As with tax wars, countries are constantly offering ever more cosy arrangements and inducements to attract financial services providers, their money, and their arrangements for managing their money. It is another race to the bottom.
So countries like the United Kingdom, Ireland or Luxembourg seek to tempt foreign money by providing opportunities to escape domestic financial regulation elsewhere. The two words – ‘escape’ and ‘elsewhere’ are foundational for our understanding of what “offshore” means.
As one player loosens rules to tempt the money, others follow suit, to stay in the ‘race.’
The race to the bottom is not just on normal financial regulation, but on levels of tolerance for dirty money. This race is profoundly harmful, from any reasonable perspective one can think of. This is race is perhaps the most important single reason why financial sectors around the world have grown so large and powerful, and have been able to ‘capture’ policy making in countries around the world.
This process is often called financial regulatory ‘competition’. But, as with tax wars, this has nothing at all to do with competition in a marketplace. Relax rules to attract the money – and financiers benefit. But rules are there for good democratic reasons: relaxing them comes at a cost to society, borne by others.
Having a ‘competitive’ financial centre may seem like a good idea – up to the point where you think about what it actually means. It turns out that ‘competitive’ financial regulation means lax financial regulation. This ‘competition’ between financial centres is always harmful. The United Kingdom has learned to its great cost than when your financial centre wins the race, everyone else loses, at home and abroad. (Read more here for a short summary.)
Watch Prof. Bill Black discuss the regulatory race. “To win the race is to lose.”
“We would not allow chemical companies to pollute rivers and lakes simply because the industry maintains that somewhere in the world another country is allowing these things. The search for “level playing fields” in global competition is highly damaging if it leads to a race to the bottom.
-Prof. Anat Admati, Stanford University.
Tension in the ‘competitive’ model
What is true for financial regulation is true for dirty money. And this helps illustrate a tension in the business model.
On the one hand, financial centres wish to portray themselves as clean, co-operative, transparent, trustworthy and well-regulated. On the other hand, they also face incentives to move in exactly the opposite direction, to attract as much dirty and questionable money (or the structures for owning that money). To manage these contradictory pressures – to take dirty money, while appearing clean – they perform carefully stage-managed theatres of probity, combined with a business model that can be crudely summarised as: “we will not steal your money – but we will turn a blind eye if you steal someone else’s.”
But there is a more important tension at play.
Leaving aside the question of financial crises and the build-up of risks through ‘competitive’ financial deregulation, research now overwhelmingly shows that – particularly for large economies – growth in the size of a country’s financial sector, above a certain size, is harmful for economic growth, and it leads to ‘political capture’ of jurisdictions, not to mention greater inequality, the ‘crowding out’ of alternative economic sectors, and oceans of rent-seeking. Read more about all this here.
In summary, the global race on financial regulation is devastating. But even seen purely from the perspective of an individual country, it makes no sense at all to engage in the race.
Highlights before 2014
- The Finance Curse: our permanent webpage exploring how oversized financial centres harm growth and corrupt democracy. Contains wide information about international arbitrage.
- Tax havens and the global financial crisis. Our permanent webpage looking at how offshore finance contributed to the global financial crisis that exploded in 2008.
- Oct 25 – Gensler: “It was financial institutions operating complicated swaps businesses in offshore entities that nearly toppled the U.S. economy” in 2008. Original here.
- July 2, 2013 – Derivatives: letter to Michel Barnier and eight finance ministers
- June 2013 – Derivatives WMD: lobbyists seeking to remove ‘burdensome’ safety catches
- 2011 – Treasure Islands, the book. With a substantial focus on ‘competitive’ financial deregulation.
- June 13 – Offshore race to bottom fosters US shadow insurance industry, “may need bailout.” Originals here and here.
- March 21, 2013 – Treasure Island Trauma. Paul Krugman endorses Shaxson’s (and TJN’s) analysis that havens help feed crisis.
- Dec 4, 2012 – Dexia and the role of Wild West Ireland
- Jul 2, 2012 – In Caymans, It’s Simple to Fill a Hedge Fund Board – NY Times. Note Bear Stearns note at bottom.
- Feb 5, 2012 – how inequality contributed to the economic crisis, Stewart Lansley. (More detail here.)
- Jan 23, 2012 – How tax havens help private equity companies dump social obligations (originals here and here and here.
- 2011/2012 – The primacy of hedge funds in the crisis – Photis Lysandrou
- Dec 12, 2011 – Deminor open letter on behalf of Madoff investors: Luxembourg’s lack of accountability, trust, action was behind the scam
- Dec 8, 2011 – MF Global: more evidence of London as a black hole of financial regulation (original here)
- Oct 11, 2011 – ActionAid: 98 of FTSE 100 companies in tax havens; banks play huge role. Original here.
- June 27, 2011 – IMF full-blown study of the link between inequality and financial crises (IMF report here )
- May 4, 2011 – Goldman Sachs, the food crisis, and offshore London
- May 2, 2011 – Nicholas Shaxson summarises how offshore finance underlay the global financial crisis
- Nov 26, 2010 – some forensic detail about offshore Ireland
- Nov 26, 2010 – Simon Johnson on Ireland’s ghost economy
- Nov 26, 2010 – Greece and the tax havens: an interconnected web of contagion
- Sept 29, 2010 – Links between inequality and financial crisis
- Sept 20, 2010 On tax, shadow banking and the social contract
- Sept 2010: Barclays, secrecy jurisdictions, and too big to fail
- July 2010 – IMF: Rehypothecation and offshore London
- June 2010 – Financial Innovation and the Financial Crisis, paper by Jim Stewart, Trinity College, Dublin
- June 2010 – the role of the offshore Euromarkets in helping U.S. banks in particular achieve “political capture” and enjoy the “too big to fail” implicit subsidy.
- June 2010 – The Other Offshore Disaster. NYT on the Bear Stearns collapse, with a prominent role for offshore.
- June 2010 – Lucy Komisar in The American Interest, on how the Cayman Islands is being used to forestall tighter regulation.
- June 2010 – more on hedge funds’ role.
- May 2010 – Review of IMF’s concerns about offshore and excess leverage, pp12-13 of Tax Justice Focus.
- April 2010 – Goldman deal went through Cayman , pattern is offshore.
- March 2010 – IMF expresses alarm about offshore role in crisis
- Feb 2010 – Onshore and offshore; boom and bust
- Sept 2009 series of blogs on tax havens and the crisis, including on living wills, the Too Big To Fail problem, the links between tax arbitrage and systemic risk, on evading bankers’ pay curbs, and on the widespread links between offshore tax devices and regulatory evasion.
- June 2009 Norwegian Commission on Capital Flight from Developing Countries, Section 4.14, contains a brief discussion of the links between tax havens and the crisis.
- June 2009 IMF report on tax roots of the global economic crisis
- May 2009 FT article “How tax havens helped to create a crisis” by TJN senior adviser Sol Picciotto.
- March 2009 at the G20 summit: UK Government official appears to recognise the links.
- Joseph Stiglitz’ UN Commission of experts on reforming the international monetary and financial system makes several points about the links between tax havens and the financial crisis, many of which TJN has proposed before. See here, and follow the link to the original report.
- Nicola Liebert of TJN-Germany and Axel Troost of the German Bundestag examine the links between tax haven and the economic crisis here, March 2009.
- March 2009: TJN’s Action Program Ending the Offshore Secrecy System.
- GFIP report on the economic crisis and offshore, Feb 2009
- William Brittain-Catlin examines the links between offshore and the financial crisis.
- Christian Aid report on The impact of the financial crisis on the developing world
- Jim Stewart’s investigation into the role of tax havens and tax and regulatory competition in Dublin’s International Financial Services Centre here (and the editorial in the same document gives additional analysis.)
- TJN’s submission to the UK Treasury Committee on offshore financial centres, here, followed by a series of blogs: Part 1 – Part II – Part III (what to do) – Part IV (nation states and global governance.) This has been followed by a blog looking at fragmented financial architecture, and a look at the role of accounting in all this.
- Several political leaders supporting TJN’s analysis, here (a top US senator, Carl Levin); here (French Prime Minister); here (French president)
- Other commentators, such as here (UK focus, by Willem Buiter); here (Sunday Herald analysis); here (TV debate on tax havens and tax competition); here (the FT); here the IMF and the OECD recognising the problem); here (a former top banker); here (a legendary US crime-fighter).
- Prof Sol Picciotto looks at a case study involving Bermuda and a credit derivatives swaps company here.
- In addition, note the role that illicit flows have played in macroeconomic imbalances that built up ahead of the market disruptions. Click here
- Richard Murphy gives an example of how offshore incentives interact with executive remuneration (May 2008).
- TJN’s article that appeared in the UK’s Guardian newspaper, written by John Christensen and Richard Murphy.
- June 2008 – Creating Turmoil – TJN’s submission to the UK Treasury Select Committee