Why Britain is a world leader in financial secrecy

Between $21-32trn of private wealth is kept in tax havens, and Britain is at the very centre of a global financial system that allows the wealthy to avoid tax.

According to the Tax Justice Network, around $21-32 trn of private financial wealth is located in secret tax jurisdictions around the world, where it is either untaxed or lightly taxed. It’s estimated that since the 1970s, this has cost African countries over $1trn, dwarfing the continent’s external debts of $190bn.

Today the Tax Justice Network has published its biannual secrecy index, which ranks countries on indicators like banking secrecy, anti-money laundering regulation, the kinds of company and trust structures permitted and whether their beneficial owners are made public. The three highest ranking countries in terms of financial secrecy are Switzerland, Luxembourg and Hong Kong.

What is noteworthy is how many British island dependencies and overseas territories – where laws must be approved in London and the Queen is the head of state – rank in the top 50 most secret tax jurisdictions. The UK itself comes in as number 21, while the Cayman Islands is in at number 4, Jersey at number 9, Bermuda (14), Guernsey (15), British Virgin Islands (20), Isle of Man (34), Gibraltar (49).

This is all the more interesting when you consider that David Cameron decided to make cracking down on tax avoidance and promoting tax transparency a key issue at G20 this year. In 2011 Nicholas Shaxson, who is a consultant for the Tax Justice Network, wrote the influential book, Treasure Islands, which argued that London is not only the creator of the modern offshore banking system, but is also one of the worst offenders. Lawyers and tax advisers based in the City manage money coming in from the world’s richest and then redirect it to low-cost satellites, from Jersey to Gibraltar.

John Christensen, the director of the Tax Justice Network has written to the Queen, drawing her attention to these findings and arguing that, “the secrecy facilities provided by these jurisdictions stains the good name of Britain in the international arena.”

Clamping down on banking secrecy will make it harder for corrupt world leaders to embezzle public funds, for criminals to launder money and for the world’s wealthiest to avoid taxes – it would however leave a lot of the smart lawyers and tax advisers in the City short of work. Most lawyers would strongly disagree with my conclusion – they are not allowed to help people break the law, and have to carry out special checks on those who are euphemistically referred to as “politically exposed persons”.

But I remember one City lawyer telling me that every year she was flown out to Switzerland by a mystery client, whose identity they didn’t know, to check over her client’s tax affairs. When they arrived in Switzerland, they’d be left in a room with their client’s financial documents. They weren’t allowed to take notes, photocopy documents or remove anything from the room. Operating in these conditions, how can a lawyer possibly be certain that they are not ironing out tax efficiencies for a Middle Eastern despot or a mafia don?

There have been tentative moves towards greater tax transparency – the Liechtenstein Disclosure Facility offers an amnesty of sorts for those who want to come clean on their tax liabilities on their money kept in Liechtenstein, for instance, and Switzerland has made a few concessions on banking secrecy. But these are only tentative moves. As one of the world’s leading financial centres, Britain does have the power to push forward moves towards greater transparency. But this requires real political commitment, and that's still lacking.

Protestors dressed as a businessman do a 'high five' on a protest site named by participants as the 'Isle of Shady Tax Haven' in London on June 14, 2013. Photo:Getty.

Sophie McBain is a freelance writer based in Cairo. She was previously an assistant editor at the New Statesman.

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Is TTIP a threat or an opportunity?

TTIP offers potentially huge opportunities to both Europe and the US - we should keep an open mind on what the final agreement will mean.

Barack Obama made it abundantly clear during his visit to the UK that if Britain left the European Union then it would be quite some time before we would be able to negotiate a trade deal with the United States. All the more reason to examine carefully what the Transatlantic Trade and Investment Partnership (TTIP) will mean for the UK. For Labour this is especially important because a number of trade unionists and Party members have expressed concerns about what TTIP could mean.

The economic worth of such a partnership between the European Union and the US has been questioned and it has been frequently stated that TTIP could give multinational companies unprecedented influence and undermine the British NHS.

With regard to the economic benefits of TTIP there are few that would argue that there are no economic gains to be achieved through the partnership. The question is to what extent economic growth will be stimulated. On the positive side the European Commission has argued that an agreement could bring economic gains of between €68 billion to €119 billion per year to the EU (0.3% to 0.5% of GDP) and €50 billion to €95 billion (0.2% to 0.4% of GDP) to the US. For Britain, this means that an agreement could add up to £10 billion annually to the UK economy.

On the negative side, a study commissioned by the European United Left/Nordic Green Left Group in the European Parliament has maintained that TTIP would bring only “limited economic gains”. These gains have to be weighed, it was argued, against the “downside risks”. Those risks have been identified as coming from the alignment of standards in areas such as consumer safety, environmental protection and public health.

These are important concerns and they should not be quickly dismissed. They are made all the more important because the existence of already low tariffs between the EU and the US make the negotiations to reduce non-tariff barriers to trade all the more significant.

There are a number of areas of concern. These include food standards and the regulation of GM crops and the worry that the EU’s focus on applying the environmental precautionary principle might be weakened. The European Commission, which has a responsibility for negotiating TTIP on behalf of the EU, is however acutely aware of these concerns and is mindful of its legal responsibility to uphold, and not to in any way weaken, the agreed legal standards to which the EU adheres. A concern has been expressed that irrespective of what European law may say, TTIP could undermine those standards. This I find difficult to accept because the ‘rule of law’ is absolutely central to the negotiations and the adoption of the final agreement.

But the EU is mindful of this concern and has brought forward measures which have sought to address these fears. The latest proposals from the Commission clearly set out that it is the right of individual governments to take measures to achieve public policy objectives on the level that they deem appropriate. As the Commission’s proposal states, the Agreement shall not affect the right of the parties to regulate within their own territories in order to achieve policy objectives including “the protection of public health, safety, environmental or public morals, social or consumer protection or promotion and protection of cultural diversity”.

Of course, this is not to suggest that there should not be vigilance, but equally I believe it would be wrong to assume the theoretical problems would inevitably become reality.

The main area of concern which has been expressed in Britain about TTIP relates to the NHS and the role of the private sector. Under the Investor-State Dispute Settlement (ISDS) provisions investors would be able to bring proceedings against a foreign government that is party to the treaty. This would be done in tribunals outside the domestic legal system. If a Government is found to be in breach of its treaty obligations the investor who has been harmed could receive monetary compensation or other forms of redress.

The concern is that the ISDS arrangements will undermine the ability of democratically elected governments to act on behalf of their citizens. Some have maintained that measures to open up the NHS to competition could be made irreversible if US companies had to be compensated when there is a change of policy from a future Labour Government.

In response to these concerns the European Commission has proposed an Investor Court System. This would be based on judgements being made by publicly appointed and experienced judges and that cases would only be brought forward if they were precisely defined. Specifically, it is proposed that cases would be limited to targeted discrimination on the basis of gender, race or religion, or nationality, expropriation without compensation or the denial of justice.

Why, you might ask, is there a need at all for a trans-national Investor Court System? The reason in part lies in the parlous state of the judicial systems in some of the relatively recent EU accession countries in Eastern Europe. To be frank, it is sadly the case that there are significant shortcomings in the judiciary of some countries and the rule of law is, in these cases, more apparent than real. It is therefore not unreasonable for investors to have an international framework and structure which will give them confidence to invest. It should also be noted that there is nothing proposed in TTIP which contradicts anything which is already in UK law.

We need to remember too that this is not only about US investment in Europe, it is also about European investment in the US. No US-wide law prohibits discrimination against foreign investors, and international law, such as free trade and investment agreements like TTIP, cannot be invoked in US courts. The Investor Court System would therefore benefit European companies, especially Small and Medium Sized Enterprises. 

It is of course impossible to come to a definitive conclusion about these provisions because the negotiations are ongoing. But it would surely be unwise to assume that the final agreement would inevitably be problematic.

This is especially true regarding the NHS. Last year Unite the Union commissioned Michael Bowsher QC to provide an opinion. His opinion was that “TTIP does pose a threat to a future government wishing to take back control of health services”. The opinion does not express a view on whether TTIP will “force” the privatisation of the health service (as some have claimed) and Bowsher admits that much of the debate is “conducted at a rather speculative level” and he has been unable to produce any tangible evidence to support his contention about future problems. On the other hand, it is the case that there is nothing in the proposed agreement which would alter existing arrangements for compensation. There are of course many legal opinions which underpin the view that existing legal arrangements would continue. While I accept that it is theoretically possible for the Bowsher scenario to occur, it is nevertheless extremely improbable. That is not to say that there ought not to be watertight safeguards in the agreement, but let us not elevate the extremely improbable to the highly likely.

A frequently heard criticism of TTIP is that the negotiations between the US and the EU are being conducted in ‘secret’.  Greenpeace, for example, has strongly sought to make this a central part of their campaign.  Although the Commission publishes EU position papers and negotiating proposals soon after they are tabled, it is impossible to see how complex negotiations of this kind can be practically conducted in public.  However, I believe that the draft agreement should be made public well before the final decisions are taken.

Once the negotiations have been concluded, the draft agreement will be presented to the European Council and the European Parliament, both of which have to agree the text. The European Council is, of course, made up of representatives of the governments of the EU and the European Parliament is democratically elected. Both Houses of the British Parliament will also debate the draft and there will need to be parliamentary approval of the agreement.

Transparency and democratic scrutiny are two things which there cannot be too much of. But, in practical terms, it is difficult to see how there could be more of either without making it nigh on impossible to secure such a complex agreement. Unite, of which I am a member, and others are quite right to express their concerns about TTIP, but let’s not exaggerate the potential difficulties and let’s not assume that the worst case scenario will always come about. TTIP offers potentially huge opportunities to both Europe and the US, and we should therefore at least keep an open mind on what the final agreement will mean.

Wayne David is the Labour MP for Caerphilly and is Shadow Minister for Political Reform and Justice. He is a former Shadow Europe Minister and was a junior minister in the last Labour government.