The Much-Too-Special Relationship

[Ognir]

http://www.the-american-interest.com/2014/03/19/the-much-too-special-relationship/

Nicholas Shaxson

The City of London threatens U.S. security and abets corruption. Revisionist powers like Russia have figured out this dynamic and are busy exploiting it.

The City of London, as is well known to its residents, is a legal-jurisdictional term from days of old for a somewhat peculiar arrangement, of which more below. But today it is a term used by those mostly ignorant of its history to describe the United Kingdom's financial services industry. According to TheCityUK, a leading lobby group, the City is by far the world's largest exporter of financial services, with a trade surplus of $64 billion last year, compared to the $20 billion for the United States. The United Kingdom comfortably leads the United States on foreign exchange turnover, on cross-border bank lending, and on over-the-counter derivatives; the London Stock exchange, too, hosts more companies than its New York City rival.

Wall Street is no shirker, of course: It trumps London on insurance, securitisation issuance, private equity values and hedge fund assets. Its $14 trillion in commercial banking assets beats London's $11 trillion, and its 46 percent share of the $87 trillion investment management sector trounces London's mere 8 percent.

The big difference between the two rivals, politically speaking, is that while the two are similar in absolute size and economic heft, at least in terms of their important international operations, Wall Street is diluted in a population five times larger than Britain's. Some of you Americans may think your financial centre has captured key domains of the policymaking apparatus in Washington—and you'd be right—but in a large, complex democracy it has not and cannot capture many others. We Brits have just over 60 million people, a far smaller democratic counterweight, and banking assets equivalent to over 400 percent of GDP, which is a multiple of the figure for the United States. Bank of England Governor Mark Carney recently crooned over the prospect that, on current growth rates, this might rise to 900 percent by 2050.

Thus, hard though it may be to believe, the City's political capture of Britain is deeper and more encompassing than anything that could ever be tolerated on the American side of the pond. Indeed, the City of London's "capture" of Britain goes far deeper than so far suggested—more on that anon. The best way into the subject, however, is not through more statistics but by way of a little Transatlantic spat that erupted recently, spurred on by articles in Politico and then in the New York Times by Ben Judah, the author of Fragile Empire: How Russia Fell In and Out of Love With Vladimir Putin.

Judah argued recently that financial interests have essentially sapped Europe's—and particularly Britain's—will to make robust foreign policy in the face of Russian aggression in Ukraine:

    Russia thinks the West is no longer a crusading alliance. . . . Putin's inner circle no longer fear the European establishment. They once imagined them all in MI6. Now they know better. They have seen firsthand how obsequious Western aristocrats and corporate tycoons suddenly turn when their billions come into play. They now view them as hypocrites—the same European elites who help them hide their fortunes.

More pointedly, Judah mounted a blistering attack on London, the biggest, most freewheeling repository for all this Russian (and Ukrainian) loot. His New York Times article boils down to this:

    Britain is ready to betray the United States to protect the City of London's hold on dirty Russian money. And forget about Ukraine.

A recent scoop in Britain's Guardian newspaper from days of old underlines Judah's thesis. It exposes a secret government document saying that Britain should oppose any measures that would close London's financial centre to Russians.

The City of London spin machine soon launched fusillades against Judah and the New York Times. The CityA.M. newspaper, a sophisticated and informative mouthpiece for City interests, joined the mainstream Telegraph in furious efforts to discredit Judah. The counterattacks have come in four main variants. The first is that "all countries, including the United States, behave like this"; and Britain has always behaved like this, so "what's new, and what's the problem?" A second is that the United States lacked a robust foreign policy stance on Russia and Ukraine anyway. The third: Russian assets in the United Kingdom are a relatively small part of the total UK asset base—a statement that is hard to prove or disprove because so many Russian assets are owned anonymously through offshore companies designed to hide the identities of the actual beneficial owners. (In any event, as we shall see, Russian assets are just one part of a much bigger picture.)

The fourth part of the counterattack, and much the most vicious, has been of this nature: "Wrong. The flats haven't been sold yet. There are no rich owners and no prostitutes", or "If Polish labourers sleep four to a room 'in bedsit slums', it's because they choose to." In other words, the City of London does no wrong; it's the clients whose moral obloquy is entirely the issue.

All this amounts to a series of quibbles: some correct, some substantial, some a matter of opinion.  It turns out that a few of Judah's more fiery assertions were wrong, but none of the counterattacks even attempt to knock down his core thesis: that the City of London will make British policy writ large untrustworthy over Russia, and, more broadly, that Russian corruption could not possibly have grown to its present scope and nature without concomitant corruption in the West's financial institutions. The arrows have fallen, and the thesis stands.

But Judah's articles don't go nearly far enough. The truth is that the City of London is a greater potential threat to the national security of the United States than almost anyone supposes. That story, told true and right, has three main parts.

The first part shows that the United Kingdom is the single most important player in a global system of offshore tax havens, and has facilitated and even enthusiastically—if discreetly—encouraged the élite looting of pretty much every country in the world, from Pakistan to Greece to Libya to Mexico, typically via U.S., British and Swiss banks. This is a national security issue par excellence, now revealed in its fullness through the Crimea affair, let's call it. This British offshore system is a fast-growing cash cow for the City, which will fight to protect it.

The second part of the story tells of how the City of London has spent half a century building a business model based on thwarting and opposing U.S. laws and regulations. It is crucial to understand that this is a deliberate feature of the modern City, not an incidental side effect.

The third reveals the aforementioned depth of Britain's political capture by the City of London, which makes Britain a thoroughly untrustworthy ally not only with regard to Russia, but many other portfolios as well.

There is more to the offshore story than the tale of the City of London. It now involves China, Saudi Arabia and others as well. But London's role is key, so much so that the financial crisis the United States is still digging its way out of can fairly be traced back to the City as well. It is therefore essential for Americans to understand better what the City of London is, how and why Britain developed its network of tax havens and the mentality of a tax haven itself, and how the all-embracing City Consensus has captured the British establishment, along with much of the UK media, and even British society at large.

The City's history as a financial centre goes back at least a thousand years. Its most ancient and venerable institution, the City of London Corporation, has to be the most peculiar creature in the whole menagerie of global finance: a powerful torch-bearer for laissez-faire attitudes that have over centuries become hardwired into the British establishment.

It is hard to say exactly what the City Corporation is. On one level, it is the local authority for the Square Mile, a 1.1 square mile slab of prime real estate located at the geographical heart of London, with Bank underground station and the Bank of England at its centre. This territory, also sometimes known (confusingly) as the City of London or the City Corporation, has its own mini-police force, looks after local parks and museums, and has its own unpaid Lord Mayor, currently Alderman Fiona Woolf. Presiding over a resident population of some 10,000 people, the Lord Mayor is not to be confused with the Mayor of London, currently Boris Johnson, who oversees the eight-million strong London metropolis.

The City Corporation says: "The Lord Mayor of London's principal role today is as ambassador for all UK-based financial and professional services." So the Lord Mayor travels the world pushing City interests; this is a pretty odd role for the head of a local authority, but it is what it is. An official City Corporation report, cited in my book Treasure Islands, describes a Lord Mayor's visit to Hong Kong, China and South Korea five years ago. The Mayor of Tianjin, a pilot city for Chinese financial reforms, was quoted as calling the City of London "the holy place" of international finance and globalization. The aim of the visit was, beyond lobbying for London's financial centre, to

    . . . lobby for China to maintain its course of economic and financial liberalisation, and encourage South Korea to adopt more open policies. . . explain the UK's liberal approach to trade policy and trade regulation; and to encourage a critical mass of similarly thinking countries.

Lobbying not just for UK financial services but for generalised global financial liberalisation is an even stranger role, one might think, for the head of a local authority.

The City Corporation also has over 100 livery companies—mostly ancient trade associations that serve as a giant (and official) Old Boys' network. From the Worshipful Company of Broderers, dating from the 13th century, to the unfortunately named Worshipful Company of Launderers, to the more modern Worshipful Company of Tax Advisers, their membership contains some of the Great and the Good of British public life: the Tax Advisers, for instance, contains some of the best names in the UK's international tax planning. All must swear an oath of allegiance to that head lobbyist for global financial liberalisation, the Lord Mayor.

The City Corporation also has a Remembrancer with an official seat in Britain's houses of parliament, pushing City interests there and bringing back parliamentary intelligence reports to the City. In local City elections, too, the mainstream UK political parties are not involved, and global multinational corporations effectively get voting allowances, outnumbering local resident voters by a large margin.

Most of Britain's laws and financial regulations do apply in the City, but all these oddities add up to a place that is, historically and constitutionally, slightly dislodged from the United Kingdom proper, with an "elsewhere" flavour about it. But far more important than how it feels is what it does. The scale of its influence is unquantifiable, and it is so bizarre that if you go on about it, you start to sound like a nutter.The scale of its influence is unquantifiable, and it is so bizarre that if you go on about it, you start to sound like a nutter.

The main point is that the UK financial services industry has at its disposal an immovable and ancient organisation with social roots penetrating to the heart of the British establishment. It has cultural anchors so deep that whippersnapper Wall Street can only dream about having a comparable advantage.

Britain is more in thrall to finance that the United States, too, because the City of London's overwhelming focus is on international rather than domestic activity—which brings us back willy-nilly to

British incentives to betray its allies. It takes us deep into the world of offshore tax havens, and leads us as well back to a question posed in 2012 by Representative Carolyn Maloney (D.-NY) during a hearing on the giant "London Whale" trading losses by J.P. Morgan: "It seems to be that every big trading disaster happens in London, and I would like to know why." Would you, now, Ms. Maloney?

To understand why so much of the world's money comes to London, go back to the emergence of the City of London financial centre as the capital-pumping heart of the British Empire: the global crossroads for trade, permanently welcoming foreign money with few questions asked. "There the Jew, the Mahometan, and the Christian transact together", Voltaire wrote in 1733, "as though they all professed the same religion, and give the name of infidel to none but bankrupts." This dogged internationalism is the bedrock of Britain's wonderful, exuberant multiculturalism, which has for centuries made London one of the most exciting and cosmopolitan cities on the planet.

Empire was the source of massive economic rents for the City grandees, many of whom never had to work hard, but could sit back and watch the world's business tumble in. After World War II, however, many people in Britain's far-flung colonies began to see that the weakened colonial power no longer had the energy to sustain its rule, and began to agitate for independence. The withdrawal from India in 1947 set the scene for renewed ferment in the colonies; the Suez crisis of autumn 1956 underlined Britain's weakness, and the independence of Ghana and Malaya in 1957 marked the start of a deluge. By the middle 1960s, decolonisation was nearly complete.

As a consequence, the City of London, the "governor of the imperial engine" in the words of the historians P.J. Cain and A.G. Hopkins, faced an existential threat. London's panicking financiers found their solution almost by accident, in a new international market that came to be known as the Eurodollar market, and (later) the Euromarkets.

It was initially an era of tight controls over global capital flows. With the lessons of the Great Depression still fresh in people's minds, John Maynard Keynes and others had argued strongly against allowing too much leeway for financial globalisation, which carried grave risks and threats. "Ideas, knowledge, science, hospitality, travel—these are the things which should of their nature be international", Keynes said. "But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national."

Under the international architecture that Keynes and his American counterpart Harry Dexter White designed at Bretton Woods, exchange rates were mostly fixed, governments were trying to restrict cross-border flows of financial capital to little more than what was required to make payments for trade, and banks were not usually allowed to take deposits in foreign currencies, other than for trade reasons. The system seemed to work, too: Economic growth was high and broad-based, and economic inequalities were falling around the world. The roughly quarter century that followed not long after World War II is known, not unreasonably, as the Golden Age of Capitalism.

The new market in London emerged just as decolonisation was gathering pace. In June 1955 some staffers at the Bank of England noticed some odd trades going on at Midland Bank, now part of the globe-trotting HSBC. They were taking U.S. dollar deposits that were unrelated to trade operations, and thus technically not allowed. Midland was also offering interest rates that were substantially higher than what U.S. regulations permitted at the time. The Bank of England gave Midland a mild warning, but soon began to tolerate it, as it could see there were profits to be made.

This was the beginning of a new offshore market that would transform the world and bind the City and Wall Street together in a new special relationship, little noticed by the general public or even  by policymakers, that is a corrupted cornerstone of the current UK-US relationship. It is Ground Zero for the world's offshore system of tax havens today.

To understand what happened next, it is essential to understand exactly what offshore is. The term "tax haven" is a bit of a misnomer, because most of the jurisdictions that are generally regarded as tax havens are about so much more than tax. The more recent term "secrecy jurisdiction" is useful, but it can restrict analysis to questions of secrecy and transparency. Offshore is a bigger term that encompasses them all, and then some.

If we examine all the jurisdictions that are widely regarded as tax havens or secrecy jurisdictions, and drill down to what it is that they all have in common, we eventually get to a bedrock of two words: "escape" and "elsewhere." In short, if someone doesn't like the responsibilities that come with living in a particular society—whether those burdens be taxes, criminal laws, financial regulation or financial disclosure requirements—than he can take his money (and sometimes himself) elsewhere to escape them. This fits the traditional terminology for these places: the word "haven" in tax haven conjures up the "escape" aspect; while the term "offshore" neatly fits the concept of "elsewhere."

One of the great incentives offered by offshore financial centres is lax or even absent financial regulation: Bring your money here, and we won't regulate it. And that is exactly what happened in London from the 1950s onward. Confronted with this new variant of banking business, the Bank of England simply deemed these dollar trades in London to be outside its jurisdiction, effectively creating an unregulated space for them to trade in.

The world's banks soon began to notice this new escape route, but the next stage did not occur in a manner you might suppose. The earliest large-scale adopters of the market weren't American, but banks from the then Soviet Union. An initial deposit from the Moscow Narodny bank in 1957 was soon followed by much larger amounts, as the Soviets, fearing asset freezes, began to move their money out of U.S. banks to a place they trusted to take their money and preserve it without kerfuffle. One might argue that, in a small way, the new offshore market was helping the Soviets thwart U.S. foreign policy.

Wall Street discovered offshore London pretty quickly thereafter, and its banks dove in head-first. In this largely unregulated offshore financial playground in London they could escape those pesky domestic rules and grow their businesses explosively, helping them over time to become powerful enough to mount ever more potent political campaigns in Washington.

The market also came with a new pricing system: the London Interbank Offered Rate (Libor,) which today is the benchmark for pricing some $800 trillion in financial instruments, and which recently erupted in a market-rigging scandal so outrageous that The Economist last year called it "The Rotten Heart of Finance."⁠ It was a direct result of British regulators' "don't ask, don't know, don't tell" attitude, under the business model to suck up as much of the world's money as possible. The offshore Eurodollar market eventually helped make the City of London richer than it was even in the heydays of Empire.

Even in the market's small, early days, increasingly concerned U.S. regulators were asking their UK counterparts to curb these wild new "Euromarkets." They were told, in essence, to go screw themselves. "It doesn't matter to me whether Citibank is evading American regulations in London", James Keogh, a top Bank of England official said in 1963. "I wouldn't particularly want to know." That year London also began offering "Eurobonds"—offshore, unregulated bearer bonds, perfect vehicles for tax evasion and financial crime. A Bank of England memo back then summarised the basic attitude: "However much we dislike hot money . . . we cannot be international bankers and refuse to accept money."

But something else was emerging, too, amid decolonisation. Britain didn't quite lose all its colonies. Today it has 14 Overseas Territories, the last remnants of the Empire, which are partly controlled by the United Kingdom, but which have their own independent politics, too. These territories include some of the world's most notorious Caribbean or Atlantic tax havens today: the British Virgin Islands, the Cayman Islands and Bermuda. In addition, Britain's three Crown Dependencies—Jersey, Guernsey and the Isle of Man—are some of the biggest tax havens in the European arena. All these jurisdictions are partly inside Britain, giving investors the reassurance of British solidity and its fabled legal system, backed by British gunboats (as Argentina's General Galtieri discovered in 1982 when he invaded the Falkland Islands, a British Overseas Territory.)  But they are also partly independent from Britain, too, giving the UK government and the City of London enough distance to say, "Look  it's nothing to do with us, and there's nothing we can do" when scandal hits. This inside/outside relationship that the tax havens have with Britain is a very, very convenient arrangement for the City of London, because the city lives and breathes in the ambiguous interstices thus created.

It is no coincidence, therefore, that the Bank of Credit and Commerce International (BCCI), surely the rottenest bank in modern world history, was headquartered in London (but incorporated jointly in the Cayman Islands and Luxembourg). BCCI serviced Saddam Hussein, the terrorist leader Abu Nidal, the Medellín drug cartel and heroin warlords in Pakistan, Iran, Afghanistan, Laos, Thailand and Burma. It financed and facilitated the trafficking of nuclear materials, the sales of Chinese Silkworm missiles to Saudi Arabia and of North Korean missiles to Syria.

BCCI also penetrated U.S. politics and its banking system, manufacturing fictitious deposits and capital and bribing politicians.

When Manhattan District Attorney Robert Morgenthau subpoenaed BCCI in the Cayman Islands in 1990 he was rebuffed by the Attorney-General, a "crotchety British guy" who declined to co-operate because of local secrecy laws. At least initially, cooperation from the Bank of England was non-existent, Morgenthau later told me. Eventually, the Bank of England was forced by the stink to close BCCI down but its Governor, Robin Leigh Pemberton, when questioned on the subject, reiterated the need for London's permissive approach. "If we closed down a bank every time we found an instance of fraud", he said, "we would have rather fewer banks than we do at the moment."

Tim Congdon, a former UK government economic adviser and veteran financial commentator, sees three big factors behind the City of London's post-imperial growth: globalisation, the information technology revolution and what he calls the "offshore revolution"—a massive growth in the use of tax havens over the past two and a half decades. "You can establish a company in a tax haven", he said, "and it can then hold assets that are subject to the tax and regulation of your choice."

It's true. I recently looked at the owners of One Hyde Park, an apartment block in ritzy Knightsbridge in central London that has been billed the most expensive slab of real estate on the planet. Of the 76 apartments that had then been sold, 31 were owned by anonymous offshore companies in the British Virgin Islands; 28 more were owned through companies incorporated in other, mostly British, tax havens. For most of them, it was impossible to find out who owned them; but among the few that are known about, many are, or are suspected to be, the fruit of the corrupt privatisations in the former Soviet Union.

Though the asset—an English stately home, for instance, or a bank account—might be owned by an offshore company, all the lucrative legal, accounting and banking work putting together these structures and arrangements would be done in a big financial centre, typically London. "So the Cayman Islands appears statistically as the fourth largest financial centre in the world," explains Ronen Palan, Professor of International Political Economy at City University in London. "But it's only a paper centre: most of the activities attributed to it in fact take place in London."

So Britain is not just an offshore jurisdiction in its own right: It is at the centre of a British spider's web of offshore finance that serves as a mechanism for feeding easy economic rents into the City. Genuine economic activities in the United States, Latin America, Africa or Asia are financialised and repackaged via the offshore conversion machine, so as to minimise taxes by legal or illegal means, to wrap an asset in offshore secrecy, or to wriggle out from domestic financial regulation. Conveniently, a lot of the business of handling and facilitating this mayhem flows to London. The more that other economies are financialised, the wealthier the City becomes—hence the Lord Mayor's lobbying for deregulation in China.

The City of London's international focus may be the most important aspect of the way it weakens Britain's reliability as an ally. This is not just about fears of Russians or Ukrainians selling up their mansions in Kensington. To understand the full picture, consider what makes an international financial centre tick. And to understand that, it helps to observe small tax havens such as Jersey or the Cayman Islands, where political and economic capture is most complete; local democratic counterweights are smallest; and the issues are crystallised into pure forms.

The business of international financial centres is a curious one. On the one hand, they want to attract money by presenting themselves as clean, respectable, reliable, efficient and trustworthy places to deposit and do business. Skittish financiers hate a taint. On the other hand, these places also want to hoover up as much of the world's dirty and questionable money as possible because, as Swiss bankers have known for centuries, it can be insanely profitable. Financial centres square this apparent contradiction—to appear clean while attracting criminals and other abusers—in two ways. The first is an offering that can be summarized as follows: "We won't steal your money, but we won't scold if you steal someone else's." This is why Transparency International's Corruption Perceptions Index places jurisdictions like Switzerland, Singapore and the United Kingdom at the "cleanest" end of the spectrum, while the Tax Justice Network's Financial Secrecy Index puts them at the opposite end.  The second element is, of course, to spin furiously: to construct a theatre of probity built on endless repetition of the line: "We are not a tax haven, but a legal, well regulated and cooperative international financial centre."

Consider, too, the fact that Switzerland is both politically neutral and a tax haven. This is no coincidence: they are part of the same package. During conflicts, capital flits to the neutral jurisdiction, which may even provide a secret platform for commercial interests in opposing belligerent countries to continue to do business. Being political neutral does help the tax haven, but it works the other way as well: The more your national business model depends on offshore finance, the less appetite you will have for engaging robustly in international affairs. Britain's long imperial and internationalist history militates against such neutrality, of course; but this incentive nevertheless makes the City a perpetual and growing counterweight against Britain's reliability as a U.S. ally.

International financial centres also demand domestic political stability. This is certainly a strong incentive to stop generalised bad governance spiraling out of control. But that is not the only "stability" incentive. Flighty global capital also demands a particular kind of stability, which means insulation of the financial centre from local democratic governance and pesky stakeholders, in the interests of so-called competitiveness.

In small tax havens, measures against financial dissidents can be quite repressive. In the words of a former police chief in the notoriously corrupt British tax haven of Jersey:

    There are no checks and balances on power and the abuse of it. . . .  With such an absence of controls, such an absence of accountability, the ordinary decent people of Jersey are helpless.

The system is buoyed by the construction of a sophisticated and pervasive finance consensus that pervades the media and society at large. Nearly everyone comes to see offshore finance as the goose that lays the golden eggs, and so must never be attacked. It's hard to understate how deep and unchallenged this consensus is in small tax havens like Jersey.

In mainland Britain, of course, the financial centre is a far more controversial player amid Britain's raucous national politics, but the financial sector still senses itself as being almost untouchable. The Too Big to Jail phenomenon is relatively new in the United States; in London, it has been ever so. Rowan Bosworth-Davies, a financial criminologist and experienced former UK financial detective, recalls warning bankers about financial crime in a speech in 2003. Afterwards, he says, a board member of a major British bank told him, "If you think Her Majesty's government is ever going to prosecute people of my class, you are utterly mistaken. We are a protected species."

All the recent evidence seems to bear this out. In 2012 the New York State Department of Financial Services accused Standard Chartered Bank of acting as a "rogue institution", using its London-based branch to help cloak at least $250 billion in transactions related to Iran in plain violation of sanctions. Standard Chartered robustly disputes the allegations. When the bank's CEO for the Americas expressed concerns to the London office about possible reputational damage, the reply came back, continuing in the tradition of BCCI: "You f......g Americans. Who are you to tell us, the rest of the world, that we're not going to deal with Iranians?" When the London-based bank HSBC bank reached a $1.9 billion settlement with U.S. authorities in 2012 for money laundering for Mexican drugs cartels and many others, British officials said they had no responsibility for oversight, even when the rules clearly state otherwise.

We Brits are told, time and again, that any crackdown will damage the "competitiveness" of the City of London. The weasel word "competitiveness" here has nothing to do with market competition: This is about a race to the bottom on standards. And it is hard to understate how pervasive this word "competitive" is in British political debates: It is repeated ad nauseam on the BBC's myriad outlets, with scarcely a dissenting voice. British politicians, desperate to be seen to be (to use a favourite government phrase) "open for business" cower in obsequious terror at the prospect of international financial capital flight. The relationship between international capital and an internationally focused financial centre is a highly unequal one, and any foreign autocrat who wants to influence British foreign policy knows this.

The problem is not so much that Britain will shy away from cracking down on the assets of Vladimir Putin and other potential menaces, significant though that may be. It is that foreign governments know how exquisitely sensitive the City is to anything that will represent the slightest intrusion of politics into Britain's "regulatory stability", and just how powerful the City is in bending the government of the day to its will.

This will not have escaped the Chinese leadership, for instance. Amid meetings in September 2011 between UK Chancellor George Osborne met Chinese vice-Premier Wang Qishang, China for the first time formally backed moves by British financial institutions to develop the United Kingdom as an offshore financial centre for Renminbi trading. The market is still quite small, and tightly restricted by the Chinese government; but the City is collectively licking its lips at the potential. The City Corporation has been lobbying ferociously to clear the decks for this growth, and it is hard to see it tolerating anything that might obstruct these fabulous opportunities. Hosting such a trading platform is significantly in Beijing's gift, and as the market grows, and other financial centres like Luxembourg "compete" to get a slice of this action, Britain will find it ever harder to say "boo!" to Beijing.

While Wall Street has also used competitiveness fears to weaken regulation at home, U.S. financial institutions have long used London as a crowbar to force deregulation in the United States. "If we can do it in London", they have argued, "why can't we do it at home?" The Commodity Futures Modernization Act of 2000, which exempted whole areas of derivatives from regulation and which some regard as the most damaging financial bill in recent U.S. history, was "all about the City of London", said Professor Bill Black of the University of Missouri, an expert in financial crime. "London is vital to Wall Street's ability to argue that it needs weak regulation", he told me in 2012. "The City is the Bogey Man."

It's true: In 2007, just ahead of the financial crisis, New York City Mayor Michael Bloomberg and Senator Charles Schumer, backed an astonishing lobbying document urging massive deregulation, which wielded the words "competitive", "competitor" or "competitiveness" 34 times, and cited light-touch London over 130 times, gushing about its "more amenable and collaborative regulatory environment."

The great financial crisis in the United States has many tangled roots, but it is surprising just how many reach directly from London. AIG, the once-mighty insurer with 116,000 employees worldwide, was brought down by a 377-person unit called AIG Financial Products in Curzon Street in Mayfair. AIGFP and its staff, who earned a combined $3.6 billion from 2001-08, showered money on central London, including on a beautiful three-storey Knightsbridge mansion inhabited by its head of operations, Joe Cassano. When AIG in 2008 became the biggest financial bailout in world history, U.S. taxpayers and others picked up the tab; London regulators said it fell outside their jurisdiction. London kept all its winnings.

Citigroup, for its part, set up all sorts of Structured Investment Vehicles (SIVs) in London (and incorporated them in the Cayman Islands) to shift assets off its balance sheet and lower its regulatory capital requirements. According to Gary Gensler, Chair of the Commodity Futures Trading Commission, it was once again U.S. taxpayers who bore the brunt when Citigroup's London-based SIVs failed. Last year, a London-based trader nicknamed the London Whale caused $6 billion odd of losses to J.P. Morgan Chase. "Often it comes right back here, crashing to our shores", Gensler said in testimony in June 2012. "If the American taxpayer bails out JPMorgan, they'd be bailing out that London entity as well." Once again, U.S. taxpayers coughed up, and London kept the benefits.

London has also been the epicentre of a risky practice called rehypothecation. That happens when a loan is borrowed against collateral, and the new holder of that collateral re-pledges it to someone else, to back fresh borrowing—and so on. U.S. rules restrict this practice but in London they have been able to do it without limit. The result is that a single sliver of collateral can get pledged and repledged around the block in a risky daisy chain of loans. This practice was heavily implicated in the collapse of Lehman Brothers and in the more recent collapse of the brokerage firm MF Global. An IMF paper in 2010 estimated that just before the crisis hit U.S. banks were getting over $4 trillion in funding via rehypothecation and said the shadow banking system—the parts that fall outside bank regulation, heavily implicated in the crisis—was 50 percent bigger than people had previously thought, because they had ignored the rehypothecation phenomenon.

More recently, there has been a little-noticed battle over the Dodd-Frank finance bill, which was originally supposed to give U.S. regulators powers to protect taxpayers by directly policing overseas derivatives activities. But Wall Street, backed by the UK government and others, quickly mobilised its lobby to eviscerate the relevant provisions. As Marcus Stanley of Americans for Financial Reform wrote last June:

    Wall Street is mobilizing to create a back door escape route. Its goal is to prevent U.S. regulation of derivatives transactions by U.S. companies that are conducted overseas. This loophole could strike at the foundations of financial reform. . . . It would create an incentive for global banks to transact their business through whatever jurisdiction has the weakest regulations – a "regulatory haven" to match the tax havens that international corporations already use.

Alas, the lobbyists appear to be winning this fight. They win most of them.

"The pressure has been so great, not only by Wall Street but by foreign governments like the UK, insisting that it's insulting for the United States to assume jurisdiction over these American-affiliated institutions", said Professor Michael Greenberger of the University of Maryland School of Law, a former top CFTC official, speaking to me in October 2012. "Now the question is whether there is going to be a gigantic loophole. "The thread that's been lost in all of this is the U.S. taxpayer."

Because of its nature, City of London will return to bite American taxpayers again. If U.S. economic stability is a matter of national security, then here lies yet another potent threat. But the

greatest national security issue emanating from Britain's offshore financial centre and its offshore satellites is something else again.

When a British or American or Swiss bank helps a foreign dictator and his or her cronies loot a poor country, and helps them stash and hide their winnings permanently offshore, that bank is an accomplice not just in criminal activity, but in that country's governance problems, by helping its offshore-diving élites float above the societies they rule and trample over. U.S. banks are guilty enough of all these crimes, but Britain and its offshore empire have made offshore secrecy into an art form: an art of darkness, one might say, with apologies to Joseph Conrad.

Turmoil and governance problems in Pakistan, Saudi Arabia, Greece or Egypt all have many causes, of course. Most are far beyond the reach of foreigners to have much influence. But here, in the arena of global  finance, lies one very significant area where the West potentially has reach. It can help bolster better governance by raising standards to help stem the looting. But for those who want to try it, they may find powerful players in the City of London, and even in the British establishment, standing in their way.