Having looked at those issues which I believe will be the precursors of the conflict which will increasingly be predicated by social and demographic change, the final aspect of this chapter is to examine those financial environments which will increasingly underpin and welcome the ambitions of the increasing number of financial refugees who will seek to escape from the crumbling edifice of the declining social structures of the old post-industrial economies of the North-Western hemisphere.
For the foreseeable future, one of the inspirations for the global movement of capital will continue to be the gaping US budget deficit. For many years the Americans have been able to sit back and ignore the fact that their profligate lifestyle was underpinned by the unique feature that the US dollar was the leading hedge currency in the world. There are more dollars held outside the USA than circulate within it, and whenever the US needed to increase its inward investment of foreign-held dollars, all it needed to do was create another issue of US investment-grade paper, and watch the money roll in as foreign holders of dollars invested in a very secure method of holding their money (whether lawfully or unlawfully acquired).
This money has for many years provided the US with an almost limitless conduit of cheap, anonymous dollars which has underpinned their ability to lend money to their own house purchasers, job seekers and otherwise maintain an affluent lifestyle at a relatively low interest rate. This money has represented a vast tidal wave of foreign capital flight which has traditionally sought a refuge in the US, and it has been traditionally jealously guarded by US investment advisers.
A letter of 3rd December 2002 sent to the US Secretary of the Treasury and signed by 17 US Congressmen said;
“…We want to express our concerns about the IRS proposed bank deposit reporting regulation…this regulation would force banks to tell the IRS the amount of interest paid to non-resident aliens, even though the information is not needed to enforce US tax law…from a policy perspective, we are concerned that the regulation will undermine the competitiveness of US financial institutions and drive capital out of the US economy. This might be a worthwhile price to pay in pursuit of good policy, but this regulation undermines the long-run tax reform goals that we all share…good tax policy must encourage investment in capital markets – particularly American capital markets…This regulation, by contrast…is discouraging foreign investors from investing in the US market…the proposed rule will drive capital to other jurisdictions. American financial institutions have attracted about $1 trillion from overseas and a substantial share of that job-creating capital will leave our economy if the service compels US banks to compromise the interests of their depositors…this means less money available for car loans, home mortgages, and small business expansion…it is particularly foolish to impose this kind of regulation when the economy is sluggish and financial markets are weak. A regulation of this type is particularly damaging to a financial system recovering from an economic downturn…’
The Americans are still engaged in a consumer spending spree, making them the main engine of growth of the world economy. Largely fuelled by easy-to-get credit, their trade deficit with the rest of the world is unsustainable in the long term, and at some stage, their almost insatiable taste for foreign-made goods will have to slow down as the realisation sinks in that they simply cannot afford to maintain this level of unserviceable debt, all the while watching their own dollars continuing to flood out.
The direct beneficiary of this financial relocation will be Asia. An article in The Times of 8th January 2004 written by Anatole Kaletsky sets out a seminal analysis of the region and the way in which it is becoming an increasingly consumer society. He states;
“…An upsurge of economic confidence is now palpable across Asia, driven by a much more powerful force – a tectonic shift in the global economy, whose centre of gravity has moved irrevocably from the Atlantic to the Pacific in the past ten years…In the past few years, Asia’s teeming but impoverished billions have started to turn into potential consumers with increasing aspirations to Western-style standards of living…”
His point is that what was once a very poor region has, through its focus on being the world’s leading supplier of consumer goods in the form of electronics, computer hardware, as well as designer branded sports clothing, transformed its economy. Indeed, there has begun to emerge a new bourgeois class, which realises it too can now enjoy all the benefits of a Western life-style. Kaletsky again;
“…Until recently there was limited appeal for goal-orientated materialistic politics in countries such as India or Pakistan, since most people, even in the educated middle classes, believed that Western-style economic prosperity was unattainable. This fatalism has now largely vanished…”
Kaletsky identifies the importance of the US trade deficit which as he points out is pumping $500 billion each year into the world economy. Interestingly, this is the same figure as that which the US authorities declare is the amount the illicit drug industry generates each year, but I am certain they have no direct connection! He states;
“…Asian governments and the economies they manage are flush with money because of the vast US trade deficit…almost all of it ending up in the coffers of Asian businesses, workers and central banks. Asian central banks now own foreign exchange reserves worth over $1.5 trillion. The tiny monetary authorities of Hong Kong and Singapore, representing 12 million people between them, now have reserves of £220 billion…”
Kaletsky identifies Asia as being the region where growth is now seen as being a reality as opposed to a pipe-dream, and this is leading to a greater rejection of religion as a political principle in both Pakistan’s and India’s growing middle class. While there may still be fundamentalists on both sides of the political divide, the drift generally is away from religious extremism.
“…This was apparent in last year’s Indian state elections, where the successful candidates generally steered away from religion, caste and ethnicity, and ran on their record of delivering results…” Kaletsky
It is of interest to remember that India and many of the other countries in this region are not part of that group of nations whose child-birth rates are falling. They are defined as ‘young’ populations’ and they are not suffering from the same problems as the north-western old post-industrial democracies. They generally do not have advanced welfare states, and the extended family model is the norm. They have a widely-educated class of young, entrepreneurial people, who are computer-literate, and who are willing to work for wage structures which are significantly lower than those paid in the West. World businesses are queuing up to outsource their call-centre operations in Delhi and Mumbai. Bangalore is the second most advanced city in the world, after Seattle, for computer software development.
Kaletsky paints a very positive image of the future of the Asian region, and the emergence of a new, powerful middle-class, led by economic growth, and the emergence of China as a regional leader.
“…The near miraculous success of export-oriented development in China has created an infinitely more attractive economic model than state-controlled central planning, based on markets, entrepreneurship and private ownership, albeit with ‘Asian characteristics’. When they look at China, the people of India and Pakistan, and especially the middle classes, can see that prosperity for their families within a generation is not an impossible dream…”
These are the countries and this is the region where the world’s wealth will migrate and continue to migrate in the foreseeable future. This is where the new economy of the information age will be most understood, and this is where the technology and the means to drive the new thinking behind the new ways of doing business will be developed. The old wealthy from the former post-industrial economies who choose to hide their money in these emerging wealth-generating democracies will find themselves increasingly under threat from their country of origin. They will seek to do everything in their power to prevent this money from escaping to these safe havens, and they will use all the powers at their disposal.
This is why governments in the old post-industrial democracies are busily passing more and more laws and regulations dealing with the flows of money around the world. This is why they are seeking to introduce even more legislation dealing with charities and other not-for-profit organisations, and why they are seeking to engage ever wider groups of players within the regulatory net. They need the information of where the money is going and where it is being held and who is holding it.
This is the area which I predict, will become the leading area of conflict for governments and its citizens in the future as more and more citizens will retreat from their continued willingness to have their own assets confiscated by government, to support a growing number of otherwise unfunded citizens.
This is where the battle lines for control of the remaining wealth possessed by a shrinking number of citizens will be drawn, and where the myriad laws and regulations regarding money laundering and criminal confiscation will come into their own.
How this will happen and how we have arrived at this state of affairs will become the subject of the next chapter.
Wednesday, November 01, 2006
Is money laundering law intended to deal more with tax evasion?
This is the second instalment of the article which appeared earlier in OCtober 2006.
Much of the early influence on this chapter comes from the writings of two social commentators, James Dale Davidson and William Rees-Mogg, the former editor of ‘The Times’. In their seminal work ‘The Sovereign Individual’, first published in 1997, I came across an analysis of taxation as a primary function of the Nation State, and a very clear explanation why the conditions of the ‘Information Age’ in which we are now living, meant that governments would find it harder and harder to collect the same level of taxation which they needed, simply to maintain the status quo of society. The changes being introduced by such facilities as the world-wide-web, digital technology and information networks, meant that tax-payers would find new and more efficient ways of hiding, disguising and disseminating their wealth from governments, whose needs to acquire such money were becoming more and more acute.
“…In the twentieth century, advanced industrial nations have taken between 30 and 60 per cent of national income to finance the welfare state. Between the disintermediation, jurisdictional and encryption problems of global computer networks, this capacity is now vanishing. The welfare state was already becoming burdensome in the early 1990s. By 2010 or thereabouts it will simply become unfinanceable, as will all kinds of unfunded state pension…” The Sovereign Individual. p7
The authors’ arguments predicated the emergence of a new kind of citizen, who they call ‘the sovereign individual’, a new kind of independent wealth-creator, whose access to technology and the power of their own intellect, would mean that they no longer needed to consider themselves as the property of an individual state or political collective, but would be free to negotiate their own terms with which they proposed to deal with governments in the future.
This new individual was placed by the authors in the context of his relationship with the nation state thus;
“…The new megapolitical conditions of the Information Age will make it increasingly obvious that the nation-state inherited from the industrial era is a predatory institution, one from which the individual will want to escape. It is an escape that desperate governments will be loathe to allow. The stability and even the survival of Western welfare states depends upon their ability to continue extracting a huge fraction of the world’s total output for redistribution to a subset of voters in the OECD countries. This requires that the taxes imposed upon the most productive citizens of the currently rich countries be priced at supermonopoly rates, hundreds or even thousands of times higher than the actual cost of the services that governments provide in return…” The Sovereign Individual. p116
The Americans, concerned as ever with the number of wealthy members of US society whose commercial or financial activities are registered in offshore, low-tax jurisdictions, either in the form of corporate tax shelters, or offshore hedge funds, and whom the US regulators have perceived could be cheating on their Internal Revenue obligations, sought to deter US citizens from taking their money out of the country by a proposal, made by President Bill Clinton in 1995. Clinton wanted to enact an exit tax or a ‘Berlin Wall for capital’ that would require wealthy Americans to pay a substantial ‘ransom’ to be permitted to escape with even part of their money.
The American authorities have always looked upon the offshore sector with mistrust, seeing them as jurisdictions into which money and value can be imported, and held in conditions of absolute secrecy. Their suspicions of the intentions and the activities of the off-shore sector were amplified by the fact that when they investigated those whom they suspected of taking unfair advantage of US markets, as in insider trading cases, they could not get any assistance from financial institutions or law enforcement agencies operating in these areas.
Nothing infuriates an American regulatory or law enforcement agency more than discovering a foreign jurisdiction which does not have to comply with their demands for cooperation. I use the word ‘demand’ advisedly, as in my experience, the USA generally does not ‘ask’ for assistance, it demands it as of right, and becomes very agitated when it finds its demands being denied, or worse, ignored. For years the offshore sector generally had merely ignored US demands for reciprocal assistance, and the Americans, in turn, had for a very long time, been looking for a means of prizing open the books and records of the offshore banks, in order to pursue their own investigations, into both outright criminal allegations, and, more importantly, into American tax evasion.
“…All advanced tax systems depend upon reporting to the tax authorities by people who make payments. A bank pays interest on a deposit account, reports the interest to the revenue authorities and the income is taxed. If the bank is outside the national jurisdiction, then it cannot be obliged to report the interest. When the internet becomes the normal route for transactions used as freely as the telephone, it will erode the reporting of transactions…” The Sovereign Individual, 1997, Pan Books, p.7.
It is this question of the way that technology is changing, and will continue to change the face of the relationship between the citizen and the State that is polarising the arguments about the way in which societies can legitimately raise revenue through taxation, and how, in future, they will seek to guarantee those sources of State income in order to maintain a social status quo which has long since passed its legitimate maintenance date.
The problem is that the increasing facilities offered by the Information Age will mean that those individuals with the skills to do so will seek to earn their living in those jurisdictions which make it easier for them to do so. The nation state’s tradition of imposing high levels of taxation upon its collective citizens will be eroded as more and more competing jurisdictions make it attractive for enterprising foreigners to seek refuge with them.
The struggle between the State and the private individual will become an altogether more vindictive one as the technology to aid private capital flight and financial secretion becomes more available, with the means to move their capital in conditions of almost total secrecy. The conditions for conflict are becoming more and more acute.
“…The flight of the wealthy from advanced welfare states will happen at just the wrong time, demographically. Early in the 21st century, large aging populations in Europe and North America will find themselves with insufficient savings to meet medical expenses and finance their lifestyles in retirement…” The Sovereign Individual - p289
This is possibly the most important aspect of the core problem with which the new social environment being generated in the post industrial democracies will be required to deal. The welfare states which for the last 60 years have provided our social environment with cradle-to-grave protections in terms of health, education and social welfare are now facing insolvency. Putting it at its simplest, they are running out of money, while at the same time, they are having to face up to the likelihood of a future in which fewer individuals will be either willing, or indeed available to provide the necessary degree of funding to continue to maintain those benefits at even contemporary standards.
The reasons are simple but stark!
We live in an age of declining birth rates, while at the same time the numbers of our elderly are living longer. At first sight, such a statement does not seem to hold any great terrors for us after all, does it really matter if grandfather lives a few years longer. Well, I’m afraid it does.
If you can imagine looking at a mathematical model of an ordinary, normal society, it would look roughly like an equilateral triangle, divided into a series of horizontal layers. The young, the new potential contributors to the welfare of society would make up the broadest layer at the base of the triangle, demonstrating a wide sector of non-financially-contributing individuals, but who would be growing to make a financial commitment to their society.
The next layer would contain those in regular work or employment who are making a contribution to the nation’s wealth via both direct and indirect taxation.
Another sector above the second would represent that group of individuals who had ceased to be net contributors to society, but as yet were not dependent upon its reserves for their well-being, the retired class who were still able to look after themselves from their own savings.
At the top of the triangle sits the group of retired, non-contributing individuals who are wholly or in a large part dependent upon the state for their welfare provision, whether it be pensions, social health care, hospitals, meals-on-wheels, or any of the other myriad services which civilised societies now deem it necessary to deliver in order to provide the needs of their elderly. The problem for these people and for their governments is that all of these individuals, almost without exception when they were working, will have been the providers of contributions but via state-deducted funding from their earnings or from their savings, whether in the form of direct taxation, national welfare or social security contributions, and over the years, those savings should have amounted to a significant pot of ‘wealth’, to enable those above them in the pyramid, to be looked after and supplied with their needs.
However, the difficulty comes when they themselves reach the point where they qualify to become the net recipients of such benefit, only to find that there are insufficient numbers of people below them in the model to make the necessary contributions to keep them in a stable condition.
In addition, it is now quite clear that these elderly people at the top of the triangle are tending to live longer, and their needs are costing more as society is required to look after them for extended periods of time, hitherto not foreseen. The mathematical model is now higher, with an extended peak, a thinner set of intervening layers and much narrower at its base, a classic isosceles triangle.
An important article entitled ‘The Great Baby Shortage’ in the Sunday Times magazine of the 15th February 2004, reported;
“…Unless we in the West produce more children, we face a nightmarish scenario in which the elderly outnumber the young, placing an impossible burden on the workers who must support them. Productivity will plummet. Unemployment will soar. Education will become unaffordable. Optimism will leach from the national psyche and we will become constitutionally depressed…”
The article demonstrated how, in order to maintain a stable population, women needed on average to produce 2.1 children each, what is referred to by demographers as the ‘replacement fertility quotient’. All the leading post-industrial democracies of the western hemisphere are suffering, more or less, from the same predicament. In the U.K the birth rate per woman is 1.6 children, the lowest reported number since records began to be kept in 1924.
In 1961, 25% of the UK population was made up of children aged between 0-15 years old, compared to an aging population in excess of 75 years old of 4%. In 2002, the comparisons were 19.9% of population were between 0-15, while 7.5% were over 75. By the year 2022, there will be 17.5% of population between 0-15, while the over 75s will amount to 10.2%. Indeed, if the falling birth rate is compared to the rising death rate, it is estimated that the two axes will bisect in 2027, when effective depopulation of the UK will begin.
I could continue to develop theoretical arguments using statistics, but I think the point is well made. We are no longer in the prediction game, but we are extrapolating from known figures. The Employer’s Forum on Age is quite clear about the issue.
“…By 2025, for every two people employed there is likely to be one person over 50 who is retired or inactive.”
This inactivity may be due to reasons other than incapacity and I will address these next, but I think the point at issue here is what is the probable response of government likely to be, when it is confronted with the realisation that it simply does not have enough money with which to meet its social and its welfare demands? Is it going to face the ultimate nightmare scenario of permitting homeless and indigent people to die in the streets and lie unburied, or consider raising direct taxation, a political feature of our social life which governments of both parties have eschewed in recent years, because of its vote-losing unpopularity. Is it perhaps going to increase an exponentially-growing amount of stealth taxation, a method which is both politically unpopular and hardly likely to accrue the amount of money it will increasingly need. Or is it most likely to begin to adopt other, more insidious methods of seeking to attack the black or grey economy, recovering money which it claims to be owed already, with legislation designed to undermine civil liberties, so as to make it easier to succeed in seizing those assets it demands, while making it easier for governments to portray such a move as a populist policy, particularly when coupled with vociferous public statements about the need to be being seen to take away the profits from criminals, and undermining the ambitions of terrorists.
How will the citizen react to these changes? Well, not without a struggle, I am convinced. Empowered through their access to web-based technologies, and with access to the best legal and accounting advice, those citizens who have been successful in creating and keeping a high level of personal wealth will become increasingly unwilling to allow it to be left in situations where an increasingly desperate government can get its hands on it. As with their Roman counterparts, they will seek every means of hiding and disguising their personal wealth, moving it out of the reach of rapacious tax gatherers and secreting it in jurisdictions whose own ambitions will be more in tune with their individual requirements. If necessary, they will seek to escape to other, more wealth-friendly environments.
As welfare, health, and education services, and all the other shibboleths of the old nation state begin to break up because government cannot pay for them, we shall see the re-emergence of the extended family unit, particularly among the once-prosperous middle class, as the core welfare model. Living together as an extended family for a much longer period of time, as in Asia, with publicly-inactive members whose role will be to maintain the family, while the elderly will take upon themselves the responsibility for educating the young – largely through privately funded, exclusive educational establishments which will rigidly exclude those who cannot pay, and also those whose children do not exhibit a sufficient level of intelligence to meet the intellectual demands of the institution.
These institutions will be driven by the need to attract the brightest and best of each generation, in order to be able to continue to demonstrate intellectual excellence, which will in turn be driven by the increasing competition between educational establishments whose examination results will be rigidly graded and whose function will be to turn out the next generation of ‘super consultants’. Schools will guard their entrance requirements by both increases in intellectual standards and fee structures so that only the truly wealthy and the most intellectually entrepreneurial will be able to qualify for admission.
Universities, in turn, will be graded by fee structures, having the power to charge on a scale which will exclude the majority of individuals who cannot meet either their intellectual or their financial standards. In order to meet the need to deliver the necessary level of financial requirement to achieve these standards, full family property inheritance will become paramount – inheritance taxes will need to be abolished, and we will see increasing pressure on Government to reform these taxes - parents will literally become the trustees of their children’s future, and in turn, their own welfare, as their offspring will be required to guarantee their parent’s longer term care, as they grow older and live longer. Having the ability to pass on their fortune intact to their offspring will therefore become for the wealthy, a significantly important investment for their own well-being in the future, and just like their Roman counterparts at the end of the 5th century AD, they may need to find other jurisdictions to escape to in order to enjoy the fruits of their labours.
Where will they go?
Well the Asian market seems as good a place as any right now.
Much of the early influence on this chapter comes from the writings of two social commentators, James Dale Davidson and William Rees-Mogg, the former editor of ‘The Times’. In their seminal work ‘The Sovereign Individual’, first published in 1997, I came across an analysis of taxation as a primary function of the Nation State, and a very clear explanation why the conditions of the ‘Information Age’ in which we are now living, meant that governments would find it harder and harder to collect the same level of taxation which they needed, simply to maintain the status quo of society. The changes being introduced by such facilities as the world-wide-web, digital technology and information networks, meant that tax-payers would find new and more efficient ways of hiding, disguising and disseminating their wealth from governments, whose needs to acquire such money were becoming more and more acute.
“…In the twentieth century, advanced industrial nations have taken between 30 and 60 per cent of national income to finance the welfare state. Between the disintermediation, jurisdictional and encryption problems of global computer networks, this capacity is now vanishing. The welfare state was already becoming burdensome in the early 1990s. By 2010 or thereabouts it will simply become unfinanceable, as will all kinds of unfunded state pension…” The Sovereign Individual. p7
The authors’ arguments predicated the emergence of a new kind of citizen, who they call ‘the sovereign individual’, a new kind of independent wealth-creator, whose access to technology and the power of their own intellect, would mean that they no longer needed to consider themselves as the property of an individual state or political collective, but would be free to negotiate their own terms with which they proposed to deal with governments in the future.
This new individual was placed by the authors in the context of his relationship with the nation state thus;
“…The new megapolitical conditions of the Information Age will make it increasingly obvious that the nation-state inherited from the industrial era is a predatory institution, one from which the individual will want to escape. It is an escape that desperate governments will be loathe to allow. The stability and even the survival of Western welfare states depends upon their ability to continue extracting a huge fraction of the world’s total output for redistribution to a subset of voters in the OECD countries. This requires that the taxes imposed upon the most productive citizens of the currently rich countries be priced at supermonopoly rates, hundreds or even thousands of times higher than the actual cost of the services that governments provide in return…” The Sovereign Individual. p116
The Americans, concerned as ever with the number of wealthy members of US society whose commercial or financial activities are registered in offshore, low-tax jurisdictions, either in the form of corporate tax shelters, or offshore hedge funds, and whom the US regulators have perceived could be cheating on their Internal Revenue obligations, sought to deter US citizens from taking their money out of the country by a proposal, made by President Bill Clinton in 1995. Clinton wanted to enact an exit tax or a ‘Berlin Wall for capital’ that would require wealthy Americans to pay a substantial ‘ransom’ to be permitted to escape with even part of their money.
The American authorities have always looked upon the offshore sector with mistrust, seeing them as jurisdictions into which money and value can be imported, and held in conditions of absolute secrecy. Their suspicions of the intentions and the activities of the off-shore sector were amplified by the fact that when they investigated those whom they suspected of taking unfair advantage of US markets, as in insider trading cases, they could not get any assistance from financial institutions or law enforcement agencies operating in these areas.
Nothing infuriates an American regulatory or law enforcement agency more than discovering a foreign jurisdiction which does not have to comply with their demands for cooperation. I use the word ‘demand’ advisedly, as in my experience, the USA generally does not ‘ask’ for assistance, it demands it as of right, and becomes very agitated when it finds its demands being denied, or worse, ignored. For years the offshore sector generally had merely ignored US demands for reciprocal assistance, and the Americans, in turn, had for a very long time, been looking for a means of prizing open the books and records of the offshore banks, in order to pursue their own investigations, into both outright criminal allegations, and, more importantly, into American tax evasion.
“…All advanced tax systems depend upon reporting to the tax authorities by people who make payments. A bank pays interest on a deposit account, reports the interest to the revenue authorities and the income is taxed. If the bank is outside the national jurisdiction, then it cannot be obliged to report the interest. When the internet becomes the normal route for transactions used as freely as the telephone, it will erode the reporting of transactions…” The Sovereign Individual, 1997, Pan Books, p.7.
It is this question of the way that technology is changing, and will continue to change the face of the relationship between the citizen and the State that is polarising the arguments about the way in which societies can legitimately raise revenue through taxation, and how, in future, they will seek to guarantee those sources of State income in order to maintain a social status quo which has long since passed its legitimate maintenance date.
The problem is that the increasing facilities offered by the Information Age will mean that those individuals with the skills to do so will seek to earn their living in those jurisdictions which make it easier for them to do so. The nation state’s tradition of imposing high levels of taxation upon its collective citizens will be eroded as more and more competing jurisdictions make it attractive for enterprising foreigners to seek refuge with them.
The struggle between the State and the private individual will become an altogether more vindictive one as the technology to aid private capital flight and financial secretion becomes more available, with the means to move their capital in conditions of almost total secrecy. The conditions for conflict are becoming more and more acute.
“…The flight of the wealthy from advanced welfare states will happen at just the wrong time, demographically. Early in the 21st century, large aging populations in Europe and North America will find themselves with insufficient savings to meet medical expenses and finance their lifestyles in retirement…” The Sovereign Individual - p289
This is possibly the most important aspect of the core problem with which the new social environment being generated in the post industrial democracies will be required to deal. The welfare states which for the last 60 years have provided our social environment with cradle-to-grave protections in terms of health, education and social welfare are now facing insolvency. Putting it at its simplest, they are running out of money, while at the same time, they are having to face up to the likelihood of a future in which fewer individuals will be either willing, or indeed available to provide the necessary degree of funding to continue to maintain those benefits at even contemporary standards.
The reasons are simple but stark!
We live in an age of declining birth rates, while at the same time the numbers of our elderly are living longer. At first sight, such a statement does not seem to hold any great terrors for us after all, does it really matter if grandfather lives a few years longer. Well, I’m afraid it does.
If you can imagine looking at a mathematical model of an ordinary, normal society, it would look roughly like an equilateral triangle, divided into a series of horizontal layers. The young, the new potential contributors to the welfare of society would make up the broadest layer at the base of the triangle, demonstrating a wide sector of non-financially-contributing individuals, but who would be growing to make a financial commitment to their society.
The next layer would contain those in regular work or employment who are making a contribution to the nation’s wealth via both direct and indirect taxation.
Another sector above the second would represent that group of individuals who had ceased to be net contributors to society, but as yet were not dependent upon its reserves for their well-being, the retired class who were still able to look after themselves from their own savings.
At the top of the triangle sits the group of retired, non-contributing individuals who are wholly or in a large part dependent upon the state for their welfare provision, whether it be pensions, social health care, hospitals, meals-on-wheels, or any of the other myriad services which civilised societies now deem it necessary to deliver in order to provide the needs of their elderly. The problem for these people and for their governments is that all of these individuals, almost without exception when they were working, will have been the providers of contributions but via state-deducted funding from their earnings or from their savings, whether in the form of direct taxation, national welfare or social security contributions, and over the years, those savings should have amounted to a significant pot of ‘wealth’, to enable those above them in the pyramid, to be looked after and supplied with their needs.
However, the difficulty comes when they themselves reach the point where they qualify to become the net recipients of such benefit, only to find that there are insufficient numbers of people below them in the model to make the necessary contributions to keep them in a stable condition.
In addition, it is now quite clear that these elderly people at the top of the triangle are tending to live longer, and their needs are costing more as society is required to look after them for extended periods of time, hitherto not foreseen. The mathematical model is now higher, with an extended peak, a thinner set of intervening layers and much narrower at its base, a classic isosceles triangle.
An important article entitled ‘The Great Baby Shortage’ in the Sunday Times magazine of the 15th February 2004, reported;
“…Unless we in the West produce more children, we face a nightmarish scenario in which the elderly outnumber the young, placing an impossible burden on the workers who must support them. Productivity will plummet. Unemployment will soar. Education will become unaffordable. Optimism will leach from the national psyche and we will become constitutionally depressed…”
The article demonstrated how, in order to maintain a stable population, women needed on average to produce 2.1 children each, what is referred to by demographers as the ‘replacement fertility quotient’. All the leading post-industrial democracies of the western hemisphere are suffering, more or less, from the same predicament. In the U.K the birth rate per woman is 1.6 children, the lowest reported number since records began to be kept in 1924.
In 1961, 25% of the UK population was made up of children aged between 0-15 years old, compared to an aging population in excess of 75 years old of 4%. In 2002, the comparisons were 19.9% of population were between 0-15, while 7.5% were over 75. By the year 2022, there will be 17.5% of population between 0-15, while the over 75s will amount to 10.2%. Indeed, if the falling birth rate is compared to the rising death rate, it is estimated that the two axes will bisect in 2027, when effective depopulation of the UK will begin.
I could continue to develop theoretical arguments using statistics, but I think the point is well made. We are no longer in the prediction game, but we are extrapolating from known figures. The Employer’s Forum on Age is quite clear about the issue.
“…By 2025, for every two people employed there is likely to be one person over 50 who is retired or inactive.”
This inactivity may be due to reasons other than incapacity and I will address these next, but I think the point at issue here is what is the probable response of government likely to be, when it is confronted with the realisation that it simply does not have enough money with which to meet its social and its welfare demands? Is it going to face the ultimate nightmare scenario of permitting homeless and indigent people to die in the streets and lie unburied, or consider raising direct taxation, a political feature of our social life which governments of both parties have eschewed in recent years, because of its vote-losing unpopularity. Is it perhaps going to increase an exponentially-growing amount of stealth taxation, a method which is both politically unpopular and hardly likely to accrue the amount of money it will increasingly need. Or is it most likely to begin to adopt other, more insidious methods of seeking to attack the black or grey economy, recovering money which it claims to be owed already, with legislation designed to undermine civil liberties, so as to make it easier to succeed in seizing those assets it demands, while making it easier for governments to portray such a move as a populist policy, particularly when coupled with vociferous public statements about the need to be being seen to take away the profits from criminals, and undermining the ambitions of terrorists.
How will the citizen react to these changes? Well, not without a struggle, I am convinced. Empowered through their access to web-based technologies, and with access to the best legal and accounting advice, those citizens who have been successful in creating and keeping a high level of personal wealth will become increasingly unwilling to allow it to be left in situations where an increasingly desperate government can get its hands on it. As with their Roman counterparts, they will seek every means of hiding and disguising their personal wealth, moving it out of the reach of rapacious tax gatherers and secreting it in jurisdictions whose own ambitions will be more in tune with their individual requirements. If necessary, they will seek to escape to other, more wealth-friendly environments.
As welfare, health, and education services, and all the other shibboleths of the old nation state begin to break up because government cannot pay for them, we shall see the re-emergence of the extended family unit, particularly among the once-prosperous middle class, as the core welfare model. Living together as an extended family for a much longer period of time, as in Asia, with publicly-inactive members whose role will be to maintain the family, while the elderly will take upon themselves the responsibility for educating the young – largely through privately funded, exclusive educational establishments which will rigidly exclude those who cannot pay, and also those whose children do not exhibit a sufficient level of intelligence to meet the intellectual demands of the institution.
These institutions will be driven by the need to attract the brightest and best of each generation, in order to be able to continue to demonstrate intellectual excellence, which will in turn be driven by the increasing competition between educational establishments whose examination results will be rigidly graded and whose function will be to turn out the next generation of ‘super consultants’. Schools will guard their entrance requirements by both increases in intellectual standards and fee structures so that only the truly wealthy and the most intellectually entrepreneurial will be able to qualify for admission.
Universities, in turn, will be graded by fee structures, having the power to charge on a scale which will exclude the majority of individuals who cannot meet either their intellectual or their financial standards. In order to meet the need to deliver the necessary level of financial requirement to achieve these standards, full family property inheritance will become paramount – inheritance taxes will need to be abolished, and we will see increasing pressure on Government to reform these taxes - parents will literally become the trustees of their children’s future, and in turn, their own welfare, as their offspring will be required to guarantee their parent’s longer term care, as they grow older and live longer. Having the ability to pass on their fortune intact to their offspring will therefore become for the wealthy, a significantly important investment for their own well-being in the future, and just like their Roman counterparts at the end of the 5th century AD, they may need to find other jurisdictions to escape to in order to enjoy the fruits of their labours.
Where will they go?
Well the Asian market seems as good a place as any right now.
The Risk-Based Approach - Is It a Poisoned Chalice?
Alain Damais, the head of the FATF, has recently highlighted some of the problems associated with the approach being adopted by many financial institutions towards the problem of ‘best practice’ anti-money laundering compliance.
In an interview widely reported in the European press, his remarks contain a series of important observations. He is reported as saying…;
‘…The main area of AML concern for banks was their obligation to take a "risk-based approach" to the problem.
"The RBA is a fairly new system for many regulated firms; the dangers are that it will increase the owner's responsibility and therefore the fear. On the other hand, it could be safer as it is more flexible. It could allow the bank to target the difficulty. The risk-based approach is how you deal with the normal people, the majority."Although someone's account may have little unusual activity, his business — or identity — could contain other "red flags" that could throw doubt upon his risk classification. Damais said that each bank had to identify and document the risk linked to each account holder and conceded that this could mean more work on the bank's part. He thought, nonetheless, that this would help each bank deal more easily with people on sanctions lists. He stated unequivocally: "Either you have Osama bin Laden as a client or you don't."
In many ways, it is too easy for a regulator, and particularly the FATF to make broad pronouncements of policy, they don’t have to think through the implications of what the policy will mean to the average institution. In some respects, this identifies one of the perennial problems that the financial industry has with the FATF, an organisation with a self-generated policy objective, and with little or no direct accountability – its pronouncements carry significant weight and moral authority, and can expect to be acted upon, while at the same time, its own authority is little more than a self-fulfilling prophecy!
There is nothing at all wrong with the risk-based approach (rba), in theory! In theory, every bank knows all its customers intimately, and the rba is practised as a sine qua non!
In practice, the rba is not attractive to financial practitioners because it places too great a degree of responsibility on the shoulders of the industry itself, to undertake the necessary degree of due diligence and risk mitigation, and it places a very mobile spotlight into the hands of the regulators which can so easily be shone into some dark and murky corners, when necessary.
The rba in fact, is a poisoned chalice for the industry, while being a consummation, devoutly to be wished, for the regulatory agencies. For the banks, it magnifies their need to provide for additional compliance requirements, while it absolves the regulators from having to make difficult decisions about the minutiae of practical issues, and enables them to focus upon the high-level provision of policy pronouncements. which the regulated sector then has to spend time and money seeking to find ways round!
Indeed, when I was both a regulator and later, a legal practitioner, it never ceased to amaze me how little money a financial institution was willing to spend on developing good compliance procedures; while money became no object if their lawyers could suggest ingenious ways to circumnavigate the implications of an inconvenient regulation!
The policy of most financial institutions has been to develop and implement AML best practice compliance procedures on a grudging, and extremely dilatory basis, in some cases, some institutions have had to be dragged, kicking and screaming into a semblance of compliance with the AML regulatory requirements. One only has had to look at the fines which have been levied on some of the most famous names in the average High Street for failure to comply with the most simple of requirements. If a major institution cannot even provide compliance with a requirement to maintain its own client’s records in an accurate and recoverable manner, then how much credence can be placed on its assertions that it is conducting meaningful transaction monitoring activities?
Possibly the biggest problem however for practitioners is that the rb approach means that they must now make all the decisions as how they engage with the entire compliance process, and without any form of proscription from the regulators. Indeed, their very approach to compliance must adopt rb characteristics. In other words, they must decide how much of a risk they can afford to take by either adopting or not adopting elements of the compliance process!
Let us examine the use of IT systems for assisting in the potential identification of suspicious transactions, as an example!
By far the largest percentage of regulated financial institutions have not implemented any form of IT-assisted transaction monitoring (tm) system, despite the significant importance that is placed on tm by international regulators. It is fast becoming realised that tm is really the only way that institutions can bring any form of meaningful enquiry to the question of how their clients are conducting their affairs.
For many practitioners, making use of a broad-based name checking system has, until now, been considered to be sufficient to meet their KYC needs, but any continued adherence to this policy alone and without additional tm applications, would be a great mistake.
Name checking, while no doubt one method of ensuring that Osama bin Laden is not running an account with your bank, is merely part of the compliance function. Let us be pragmatic, what are the chances of any well-known international terrorist or criminal operating an account in his or her reported name, I mean, it isn’t going to happen, is it? At the same time, how many variations are there on the way in which the single name, ’Mohammed, can be spelt?’ How many false positives must get generated every day by a mere name checking system, and how long do these take to verify?
TM tools have to be seen as now becoming a mandatory part of the regulatory process, and financial practitioners must begin to implement such systems, as part of a best practice, rb approach to AML compliance.
Now, there have been some real scare stories generated in this space, and I have no doubt that everyone who practises in this arena could tell an equally horrifying tale of woe of cases where they have heard of thousands of false positives being generated, all of which have to be examined and analysed.
Such events have happened, it’s true, but at the same time, a significant amount of good work has also been identified as the result of good adherence to these systems. I have always maintained that the use of a well-balanced, properly implemented tm system not only provides the front line of defence against allegations of failing to adhere to the regulatory imperative; but at the same time, in practice can be used to identify real examples of purported fraud against the bank, because the tm system picks up all anomalies. It does not seek to differentiate and only examine those activities which might be indicative of money laundering! That is not its function, it looks at every transaction and seeks to identify any one which breaks the parameters of normative behaviour defined by the account conduct over the past year!
The adoption of the rba means, that in so many cases, and for the first time, the institution is required to take a long look at its business profile and determine its risk parameters in a meaningful way. Having conducted that exercise, it is then better placed to decide what kind of tm system it really needs.
The practice has developed for IT managers to require additional functions to be added to any IT response, in the hope that by packaging a portfolio of different tools within one platform, this will make the product easier to sell, internally. Increasingly therefore, IT solution providers are being asked to provide anti-fraud tools, as well as AML requirements. Some of these anti-fraud tools require a wide cross-section of individual fraud scenarios to be included, yet all this is doing is making the problem of determining potentially suspicious transactions which need to be disclosed to the relevant authorities, more and more difficult to identify, and is radically increasing the possibility of the provision of additional false positives.
The answer to a best practice rba is not to seek to build an entire suite of solutions into one operating model because this will merely exacerbate the potential problems which can be generated.
If the rba is properly determined, constructed and documented, the provision of an IT-led, STR support mechanism, can and should be capable of being calibrated in a simple and extremely functional way. By tailoring the operating function as closely to the risk profile of the institution, false positives should be reduced significantly and the system should become really effective at identifying those disclosures that the institution really needs to be making, rather than just submitting a vast batch of alerts, none of which have been properly qualified.
The intelligence agencies are not looking for a vast volume of disclosures, but value in information; disclosures that really do identify potential wrong-doing and upon which they can rely from an early stage. Any financial institution which is regularly submitting hundreds of alerts on a regular basis, is failing in their duty to provide a properly qualified rba, as is the institution which submits none at all. Both will, in future, stick out like a sore thumb!
In an interview widely reported in the European press, his remarks contain a series of important observations. He is reported as saying…;
‘…The main area of AML concern for banks was their obligation to take a "risk-based approach" to the problem.
"The RBA is a fairly new system for many regulated firms; the dangers are that it will increase the owner's responsibility and therefore the fear. On the other hand, it could be safer as it is more flexible. It could allow the bank to target the difficulty. The risk-based approach is how you deal with the normal people, the majority."Although someone's account may have little unusual activity, his business — or identity — could contain other "red flags" that could throw doubt upon his risk classification. Damais said that each bank had to identify and document the risk linked to each account holder and conceded that this could mean more work on the bank's part. He thought, nonetheless, that this would help each bank deal more easily with people on sanctions lists. He stated unequivocally: "Either you have Osama bin Laden as a client or you don't."
In many ways, it is too easy for a regulator, and particularly the FATF to make broad pronouncements of policy, they don’t have to think through the implications of what the policy will mean to the average institution. In some respects, this identifies one of the perennial problems that the financial industry has with the FATF, an organisation with a self-generated policy objective, and with little or no direct accountability – its pronouncements carry significant weight and moral authority, and can expect to be acted upon, while at the same time, its own authority is little more than a self-fulfilling prophecy!
There is nothing at all wrong with the risk-based approach (rba), in theory! In theory, every bank knows all its customers intimately, and the rba is practised as a sine qua non!
In practice, the rba is not attractive to financial practitioners because it places too great a degree of responsibility on the shoulders of the industry itself, to undertake the necessary degree of due diligence and risk mitigation, and it places a very mobile spotlight into the hands of the regulators which can so easily be shone into some dark and murky corners, when necessary.
The rba in fact, is a poisoned chalice for the industry, while being a consummation, devoutly to be wished, for the regulatory agencies. For the banks, it magnifies their need to provide for additional compliance requirements, while it absolves the regulators from having to make difficult decisions about the minutiae of practical issues, and enables them to focus upon the high-level provision of policy pronouncements. which the regulated sector then has to spend time and money seeking to find ways round!
Indeed, when I was both a regulator and later, a legal practitioner, it never ceased to amaze me how little money a financial institution was willing to spend on developing good compliance procedures; while money became no object if their lawyers could suggest ingenious ways to circumnavigate the implications of an inconvenient regulation!
The policy of most financial institutions has been to develop and implement AML best practice compliance procedures on a grudging, and extremely dilatory basis, in some cases, some institutions have had to be dragged, kicking and screaming into a semblance of compliance with the AML regulatory requirements. One only has had to look at the fines which have been levied on some of the most famous names in the average High Street for failure to comply with the most simple of requirements. If a major institution cannot even provide compliance with a requirement to maintain its own client’s records in an accurate and recoverable manner, then how much credence can be placed on its assertions that it is conducting meaningful transaction monitoring activities?
Possibly the biggest problem however for practitioners is that the rb approach means that they must now make all the decisions as how they engage with the entire compliance process, and without any form of proscription from the regulators. Indeed, their very approach to compliance must adopt rb characteristics. In other words, they must decide how much of a risk they can afford to take by either adopting or not adopting elements of the compliance process!
Let us examine the use of IT systems for assisting in the potential identification of suspicious transactions, as an example!
By far the largest percentage of regulated financial institutions have not implemented any form of IT-assisted transaction monitoring (tm) system, despite the significant importance that is placed on tm by international regulators. It is fast becoming realised that tm is really the only way that institutions can bring any form of meaningful enquiry to the question of how their clients are conducting their affairs.
For many practitioners, making use of a broad-based name checking system has, until now, been considered to be sufficient to meet their KYC needs, but any continued adherence to this policy alone and without additional tm applications, would be a great mistake.
Name checking, while no doubt one method of ensuring that Osama bin Laden is not running an account with your bank, is merely part of the compliance function. Let us be pragmatic, what are the chances of any well-known international terrorist or criminal operating an account in his or her reported name, I mean, it isn’t going to happen, is it? At the same time, how many variations are there on the way in which the single name, ’Mohammed, can be spelt?’ How many false positives must get generated every day by a mere name checking system, and how long do these take to verify?
TM tools have to be seen as now becoming a mandatory part of the regulatory process, and financial practitioners must begin to implement such systems, as part of a best practice, rb approach to AML compliance.
Now, there have been some real scare stories generated in this space, and I have no doubt that everyone who practises in this arena could tell an equally horrifying tale of woe of cases where they have heard of thousands of false positives being generated, all of which have to be examined and analysed.
Such events have happened, it’s true, but at the same time, a significant amount of good work has also been identified as the result of good adherence to these systems. I have always maintained that the use of a well-balanced, properly implemented tm system not only provides the front line of defence against allegations of failing to adhere to the regulatory imperative; but at the same time, in practice can be used to identify real examples of purported fraud against the bank, because the tm system picks up all anomalies. It does not seek to differentiate and only examine those activities which might be indicative of money laundering! That is not its function, it looks at every transaction and seeks to identify any one which breaks the parameters of normative behaviour defined by the account conduct over the past year!
The adoption of the rba means, that in so many cases, and for the first time, the institution is required to take a long look at its business profile and determine its risk parameters in a meaningful way. Having conducted that exercise, it is then better placed to decide what kind of tm system it really needs.
The practice has developed for IT managers to require additional functions to be added to any IT response, in the hope that by packaging a portfolio of different tools within one platform, this will make the product easier to sell, internally. Increasingly therefore, IT solution providers are being asked to provide anti-fraud tools, as well as AML requirements. Some of these anti-fraud tools require a wide cross-section of individual fraud scenarios to be included, yet all this is doing is making the problem of determining potentially suspicious transactions which need to be disclosed to the relevant authorities, more and more difficult to identify, and is radically increasing the possibility of the provision of additional false positives.
The answer to a best practice rba is not to seek to build an entire suite of solutions into one operating model because this will merely exacerbate the potential problems which can be generated.
If the rba is properly determined, constructed and documented, the provision of an IT-led, STR support mechanism, can and should be capable of being calibrated in a simple and extremely functional way. By tailoring the operating function as closely to the risk profile of the institution, false positives should be reduced significantly and the system should become really effective at identifying those disclosures that the institution really needs to be making, rather than just submitting a vast batch of alerts, none of which have been properly qualified.
The intelligence agencies are not looking for a vast volume of disclosures, but value in information; disclosures that really do identify potential wrong-doing and upon which they can rely from an early stage. Any financial institution which is regularly submitting hundreds of alerts on a regular basis, is failing in their duty to provide a properly qualified rba, as is the institution which submits none at all. Both will, in future, stick out like a sore thumb!
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