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1 Relieving congestion one tissue at a time
Prologue
Modern-day variations notwithstanding, banks of yore were traditionally the rallying point for borrowers and lenders. It is no wonder then that these money moving trustees have found themselves at the navel of the work involved in procedurally distilling evil money from good.
Onshore and offshore obstipations
Due to a deficit of funds for commercial or other purposes, borrowers would seek out financing opportunities to assist with closure of operational gaps. Lenders, on the other hand, were willing to supply excess funds to a responsible repository mostly for safekeeping purposes as long as they were able to access them again given reasonable notice (Whitehead, 1969). These dual needs were mathematically satisfied by way of an intermediation process which allowed for disbursement of funds over the period required, but at a cost to the borrower. Simultaneously, the lender was rewarded for temporarily parting with funds. The broking entity also developed a capacity to facilitate commercial related payments, a vital need for traders of the day. This early intermediation principle would later be reflected in a central banking model, the major differences being in clientele and economic influence. A central bank’s clients are those institutions it is legally required to regulate and whose operations it is required to supervise. Most importantly, through its open market operations in the banking system a central bank is able to influence the supply of money throughout an economy, and in so doing enable the monetary policy of presiding governments.
As with other types of business, successful banking is built in part on reputation. This intangible commodity is of critical importance to clients as they would want assurance their money is safe and accessible to them on demand. Indeed, where depositors have a sense – even if that sense is unfounded – that their money is not, in fact, safe it can trigger the rapid withdrawal of funds or, in cases of severe reputational loss, a run on the bank. By extension, an international institutional lender may also consider that its disbursed funds may be at risk of non-repayment. In such instances, demand clauses may be invoked and appended security leveraged. Worst yet, there is always the option to refuse to engage in future transactions with a country due to the perceived high risk involved.
The erosion of depositor and/or lender confidence as a result of the money laundering stigma can therefore potentially affect a country’s or a bank’s ability to attract and retain legitimate capital (Masciandaro, 2004). Bank solvency may also be impacted where large amounts of illicit funds are suddenly transferred outwards. This is particularly so in the case of the Caribbean due to the open and dependent nature of their economies. It would therefore suggest that a single market environment could itself attract several risks: the movement of criminal elements and their enterprise across market territories; financial company mergers or acquisitions where the bona fides of inherited clients are not known; or the appended institution may, itself, be a criminal operation. There may also be regulatory failings where the absence of effective oversight and ongoing due diligence on shareholders and directors could result in impropriety at the highest level of governance.
The overarching point to be made here is that given the plight of small island nations to find alternative means of earning foreign exchange, they are by now fully aware of the importance of engaging a robust regulatory framework if national reputations are to be maintained. What is therefore left to be assessed is the extent to which national motivations to comply are linked to the desire to protect jurisdictional reputation.
Commercial evolution
If we understand this original configuration of banking, the importance of legislation in guiding behaviour and the reputational pillar on which the tradition is built, we could perhaps glean a better understanding of its offshore derivative and the exponential evolution of commerce as a result of financial globalisation or “financialisation”.
While offshore banking is essentially a financial service, it does have its own distinctions. For example, although regulated, offshore financial institutions are not used as a conduit for government monetary policy. Their activities are also more extensive in scope. Generally, there is no restriction around reserve requirements or interest rate charges and since clientele are non-residents of the jurisdiction in which their assets are located, transactions are mostly conducted in foreign-denominated currency (Blum et al., 1998). The implication here is that although there may be a regulatory reporting requirement, there is in fact less sovereign influence over offshore financing activities.
The globalisation component of the equation, according to dominant discourse refers to the unprecedented level of cross-border engagement and interaction between and among people, business and countries. This is made possible – chiefly – by the lowering of trade barriers and the development of faster and more efficient means of transportation whose capacity allow for the movement of greater volumes of goods and people. Of course, all of this is underpinned by extraordinary technological innovation.
However, when we think of financialisation, we transverse the heart of global markets and the resonant, fiscal ingenuity and agility to engineer spin-off products masterminded in a virtual framework of risk and return (Beck, 2002; Langley, 2004, Blackburn, 2006). The c(overt) strategic intention is to maximise shareholder value (Marshall, 2008, pp. 357–358). This type of innovation, while made possible in the free market system of capitalism is premised on equations purporting to predict the future in such a way as to engender present-day confidence. It is also this type of innovation which adds to the complexity and perplexity of neo-finance and the tendency of ordinary folk to yield its control to third parties (Marshall, 2008, p. 362).
Hedge funds, futures, financial haggling and speculation by finance experts (aka “quants”) on what the markets may or may not do lead one to agree with the characterisation of the workings and operations of the contemporary international financial system as “casino capitalism” (Strange, 1997). Contributions by Neal in 1990, Germaine in 1997 and de Goede in 2005 as cited in Marshall (2008, p. 364) note the linkage of high finance to gambling as being consistent with historical norms. Risk-oriented models of the day were applied to offset unknown future impacts. With this apparent ability to quantify financial risk taking and therefore provide greater tangibility to outcomes, the door was opened to the technical validation of a new subdivision of finance (Marshall, 2008, p. 364).
Onshore and offshore disputations also resonate in philosophical outlook. The advent of the latter represents a fundamental change; a shift describes Wallerstein (1974) of financial capital away from the “core” (industrial nations) to the “periphery” (weaker and therefore non-comparable) smaller nations. Following this assertion, if say half of offshore capital is “housed” in or simply passes through island financial centres (periphery nations), it could create a sense of powerlessness, that is to say, a perceived loss of control over what might otherwise be taxable income for onshore nations. Competitively speaking, therefore, some kind of tension is likely to emerge. And in the spirit of capitalist competition for one’s share of the proverbial pie, it is expected that firms (countries in this case) and/or their representative cartels would engage actions deemed appropriate for the achievement of market objectives. Typically, competition on price, product and place undergirded by a spirited marketing strategy would be a good starting point to attract business away from one’s rivals. But then, up come the politics of compliance and suddenly governing actors shift back to being frightened competitors. How could lost business be regained through a traditional marketing strategy except the marketing instrument is tinged with the psychology of distrust and doubt? For, once issues of integrity are raised and indeed formed in public minds, the bona fides – that is to say state character in the form of qualifications, reputation, ability, facility and skills – are immediately brought into question. In fact the very notion of a “harmful tax competitor”1 immediately demarcates and alienates the one said to be doing the apparent harm. Thus with the seed of scepticism sown, a would-be investor is now forced to examine the trade-off between doing business with a country of questionable repute and one which is untainted. Depending on the option taken there is the risk of losing one’s own access to the bounty of international business and the important relationships that characterise the trading community.
Noting the Harmful Tax Competition Initiative as essentially a means of economic domination which undermines international rules and practice, Sanders makes the point that Caribbean IFCs in particular were in fact encouraged by their former colonists to engage other options, specifically financial services, to support building out their small economies and “maintaining democracy and civil order in their societies” (Sanders, 2002, p. 326). Evidently, OECD countries could not portend the fiscal impact of their then innocent suggestions on their own economies and the formidable threat that would emerge from previously subjugated nations as regards the redistribution of the wealth of nations.
Now let me be clear: as a compliance officer myself, I believe accountability mechanisms are necessary to curb unwanted behaviours. In fact, while not always fully compliant themselves, I note the bent of onshore nations is to promote compliance as a minimum standard for players in globalised markets. Standards are benchmarks against which conformance is measured to promote order in our various contexts.
However, in my view a blurring emerges when competitors assume a structural position of oversight, insisting and indeed creating, unilaterally, a rule-based framework aimed at “levelling the playing field”. Now pray tell, how can a playing field be levelled without engagement of players on the field? Really? The conflict of interest reeks and the abuse of power leaps out when your primary opponents are deliberately excluded from the rule and decision-making process. What ever became of good, old fashioned, independent oversight?
In order to quell potential opportunistic conduct of state actors in circumstances of this nature, Masciandaro (2004) speaks of deliberately embedding offsetting measures in a broadened financial policy-making agenda. Outside addressing the problem of bias, this posture is felt to better support the efficiency of global financial flows and resource allocation. It is also the kind of thinking consistent with the macro-level regulatory oversight strategy of Keohane (2001) and Scholte (2002), as well as standard setting bodies (e.g. the World Bank and the IMF).
Self governance vs. selfishness
Whereas limited natural resources can place offshore nations at a comparative economic disadvantage, the importance of self-governance does not suddenly dissipate because of physical resource limitations. Instead, what is required to advance beyond such strictures is state analysis, social engagement, a legal framework and, above all, political will. This process of seeking and fostering alternatives quite rightly falls within the decision-making capacity and domain of an autonomous state (Antoine, 2001; Hartman, 2002; Rahn, 2002). Traditionally, there is no consulting between and among countries regarding in-state taxation frameworks. And neither should there need to be. From whence therefore, comes the apparent tension?
Arguing that EU member states of the OECD are the highest and most widely taxed, such that people are “quite literally taxed from the cradle to the grave and beyond”,2 Sanders (2002, p. 330) notes that high income tax yields tend to be used up in national defence projects and ever increasing social liabilities of these nations. The latter is compounded by longer life expectancy against shrinking contributions by eligible (some of whom are unemployed) members of the work force. The hunt for additional revenue sources is therefore constant and in the absence of creative economic options, the first port of call is ordinarily state cash, namely more taxes. Yet, notes Sanders, there is a limit if incumbent governments want to survive upcoming election cycles (Sanders, 2002, p. 330).
This erosion of an administration’s revenue stream may be considered a factor of both political opportunity and consumer choice in a competitive environment. That said, how can it be mistaken as a failure of offshore finance providers to assist industrial nations in maintaining their tax base? It is uncertain if the shoe was on the other foot so to speak and onshore nations had adopted low tax regimes from the get go whether there would be an issue of harmful tax competition; likely not. True capitalist competition is incomplete without venturing into the area of taxation for advantage and this may have been an oversight on the part of industrial nations (Sanders, 2002). Understandably, though, taxation, even as a competitive strategy may have been far from the governing minds of OECD countries. The more immediate of concerns was finding an avenue for excess productive capacity as this had so outsized benchmark levels required for social sustenance that exploring new markets was the next economical and indeed logical step.
In short, a place to sell one’s goods at higher prices for greater corporate yield was too alluring to look the other way. With hindsight, this trade-based response to solving the ultimate problem of tax competition – in essence, a kind of economic self-de-regulation – could conceivably have been a strategic error on the part of OECD (onshore) nations, exacerbated not merely by failure to address the fundamentals of their own tax regime, but also the high-handed manner in which wholesale change was sought (Sanders, 2002, p. 331).
In contrast, the virtue of small islands in clinging to a low tax regime in its international financial services space as a primary drawing card is rooted more in livelihood than anything else. It is, indeed, more of a competitive advantage and thus a strength which should be exploited for maximum benefit. There is, after all, neither moral nor legal obligation for IFCs to assist onshore states in their fiscal revenue-generation processes (Antoine, 2001).
At the same time, little argument can be made against the need for operative rules which not only set a framework conducive to good business, but also promote fairness. This seems to be the underlying premise for the OECD’s BEPS project. Consumer protection and deterring the abuse of the financial system by the criminally minded must remain high agenda items. It is this felonious leveraging of the global payments and conversion network that is of particular import to our debate and to which we now turn.
Anti-money laundering policy diffusion
Paradoxically, the lifting of currency controls under neo-trade liberalism also creates the need for regulatory management over transactions (Levi-Faur, 2008; Alldridge, 2001; Vogel, 1996). In the same way, international rule making is deemed necessary to curb money laundering in light of relatively easier access to world markets than before (Alldridge, 2003). The fact is that huge volumes of capital are transacted in this vast, virtual space, and provide the criminal minded with ample, parallel opportunity to launder or hide ill-gotten gains, thereby concealing their true source – crime. Once funds are successfully concealed in the banking system criminals may access them again to further finance more illicit or illegal activity including the trafficking of drugs and terrorism, considered by many as two of the most powerful forces against human development in the new millennium.
It would not be uncommon for reasonable persons to wish to contribute to the stemming of evil money flows particularly if there is ultimate common societal value to uncovering financial crime. However, far from volunteering to be part of the army drawn up to fight what is supposed to be a common foe, there is the unfortunate situa...
