The Ethical Challenge to Offshore Banking
Cyprus’s financial crisis has proved to be one special instance of a broader crisis of finance and of ethics
No one emerges with glory from the mishandled process of the Cyprus bailout. A first plan for a graduated scheme of enforced losses (‘haircuts’) for all bank account-holders was rejected by the Cypriot Parliament, and was replaced by a Plan B which spared small customers while penalising accounts of over €100,000. The latter group, notably including Russian investors, attracted little sympathy given Cyprus’s reputation as an offshore tax haven.
The Cyprus case was distinctive given that the capital shortfall is estimated at about a half of Cypriot total GDP, and the economic impact will be profound. On the other hand, Cyprus’s banking structure is just one case of a global phenomenon. For Cyprus’s banks had prospered because of their facilitation of the offshore finance industry. In a population of 860,000, Cyprus has 320,000 registered companies, including shell companies. Competitor offshore venues leapt in to attract this lucrative business.
At this point, the European (though not the Cypriot) perspective on the crisis changed radically. Suddenly, long overdue, the entire murky offshore banking industry was exposed to the spotlight, as the previously little-known International Coalition of Investigative Journalists (ICIJ) publicised the existence of some ‘120,000 offshore companies and trusts, exposing hidden dealings of politicians and the mega-rich the world over’.
Coming soon after the USA’s ‘Foreign Account Tax Compliance Act’ this journalistic coup seems to have provoked such secretive banking regimes as that of Luxembourg to agree the sharing of foreign customer data, ‘from 2015’, with the tax authorities concerned. The governments of France Italy, Germany, Spain and the UK have proposed to the European Commission - not spontaneously but in response to the Commission’s initiative of December 2012 - a ‘pilot’ regime of reciprocal tax transparency. The proposal has strict limits, being designed to protect banks, not undermine them. We do not expect Europe’s banks to publish any time soon the deposits of oil sheikhs, or the fruits of capital flight from Africa.
The aftermath of these disclosures will occupy the EU for months to come. Europe Infos will soon consider the ethical considerations, which are numerous and dizzying. Three, both urgent and intriguing, will serve to illustrate the scale of the challenge.
- The offshore finance industry exists to avoid tax and to hide funds, not least from tax authorities. Banks are necessary intermediaries in this process. Major banks have been rescued by public funds while being well-paid to facilitate a practice that deprives governments of funding. How to respond?
- Regulation, while essential, can never be a total solution. Major corporations and specialist ‘tax consultants’ will stay ahead of the regulators - though not now without appropriate anxiety. Abuses of regulation are always likely since regulators are not necessarily moral paragons. Excessive regulation paralyses the industry. Yet is it not reasonable to restrain banks’ profitability to safeguard their trustworthiness?
- How was the ICIJ’s information gathered? Was data ‘stolen’? If so, how far is it permissible to break the law in order to reveal lawbreaking? What private data merits legal protection? Are whistleblowers culpable, or public benefactors?
Quoting proverbial wisdom, a nineteenth century Anglican bishop neatly said, ‘Honesty is the best policy: but that is not the motto of an honest man’. Neither banks nor governments can do without a ‘virtue ethic’.
Frank Turner SJ
Secretary for European Affairs, JESC