City of London: Capital of an invisible empire

The British Empire still persists – in the guise of the City of London. This is where the real power lies. In their documentary "The Spider´s Web" filmmaker Michael Oswald and producer and insider John Christensen take a closer look at the gravitational centre of the financial world and it´s influence on politics worldwide.

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Deutsche Wirtschafts Nachrichten: You´ve produced and directed a documentary on the City of London, titled „The Spider´s Web“. What motivated you to do it and what is the title alluding to?

Michael Oswald: I was reading Nicholas Shaxson’s book „Treasure Islands“, which contained a number of quotes to the effect that London’s position as a capital of international finance had its roots in the Empire and was in a sense a continuation of empire. I wanted to understand this relationship between finance during empire and how the City of London functions in the present day.

The Spider’s Web is a term coined by Nicholas Shaxson that refers to the City of London as being at the centre of a global web of international finance, a hub on which many smaller financial centres around the world depend on.

Deutsche Wirtschafts Nachrichten: Many consider finance to be a dry subject. Which cinematic means did you use and how did you turn it into a filmic narration?

Michael Oswald: We used the BMPC Camera, we did not have privileged access to venues or events, but since the film was created over the space of a number of years we had plenty of opportunity to document events in London and the City. The aim was to create a film with a strong narrative thread and reveal this in a manner that would encourage the viewers‘ participation.

Deutsche Wirtschafts Nachrichten: Which sources did you use while researching for your documentary?

Michael Oswald: In addition to Nicholas Shaxson’s „Treasure Islands“, I read „British Imperialism“ by Cain and Hopkins and „The Great Tax Robbery“ by former tax inspector Richard Brooks. I came across a recording of a talk John Christensen had given at the London School of Economics, which was very much in line with the angle I saw for The Spider’s Web, so I contacted John and asked him if he would be interested in collaborating on the film.

John Christensen: I started researching this subject in 1978, and spent almost fourteen years working in the offshore financial world in Jersey (a British Channel Island), so I have considerable professional experience in this area. During the course of my research I spoke with many senior officials and politicians around the world, and they are broadly agreed that London has been central to the creation and operation of the Euromarket and the global tax haven economy. Successive British governments have placed the City of London’s tax haven role at the core of Britain’s development strategy since the 1950s.

Deutsche Wirtschafts Nachrichten: Did you encounter any restrictions during your work?

Michael Oswald: We didn’t encounter any restrictions, but we also didn’t approach the City of London for comment. The experience of previous filmmakers has been that the City of London is not willing to engage with independent producers who may present it in a critical light.

John Christensen: Making a film on this subject can be frustrating because off-the-record many people who work in international finance will confirm that tax havens cause immense harm to the general public, but they don’t have the courage to say this publicly to camera. In London the joke goes that „those who know don’t talk, those who talk don’t know.” People like me who speak out from a position of experience are regarded as traitors!

Deutsche Wirtschafts Nachrichten: In your documentary you make reference to the British Empire – which in a way still persists in the form of the City of London. Could you explain what you mean?

Michael Oswald: At the time of the British Empire, Britain structured its economy not around manufacturing and productive sectors, but around finance. City of London banks provided the financing for the Empire and the colonies would pay interest to the City. Britain would create trade agreements with its colonies that would allow them to export a certain amount of their goods to the UK, thus enabling them to pay the interest on their loans. The Empire allowed the financial sector in the UK to take on a role and importance, which financial sectors did not have in other countries.

As Britain’s Empire declined, City of London institutions were increasingly confronted by circumstances that limited their ability to function and make a profit. It was out of this need that various financial interests sought to fashion for themselves spaces in which they could continue to operate and profit. In order to create these spaces they used the expertise developed during empire and the territorial remnants of the Empire, such as Britain’s dependent territories, financial expertise and networks established during Empire and the knowledge of how to establish, run and benefit from an international financial system.

And as a result, instead of diminishing as the Empire declined, which is what you would have expected to happen, the City in combination with British secrecy jurisdictions remained the largest player in the world of international finance.

Deutsche Wirtschafts Nachrichten: We have a saying that goes: „American muscle, but British brains.“ Is the British establishment still pulling some strings behind the scenes on a global scale?

Michael Oswald: The types of financial secrecy on offer in British secrecy jurisdictions could provide an opportunity to exert influence in this manner.

John Christensen: Very much so. Britain has consistently voted against creating a globally representative inter-governmental body to shape a framework of rules to strengthen international cooperation on tax matters. Britain has successfully resisted international pressure to take effective action against its tax havens in the Channel Islands, the Cayman Islands, the British Virgin Islands, and other British dependencies.

I have observed British officials blocking attempts to strengthen international cooperation on tax information exchange by keeping discussion on offshore trusts off the agenda. This happened as recently as 2015 when Prime Minister David Cameron pushed to have trusts excluded from information exchange processes. This is a pivotal issue since offshore trusts are key to the British tax haven secrecy model. Britain has also spent years blocking EU attempts to make progress towards a common approach to taxing multinational companies (the Common Consolidated Corporate Tax Base).

In a post-Brexit environment it will be far easier for the EU-27 states to make progress against secrecy jurisdictions, which explains why officials in Guernsey and Jersey are fearful of Britain’s withdrawal from the table in Brussels.

Deutsche Wirtschafts Nachrichten: Is London outperforming New York as a financial center?

John Christensen: Based on global market share of offshore financial services, London is the largest financial centre, especially if its offshore satellites – the spider’s web – are included in the calculation.

The USA appears to be aiming to regain the lead as the world’s largest tax haven, for example by refusing to sign up to the OECD’s new Common Reporting Standard (on automatic information exchange), and by not creating publicly searchable registries of the beneficial ownership of companies registered in states like Wyoming, Nevada, Florida and Delaware.

Deutsche Wirtschafts Nachrichten: How important is the City to the British economy today?

John Christensen: The British economy is heavily reliant on external trade in services which is dominated by financial services. Any shock to the financial services sector, for example arising from being denied access to the EU single market, would be highly damaging to the economy.

Deutsche Wirtschafts Nachrichten: How will Brexit affect the British economy?

John Christensen: The post referendum adjustment of the exchange rate, which has seen sterling fall by around 20 percent against other currencies, could lead to a rebalancing of the UK economy, but this will require an activist government to overcome structural deficiencies relating to weak productivity, poor infrastructure quality, and decades of underinvestment in research and development of new products.

Brexit has thrown up the real possibility of shocks to key sectors such as financial services. Many of the banks and financial service providers currently working in London will need to shift parts of their activities to countries within the Single Market in order to meet prudential regulation requirements relating to commercial establishment. Major centres like Amsterdam, Frankfurt, Luxembourg and Paris are likely to attract some of this business. London is likely to decline as global banks restructure to retain access to the Single Market.

The implications of Brexit are huge for Britain’s longer term development strategy. Now is the time to reduce over-dependence on London’s role as a global tax haven and move towards a more balanced economy.

Deutsche Wirtschafts Nachrichten: What do you think were the driving forces behind Brexit?

John Christensen: Brexit reflects deep anger about inequality in Britain and about austerity measures imposed by Westminster on a workforce that has seen wages falling while housing costs have inflated beyond the reach of most young people. Prime Minister Cameron called the referendum to placate the xenophobic right wing of his party, but he didn’t anticipate the negative outcome with the result that no plans were in place to shape a post-Brexit development strategy.

Deutsche Wirtschafts Nachrichten: Might the City of London have had a say in Cameron`s decision to run the Brexit-referendum?

John Christensen: The City of London has been divided over Brexit.  When the idea of the referendum was mooted by Prime Minister Cameron, few people expected that – by a narrow majority – the British electorate would vote to leave.  The City saw the referendum as a welcome distraction of public debate away from the austerity programme that followed in the wake of the banking crisis. The UKIP’s Nigel Farage and many of his funders come from the City and I suspect they saw the Brexit focus on immigration as a useful way way to force the UK government to take a strong position on blocking attempts by the European Commission to both strengthen financial market regulation and also move towards harmonsation of fiscal policy, which could include adoption of the Common Consolidated Corporate Tax Base.  Steps in these directions would curtail much of the tax avoidance activity that happens in London.

But things have changed dramatically since the Brexit vote.  The City has woken up to the complexities of securing passporting rights across the range of financial services that are currently sold within the single market.  Many of the banks and law firms that I’ve spoken with in recent months are now starting to recognise that if they want to continue to operate within the single market they will need to create commercial establishments in Amsterdam, Frankfurt or Paris.  Many key staff will be need to be relocated away from London.  Contacts in the British tax havens tell me they are highly concerned that Britain’s withdrawal from Brussels will leave them effectively unprotected.  There is a widespread sense that Brexit will be damaging to the City’s role as a pre-eminent offshore financial services centre.

Deutsche Wirtschafts Nachrichten: Do you think Brexit might lead to even more deregulation and secrecy in the British banking sector?

John Christensen: Prime Minister May and her finance minister have already indicated that deepening Britain’s tax haven role is an option. This is a sign of weakness since a race-to-the-bottom on regulation, secrecy and corporate taxation would probably expose Britain to risks relating to financial stability and fiscal sustainability. The EU-27 will need to make it absolutely clear in negotiations with Britain that trade in financial services will be contingent on strengthening regulation and compliance, and on tackling the secrecy of its tax haven dependencies. They will also need to take countermeasures against corporate profits shifting, ideally by agreeing to move towards taxing on the basis of apportionment of profits.

Deutsche Wirtschafts Nachrichten: Maybe the British establishment believes that the EU is going to fall apart sooner or later and that it might be cheaper to pull out now rather than later?

John Christensen: Since the financial crisis of 2008/9 the British Establishment has been more concerned about international attempts to strengthen financial market regulation, to harmonise fiscal policy, and to tackle tax havens. Moves in that direction would undermine the business models of many of the banks and finance houses operating in London. I don’t have a sense that the British Establishment seriously wants to see the European Single Market dissolve – the results would be catastrophic for trade.

Deutsche Wirtschafts Nachrichten: What are the most acute problems of the EU right now?

John Christensen: The remorseless rise of inequality across the EU poses an existential threat to our liberal democracies. Far-right parties have made huge inroads among young voters in the past 18 months, and centrist parties have lost ground in most countries. Inequality and the general sense of unfairness about how economies work to promote the interests of elites have corroded public confidence in political institutions.

The response to the 2008/9 banking crisis has worsened this loss of confidence in the integrity of Europe’s political elites. While austerity measures have tangibly harmed welfare state provisions in most countries, elites have become much wealthier and are clearly doing little or nothing to contribute to recovery.  Capitalism has become more concentrated, investment remains weak, and rent-seeking behavior has become normalized.

Deutsche Wirtschafts Nachrichten: Do you think a modern economy could do without an industrial basis and live on financial products only?

Michael Oswald: This is something we explore in the documentary, in the case of the US and the UK, services do not make up for the reduction in industrial capacity. Michael Hudson explains that it is through attracting international capital whose origins may very well be criminal that this has become a possibility in the US and the UK.

John Christensen: The film explores a political economic phenomenon known as the Finance Curse. Countries, like Britain, which host an over-sized financial services industry, are prone to slower rates of growth, over-dependence on a dominant industrial sector, state capture and high rates of corruption. There are clear parallels between the Finance Curse and the Resource Curse which impacts countries with large oil and gas exporting sectors. Mitigation measures can be taken to reduce the harmful effects of too much finance, but Britain serves as a warning to other countries of what might happen when mitigating steps aren’t taken.

Deutsche Wirtschafts Nachrichten: Do you think that an unregulated financial sector leads to the erosion of democracy and – if so – why?

Michael Oswald: I think for democracy to function properly you would need accountability and transparency, especially in areas where power is exercised.

John Christensen: My answer is undoubtedly yes. The financial crisis, followed by the LuxLeaks and Panama Papers exposés have revealed that a toxic combination of so-called ‘light touch’ regulation and secrecy can harm democracy.

Lax regulation has created a situation in which too-big-to-fail banks have morphed into too-big-to-jail banks which have been revealed, time and again, to be able to operate outside the rule of law with impunity. Political leaders appear clueless about how to react to these Frankenstein creations, and I think the only way forward lies with massively reducing the role of banks and shadow banks within the economy. In too many cases they are wealth extractors rather than wealth creators.

To restore national sovereignty over tax matters we need greater transparency in the form of specific policy measures, including public registry of beneficial ownership of companies, publicly available country-by-country reporting by multinational companies, and automatic information exchange between national authorities. And these measures need to be accompanied by stronger whistleblower protection to prevent powerful companies from intimidating their employees.

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John Christensen is a London-based director of the Tax Justice Network. Trained as both a forensic auditor and economist, he has worked extensively in offshore finance and was Economic Adviser to the government of Jersey for over a decade.

Michael Oswald is an independent documentary filmmaker based in London. The Spider’s Web is his forthcoming film, his previous film was Princes of the Yen (2014), which was based on Richard Werner’s book of the same title.