AS BRITAIN’S prime minister between 2010 and 2016, David Cameron championed financial transparency, targeting anonymous shell companies as the getaway cars of tax-evaders and money-launderers. On his watch Britain became the first G20 country to commit to a publicly accessible register of company owners. Mr Cameron tried to make British territories with big offshore financial centres do likewise. The arm-twisting stopped when he stepped down in 2016. But campaigners, led in Parliament by Labour’s Margaret Hodge, vowed to keep going. This week their persistence paid off.
Ms Hodge and Andrew Mitchell, a Conservative MP, had tabled an amendment to an anti-money-laundering bill, which was designed to force “overseas territories” in the Caribbean and Atlantic, among them the British Virgin Islands (BVI), Bermuda and the Cayman Islands, to set up public registers, if they had not already done so, by the end of 2020. Faced with defeat in the House of Commons, the government dropped its opposition to the amendment, clearing the way for it to be shoehorned into the legislation. The House of Lords, which rejected it in January, is not expected to do so again.
The measure looked a long shot until recently. But that changed with the poisoning in Salisbury, a southern English city, of Sergei Skripal, a Russian ex-spy. The nerve-agent attack sparked intense scrutiny of Russian malfeasance, including oligarchs’ use of Britain and its offshore satellites to wash their dirty money. “It’s all down to the Salisbury effect,” says a lobbyist.
Global Witness, a campaign group, hailed the breakthrough as the “biggest move against corruption in years”. The affected territories—under British sovereignty but not actually part of the United Kingdom—are livid. They say it breaks a long-standing constitutional arrangement, under which they have been left to shape their own policies on finance and much else. Orlando Smith, the BVI’s premier, called it a “ breach of trust” that “calls into question our very relationship with the UK”. His wife, who runs the agency that promotes the islands’ financial sector, described it as “smacking of colonialism”.
In fact, such intervention is not unprecedented. Britain’s government has laid down the law in its territories on capital punishment and the criminalisation of homosexuality. In 2009 it imposed direct rule on the Turks & Caicos Islands after an inquiry uncovered government corruption. In February, however, it declined to block legislation in Bermuda that revoked a law allowing same-sex marriage. A minister said that such powers “can only be used where there is a legal or constitutional basis for doing so, and even then, only in exceptional circumstances”.
Do the activities of tax havens amount to such circumstances? The territories point out that they have improved their tax-transparency and anti-money-laundering regimes to the point where they are judged as good as or better than those of several OECD countries, including America. They have central ownership registers that can be accessed quickly by British and other law-enforcement agencies.
They also argue that public registers are no panacea. Britain’s is in effect an honour system. The only person prosecuted for providing false information so far has been a campaigner who sought to highlight the lack of checks on submissions by registering a firm called after Vince Cable, a former British minister, and naming him as a director. The anti-money-laundering standards set by the Financial Action Task Force, an intergovernmental body, do not require registers to be public.
Anti-corruption activists insist that the rampant use of havens by financial ne’er-do-wells warrants extraordinary action. BVI-registered shell companies, in particular, crop up frequently in tax-evasion and corruption cases. Mr Mitchell argues that public access to registers is important because resource-constrained law enforcement needs help from NGOs and investigative journalists to “join up the dots”.
With the bit now firmly between their teeth, anti-corruption types will want more. Pressure could grow for similar treatment of Britain’s closer-to-home crown dependencies of Jersey, Guernsey and the Isle of Man, though their relationship with Britain is different. They are not former colonies, which makes it harder for Parliament to legislate for them. Geoff Cook of Jersey Finance, which is part-funded by the island’s government and promotes its financial centre, says Jersey will fight to keep its system of “compliant confidentiality”, until global standards dictate otherwise. Another battle looms.
Japan still has great influence on global financial markets
IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.
“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.
This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.
One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).
But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.
Tokyo storm warning
These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.
Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.
What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.
Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.
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