western strategic studies”. It is an area of confusion, forever (or so it seems) bound up with the history of Russia.

 

Russia’s history is one of suffering and hardship. Its people are hardened by centuries of serfdom, relative poverty and rigid rule from the centre. It is also a history of power and control: from well before the first of the Tsars (Ivan IV) through to the Romanovs, via Lenin and the short-lived Communist regime to the present day. In the West, even after so many years, we misunderstand the core drivers behind the leadership and the people.

 

Russia changed dramatically after the 1905 Revolution and then the October Revolution of 1917 into the expensive experiment that was Communism. Marxist thought was “developed” through Lenin and Stalin into a model of dictatorship that, whilst a complete political change from before, continued the power to rule from the centre.

 

The fall of this elite in 1979 under Gorbachev was an opportunity to ally Russia with western thought on democracy and economics but the power of libertarian economics was too much. For a time, the rush for economic power was electrified across Russia as an elite (the Oligarchs) wrested the power of the economy from the State. The new gangster rule – hugely corrupt, murderous and allowing no opposition – took over from the endemically corrupt regimes that began with Stalin and his underlings.

 

Yeltsin enabled this robbery and corruption by his lethargy and inability to rule a people that prided itself on central control. The West, misunderstanding the rigours of power in Russia, stood by hoping that the new economic opportunities would, somehow, generate a desire for democracy. But, market economics does not need democracy to survive (viz. China) and the Russian economy was not becoming a market economy but a new kind of centrist yet libertarian economy: one that was predominantly corrupt (hugely corrupt) and where individual centres of economic power (whether oligarchs or regional centres) dominated. This new economy was, for a time, the true government of Russia.

 

The Triangle of Mis-Rule in Russia

Slide1

Vladimir Putin came on to the scene relatively late but enshrines the old order of (mis) rule. He made his way to the top by promising an end to economic shambles and strong centrism in terms of government. The years of Gorbachev and Yeltsin are seen by him (and many Russians) as a disaster – leading to governmental shambles, a loss of Russian honour and an economy shared out between a few ruthless gangsters.

 

Putin has worked to centralize government to himself (the new Tsar) while piecing together an economy based on market basics but which remains heavily unbalanced by corruption and key centres of economic power. This Triangle of Tsarist mis-rule, corruption and economic centres of power are not dissimilar to the pre-communist set-up. It is a reversion to the norm in Russia after communism and the Gorbachev-Yeltsin period of chaos. It is a reversion to what Russia knows best and what its people are still willing to accept – knowing that they cannot have any power of thought, that they will be ruled from the centre both in terms of economics and in terms of the way they live; knowing that corruption will endure and that they will be OK as long as they have enough to get by on and keep quiet. It is a world where the Duma has resumed its original status – merely as an organ to assist the ruler – the Tsar (Putin) – rule.

 

China and Russia – centrism and market economics

 

The world’s heartbeat of communism pulsed in Russia and China. Both countries suffered tremendously for the experiment of their own type of communism – Lenin-Stalinism or Maoism. Both have now moved towards what we perceive as market-driven economies. We (the West) think that our form of economics has won out in both countries and that democracies will automatically follow.

 

Unfortunately, both models show how market-driven economics can be developed in different ways and to suit the ruling elites.

 

China operates as a legalist society whereby the ruling elite sees itself as above the law. This is a blurring of its communist ideology whereby the state is run for the benefit of the ruling ideology. The fact that communism no longer exists means nothing: a ruling elite is considered by itself to be above the law.

 

Of course, the economy is managed very differently to how it was managed under Mao. Deng changed this to entwine market forces within a rigid centrism – made real by ownership of the banks and finance and of key industries and resources. While most pricing mechanisms are set by the market, it is massively influenced by interest rate manipulation, by endemic corruption and by key units of power in local government – and by the family-focused culture. This is a mix of market economics, centrism and Confucianism that is uniquely Chinese.

 

This is wholly different to the Russian model which is far more dominated by the strong man culture. In this way, it could be argued that there is more hope for change. The intertwining of Confucianism with the long-term centrism of Emperor rule through to the Communist rule and now the post-Communist legalism makes China’s “Civilisation State” very hard to break down. Economic change was relatively easy as this was only communist for a relatively short period. Governmental change is far harder to crack.

 

In Russia, this may be true as well but there is no equivalent of Confucianism in Russia and the state apparatus is not as broad in Russia as in China – it was destroyed under Gorbachev and Yeltsin. So, in that short period, the West hoped for real change. Now, Putin has embodied the state apparatus in himself as Tsar.

 

Ukraine – Catch a falling Tsar

 

Putin’s aspirations for a renewed Russia have seen him march into the Crimea and undermine Ukraine. Ukraine was for many years just a smaller version of Russia in Russian minds – Ukainians were termed “Little” or “Southern Russians” in the 19th Century and Stalin saw them as a tribute nation (similar to the way that China views its neighbours). The Russification began in the 1860’s and it was only the fact that Kruschev was Ukrainian that gave them a measure of independence (and Crimea) around 40 years ago.

 

But, Ukraine is similar in other ways, too. It is endemically corrupt from the top down. It is not just IKEA that has found the corruption difficult to penetrate.

 

Ukraine has seen endemic and high-scale corruption for many years. In 2006, for example, Global Witness (an anti-corruption NGO and this year’s winner of the TED award) published “It’s a Gas” – an expose of the corrupt Turkmenistan – Ukraine gas trade.

 

The report highlighted the case of former Ukrainian Prime Minister Pavlo Lazarenko, who, it claimed, syphoned off huge amounts of money from questionable business practices: money that was then funneled into Swiss Bank accounts. Lazarenko (who served time in the USA) recently had substantial assets seized in the US.

 

The Global Witness report also highlighted the barter economy which anti-corruption experts know as one of the best-known ways to hide massive money transfers illegally.

 

Yet, Lazarenko was not part of the Government clique that Ukrainians pulled down earlier this year. He was closely linked to the earlier regime of Yulia Tymoshenko (the West’s best friend) – very closely linked as an article in January showed.

 

Those in power in Ukraine followed the Russian model. Little Russians modeled themselves on Russia in many ways and this was not limited to one party or one clique. The EU desire to bring Ukraine into the EU tent was not necessarily misguided in the way that Nigel Farage would have us believe but the powerful in Ukraine are essentially part of a highly corrupt clique that dominates the country in the same way that Russia is dominated by its own corrupt. They have divided up the nation’s assets between them.

 

Tsar Gazing

 

This is one reason why Putin is keen to bring Ukraine back into Russia’s control. The horror of the break-up of the Soviet Union was bad enough but assuaged by the economic benefits that accrued to the Putin elite and the retention of power in the hands of the few. This was mirrored in Ukraine – the home of many Russians. The call to patriotism has been partly a response to the shouts for democracy but underneath is a need for Russian mores to be maintained.

 

This is the Triangle of Mis-rule: Tsarist centrism, corruption and economic centres of power that Ukraine has witnessed since it was deemed to have left Soviet control – an exact image of big brother Russia. This is why it is so difficult to break down the stranglehold. Ukraine is fixed within the Bermuda Triangle of the Black Sea.

 

The EU may well have been Tsar Gazing when it simplistically assumed that riots on the streets could topple a government in a bankrupt nation with such a history and such conventions. It appeared not to understand enough about the pull that Russia had on it: Russification going back over 150 years and a model of the economy and government that is a replica of the Russian model.

 

Breaking this down was bound to be a challenge – but it is not clear that the model is sufficiently understood even now. Many write on the endemic corruption but provide little guidance to solving it. Many write on Russification but have no answers other than a hope that “democracy” will triumph. Others write about Putin’s urge to control without too much understanding of the Russian legacy that goes back to the 15th Century.

 

Can Ukraine break free?

 

It is not just one aspect or another that has to be broken in Ukraine. They have the three corners of the Triangle of Mis-rule to break in addition to the large numbers of Russians – patriots to Russia – in their midst and the larger numbers just over the border in Russia itself.

 

This is a massive challenge and there is no rapid solution.

 

Ukraine is in a mess – as we know. It has lost the Crimea and may well lose the Eastern half of the country. It is not often stated that this may be the best medium-term solution even if it is not one that appears wholly palatable. A loss to Russia of this scale may appear too much and it is, of course, for Ukraine and others to decide. But, the devil’s triangle that operates in Russia and Ukraine is endemic to the Eastern side of the country in a way that could be shaken off more easily in the West. The unthinkable may have to be thought. Without much effort, Putin could regain the Eastern side of Ukraine and the West of Ukraine would then be welcomed into Europe.

 

It is highly likely that governments in the West are already planning for this. As ethnic Russians pore into Ukrainian security buildings, it is clear that the fight for Eastern Ukraine is in its early days. The Western half can, through massive economic help by Europe, be purged of corruption, centrist rule and economic stagnation. Without the East and as part of Europe, it can be made good. While it remains affixed to the Russianised East, it is unlikely to do so for many years.

 

Russia is likely to see eastern Ukraine back in its orbit and remain enclosed with the Triangle of Mis-rule that epitomizes both. What happens after that is something that is also, I am sure, being actively discussed in governments throughout the world.

 

The problem is that nothing will really have changed – Putin’s Russia is endemically riddled with forms of entwined government and economics that are alien to modern-day Europe and the west in general. Changing this will take a long time and Putin, a fit 61 year-old, is in no mood to give up all that Russia provides to him.

 

To an extent, the rest of the world will play a waiting game with Putin. In Ukraine, it may have to understand that Plan B (the break-up of Ukraine) is a potential and real outcome. Maybe, over time, Eastern Ukrainians, bordering an economically advancing Western Ukraine, will begin to appreciate the benefits of freedoms brought by the rule of law that is above all (including government), economic freedoms that are not concentrated in the hands of the few and democracy that can (when done properly) do away with bad government. Maybe, over greater time, Russia (and China) will adapt as well and copy not just the basics of market economics but much more.

 

For the rest of us, understanding the Triangle of Mis-rule would be a good step before the results of misunderstanding are yesterday’s news.

 

 

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.

Cyprus – Cinderella and the Ugly Sisters

The oldest known version of the Cinderella story dates back to ancient Greece – how ironic.

Cyprus was, for many years, an idyllic island – originally settled by Mycenaean Greeks around 4,000 years ago. Known for its beauty and its beaches, it became a tax haven before 2004 when it joined the European Union. Its economy benefitted enormously – Cyprus did, indeed, go to the Ball.

The Sisters turn Ugly

Yet Cyprus is now being rejected by its two ugly sisters – the EU and Russia, who have conspired with Cyprus throughout the last ten or so years by enabling illicit money to flow into the country. Cyprus has benefitted from its relationships with the EU and Russia but those sisters are now turning ugly.

Isaac Newton was an alchemist but even he could not transmogrify base elements into gold. Modern counterparts are far more able to magically transform base elements into gold on a massive scale that would amaze even the alchemists of the seventeenth and eighteenth centuries. Now that money is digitized, base elements (the profits made from illicit activities) can be changed in seconds within banks situated in secret jurisdictions.

The essence of the problems in Cyprus is that a vacation destination, home to many hard-working and energetic people, has been itself transmogrified into an offshore banking centre that is many times the size of the rest of the economy. That the part of Cyprus within the European Union is close to bankruptcy is astonishing enough to many.  Even more astonishing is the evidence that is mounting about a small country enriched in the short-term by a Faustian sale of its soul to Russian criminals.

Cyprus is an island with around 1 million people and a GDP of around $24 billion. Some years ago, the government of Cyprus decided (or was persuaded) that attracting huge sums of digitized money from wherever it could get it would increase their income. So, through increased secrecy laws, a multitude of double-taxation agreements with other countries and low tax rates in Cyprus, it created itself as a tax haven. Russians, for many years with interests in the country, flocked to Cyprus – preceded by their money. Cyprus became a home of money laundering as well as a tourist destination. The combination has been very powerful.

The banking crisis

When the sub-prime crisis hit in 2007/8, Cyprus was enjoying substantial growth. However, it had followed the high interest rates in Greece and invested in Greek banks. When they failed so famously (requiring massive “haircuts” from those investing in them), Cyprus – massively over-extended in them – suffered badly.

While its two ugly sisters worked out a way to enable Cyprus to be the beneficiary of illicit hot money for many years, one ugly sister (the EU) rebels at the thought of such mismanagement leading to a call on it to prop it up. While the EU is full of tax havens – from the City of London to Luxembourg to Austria – the political will of members of the EU such as Germany to continue to prop up Cyprus is vanishing fast. Hard-working German taxpayers, already riled by the needs of Greece, the political anarchy in Italy and the mass youth unemployment in Spain, have been further spooked by the machinations of discredited politicians in Cyprus – already in hock to the Russian mafia on a grand scale. This is why they demanded a contribution from Cypriots that resulted in the mass demonstrations in Nicosia and elsewhere as the middle classes were confronted by the fact that their insured deposits in Cypriot banks were not, after all, insured against the EU.

Where’s the Fairy Godmother?

Cyprus now realizes that its pact with the devil (Russian mafia) and its focus on becoming a secretive, tax haven has turned sour. To remain in the EU, it needs to save its banks. To save its banks, it needs to raise significant sums from its people (in terms of further tax revenue or long-term bond issues) and also from other, overseas, depositors. The latter are mainly Russians – and much of that money is illicit. The mere thought of taxing the Russian mafia is enough to make the story of Cinderella into a horror film – that might make the new wave of horror films based on fairy tales (such as Hansel and Gretel – Witch Hunters) look insipid by comparison.

There appears to be no Fairy Godmother who will let Cinders go to the Ball. It seems to be the case that Cyprus is between the rock and the hard place – between two ugly sisters: one that has plied it with funny money for years, the other that has conspired with it to do so and stayed quiet until now.

Greece has suffered five years of depression. The problems for Cyprus are only just beginning but whereas Greece’s problems remain its own, Cyprus is in much more danger – it is in hock to a mafia-ridden nation and appears to have few friends within the EU who are willing to turn it around. For its people, this could be a disaster – economically and also in terms of the way of life for its citizens. The EU allowed this situation to develop – it should not be blind to the plight of its smallest member. It is enough that fear has been struck into the citizens of Cyprus and to those in Italy, Greece, Spain and maybe France, who now know that bank deposits are not theirs any longer. Bank runs come from times like this.

Allowing Cyprus to be so wayward for so long is bad enough – to allow it to go completely off the rails and into the clutches of a mafia state would be too far.  Cyprus needs a short-term remedy and a long-term plan to get it away from the drug of tax havens. The EU has to turn from Ugly Sister into the Fairy Godmother (and stay the course) or this may well be a Lehman moment that will not easily be forgotten.

Where the Wild things are – bribery at the edge of business

The Financial Times (http://www.ft.com/cms/s/0/e12e0efc-0d71-11e2-bfcb-00144feabdc0.html#axzz28VeYteen) reports that one third of Board members would happily bribe to win business despite the introduction and publicity over the Bribery Act that was enacted in 2010 and brought into law last year. FTI Consulting, which did the survey, believes that the Serious Fraud Office is showing no desire to investigate and prosecute low level crime and is only after the big boys (www.fticonsulting.com/…/the-realities-of-the-uk-bribery-act.pdf).

 

This is no surprise to those of us involved in agitating to bring the Act into being – 34 years after the FCPA in the US and years after we signed up to the OECD convention. Jack Straw advised that around 1.1 extra prosecutions a year would ensue from the Act – so, no real surprise.

 

The Grown-ups get it

 

The report from FTI shows that businesses are being divided into those (usually large and quoted) that comply and other who are becoming the “risk takers” – willing to go for business in whatever way and hope they don’t get caught.

 

Like tax evasion and using deep and difficult schemes to evade tax, these organizations are willing to act outside the law and depend on the SFO’s inability to implement the law.

 

The grown-ups get it, the kids don’t – but, we have insufficient numbers of grown-ups in the SFO (many of whom left to go to private industry when the Bribery Act came into effect).

 

Just like Maurice Sendak’s children’s book, our small and medium companies wander into places and get transfixed by the wilder side of business. It wasn’t that long ago that the costs of bribery overseas were tax deductible in the UK and big companies (especially in defence and aerospace, construction and energy routinely bribed to get business and keep business.

 

Now, most large UK-based businesses act like their American and European cousins and have mainly (not completely) forsaken large-scale bribery. The SFO has said it will prosecute those who threaten the stability and reputation of the UK.

 

ITV’s Exposure on Wednesday, 10th March at 10.35 (UK) – “No Bribes Please, We’re British” – takes a look at the UK one year on. I spent some time helping with this documentary made by Ed Harriman and was interviewed for it – http://www.radiotimes.com/episode/sgzfv/exposure–no-bribes-please-were-british and it looks back at how we did business before the Act – and how many still do such business now.

 

 

This leaves the kids – SME’s / SMB’s.

 

Should we worry about the children?

 

Winning business overseas (especially in the BRICs – where methods of business may be different) in any recession is tough. Competition from those who don’t worry about giving bribes (and that is much more of a norm in the rapidly growing nations of Asia, Russia and South America) is enormous and business leaders want a level playing field.

 

The OECD Anti-Bribery Convention was signed by 39 nations – all the OECD countries plus Argentina, Brazil, Bulgaria, South Africa and Russia (China has not signed) and aims to tackle the “supply-side” of bribery. This is where the money comes from – the wealthy nations that enable bribes to take place. It was on this basis that the UK eventually enacted the Bribery Act.

 

The question asked is now that the Act is in force and most very large businesses comply, does it matter that the smaller ones don’t? Shouldn’t we only concern ourselves with large-scale bribery and corruption?

 

While we don’t want to go back to the 18th Century when you could get sent to Australia for stealing a loaf of bread, the impact of bribery is substantial. From small-scale “facilitation payments” upwards, bribery impoverishes and kills. This sounds overly fraught maybe – but, funds diverted to projects that a country does not need means less is spent where it does – on doctors, hospitals, safety measures and the like. As bad, poor construction of buildings and bridges in China (as an example) causes death each year – the contractors are normally found to have won the work through bribery.

 

In the 21st Century and in our global economy where we are all much closer to each other economically (as customers and suppliers), we need to ratchet up the standards not diminish them. The UK is a wealthy nation that can do without involvement in helping to destroy developing nations. Bribery is a constant threat at any level as Transparency International constantly shows in their annual Corruption Perception Index. Even in industries like Defence which have been subject to anti-bribery investigations for many years, the picture is unclear as TI have recently shown: http://www.transparency.org.uk/news-room/press-releases/13-press-release/375-defence-companies-fail-anti-corruption-test

 

Now countries like Greece, whose economy has been based on corruption, are paying the price. Countries like Mexico are likewise – http://www.nytimes.com/2012/04/24/world/americas/bribery-tolerated-even-as-it-hurts-mexican-economy.html?_r=0

 

Bribery hurts those countries receiving the bribes. If we let our kids (the SME’s) run amok, then the hurt just grows. We have to keep our neighbours safe.

 

Getting an ASBO

 

In the UK, Anti-social Behaviour Orders (ASBO’s) are now routinely given out by police to kids who run riot in the streets and disturb neighbours. The UK was close to receiving the equivalent from the OECD before the Bribery Act was enacted. The UK had to be pushed to enact it – although all party support was eventually forthcoming.

 

Now, a year on, we see that lack of implementation (always feared by those most supportive of the Act) looks like it is providing those with more risk attuned attitudes to buck the system here and enter into the system overseas. Our neighbours (our trading partners) often don’t help – bribery takes a long time to eradicate and often governments are implicit in it. But, countries like the UK managed to stop slavery, made drug running illegal (although after we grew rich on both) and campaign to stop child-labour improve safety standards worldwide. Bribery seems a softer crime to many yet studies have continuously shown that the impact can be as horrific.

 

The UK is in recession but a get-rich-quick attitude that admires tax evasion (and tax havens) and tolerates bribery is not a modern society – it is a throwback to the 19th Century. We deserve credit for enacting Bribery legislation and we deserve an ASBO for tolerating bribery and for tolerating the use by foreign businesses especially in the energy sector that use London to raise capital on the stock exchange – and who are notorious for their poor business practices in poor health and safety and corruption.

 

The current UK Government has been mute in its delivery on anti-bribery provisions and the FTI survey – which should be a wake-up call – has received scant reaction. Watch Exposure on Wednesday, 10th October at 10.35 (UK) – No Bribery Please, We’re British. One year on from the Bribery Act, we should not be rolling back the legislation by lack of implementation.

 

 

The Financialist-Political Complex

The Military-Industrial Complex is now old news

 

Investment banks ran amok and created financial disaster; Governments bought up the debt and have created sovereign debt bubbles and a crisis in the Eurozone; banks are now found to be rigging LIBOR and potentially costing savers and borrowers billions of dollars; banks are accused of rigging software that would have told regulators they were channeling drug money and terrorist finances through the banking system; small fines are levied which provides a huge rate of return on those “misdemeanors”.

So it goes on and on from when “the tide went out” in 2007 and we have forgotten the ever-depressing news from just a few years ago. Back in 2009, Lloyds TSB (now 43% owned by the British Government) was fined $350m for similar offences to those HSBC are alleged to have committed.

The US Department of Justice alleged that dating back to 1995, Lloyds falsified wire transfers involving countries or individuals on the US sanctions list.

In effect, the bank removed customer information so that transfers would pass undetected through sanction-focused filters at US banks, violating US federal law aimed at starving terrorists of money in certain countries.

Manhattan District Attorney Robert Morgenthau said: “The Iranian banks have money on deposit in London with Lloyds. They were having Lloyds send the money to the US and beyond and stripping the identification.”

In a statement, Lloyds TSB noted that it set aside £180m last year pending the settlement, and said that it “does not anticipate any further enforcement actions.”

Now, HSBC have made a similar settlement and the regulators are lauded for their achievements three years after the almost-forgotten Lloyds TSB case.

Nepotism

Government, politics and financiers have run nations together for hundreds of years. It is unlikely to change anywhere or anytime soon. What properly functioning societies should be able to do is to work to prevent the worst wrongs being committed. We clearly have not managed that in the last five years and our counter-balancing systems are not in place.

Especially in the USA and UK (but the same is true elsewhere as well) Governments and politicians in most major parties have contrived to provide the finance industry with freedom and have reduced the risk of failure to almost zero. This is now a tired story, repeated many times. Yet, five years on from the initial discovery of sub-prime devastation in the USA, has anything changed? Do we even recognize the real problems?

The nepotism within the family of government and finance persists and becomes more insidious. Banks and the finance industry are by far the most favoured by politicians. Bankers and financiers understand what drives the business of politics as well as what drives the engine of business on which they depend. A core problem is the very understandable reluctance of politicians (and in most cases their lack of understanding) to do anything. Democracies have lost the grip over a key element of our societies – and there is little being done to remedy that problem.

The reasons are simple: one the one hand, banking provides the lubrication for economic growth and, during good times, huge tax revenues ; on the other, political parties are funded by those who have made and still make their money in banking and finance. This is especially true in the USA and UK – which are heavily tilted economically towards the finance industry, but it is also true in the EZ land wherever banking exists (internationally, nationally or regionally, politicians are usually in hock to the finance industry). The interlocking of politics and banking is extraordinarily tight – it has been for a long time. We should not be surprised that very little is being done now to change this. Governments bailed out the banks by taking on their debts and continue to supply massive liquidity to the banking system. The combination of economic growth, tax receipts and party donations is too big for them to ignore.

Post-2007

We say the word changed post 9/11, but what changed post-2007, after the banks were shown to have failed our economies. Sure, many people now vilify the banking community as they do wartime con men or spivs. We feel that the banks and the bankers (especially those in investment banking) have taken us all for a ride. This was a ride they could not lose. They made huge money for themselves as individuals on the upside and lost nothing on the downside. True, a few like Fred Goodwin and recently Bob Diamond have lost their jobs – but, they remain seriously wealthy, having never actually paid for mistakes in the way an entrepreneur would have. They haven’t lost their homes whereas many others have. The risk: reward ratio was and remains massively in favour of bankers and the banks. Nothing has changed.

Banks that are too big to fail are still in place and the Vickers Review in the UK envisages nothing more than Chinese walls between the casino elements and the more traditional forms. Chinese Walls in banks (!) – the same banks that have engaged in LIBOR fixing, in sub-prime marketing, in money laundering. The same banks that are deemed to have dubious ethics and poor control systems, where compliance officers resign because of the lousy job they do and are given as good a job elsewhere in the business (just like arms manufacturers did for their staff caught bribing in the 1980’s).

Banks have now taken on the mantle of the defense companies that were ridiculed in the 1970’s and later for corruption on a world-wide scale (and where corruption continues in many, but differing areas). From the introduction of the Foreign Corrupt Practices Act – FCPA – in 1977 in the USA (which is now under sustained attack in the USA by Chambers of Commerce), it took over 30 years for the UK to pass the Bribery Act and it will take many more years to ensure proper implementation. It is a relentless task to keep corruption under control – society has, though, a way of dealing with it, an understanding of it and a willingness to keep at it.

The Military-Industrial complex remains in place but it is no longer the ogre it once was (in the West anyway – even if the corruption engaged in by China, Russia and other newer entrants is destabilizing that market and affecting the resolve). Now, a bigger threat is the Financialist-Political complex (see Forbes July 2012 – Beware the Financial-Political Complex ) that has forever been in place and is now assuredly seen as a major threat. The only benefit of the financial disasters of 2007 is that the Financialist-Political Complex is no longer under cover – it is now there for all to see just as the Military-Industrial Complex was “uncovered” by Eisenhower in the 1950’s. The big question for the rest of society is what to do about it.

Tom Armistead (http://seekingalpha.com/) described Financialism recently:

Financialism is an economic system where the primary activity consists of creating and manipulating financial instruments.  Financial instruments…are in their original form firmly linked to economic reality.  However, when financialism sets in, financial instruments become progressively further removed from their role in supporting commerce in the real world and develop a life of their own.
I would add that Financialism should also include the undue influence that banking and finance have on politics, politicians and governments.

An FCPA for the FPC  (Financialist-Political Complex)

The inherent corruption of the investment banking industry, its progressive drive towards Financialism and its close relationship with Government means that it will take enormous sense of purpose and quite some time to make a change.

What the world needs is an FCPA not just for Financialism but for the Financialist-Political Complex – the FPC – where the world of banking and crazed financial instruments has bank-rolled governments and carries governments and politicians by its supposed economic force.

An FCPA for the FPC would mean that we first have to recognize the problem. It is not just a problem of the banking industry but a recognition that financialism and government are too intertwined and need to be separated – especially in the USA and UK, but, because the world is a global market, world-wide in a way that the OECD convention bribery made the FCPA a world-wide requirement.

  • We need to ensure that tax havens (the spiritual and economic home of financialists) are deprived of their tax haven status.
  • We need to ensure that taxes are paid where profits are made and that the virtual reality world of financialism is not allowed to exploit loopholes in tax regimes.
  • We need to ensure that political parties are not beholden on financialism so that funding for political parties is through contributions limited in size to, say, £10,000 or $15,000 or €11,500 or similar per person or company or association or union.
  • We need to ensure that that the financial instruments of the financialist industry are separated from the rest of the banking industry – not just by Chinese walls but by legal separation into separate entities.
  • We need to ensure that compliance regulation is strong in all countries allowed to carry out international banking and that compliance officers and managers are independently regulated and independent from those who sell financialist products. FATF needs to be given real powers but the OECD and other multi-national organisations should seek to ensure that banking and politics are kept apart and that influences are controlled. This will not inhibit growth – the disasters of the last 5 years have shown the impact of poor banking – its cost is in trillions of dollars.
  • We need to ensure that risk:reward ratios are proper and commensurate with those faced by entrepreneurs – who risk their homes and all their wealth. Managers should not see upward only rewards at the expense of shareholders and society.

The FCPA that led to the OECD anti-bribery convention and later to the Bribery Act in the UK was a forerunner that helped to shape the course  that the western world took in terms of governance and anti-bribery. Its impact, itself, is in danger of being blown off course by the economic problems caused by the financial collapse of 2007 as much as by the new players of China, India, Russia and Brazil. Nevertheless, it shaped a cultural direction that has endured and has done much to re-shape the military-industrial complex.

The financialist-political complex is where the military-industrial complex was before 1977. It needs a massive change in our culture and an understanding that it is not just focused on the banks but also the governments and politicians that depend on them so much that need changing.

Let me finish with another quote from Tom Armistead:

Banks need to be returned to their primary purpose, which is to serve the real economy, as financial intermediaries between those who work, save and invest, and those who need funds to create new means of production, or to buy a home, or a car. 

To go slightly further:

Banks and the whole finance industry need to to be separated from their nepotistic relationship with Governments and politicians so that their interdependence is no longer the massive risk that forces all of us to pay for it. We need an FCPA for the FPC – the financialist-political complex.

Looking Down from Mount Olympus

With Olympics fervor at its height, it’s tough to resist Homer’s description:

“Olympus was not shaken by winds nor ever wet with rain, nor did snow fall upon it, but the air is outspread clear and cloudless, and over it hovered a radiant whiteness.” Homer, Odyssey.

Today, the equivalent of the 12 Gods on Olympus are, maybe, the G-20, or G-2, or the UN or any of the international organisations that are set-up on our behalf.

Or, maybe it’s closer to home – the national heads who make up the EU or the lesser number that make up the EZ; the 100 Senators in the US Congress.

Or, maybe they are the 1% who own 40% of the earth’s assets (financially-speaking).

Or, how about Forbes Global 2000 – the top 2000 of the world’s companies that, between them, account for $149 trillion in assets and employ 83 million people. This compared to McKinsey’s estimate of $212 trillion value of the world’s capital stock in 2011 – a huge percentage.

Icy Slopes

The Greek Gods took their place after a war with the Titans – who ruled before them. Mythology into reality – our new Gods rule in much the same way after a 20th Century where totalitarian regimes fought each other, amongst each and against  democratic nations in bloody conflict. Millions died in China, the Soviet Union, Europe, Vietnam, Africa, Indonesia and elsewhere as different theories of government battled for supremacy.

Francis Fukuyama declared it “The End of History” as liberal democracy supposedly triumphed. We know now that he was wrong (as he has himself declared). For, the winner (for now) was not democracy but a form of capitalism that promotes a new set of god-like creatures and a new Olympus where the wind does not blow and the air is clear. This new capitalism – the complete dominance of quantity no matter what type of government is in power – was relatively bloodless in its conquests, but no less callous in its purpose. Indeed, its callousness is worse than before as it is merely the “invisible hand” that drives the marketplace that has led to the victory of the new Gods.

Now, sitting upon the summit, surrounded by the icy slopes that let few into their circle, they can look down upon the rest in their eco-defended enclave.

How the War Was Won

 

The titanic struggle was won on the back of the primacy of goods – developing the ability for ordinary people to secure their basic material needs and then onwards to “choice” and leisure and luxury. This has been wonderfully accompanied by the ability of business to promote their products so that demand could be developed without the consumer realizing it. This ability to influence demand (so brilliantly described in Galbraith’s “The Affluent Society”) has led to a victory of quantity over quality in the West and will do so elsewhere.

The victory was made easier by Governments’ willingness to adhere to the 19th Century economic theories that made “growth” and GDP the concepts upon which all governing was placed – but, placed them in simulations which cannot reflect reality. Mathematicians and econometricians have extended the fallacy – we live for numbers. The evidence for this can be seen so well in Russia and China. For most of the 20th Century, both held out as anti-capitalist bastions as the world moved to strengthen democracy. Neither has succumbed to democracy – Russia is a gangster-elite State, China is a legalist, centralized State. But, both yielded wholeheartedly to the market.

Who Won the War?

Many argue that the democratic West won the war (as Fukuyama attempted to suggest) but this is wrong. The western form of liberal democracy with its desire to provide representative government, elections and low corruption levels (comparatively) as well as supposed access to education and upward social mobility is losing out. It is arguable that even in those countries that still pursue these ends, there is now a vastly worsening separation between rich and poor and a hardening of social structures – with far less mobility.

In China and Russia, elites have won the war and their instruments of war have been capitalist – as their citizens climb up Maslow’s hierarchy of need from the very bottom, quantity of goods is supreme no matter how they are derived. As Jonathan Fenby describes in “Tiger Head, Snake Tails” this is, in China, despite rampant corruption, ecological degradation and vast differences in wealth between elites as well as complete indifference to the vast population when their houses are demolished to make way for new buildings or motorways (for example).

Who Lost the War?

Millions of lives were lost in the 20th Century as nations defended themselves against the onslaught of totalitarianism. But, a new totalitarianism has taken root right beneath our noses.

It is the totalitarianism of the elites that control the markets – markets fed by a constant diet of GDP statistics and growth targets.

The losers are (in Orwellian-speak) supposedly the winners – the mass of the population that has grown “wealthier” throughout the latter half of the 20th Century.

So, it seems to be a benign revolution but the problems are becoming clearer by the day.

In Greece, home to Mount Olympus, the country is in its fifth year of recession. In Spain, 24.6% of people are now officially unemployed. In most countries, the gap between the wealthy and the rest is growing steadily.  Economic strains are now working their way around the system as growth (measured traditionally in 19th  Century models) stalls outside of newly developing nations (yet, who believes the measures coming from China?). Today’s youth in the developed west are unlikely to be “wealthier” than their parents in pure GDP terms.

But, we should not be focused on pure numbers. Economic growth is also threatening the ecology of the planet at an alarming rate. Whether or not fossil fuels are near their end, the effects on the planet are growing and recent changes to our weather patterns merely the first signs. Our damning footprint is ever more etched on the planet and real risks are emerging that the life styles we live now may not be available for long. As Rumanian economist Georgescu-Roegen surmised over fifty years ago, maybe we can’t change and will simply go out in a puff of smoke.

Maybe, though, society will not, for ever, tolerate the new totalitarians, the new Olympians.

The Gods were not immortal

 

Of course, nothing lasts forever. The Greek Gods did not survive (except in mythology) and neither will the current ones.

The problem is that we are engrained with the belief that quantity is the key to good life (which it may be up to a point) and have lost a connection with what society is about. Mass production has led to greater wealth but, as Galbraith saw 60 years ago, society cannot be all about quantity.

Maslow, developing his Hierarchy of Need as a marketing tool, expected that we would go beyond quantity to some form of self-actualization. We have definitely not managed that yet but we have some signs that societal self-actualization is possible.

A major problem in the way of this is that different countries are at different stages of economic development. China has a massive population still well down the material scale and there will be no let-up in the leadership’s drive for “growth” to stem the dismay of their people on all other issues. In Africa, the longing for material wealth is as strong and who can blame them bearing in mind the economic and social torment they have suffered?

So, initiatives like Zero Impact Growth being developed by John Elkington and his Volans company are worth considering.

This is an approach to growth with zero impact on the planet and ultimately to give back more than is taken out. Where others seek to quantify (and there are dangers in the approach of quantifying everything), the Elkington approach is to develop a maturity matrix as follows:

Maturity Level Definition from ‘The Zeronauts’ Analogy: Characteristics of a company on that level
No strategy and goals No definition The company barely understands the relevance of restructuring its actions towards sustainable solutions and hardly reports on sustainability. Furthermore, no strategy has been defined and no targets have been set.
Eureka Opportunity is revealed via the growing dysfunction of the existing order. The company understands the relevance of restructuring its actions towards sustainable solutions. No considerable actions have been taken yet and almost no strategies and targets have been set. The company does already understand the relevance of the topic though, has started reporting and communicates plans to ameliorate its sustainability performance in the future.
Experiment Innovators and entre­preneurs begin to experiment, a period of trial and error. Although the company has started its first inno­vation efforts and internal programs in certain sustainability areas and has developed initial policies and strategies, no concrete milestones and an overarching future vision have been defined yet.
Enterprise Investors and managers build new business models creating new forms of value. The company has developed a short- to mid-term strategy ( ≤ 2020) for specific areas and has set measureable targets. Nevertheless, almost no long-term milestones have been defined. Furthermore, they do not communicate an over­arching future vision.
Ecosystem Critical mass and part­nerships create new markets and institu­tional arrangements. Measureable, ambitious (zero) targets based on a mid- to long-term vision (≥2020) are set. Nevertheless, a conjoint approach and some collaborative aspects are still missing since the holistic zero impact growth vision has not been (fully) adapted.
Economy The economic system flips to a more sustainable state, supported by cultural change. The company has fully adapted the zero impact growth vision. Measureable zero targets that have been adapted jointly are set out for each field of action. A clearly defined strategy is in place on how to achieve these targets, with defined short- and long-term milestones. The underlying benchmarks are clearly defined.

Maybe there is some fight left and the reality behind the model is clear – we can’t fight the invisible hand but maybe there is a chance for society to develop some self-actualisation behind the corporate drive towards zero impact growth where the planet survives along with humanity.

That doesn’t impact on the gap between the wealthy and the rest as the focus is on economics and sustainability. Inequality is as important a problem as ecology. Numbers should be seen for what they are – where money is one aspect of our lives not the only one. Demos, a UK think-tank has just published: Beyond GDP – New Measures for a New Economy.

It is an attempt to seek a rationale for economics beyond numbers. Briefly it posits that:

  • GDP does not distinguish between spending on bad things and spending on good things.  By this measurement, the BP oil spill in the Gulf of Mexico “positively” contributed to the economy just like the many good and services that people actually want or need.
  • GDP doesn’t account for the distribution of growth. Our total national income has doubled over thirty years, and so has the share of national income going to the wealthiest households, but average households have seen little or no income gains. GDP doesn’t care if growth is captured by a few or widely shared.
  • GDP doesn’t account for depletion of natural capital and ecosystem services.  If all the fish in the sea are caught and sold next year, global GDP would see a big boost while the fishing industry itself would completely collapse.
  • GDP doesn’t reflect things that have no market price but are good for our society, like volunteer work, parenting in the home, and public investments in education and research.

Two studies that show on this morning after that wonderful Danny Boyle-inspired Olympics night – where values were keenly shown as more than just money – that the slopes of Mount Olympus are slippery but not completely impassable: a Danny Boyle-inspired dose of self-actualisation.