Jason Sharman on how IFCs and NGOs can work together.
For the last decade, many commentaries on the plight of IFCs have painted a dark picture, particularly with regards to the panoply of multilateral initiatives directed against such centres. Clearly, the global economic crisis, and even more so the regulatory response of the G20 countries, have tended to accentuate the gloom. At the same time, there has been a growing realisation that, in terms of day-to-day commercial operations, but even more so in terms of long-term survival, the perception, standing, and reputation of IFCs in the eyes of various international audiences are key.
These two issues, threats to the viability of IFCs, and the importance of public opinion, are closely related. To the extent that policy-makers and the general public automatically associate ‘offshore finance’ with ‘crime’, ‘money laundering’ or ‘tax evasion’, IFCs face a serious problem. This situation results from a steady drum-beat of negative media coverage. In large part this unflattering portrayal has been driven by the self-interested actions of various large, rich states and the various international clubs that they dominate (the G20, OECD, FATF, EU etc.).
But increasingly important players in the struggle for popular sympathy are non-government organisations (NGOs) seeking to achieve policy change through public pressure. While financial regulation was previously seen as too dry and technical for such campaigning advocacy groups compared with poverty or debt relief, over the last decade their interest in IFCs has grown exponentially. While NGOs lack the power and resources of states, they have important advantages when it comes to shaping public opinion. Above all, unlike the large, rich states or IFCs (or private firms for that matter), NGOs are generally seen as being motivated by altruism, a genuine and selfless desire to improve the human condition, and thus as trustworthy, impartial and objective. As their technical expertise and influence over the policy grows, it is no longer tenable for IFCs to ignore such groups.
While NGOs have often been highly critical of IFCs in the past, more recently there are important points of convergence between the two in terms of criticising the G20's attitude towards IFCs. Rather than just representing a threat, the public work of NGOs like the Tax Justice Network, Oxfam, Global Witness and others can actually bolster and add credibility to some of the key arguments put forward by IFCs’ supporters.
Two of the most common and most damaging charges made against IFCs have been, firstly, that they provide havens for corrupt leaders to stash their wealth, generally through private banking facilities; and secondly, that IFCs encourage a variety of crimes like tax evasion and embezzlement through the provision of corporate secrecy. Both are said to have particularly severe consequences for the developing world, acting to entrench poverty and all the associated social and humanitarian ills.
In response to the first charge, popular stereotypes and the self-interested rhetoric of powerful countries to the contrary, the available evidence gathered by NGOs indicates that the G20/OECD countries are much more at fault in hosting the proceeds of grand corruption than small state IFCs. Certainly, no financial sector large or small is immune to financial crime. But on the evidence, countries like the United States and France are far more likely to host kleptocrats’ plunder than any IFC.
Perhaps the most compelling source for this conclusion is a report, Undue Diligence, released by the NGO, Global Witness, in 2009. It notes in particular how receptive France has been in hosting the vast sums looted by Francophone African leaders. With the tolerance and in some cases open support of French governments up to and including the current Sarkozy administration, corrupt leaders from Angola, Burkina Faso, Congo-Brazzaville, Equatorial Guinea, and Gabon have maintained extensive luxury real estate holdings and bank accounts in France, as well as indulging in multi-million Euro spending binges (e.g. EUR4.5 million on cars by one minister, see Global Witness 2009: 40-50). In the past France has deliberately chosen to act as a haven for corrupt monies, and still does so, despite the massive economic and social damage such plundering imposes on the most vulnerable populations of the developing world (UNODC/StAR 2007), and despite the French government’s repeated and forceful public commitments in the G20, EU, FATF and elsewhere to the principles of transparency and probity in the global financial system.
The record of the United States is scarcely less edifying in acting as a haven for assets plundered by leaders from the developing world. A further Global Witness report (The Secret Life of a Shopaholic 2009) details how in violation of its own laws and a presidential order, the United States allows Teodoro Obiang of Equatorial Guinea to routinely travel to his USD35 million Malibu mansion, despite the US government’s own conclusion that this asset represents the proceeds of corruption (see also ‘US Door Remains Open in Face of Swirl of Corruption’, New York Times, 16 November 2009). Obiang’s father, the president of the country, has reportedly just purchased a private Boeing 747 with gold-plated bathroom (‘Oh We Love You So’, Economist, 5 December 2009).
But as a recent report by the Tax Justice Network points out, bank accounts and real estate may be a secondary issue compared to the problem of corporate secrecy in facilitating financial crime in the developing world and more generally: ‘For decades it has been believed that bank secrecy... is the touchstone of offshore financial secrecy. This is a myth... Trusts, for example, or certain kinds of anonymous companies offered by places like Delaware in the United States, are used to disguise true identities and ownerships in far more devious and effective ways’ (TJN Financial Secrecy Index 2009: 2). The report concludes, ‘[t]he major global players in the supply of financial secrecy are mostly not tiny, isolated islands, but rich nations operating their own specialised jurisdictions of secrecy’. For all its virtues, this study actually underestimates the extent to which corporate secrecy is a problem of onshore centres, in only considering Delaware while ignoring other US states like Nevada, Wyoming etc. More generally, the Tax Justice Network argues that the term ‘tax haven’ is unhelpful and misleading, instead favouring the term ‘secrecy jurisdiction’. Presumably many in IFCs would enthusiastically second this call to drop the label ‘tax haven’.
Thus, as is the case with private banking, when it comes to corporate secrecy, the conventional picture whereby IFCs are seen as the primary problem is shown to be deeply misleading by the NGO reports referred to above. The investigations and research conducted by Global Witness and the Tax Justice Network strongly suggests that large, powerful G20/OECD states are the main problem in facilitating corruption and other financial crimes, particularly in the developing world.
While such claims have often been made by IFCs’ supporters before, the difficulty is that these commentators have been seen to lack independence and credibility, because of their prominent ulterior motives for advancing such a line. But the same arguments are seen as much more credible and compelling when made by NGOs, precisely because their lack of a financial stake leads to a perception of objectivity and impartiality. Looking at the same issue of perceived bias, the rich, powerful states, and the multilateral clubs they fund and dominate, have a strong incentive to overlook the evidence of their culpability and shift the blame to small, weaker jurisdictions. Once again, NGOs are much freer to follow the evidence. This may lead to conclusions that are awkward or embarrassing for the governments of powerful states, such as those described above.
Clearly, there are issues where NGOs and IFCs are still far apart (for example, the scope and desirability of tax competition). But this should not obscure the important points of overlap in what both groups have recently been saying, especially in exposing the hypocrisy of the G20 states. Most important amongst these shared complaints is that the problem of financial under-regulation which facilitates corruption and other crimes is disproportionately a problem of onshore, not offshore, centres. Given the forces ranged against them, and the importance of public opinion, IFCs would be reckless to pass up any opportunity to strengthen their cause, even when the help in question comes from an unlikely source.
Jason Sharman is a Professor at Griffith University in Brisbane, Australia. Sharman’s research is focused on the regulation of global finance, especially as relates to money laundering, tax, corruption and international financial centres. He has worked as a consultant with the World Bank, Asian Development Bank, Commonwealth Secretariat, Financial Action Task Force, the Asia-Pacific Group on Money Laundering, Pacific Islands Forum and in the private sector. He is currently working on his fifth book, investigating the effectiveness and diffusion of anti-money laundering policy. His work has been featured in major media outlets like the Economist and the New York Times, and has been taken as evidence by the United State Senate Homeland Security Committee.