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Just over a week ago, that some financial centres were used for money laundering, tax evasion and other forms of illegality was a well-understood fact. The release of the so-called ‘Panama Papers’ and the accompanying headlines (of varied accuracy) of tax evasion and money laundering concerning politicians and officials from Iceland to North Korea via Russia has simply provided more evidence of what we already knew. Financial centres that offer secrecy and discretion are ripe for abuse by those seeking to operate beyond the gaze of regulators, journalists or their electorate.
In the UK, the focus has inevitably fallen on the dealings of Prime Minister David Cameron’s late father, generating hysterical, largely inaccurate headlines and accusations. But the more serious challenge for the prime minister, and for the reputation of the UK more broadly, is that key to many of the schemes that have been revealed is the role of UK overseas territories such as the British Virgin Islands; jurisdictions that benefit from their affiliation with the UK but over which, it appears, London seems unwilling to exert control.
The reputation of the UK, and the City in particular, has been under pressure for many years. The Government’s National Risk Assessment of Money Laundering and Terrorist Financing, published in October 2015, included an estimate from the National Crime Agency that ‘many hundreds of billions of pounds of international criminal money is almost certainly laundered through UK banks and their subsidiaries each year.’ The prime minister himself, in a speech in Singapore in July 2015, reflected this concern when he expressed the determination that ‘the UK must not become a safe haven for corrupt money from around the world’ stating further that ‘We need to stop corrupt officials or organised criminals using anonymous shell companies to invest their ill-gotten gains in London property, without being tracked down.’
To his credit, Mr Cameron has championed transparency in global financial dealings, government procurement and company ownership structures for some time, and has sought to lead by example in the UK. However, at critical moments he has blinked, failing to take the tough action that would make a genuine difference and bring greater transparency to all of the system over which the UK has either political or financial influence. In December last year, the government stepped back from insisting on the complete transparency that the prime minister had previously called for from the UK’s Overseas Territories, with foreign office minister James Duddridge observing that ‘We don’t want to move corrupt money and corrupt practices, we don’t want to move tax evasion and avoidance, we want to eliminate it and we want to do that everywhere.’
And herein lies the challenge. Money is like water, and illicit funds will flow through cracks in the system wherever they can be found. The key to addressing the continued large-scale and wide-spread flow of illicit finance through financial centres is uniform and co-ordinated action. At his upcoming Anti-Corruption Summit in May, Mr Cameron will have a golden opportunity to galvanise the international community to take such action. If he were lacking an agenda around which high-level conference participants could rally a few weeks ago, the publication of the Panama Papers has presented him with a ready-made script for the gathering.
For too long, the international community has accepted the position of countries that create cracks in the system that can be abused by criminal elements. It is not just Caribbean islands that offer a shroud of secrecy behind which illicit finance can hide. Jurisdictions such as Delaware and Nevada in the US also have a reputation for opacity that invites illegality. So what action could be taken that is measured and avoids politically motivated overreaction?
At its core, any solution must address the much-needed lack of transparency that continues to exist in key jurisdictions around the world, creating shadows into which illicit funds can flow. This is not the kind of transparency that rides roughshod over privacy, but the form of transparency and information exchange that deters illegality and discourages anonymity. International standards, such as those developed by the OECD, should be implemented and complied with. Jurisdictions that fail to meet globally agreed standards should face sanctions that make clear that it is unacceptable for states to offer safe harbour to illicit funds. Some strong suggestions have been offered in recent days. For example, the US Foreign Account Tax Compliance Act imposes a 30% tax on payments made from the US to any international financial institution that does not provide account-holder reporting to the US authorities. The EU could follow suit. Many opaque financial centres rely on London for banking services – such a tax incentive would quickly bring light to murky corners. Tougher still are calls from German finance minister Wolfgang Schäuble for countries to be blacklisted on a global basis, perhaps by suspending their access to the SWIFT international banking communication system – a measure taken against Iran with devastating consequences.
But whilst politicians and global leaders consider what actions to take, it is likely that the financial sector itself will increasingly ‘self-police’: jurisdictions that fail to meet global standards will find themselves being cut off from the international financial system as part of the banking sector’s ongoing risk reduction. Countries such as Panama and the British Virgin Islands could quickly find themselves joining Syria, Somalia and Yemen as being ‘unbankable’.
Offshore centres, many benefiting from their relationships (legal or financial) with the UK, have important roles to play in the operation of global finance, offering efficient ways of investing and moving funds around the world. But such roles should be offered transparently, without the shroud of secrecy that some centres provide and which, inevitably, attracts those seeking to hide illegality. As guardian of many of these centres, as the epicentre of international finance, and as a place through which the National Crime Agency believes hundreds of billions of pounds are laundered every year, the UK has a responsibility to show leadership in acting to raise standards everywhere. The prime minister’s upcoming Anti-Corruption Summit is an opportunity for the UK to show that having facilitated the problem, it can now be a key part of the solution.