713 The British Empire continues through the City of London & its Tax Havens - Nicholas Shaxson

The British Empire continues through the City of London & its Tax Havens
- Nicholas Shaxson

Newsletter published on 23 November 2014

Date: Sun, 23 Nov 2014 12:32:28 +0900
Subject: The Much-Too-Special Relationship - The American Interest
From: chris lancenet <chrislancenet@gmail.com>

http://www.the-american-interest.com/2014/03/19/the-much-too-special-relationship/

Nicholas Shaxson

The City of London threatens U.S. security and abets corruption.
  Revisionist powers like Russia have figured out this dynamic and are
busy exploiting it.

The City of London, as is well known to its residents, is a
legal-jurisdictional term from days of old for a somewhat peculiar
arrangement, of which more below. But today it is a term used by those
mostly ignorant of its history to describe the United Kingdom’s
financial services industry. According to TheCityUK, a leading lobby
group, the City is by far the world’s largest exporter of financial
services, with a trade surplus of $64 billion last year, compared to the
$20 billion for the United States. The United Kingdom comfortably leads
the United States on foreign exchange turnover, on cross-border bank
lending, and on over-the-counter derivatives; the London Stock exchange,
too, hosts more companies than its New York City rival.

Wall Street is no shirker, of course: It trumps London on insurance,
securitisation issuance, private equity values and hedge fund assets.
Its $14 trillion in commercial banking assets beats London’s $11
trillion, and its 46 percent share of the $87 trillion investment
management sector trounces London’s mere 8 percent.

The big difference between the two rivals, politically speaking, is that
while the two are similar in absolute size and economic heft, at least
in terms of their important international operations, Wall Street is
diluted in a population five times larger than Britain’s. Some of you
Americans may think your financial centre has captured key domains of
the policymaking apparatus in Washington—and you’d be right—but in a
large, complex democracy it has not and cannot capture many others. We
Brits have just over 60 million people, a far smaller democratic
counterweight, and banking assets equivalent to over 400 percent of GDP,
which is a multiple of the figure for the United States. Bank of England
Governor Mark Carney recently crooned over the prospect that, on current
growth rates, this might rise to 900 percent by 2050.

Thus, hard though it may be to believe, the City’s political capture of
Britain is deeper and more encompassing than anything that could ever be
tolerated on the American side of the pond. Indeed, the City of London’s
“capture” of Britain goes far deeper than so far suggested—more on that
anon. The best way into the subject, however, is not through more
statistics but by way of a little Transatlantic spat that erupted
recently, spurred on by articles in Politico and then in the New York
Times by Ben Judah, the author of Fragile Empire: How Russia Fell In and
Out of Love With Vladimir Putin.

Judah argued recently that financial interests have essentially sapped
Europe’s—and particularly Britain’s—will to make robust foreign policy
in the face of Russian aggression in Ukraine:

Russia thinks the West is no longer a crusading alliance. ... Putin’s
inner circle no longer fear the European establishment. They once
imagined them all in MI6. Now they know better. They have seen firsthand
how obsequious Western aristocrats and corporate tycoons suddenly turn
when their billions come into play. They now view them as hypocrites—the
same European elites who help them hide their fortunes.

More pointedly, Judah mounted a blistering attack on London, the
biggest, most freewheeling repository for all this Russian (and
Ukrainian) loot. His New York Times article boils down to this:

Britain is ready to betray the United States to protect the City of
London’s hold on dirty Russian money. And forget about Ukraine.

A recent scoop in Britain’s Guardian newspaper from days of old
underlines Judah’s thesis. It exposes a secret government document
saying that Britain should oppose any measures that would close London’s
financial centre to Russians.

The City of London spin machine soon launched fusillades against Judah
and the New York Times. The CityA.M. newspaper, a sophisticated and
informative mouthpiece for City interests, joined the mainstream
Telegraph in furious efforts to discredit Judah. The counterattacks have
come in four main variants. The first is that “all countries, including
the United States, behave like this”; and Britain has always behaved
like this, so “what’s new, and what’s the problem?” A second is that the
United States lacked a robust foreign policy stance on Russia and
Ukraine anyway. The third: Russian assets in the United Kingdom are a
relatively small part of the total UK asset base—a statement that is
hard to prove or disprove because so many Russian assets are owned
anonymously through offshore companies designed to hide the identities
of the actual beneficial owners. (In any event, as we shall see, Russian
assets are just one part of a much bigger picture.)

The fourth part of the counterattack, and much the most vicious, has
been of this nature: “Wrong. The flats haven’t been sold yet. There are
no rich owners and no prostitutes”, or “If Polish labourers sleep four
to a room ‘in bedsit slums’, it’s because they choose to.” In other
words, the City of London does no wrong; it’s the clients whose moral
obloquy is entirely the issue.

All this amounts to a series of quibbles: some correct, some
substantial, some a matter of opinion. It turns out that a few of
Judah’s more fiery assertions were wrong, but none of the counterattacks
even attempt to knock down his core thesis: that the City of London will
make British policy writ large untrustworthy over Russia, and, more
broadly, that Russian corruption could not possibly have grown to its
present scope and nature without concomitant corruption in the West’s
financial institutions. The arrows have fallen, and the thesis stands.

But Judah’s articles don’t go nearly far enough. The truth is that the
City of London is a greater potential threat to the national security of
the United States than almost anyone supposes. That story, told true and
right, has three main parts.

The first part shows that the United Kingdom is the single most
important playerin a global system of offshore tax havens, and has
facilitated and even enthusiastically—if discreetly—encouraged the élite
looting of pretty much every country in the world, from Pakistan to
Greece to Libya to Mexico, typically via U.S., British and Swiss banks.
This is a national security issue par excellence, now revealed in its
fullness through the Crimea affair, let’s call it. This British offshore
system is a fast-growing cash cow for the City, which will fight to
protect it.

The second part of the story tells of how the City of London has spent
half a century building a business model based on thwarting and opposing
U.S. laws and regulations. It is crucial to understand that this is a
deliberate feature of the modern City, not an incidental side effect.

The third reveals the aforementioned depth of Britain’s political
capture by the City of London, which makes Britain a thoroughly
untrustworthy ally not only with regard to Russia, but many other
portfolios as well.

There is more to the offshore story than the tale of the City of London.
It now involves China, Saudi Arabia and others as well. But London’s
role is key, so much so that the financial crisis the United States is
still digging its way out of can fairly be traced back to the City as
well. It is therefore essential for Americans to understand better what
the City of London is, how and why Britain developed its network of tax
havens and the mentality of a tax haven itself, and how the
all-embracing City Consensus has captured the British establishment,
along with much of the UK media, and even British society at large.

The City’s history as a financial centre goes back at least a thousand
years. Its most ancient and venerable institution, the City of London
Corporation, has to be the most peculiar creature in the whole menagerie
of global finance: a powerful torch-bearer for laissez-faire attitudes
that have over centuries become hardwired into the British establishment.

It is hard to say exactly what the City Corporation is. On one level, it
is the local authority for the Square Mile, a 1.1 square mile slab of
prime real estate located at the geographical heart of London, with Bank
underground station and the Bank of England at its centre. This
territory, also sometimes known (confusingly) as the City of London or
the City Corporation, has its own mini-police force, looks after local
parks and museums, and has its own unpaid Lord Mayor, currently Alderman
Fiona Woolf. Presiding over a resident population of some 10,000 people,
the Lord Mayor is not to be confused with the Mayor of London, currently
Boris Johnson, who oversees the eight-million strong London metropolis.

The City Corporation says: “The Lord Mayor of London’s principal role
today is as ambassador for all UK-based financial and professional
services.” So the Lord Mayor travels the world pushing City interests;
this is a pretty odd role for the head of a local authority, but it is
what it is. An official City Corporation report, cited in my book
Treasure Islands, describes a Lord Mayor’s visit to Hong Kong, China and
South Korea five years ago. The Mayor of Tianjin, a pilot city for
Chinese financial reforms, was quoted as calling the City of London “the
holy place” of international finance and globalization. The aim of the
visit was, beyond lobbying for London’s financial centre, to

  ... lobby for China to maintain its course of economic and financial
liberalisation, and encourage South Korea to adopt more open policies
... explain the UK’s liberal approach to trade policy and trade
regulation; and to encourage a critical mass of similarly thinking
countries.

Lobbying not just for UK financial services but for generalised global
financial liberalisation is an even stranger role, one might think, for
the head of a local authority.

The City Corporation also has over 100 livery companies—mostly ancient
trade associations that serve as a giant (and official) Old Boys’
network. From theWorshipful Company of Broderers, dating from the 13th
century, to the unfortunately named Worshipful Company of Launderers, to
the more modern Worshipful Company of Tax Advisers, their membership
contains some of the Great and the Good of British public life: the Tax
Advisers, for instance, contains some of the best names in the UK’s
international tax planning. All must swear an oath of allegiance to that
head lobbyist for global financial liberalisation, the Lord Mayor.

The City Corporation also has a Remembrancer with an official seat in
Britain’s houses of parliament, pushing City interests there and
bringing back parliamentary intelligence reports to the City. In local
City elections, too, the mainstream UK political parties are not
involved, and global multinational corporations effectively get voting
allowances, outnumbering local resident voters by a large margin.

Most of Britain’s laws and financial regulations do apply in the City,
but all these oddities add up to a place that is, historically and
constitutionally, slightly dislodged from the United Kingdom proper,
with an “elsewhere” flavour about it. But far more important than how it
feels is what it does. The scale of its influence is unquantifiable, and
it is so bizarre that if you go on about it, you start to sound like a
nutter.The scale of its influence is unquantifiable, and it is so
bizarre that if you go on about it, you start to sound like a nutter.

The main point is that the UK financial services industry has at its
disposal an immovable and ancient organisation with social roots
penetrating to the heart of the British establishment. It has cultural
anchors so deep that whippersnapper Wall Street can only dream about
having a comparable advantage.

Britain is more in thrall to finance that the United States, too,
because the City of London’s overwhelming focus is on international
rather than domestic activity—which brings us back willy-nilly to
British incentives to betray its allies. It takes us deep into the world
of offshore tax havens, and leads us as well back to a question posed in
2012 by Representative Carolyn Maloney (D.-NY) during a hearing on the
giant “London Whale” trading losses by J.P. Morgan: “It seems to be that
every big trading disaster happens in London, and I would like to know
why.” Would you, now, Ms. Maloney?

To understand why so much of the world’s money comes to London, go back
to the emergence of the City of London financial centre as the
capital-pumping heart of the British Empire: the global crossroads for
trade, permanently welcoming foreign money with few questions asked.
“There the Jew, the Mahometan, and the Christian transact together”,
Voltaire wrote in 1733, “as though they all professed the same religion,
and give the name of infidel to none but bankrupts.” This dogged
internationalism is the bedrock of Britain’s wonderful, exuberant
multiculturalism, which has for centuries made London one of the most
exciting and cosmopolitan cities on the planet.

Empire was the source of massive economic rents for the City grandees,
many of whom never had to work hard, but could sit back and watch the
world’s business tumble in. After World War II, however, many people in
Britain’s far-flung colonies began to see that the weakened colonial
power no longer had the energy to sustain its rule, and began to agitate
for independence. The withdrawal from India in 1947 set the scene for
renewed ferment in the colonies; the Suez crisis of autumn 1956
underlined Britain’s weakness, and the independence of Ghana and Malaya
in 1957 marked the start of a deluge. By the middle 1960s,
decolonisation was nearly complete.

As a consequence, the City of London, the “governor of the imperial
engine” in the words of the historians P.J. Cain and A.G. Hopkins, faced
an existential threat. London’s panicking financiers found their
solution almost by accident, in a new international market that came to
be known as the Eurodollar market, and (later) the Euromarkets.

It was initially an era of tight controls over global capital flows.
With the lessons of the Great Depression still fresh in people’s minds,
John Maynard Keynes and others had argued strongly against allowing too
much leeway for financial globalisation, which carried grave risks and
threats. “Ideas, knowledge, science, hospitality, travel—these are the
things which should of their nature be international”, Keynes said. “But
let goods be homespun whenever it is reasonably and conveniently
possible, and, above all, let finance be primarily national.”

Under the international architecture that Keynes and his American
counterpart Harry Dexter White designed at Bretton Woods, exchange rates
were mostly fixed, governments were trying to restrict cross-border
flows of financial capital to little more than what was required to make
payments for trade, and banks were not usually allowed to take deposits
in foreign currencies, other than for trade reasons. The system seemed
to work, too: Economic growth was high and broad-based, and economic
inequalities were falling around the world. The roughly quarter century
that followed not long after World War II is known, not unreasonably, as
the Golden Age of Capitalism.

The new market in London emerged just as decolonisation was gathering
pace. In June 1955 some staffers at the Bank of England noticed some odd
trades going on at Midland Bank, now part of the globe-trotting HSBC.
They were taking U.S. dollar deposits that were unrelated to trade
operations, and thus technically not allowed. Midland was also offering
interest rates that were substantially higher than what U.S. regulations
permitted at the time. The Bank of England gave Midland a mild warning,
but soon began to tolerate it, as it could see there were profits to be
made.

This was the beginning of a new offshore market that would transform the
world and bind the City and Wall Street together in a new special
relationship, little noticed by the general public or even by
policymakers, that is a corrupted cornerstone of the current UK-US
relationship. It is Ground Zero for the world’s offshore system of tax
havens today.

To understand what happened next, it is essential to understand exactly
what offshore is. The term “tax haven” is a bit of a misnomer, because
most of the jurisdictions that are generally regarded as tax havens are
about so much more than tax. The more recent term “secrecy jurisdiction”
is useful, but it can restrict analysis to questions of secrecy and
transparency. Offshore is a bigger term that encompasses them all, and
then some.

If we examine all the jurisdictions that are widely regarded as tax
havens or secrecy jurisdictions, and drill down to what it is that they
all have in common, we eventually get to a bedrock of two words:
“escape” and “elsewhere.” In short, if someone doesn’t like the
responsibilities that come with living in a particular society—whether
those burdens be taxes, criminal laws, financial regulation or financial
disclosure requirements—than he can take his money (and sometimes
himself) elsewhere to escape them. This fits the traditional terminology
for these places: the word “haven” in tax haven conjures up the “escape”
aspect; while the term “offshore” neatly fits the concept of “elsewhere.”

One of the great incentives offered by offshore financial centres is lax
or even absent financial regulation: Bring your money here, and we won’t
regulate it. And that is exactly what happened in London from the 1950s
onward. Confronted with this new variant of banking business, the Bank
of England simply deemed these dollar trades in London to be outside its
jurisdiction, effectively creating an unregulated space for them to
trade in.

The world’s banks soon began to notice this new escape route, but the
next stage did not occur in a manner you might suppose. The earliest
large-scale adopters of the market weren’t American, but banks from the
then Soviet Union. An initial deposit from the Moscow Narodny bank in
1957 was soon followed by much larger amounts, as the Soviets, fearing
asset freezes, began to move their money out of U.S. banks to a place
they trusted to take their money and preserve it without kerfuffle. One
might argue that, in a small way, the new offshore market was helping
the Soviets thwart U.S. foreign policy.

Wall Street discovered offshore London pretty quickly thereafter, and
its banks dove in head-first. In this largely unregulated offshore
financial playground in London they could escape those pesky domestic
rules and grow their businesses explosively, helping them over time to
become powerful enough to mount ever more potent political campaigns in
Washington.

The market also came with a new pricing system: the London Interbank
Offered Rate (Libor), which today is the benchmark for pricing some $800
trillion in financial instruments, and which recently erupted in a
market-rigging scandal so outrageous that The Economist last year called
it “The Rotten Heart of Finance.”? It was a direct result of British
regulators’ “don’t ask, don’t know, don’t tell” attitude, under the
business model to suck up as much of the world’s money as possible. The
offshore Eurodollar market eventually helped make the City of London
richer than it was even in the heydays of Empire.

Even in the market’s small, early days, increasingly concerned U.S.
regulators were asking their UK counterparts to curb these wild new
“Euromarkets.” They were told, in essence, to go screw themselves. “It
doesn’t matter to me whether Citibank is evading American regulations in
London”, James Keogh, a top Bank of England official said in 1963. “I
wouldn’t particularly want to know.” That year London also began
offering “Eurobonds”— offshore, unregulated bearer bonds, perfect
vehicles for tax evasion and financial crime. A Bank of England memo
back then summarised the basic attitude: “However much we dislike hot
money ... we cannot be international bankers and refuse to accept money.”

But something else was emerging, too, amid decolonisation. Britain
didn’t quite lose all its colonies. Today it has 14 Overseas
Territories, the last remnants of the Empire, which are partly
controlled by the United Kingdom, but which have their own independent
politics, too. These territories include some of the world’s most
notorious Caribbean or Atlantic tax havens today: the British Virgin
Islands, the Cayman Islands and Bermuda. In addition, Britain’s three
Crown Dependencies—Jersey, Guernsey and the Isle of Man—are some of the
biggest tax havens in the European arena. All these jurisdictions are
partly inside Britain, giving investors the reassurance of British
solidity and its fabled legal system, backed by British gunboats (as
Argentina’s General Galtieri discovered in 1982 when he invaded the
Falkland Islands, a British Overseas Territory.) But they are also
partly independent from Britain, too, giving the UK government and the
City of London enough distance to say, “Look it’s nothing to do with us,
and there’s nothing we can do” when scandal hits. This inside/outside
relationship that the tax havens have with Britain is a very, very
convenient arrangement for the City of London, because the city lives
and breathes in the ambiguous interstices thus created.

It is no coincidence, therefore, that the Bank of Credit and Commerce
International (BCCI), surely the rottenest bank in modern world history,
was headquartered in London (but incorporated jointly in the Cayman
Islands and Luxembourg). BCCI serviced Saddam Hussein, the terrorist
leader Abu Nidal, the Medellín drug cartel and heroin warlords in
Pakistan, Iran, Afghanistan, Laos, Thailand and Burma. It financed and
facilitated the trafficking of nuclear materials, the sales of Chinese
Silkworm missiles to Saudi Arabia and of North Korean missiles to Syria.

BCCI also penetrated U.S. politics and its banking system, manufacturing
fictitious deposits and capital and bribing politicians.

When Manhattan District Attorney Robert Morgenthau subpoenaed BCCI in
the Cayman Islands in 1990 he was rebuffed by the Attorney-General, a
“crotchety British guy” who declined to co-operate because of local
secrecy laws. At least initially, cooperation from the Bank of England
was non-existent, Morgenthau later told me. Eventually, the Bank of
England was forced by the stink to close BCCI down but its Governor,
Robin Leigh Pemberton, when questioned on the subject, reiterated the
need for London’s permissive approach. “If we closed down a bank every
time we found an instance of fraud”, he said, “we would have rather
fewer banks than we do at the moment.”

Tim Congdon, a former UK government economic adviser and veteran
financial commentator, sees three big factors behind the City of
London’s post-imperial growth: globalisation, the information technology
revolution and what he calls the “offshore revolution”—a massive growth
in the use of tax havens over the past two and a half decades. “You can
establish a company in a tax haven”, he said, “and it can then hold
assets that are subject to the tax and regulation of your choice.”

It’s true. I recently looked at the owners of One Hyde Park, an
apartment block in ritzy Knightsbridge in central London that has been
billed the most expensive slab of real estate on the planet. Of the 76
apartments that had then been sold, 31 were owned by anonymous offshore
companies in the British Virgin Islands; 28 more were owned through
companies incorporated in other, mostly British, tax havens. For most of
them, it was impossible to find out who owned them; but among the few
that are known about, many are, or are suspected to be, the fruit of the
corrupt privatisations in the former Soviet Union.

Though the asset—an English stately home, for instance, or a bank
account—might be owned by an offshore company, all the lucrative legal,
accounting and banking work putting together these structures and
arrangements would be done in a big financial centre, typically London.
“So the Cayman Islands appears statistically as the fourth largest
financial centre in the world,” explains Ronen Palan, Professor of
International Political Economy at City University in London. “But it’s
only a paper centre: most of the activities attributed to it in fact
take place in London.”

So Britain is not just an offshore jurisdiction in its own right: It is
at the centre of a British spider’s web of offshore finance that serves
as a mechanism for feeding easy economic rents into the City. Genuine
economic activities in the United States, Latin America, Africa or Asia
are financialised and repackaged via the offshore conversion machine, so
as to minimise taxes by legal or illegal means, to wrap an asset in
offshore secrecy, or to wriggle out from domestic financial regulation.
Conveniently, a lot of the business of handling and facilitating this
mayhem flows to London. The more that other economies are financialised,
the wealthier the City becomes—hence the Lord Mayor’s lobbying for
deregulation in China.

The City of London’s international focus may be the most important
aspect of the way it weakens Britain’s reliability as an ally. This is
not just about fears of Russians or Ukrainians selling up their mansions
in Kensington. To understand the full picture, consider what makes an
international financial centre tick. And to understand that, it helps to
observe small tax havens such as Jersey or the Cayman Islands, where
political and economic capture is most complete; local democratic
counterweights are smallest; and the issues are crystallised into pure
forms.

The business of international financial centres is a curious one. On the
one hand, they want to attract money by presenting themselves as clean,
respectable, reliable, efficient and trustworthy places to deposit and
do business. Skittish financiers hate a taint. On the other hand, these
places also want to hoover up as much of the world’s dirty and
questionable money as possible because, as Swiss bankers have known for
centuries, it can be insanely profitable. Financial centres square this
apparent contradiction—to appear clean while attracting criminals and
other abusers—in two ways. The first is an offering that can be
summarized as follows: “We won’t steal your money, but we won’t scold if
you steal someone else’s.” This is why Transparency International’s
Corruption Perceptions Index places jurisdictions like Switzerland,
Singapore and the United Kingdom at the “cleanest” end of the spectrum,
while the Tax Justice Network’s Financial Secrecy Index puts them at the
opposite end. The second element is, of course, to spin furiously: to
construct a theatre of probity built on endless repetition of the line:
“We are not a tax haven, but a legal, well regulated and cooperative
international financial centre.”

Consider, too, the fact that Switzerland is both politically neutral and
a tax haven. This is no coincidence: they are part of the same package.
During conflicts, capital flits to the neutral jurisdiction, which may
even provide a secret platform for commercial interests in opposing
belligerent countries to continue to do business. Being political
neutral does help the tax haven, but it works the other way as well: The
more your national business model depends on offshore finance, the less
appetite you will have for engaging robustly in international affairs.
Britain’s long imperial and internationalist history militates against
such neutrality, of course; but this incentive nevertheless makes the
City a perpetual and growing counterweight against Britain’s reliability
as a U.S. ally.

International financial centres also demand domestic political
stability. This is certainly a strong incentive to stop generalised bad
governance spiraling out of control. But that is not the only
“stability” incentive. Flighty global capital also demands a particular
kind of stability, which means insulation of the financial centre from
local democratic governance and pesky stakeholders, in the interests of
so-called competitiveness.

In small tax havens, measures against financial dissidents can be quite
repressive. In the words of a former police chief in the notoriously
corrupt British tax haven of Jersey:

There are no checks and balances on power and the abuse of it. ... With
such an absence of controls, such an absence of accountability, the
ordinary decent people of Jersey are helpless.

The system is buoyed by the construction of a sophisticated and
pervasive finance consensus that pervades the media and society at
large. Nearly everyone comes to see offshore finance as the goose that
lays the golden eggs, and so must never be attacked. It’s hard to
understate how deep and unchallenged this consensus is in small tax
havens like Jersey.

In mainland Britain, of course, the financial centre is a far more
controversial player amid Britain’s raucous national politics, but the
financial sector still senses itself as being almost untouchable. The
Too Big to Jail phenomenon is relatively new in the United States; in
London, it has been ever so. Rowan Bosworth-Davies, a financial
criminologist and experienced former UK financial detective, recalls
warning bankers about financial crime in a speech in 2003. Afterwards,
he says, a board member of a major British bank told him, “If you think
Her Majesty’s government is ever going to prosecute people of my class,
you are utterly mistaken. We are a protected species.”

All the recent evidence seems to bear this out. In 2012 the New York
State Department of Financial Services accused Standard Chartered Bank
of acting as a “rogue institution”, using its London-based branch to
help cloak at least $250 billion in transactions related to Iran in
plain violation of sanctions. Standard Chartered robustly disputes the
allegations. When the bank’s CEO for the Americas expressed concerns to
the London office about possible reputational damage, the reply came
back, continuing in the tradition of BCCI: “You f……g Americans. Who are
you to tell us, the rest of the world, that we’re not going to deal with
Iranians?” When the London-based bank HSBC bank reached a $1.9 billion
settlement with U.S. authorities in 2012 for money laundering for
Mexican drugs cartels and many others, British officials said they had
no responsibility for oversight, even when the rules clearly state
otherwise.

We Brits are told, time and again, that any crackdown will damage the
“competitiveness” of the City of London. The weasel word
“competitiveness” here has nothing to do with market competition: This
is about a race to the bottom on standards. And it is hard to understate
how pervasive this word “competitive” is in British political debates:
It is repeated ad nauseam on the BBC’s myriad outlets, with scarcely a
dissenting voice. British politicians, desperate to be seen to be (to
use a favourite government phrase) “open for business” cower in
obsequious terror at the prospect of international financial capital
flight. The relationship between international capital and an
internationally focused financial centre is a highly unequal one, and
any foreign autocrat who wants to influence British foreign policy knows
this.

The problem is not so much that Britain will shy away from cracking down
on the assets of Vladimir Putin and other potential menaces, significant
though that may be. It is that foreign governments know how exquisitely
sensitive the City is to anything that will represent the slightest
intrusion of politics into Britain’s “regulatory stability”, and just
how powerful the City is in bending the government of the day to its will.

This will not have escaped the Chinese leadership, for instance. Amid
meetings in September 2011 between UK Chancellor George Osborne met
Chinese vice-Premier Wang Qishang, China for the first time formally
backed moves by British financial institutions to develop the United
Kingdom as an offshore financial centre for Renminbi trading. The market
is still quite small, and tightly restricted by the Chinese government;
but the City is collectively licking its lips at the potential. The City
Corporation has been lobbying ferociously to clear the decks for this
growth, and it is hard to see it tolerating anything that might obstruct
these fabulous opportunities. Hosting such a trading platform is
significantly in Beijing’s gift, and as the market grows, and other
financial centres like Luxembourg “compete” to get a slice of this
action, Britain will find it ever harder to say “boo!” to Beijing.

While Wall Street has also used competitiveness fears to weaken
regulation at home, U.S. financial institutions have long used London as
a crowbar to force deregulation in the United States. “If we can do it
in London”, they have argued, “why can’t we do it at home?” The
Commodity Futures Modernization Act of 2000, which exempted whole areas
of derivatives from regulation and which some regard as the most
damaging financial bill in recent U.S. history, was “all about the City
of London”, said Professor Bill Black of the University of Missouri, an
expert in financial crime. “London is vital to Wall Street’s ability to
argue that it needs weak regulation”, he told me in 2012. “The City is
the Bogey Man.”

It’s true: In 2007, just ahead of the financial crisis, New York City
Mayor Michael Bloomberg and Senator Charles Schumer, backed an
astonishing lobbying document urging massive deregulation, which wielded
the words “competitive”, “competitor” or “competitiveness” 34 times, and
cited light-touch London over 130 times, gushing about its “more
amenable and collaborative regulatory environment.”

The great financial crisis in the United States has many tangled roots,
but it is surprising just how many reach directly from London. AIG, the
once-mighty insurer with 116,000 employees worldwide, was brought down
by a 377-person unit called AIG Financial Products in Curzon Street in
Mayfair. AIGFP and its staff, who earned a combined $3.6 billion from
2001-08, showered money on central London, including on a beautiful
three-storey Knightsbridge mansion inhabited by its head of operations,
Joe Cassano. When AIG in 2008 became the biggest financial bailout in
world history, U.S. taxpayers and others picked up the tab; London
regulators said it fell outside their jurisdiction. London kept all its
winnings.

Citigroup, for its part, set up all sorts of Structured Investment
Vehicles (SIVs) in London (and incorporated them in the Cayman Islands)
to shift assets off its balance sheet and lower its regulatory capital
requirements. According to Gary Gensler, Chair of the Commodity Futures
Trading Commission, it was once again U.S. taxpayers who bore the brunt
when Citigroup’s London-based SIVs failed. Last year, a London-based
trader nicknamed the London Whale caused $6 billion odd of losses to
J.P. Morgan Chase. “Often it comes right back here, crashing to our
shores”, Gensler said in testimony in June 2012. “If the American
taxpayer bails out JPMorgan, they’d be bailing out that London entity as
well.” Once again, U.S. taxpayers coughed up, and London kept the benefits.

London has also been the epicentre of a risky practice called
rehypothecation. That happens when a loan is borrowed against
collateral, and the new holder of that collateral re-pledges it to
someone else, to back fresh borrowing—and so on. U.S. rules restrict
this practice but in London they have been able to do it without limit.
The result is that a single sliver of collateral can get pledged and
repledged around the block in a risky daisy chain of loans. This
practice was heavily implicated in the collapse of Lehman Brothers and
in the more recent collapse of the brokerage firm MF Global. An IMF
paper in 2010 estimated that just before the crisis hit U.S. banks were
getting over $4 trillion in funding via rehypothecation and said the
shadow banking system—the parts that fall outside bank regulation,
heavily implicated in the crisis—was 50 percent bigger than people had
previously thought, because they had ignored the rehypothecation phenomenon.

More recently, there has been a little-noticed battle over the
Dodd-Frank finance bill, which was originally supposed to give U.S.
regulators powers to protect taxpayers by directly policing overseas
derivatives activities. But Wall Street, backed by the UK government and
others, quickly mobilised its lobby to eviscerate the relevant
provisions. As Marcus Stanley of Americans for Financial Reform wrote
last June:

Wall Street is mobilizing to create a back door escape route. Its goal
is to prevent U.S. regulation of derivatives transactions by U.S.
companies that are conducted overseas. This loophole could strike at the
foundations of financial reform. ... It would create an incentive for
global banks to transact their business through whatever jurisdiction
has the weakest regulations – a “regulatory haven” to match the tax
havens that international corporations already use.

Alas, the lobbyists appear to be winning this fight. They win most of them.

“The pressure has been so great, not only by Wall Street but by foreign
governments like the UK, insisting that it’s insulting for the United
States to assume jurisdiction over these American-affiliated
institutions”, said Professor Michael Greenberger of the University of
Maryland School of Law, a former top CFTC official, speaking to me in
October 2012. “Now the question is whether there is going to be a
gigantic loophole. “The thread that’s been lost in all of this is the
U.S. taxpayer.”

Because of its nature, City of London will return to bite American
taxpayers again. If U.S. economic stability is a matter of national
security, then here lies yet another potent threat. But the greatest
national security issue emanating from Britain’s offshore financial
centre and its offshore satellites is something else again.

When a British or American or Swiss bank helps a foreign dictator and
his or her cronies loot a poor country, and helps them stash and hide
their winnings permanently offshore, that bank is an accomplice not just
in criminal activity, but in that country’s governance problems, by
helping its offshore-diving élites float above the societies they rule
and trample over. U.S. banks are guilty enough of all these crimes, but
Britain and its offshore empire have made offshore secrecy into an art
form: an art of darkness, one might say, with apologies to Joseph Conrad.

Turmoil and governance problems in Pakistan, Saudi Arabia, Greece or
Egypt all have many causes, of course. Most are far beyond the reach of
foreigners to have much influence. But here, in the arena of global
finance, lies one very significant area where the West potentially has
reach. It can help bolster better governance by raising standards to
help stem the looting. But for those who want to try it, they may find
powerful players in the City of London, and even in the British
establishment, standing in their way.