Texas A&M University School of Law Texas A&M Law Scholarship Faculty Scholarship 1-2009 Changing the Rules of the Game: Offshore Financial Centers, Regulatory Competition & Financial Crises Andrew P. Morriss Texas A&M University School of Law, [email protected] Follow this and additional works at: https://scholarship.law.tamu.edu/facscholar Part of the Law Commons Recommended Citation Andrew P. Morriss, Changing the Rules of the Game: Offshore Financial Centers, Regulatory Competition & Financial Crises, 15 NEXUS 15 (2009). Available at: https://scholarship.law.tamu.edu/facscholar/186 This Article is brought to you for free and open access by Texas A&M Law Scholarship. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of Texas A&M Law Scholarship. For more information, please contact [email protected]. Changing the Rules of the Game: Offshore Financial Centers, Regulatory Competition & Financial Crises Andrew P. Morriss* Even ardent proponents of free mar- Serfdom" 2 by arguing they merely seek to kets often concede a significant role for "level the playing field" by adding suffi- the state in providing the "rules of the cient safeguards to prevent fraud and fi- game" for market competition by creating nancial crises, preserving market contract and property law, providing dis- competition while taming what they view pute resolution services, and enforcing as its excesses.8 However, because goods, court judgments.' At the same time, services, capital, and people can move those favoring a more substantial role for across borders, states must compete for the state resist politically inconvenient these resources. That competition limits charges that interventionist policies can the ability of states to move toward the lead down Friedrich Hayek's "Road to interventionist end of the spectrum and * H. Ross & Helen Workman Professor of Law and Business and Professor, Institute for Government and Public Affairs, University of Illinois. 1. See Richard A. Epstein & Michael S. Greve, Introduction: The IntractableProblem of Antitrust, COM- PETITION LAWS IN CONFLICT: ANTITRUST JURISDICTION IN THE GLOBAL ECONOMY, May 2004, at 3. ("Make govern- ment prevent force and fraud; otherwise, let people do what they will. That position leads quite naturally to the development of ordinary markets . ..") 2. See FRIEDRICH A. HAYEK, THE ROAD TO SERFDOM (University of Chicago Press) (1944). 3. See, e.g., Tax Justice Nework, Our Core Themes available at http://www.taxjustice.net/cms/ front-content.php?idcatart=2 ("We support simplicity and a level playing field on tax."); See also Rebecca Christie & Robert Schmid, Geithner Calls for New 'Rules of the Game' in Finance, REUTERS (March 26, 2009) ("'To address this will require comprehensive reform,' Geithner said at a House Financial Services Committee hearing. 'Not modest repairs at the margin, but new rules of the game."'); For criticism of the concept of a "level playing field" see William Vicek, "A Level Playing Field and the Space for Small States," Paper presented at the annual meeting of the International Studies Association 48th Annual Convention, Feb 28, 2007. 15 NEXUS so frustrates proponents of greater regu- interests, I will discuss three of the lation of financial markets. claims made in support of such regula- Part of the competition for economic tions: (1) that OFCs provide lax regula- activity involves provision of law and tory regimes that undercut onshore competition among states, which helps efforts to provide stability; (2) that confi- shape the law they provide.4 This compe- dentiality laws undercut onshore efforts tition takes place within a framework of at financial regulation; and (3) that tax international law including treaties, cus- competition inhibits onshore regulatory tomary public and private law, and con- efforts. I conclude that these are an in- flict of law rules. Like any competitor sufficient basis for limiting regulatory with power to affect the rules of the competition. game, however, states seek to alter this Changing the Rules framework to provide themselves with advantages against their competitors. Soon after the current financial crisis The global financial crisis provided a began, public officials of onshore econo- powerful group of states, including the mies began to blame offshore financial United States, the United Kingdom, centers ("OFCs") for contributing to the France, and Germany, with an opportu- crisis and to call for regulatory measures nity to change the rules of international to limit OFCs' abilities to compete in the regulatory competition to disadvantage global financial market: New York City offshore financial centers (OFCs) in their District Attorney Robert Morgenthau competition with these onshore govern- complained that "vast sums of money ... ments over financial services. Putting lie outside the jurisdiction of U.S. regula- White House Chief of Staff Rahm Eman- tors and other supervisory authorities."6 uel's dictum of "never let a serious crisis UK Prime Minister Gordon Brown called go to waste"5 into practice, interest on "the whole of the world to take action. groups favoring additional regulation in That will mean action against regulatory these onshore jurisdictions have sought and tax havens in parts of the world to use the financial crisis to seek changes which have escaped the regulatory atten- in the rules of the game for international tion they need."7 French President Nico- financial competition that reduce OFCs' las Sarkozy denounced "the excesses of comparative advantages. financial capitalism which has exper- After briefly describing some of the ienced serious abuses: concealment of changes sought by pro-regulation onshore risks, uncontrolled sophistication of fi- 4. ERIN O'HARA & LARRY E. RIBSTEIN, THE LAW MARKET _ (Oxford University Press) (2008). 5. A 40-Year Wish List, WALL ST.J., January 28, 2009, at A14. 6. Robert M. Morgenthau, Too Much Money is Beyond Legal Reach, WALL ST.J., September 30, 2008 at A19 available at http://online.wsj.com/article/SB122273062657688131.html. 7. Nigel Morris, Brown leads global drive to close down tax havens," THE SUNDAY INDEPENDENT, February 19, 2009, available at http://www.independent.co.uk/news/uk/politics/brown-leads-global-drive-to- close-down-tax-havens-1625959.html. 16 Andrew P. Morriss nancial instruments, gaps in regulation identity for the informant through a wit- and persistence of tax havens capturing a ness protection program-despite Liech- part of global savings that would be more tenstein's attempt to arrest the justly employed financing investment informant for violation of its banking and growth."" laws," a dramatic unwillingness to abide At the same time, several large coun- by the usual norms of comity toward a tries are acting inconsistently with well- fellow member of the European single established international legal principles market. In a third major departure from as part of efforts to restrict competition established international legal principles, by OFCs. In the United States, the Britain invoked anti-terrorism laws Obama Administration endorsed the Stop against a bank in NATO ally Iceland to Tax Haven Abuse Act, legislation pro- seize assets after the bank's internet sub- posed by Sen. Carl Levin aimed squarely sidiary collapsed, putting the bank on the 2 at OFCs that did not cooperate with the same terrorism list as al-Qaeda.1 All U.S. Treasury in enforcing American tax these measures are expressions of inter- laws. The Levin proposal requires that est groups within large, developed econo- OFCs assist in stopping not only criminal mies' desire to rewrite the rules to limit tax evasion but also legal tax avoidance,9 regulatory and tax competition by small ignoring well-established international jurisdictions. law principles that jurisdictions are not If successful, these efforts will dam- required to assist each other in collection age the world economy by removing an of tax revenue.'0 In a second departure important set of competitors from the from normal state-to-state conduct, Ger- scene. The losers will include not just the many and other European governments residents of OFCs but the residents of the have paid millions of Euros to the thief developed economies, since OFCs play an for account data stolen from a Liechten- important role in encouraging transac- stein bank and Germany created a new tion cost minimizing regulatory and fi- 8. Quoted in Sarkozy on Tax Havens, and more, Tax Justice Network, August 28, 2008 available at http:/ /taxjustice.blogspot.com/2008/08/sarkozy-on-tax-havens.html, original speech, XVIeme Conference Des Ambas- sadeurs Discours Du President De La Republique, M. Nicolas Sarkozy available at http://www.ambafrance- uk.org/XVIeme-conference-des-Ambassadeurs.html. 9. Kevin Drawbaugh & Corbett Daly, Obama admin. backs tax haven bill, Reuters Mar. 3, 2009 available 2 2 7 2 0 09 3 at http://www.reuters.com/article/politicsNews/idUSTRE5 lL 030 (endorsement). S. 506, Stop Tax Ha- ven Abuse Act, §101 (requiring jurisdictions to assist in ending tax avoidance). 10. See Rose-Marie Antoine, The Legitimacy of the Offshore Financial Sector - A Legal Perspective, in REGULATORY COMPETITION & OFFSHORE FINANcIAL CENTERS (forthcoming). 11. See, e.g., Informant in German Investigation 'Fears'for his Life, Der Spiegel, March 8, 2008 available 8 5 4 0 28 3 at http://www.spiegel.de/international/business/0,151 , ,00.html; Mark Landler, Liechtenstein Issues Warrant for Tax Informant, N.Y. TIMES, March 13, 2008 available at http://www.nytimes.com/2008/03/13/ business/worldbusiness/13tax.html. 12. Id. 17 NEXUS nancial innovations.1 3 Moreover, OFCs of more than simple enforcement of con- play a critical role in pressuring auto- tracts and protection of property rights as cratic governments into ceding power part of their provision of the rule of law. over their economies to market forces, re- To encourage economic activity, govern- ducing the scope of autocracies' ability to ments can provide efficiency-enhancing interfere with the rule of law.14 rules.