He dealt with matters such as the Patriot Act, which will have major consequences for The Bahamas.
Here is the first in a three-part series on his presentation.
Let me begin by framing a pre-text for my thinking on philosophical foundations of corporate governance.
I shall have to go round about to build the framework for what I shall like to say, and so I will require not only your careful attention, but your kind indulgence. I will end with a few direct references to a technical and strategic issue in corporate governance in our region, but I will not go into text-book definitions of corporate governance, since we are amongst the well-informed.
Principally, let me set the inner core of my framework with this point: the current iteration of imposing agency power… whether from the OECD, the IRS, the PATRIOT or Sarbanes Oxley Act, "is not going to abate any time soon. There will be no return to normal. The state of crisis we now live in is the new normal. What I mean is that the aggressiveness and tactical chauvinism of the aforenamed bodies and their initiatives are part of a larger shift in the world community you will be at perils to ignore. Some new paradigm may emerge from the imposition on smaller nations by larger ones, but I see no ground for the belief that things will become easier.
There are several reasons for this:
(a) PRINCIPLE ﾖ Mission Creep: This is the means by which organisations start out with one objective, but they take on new objectives in order to justify their continued existence, no matter how detrimental those objectives are to the commercial practice which brought the organisation into being:
ARGUMENT: In my view, the object of the OECD and FATF is to become global organisations with official multilateral responsibilities. At the moment, the language they employ to describe their objectives, betrays an intention to move beyond being passive research and resource institutions, to exercising legal authority and political power in relation to nation states as does the UN Security Council, for instance.
(b) PRINCIPLE ﾖ The world security crisis: tax competition, terrorism and the shift in emphasis from the authority of law to enforcement power:
ARGUMENT: the new crisis in national security has given governments, which are already careless about the balance between the governors and the governed, an impetus to exercise power over even constitutionally protected areas of life. I believe , particularly if it continues in America, governments will claim a constant state of emergency as an excuse for more and more comprehensive exercise of power.
(c) PRINCIPLE ﾖ The demographic changes in the G-7 nations: whenever a distribution of retirees exceed 17 per cent of a population, a demographic crisis is set in train and one of the ways it is experienced is in the depletion of the tax pool.
ARGUMENT: In the OECD member nations, populations are aging to a degree which makes the operational nexus of government revenues supported by taxation impossible to sustain. Because of an absence of imagination, the need to be seen to be doing something, given also the ease of demonizing offshore financial centres (OFC) and our tendency to react or act alone, which leads to capitulation, the OECD nations were able to enforce their will, without much resistance. Moreover, I see no preparation in OFCs to off-set future assaults of this sort through strategy and policy responses.
(d) PRINCIPLE ﾖ The doctrine of pre-emption: I would actually have to write a book to explain the repugnance of this idea in international law. However, as explained by the current American administration, it may go to war in "self-defence" before it is assaulted on the ground that the assault will be so devastating that one cannot wait for it to occur or even show evidence that it can occur. (The obvious problem is that everyone can claim this argument.)
ARGUMENT: Whether or not you agree with the attack on Iraq, often misnamed as a "war," I think part of the reaction to the American approach to the conflict will suggest to national leaders around the world that when facing a demand from the U.S. or its agencies, further capitulation is the best policy, particularly as under Title III of the Patriot Act 2001, the Secretary of the Treasury is given the discretion to cut off the financial systems of jurisdictions from the U.S. financial system.
These factors above form the basis of my pre-text, and are at the core of my conclusion that things will not go back to normal, and we shall be visited and re-visited with an increasing body of proposed rules which do not necessarily reflect the needs or experience of our societies, or their historical intelligence. A principal amongst these rules will be a series of "best-practices" initiatives which no longer carry the imprimatur of the professional industry associations, such as banking, accounting or bar associations. Increasingly, if we allow it, governments will assume direct management over professions under the presumption that we could be doing something which is a threat to national security. Another problem is that larger governments will be advised by short-sighted advisers to undertake these approaches, if we allow it, not only within their jurisdictions, but will treat smaller nations, if we allow them, as if they are tag-along organisations within their jurisdictions.
Here is the main point: In the larger nations "best practices" rules will be backed by legislation, as corporate governance rules are now enshrined in the Sarbanes-Oxley Act, and for those of us operating outside the U.S. and other OECD jurisdictions, these acts and their underlying rules will form a series of access thresholds to participation in the financial systems of OECD nations, and eventually in the global financial system, as it will be easy to characterise smaller, weaker nations as security risks in the new environment, even where they are engaged in delivering the same corporate and financial services as larger nations.
For instance, whilst Sarbanes-Oxley does not apply to non-American firms, as an investment adviser, accountant or lawyer who signs off on the audited accounts of listed U.S. corporations, you may have invited upon yourself certain forms of liability. But more importantly, these rules will become standard thresholds in various treaties and agreements in which the benefits flow from the U.S. to other nations. That is the new cross-border jurisprudence, and if Cayman and other smaller jurisdictions want to continue to enjoy a high standard of living, this is the new environment in which you must provide larger nations with a reason to take you seriously.
With respect, I will admonish you to remember this principle of nature and of international relations which I teach my students: giants do not want to hear that they are stepping on midgets. That is what giants do, it is in their nature. If you are going to get a giant's attention, rather than complaining about being stepped on, you must show him that he is about to step on a nail.
Stay tuned for part 2
By Gilbert Morris
