This past summer, the IRS took serious steps in an international attempt to cut down on tax evasion through the use of offshore accounts in Switzerland. The IRS has entered into an agreement with the Swiss Parliament to release over 4,000 names of U.S. citizen clients of UBS AG with significant holdings in Switzerland.

The trouble began when the IRS decided to investigate UBS for helping Americans evade US taxes.  UBS was facing potential criminal prosecution, which could have threatened the very existence of one of the largest and well-reputed banks of our time.  In a move to save the bank, UBS executives pressured the Swiss government for ways around the secrecy banking laws to give the IRS the names it wanted.

And thus commenced a potentially colossal conflict of laws battle between the Swiss and the Americans.  The Swiss have always been extremely protective of private information, regulating banking secrecy through banking laws, criminal laws, civil laws and other professional codes.[1]

Article 47 of the Swiss Banking Federal Act 1934 codifies the banker’s responsibility to protect client information, and imposes potential criminal sanctions for violations.

Article 47 states:

Any person who willfully . . . (b) in his capacity as organ, officer or employee of a bank, as auditor or assistant auditor, as member of the Banking Commission, officer or employee of its secretarial office, violates his duty to observe silence or the professional secrecy, or whoever induces or attempts to induce a person to commit such an offense, shall be fined not more than twenty thousand francs, and/or shall be imprisoned for not longer than six months. . . . If the offender acted negligently, the penalty is a fine of not more than ten thousand francs.

Thus, on its face, handing over information on bank account holders would infringe upon these codified duties.  Moreover, the Swiss Criminal Code, in art. 273. states:

Whoever makes accessible a manufacturing or business secret to a foreign official, agency, or to a foreign organization or private enterprise or to any agents of the same, shall be punished by imprisonment and in serious cases by penitentiary. In addition to that penalty, a fine may be imposed.

As we see, privacy is taken very seriously.  While Swiss banks are authorized to turn over some client information to Swiss regulators in very specific, legislated circumstances, there is no general authority to divulge secrets to foreign authorities.  Foreign authorities requesting information will need a judicial declaration to gain access to the information, and must use diplomatic channels established through treaties to do so.  Consequently, the Swiss Federal Administrative Court in Bern held in Feb 2009 that UBS violated Swiss banking law when it turned over 255 bank clients to the IRS.  However, the new agreement with Switzerland has put some of these questions to rest – at least for now.

Preceding the new agreement is a bilateral double taxation treaty between Switzerland and the USA.  The new UBS Agreement is seen as another step in this direction — not just as a private agreement concerning UBS, but rather another tax treaty which is more specific and empowering than the previous bilateral double taxation convention.  Whereas the Swiss had a duty under the general double taxation convention to provide the US assistance in cases of tax fraud, under the UBS Agreement, those obligations are extended to include assistance in cases of continued and serious tax evasion as well.

This is a significant change. Previously, many requests for bank account information by the IRS had been denied.  The basis for rejection largely stemmed from differences in Swiss and American tax law.  In the USA, tax evasion can be charged either civilly or criminally.  Under Swiss law, it is only a civil violation.  Consequently, the Swiss would only disclose information where a violation would be criminal under Swiss law, and not for mere instances of tax evasion.  (Bondi, 5-6)

While Switzerland has been able to temporarily legislate around the privacy conflict and the IRS’s imposing criminal and civil threats to UBS, the question remains: what will happen to Switzerland’s staunch commitment to privacy, particularly in the area of private finance?  To what extent should the USA be able to interfere with the domestic laws of foreign jurisdictions?  While many speak of the end of the heydays of American hegemony, this encounter with the IRS demonstrates that, at least for now, the USA – and the IRS in particular – still retain powerful influence over other countries, largely due to the economic weight of Americans in multinational institutions like UBS.

As a side note, while this development is bad news for American UBS Swiss account-holders, the potential onslaught of litigation has been keeping tax boutique firms in New York busy. While we are still weathering out the recession, bankruptcy, restructuring and now tax evasion continues to occupy lawyers.

The stated purpose of the Act was, “to ensure that corporations engaged in mining, oil or gas activities and receiving support from the Government of Canada act in a manner consistent with international environmental best practices and with Canada’s commitments to international human rights standards.” In other words, the bill hoped to codify what is currently considered, insofar as international law is concerned, to be soft law. Despite the fact that some of the biggest Multinational Enterprise (MNEs) are technologically and financially stronger than some of the countries in which they operate, they are not recognized as having international legal personality.

Several international declarations demonstrate a consensus on behalf of the majority of states that the bottom line should not be companies’ sole prerogative; human rights must also be taken into account. The 2002 Johannesburg Declaration on Sustainable Development states that the private sector, “has a duty to contribute to the evolution of equitable and sustainable communities and societies.” Similarly, OECD Guidelines, the UN Global Compact, and the 1998 ILO Declaration on Fundamental Principles and Rights at Work are seen as important sources of international opinion on the duties of MNE’s. However, under international law, Corporate Social Responsibility (CSR) is still treated as a voluntary measure that such corporations agree to undertake (whether it be for public image or morality is not significant), while positive obligations on MNE’s remain a municipal issue.

A general argument made against the Act is that it would impede business interests and would be economically disadvantageous for Canadian mining companies. Yet other countries have come forward in creating similar obligations for MNE’s. The U.K. passed the Corporate Responsibility Bill in 2003, which extends to any company with an annual turnover of at least five million pounds. The Bill appears to be much more onerous than the proposed Canadian Act, as it includes liability for Directors which could lead to imprisonment. In contrast, the Canadian Act did not include an extensive section on penalties and made no mention of liability for Directors. In fact, the three –to-four page Canadian Act looks relatively harmless compared to the twelve page U.K Bill.

Canadian mining companies have relatively recently developed quite a bad reputation abroad. It is said that in the mid-to-late 90’s, a Canadian gold mine company operating in Tanzania was involved in a cover up of 52 deaths of local farmers with the Multilateral Investment Guarantee Agency’s (MIGA) Ombudsman. Just recently, the Inter-American Commission of Human Rights granted precautionary measures for the members of 18 communities of the Maya indigenous people in Guatemala whom allege that mining by Montana Company, a Goldcorp subsidiary, was issued and mining began without the prior, complete, free, and informed consultation of the affected communities. Furthermore there are allegations of ongoing human rights and environmental abuses.

It was largely in response to these and similar stories that Bill C-300 was introduced. Yet, it seems that Canadian issues will take precedence over international norms. This is not surprising; in 1948, Canada was one of the last countries (along with some from the Soviet bloc) to hold out on the UN’s Universal Declaration of Human Rights, allegedly because the government was urged by lawyers and business not to sign a document that was seen as too revolutionary. At the civil society’s Convention for Biological Diversity taking place in Japan, Canada and the EU recently won the ‘Dodo award’ (named after the dodo bird). Canada was accused of blocking any real impact for the United Nations Declaration on the Rights of Indigenous Peoples within the ABS regime.

Thus, until international norms take the shape of positive international obligations, Canada’s approach will be the traditional one – allow for a business to ‘regulate and monitor’ itself and ensure that municipal law does not interfere.

“What does this have to do with law?” you may ask (other than its relevance to my ongoing unjust dismissal hearing). Simple: by passing the environmental buck on to financial regulatory agencies such as the Ontario Securities Commission (OSC), we would be treating them just like poor old Tibor.

In the land of the incompetent, the semi-competent man is king. Similarly, in the ham-fisted world of inefficient and ineffective governmental organisations, a body which generally satisfies its mandate, such as the OSC, is a paragon. Of course, the OSC (or the rest of Canada’s financial market regulators) isn’t beyond criticism. Many complain that Canada is more lax towards fraud and white-collar crime than other countries. Nevertheless, the OSC has fared much better in meeting its dual mandate – protecting investors while promoting fair and efficient markets – than equivalent organizations in other jurisdictions, such as the Securities and Exchange Commission (SEC) in the United States (particularly during the financial crisis).

It is understandable that some would want to use a relatively effective (and semi-autonomous) governmental body such as the OSC to advance important causes which are unrelated to its mandate, just because they have been neglected by more relevant organisations. Examples of such causes could include labour standards, unpopular executive decisions (see this year’s OSC ruling involving Magna International), and now environmental standards. “Tibor,” I mean “OSC,” you might say, “Environment Canada has little power to force businesses to improve their sustainability practices. Why not use corporate disclosure rules to help things along?”

Professor Dhir’s proposal, in his recent special submission to Legal Frontiers, is of course phrased differently, but the effect is largely the same. Professor Dhir argues that the OSC already has the power to require disclosure on environmental matters, and that such disclosure is of material significance to investors. He proposes that Canadian (or Ontario) law be modified to require that companies explain an absence of environmental and social policies, and assess the success of such policies.

The crucial assumption for having financial regulators enforce environmental disclosure is that it is materially relevant to investors because it corresponds with financial performance. Yet various studies have examined this link and found it to be inconclusive. For this reason, National Instrument 51-102 (which applies across Canada) requires companies only to report on “environmental policies that are fundamental to […] operations”. This is logical on its face: in some industries (such as mining or fishing) environmental policies may closely relate to financial performance, while in others (such as manufacturing musical instruments) the link may be nonexistent. Disclosure of these policies is thus only relevant to investors in the former case.

The distinction is important because as international political action on the environment – and particularly climate change – stalls, individual countries will turn to non-conventional means and organisations to achieve progress. For example, the United States has been considering using tariffs within the World Trade Organisation (WTO) framework to prompt action on greenhouse gas emissions. But the risk is that pulling in unrelated organisations such as the OSC or the WTO may merely confuse environmental law, reducing the impetus for a proper solution without actually achieving much.

There are many strong arguments for forcing corporations to implement environmental and social policies. But these arguments may not involve information which is materially important to investors. For this reason, it unwise to pursue action on corporate environmental responsibility within the context of a financial regulatory body tasked with protecting investors – even if progress on other fronts has been limited. Doing so is like forcing a square peg into a round hole, just because someone put gum in the square hole. Nevertheless, the temptation to do so in this case is strong, particularly since political action on the environment is so full of gum. But as Tibor could tell you, foisting the tough jobs onto someone else can only get you so far.

I only wish he hadn’t told a certain Labour Relations Board the same thing during a certain unjust dismissal hearing.

QUICK, FIND TIBOR!

Yet Mike Bakunin, who recently left SOAR to establish a sister branch in Rivière Ouest (Manitoba) with a more awesome acronym, claims that these groups don’t just advocate violence. “For those who think that anarchists are just about chaos and firebombing, that’s not the case. Groups like FFFC Ottawa give the rest of us a bad name – we can actually engage with the issues as well as anyone. Now obviously the summit will be focusing on economic and financial matters, so we think that we can best get our message across if we zero in on those issues as well. It’s hard to convey complex messages like that with firebombs…not impossible though.”

As an example, Mike points to the debate over a proposed international bank tax. Although countries including Britain and the U.S. were initially pushing for a tax on banks to pay for bailouts when they became necessary, countries whose banks never needed to be bailed out such as Australia, Brazil, and Japan – with Canada leading the way – opposed the idea. Now as an alternative the Canadian government is proposing an idea called “embedded contingent capital” (ECC); essentially bonds issued by banks which would automatically convert into shares in times of crisis, providing instant extra capital. Finance Minister Jim Flaherty and Julie Dickson, the head of the Office of the Superintendent of Financial Institutions (OSFI), have recently been touting the merits of ECC. “The problem,” Mike says, “is that because there’s so much uncertainty about what would trigger the conversion, buyers of the bonds will demand a hefty risk premium which may end up costing the banks more than the tax would have. Plus, in a time of crisis, the conversion of the bonds might scare away other investors and exacerbate capital flight. So I think we have to fight ‘the man’ on this – even if ‘the man’ is Julie Dickson.”

It’s clear that ECC won’t be the only financial reform discussed at the summit. Reform of the Basel Accords – international banking regulations – will be a major focus. The Basel Committee on Banking Supervision (BCBS), based at the headquarters of the Bank for International Settlements in Basel, Switzerland, is composed of representatives of the central banks of developed and emerging market countries. It was created in 1974 in an effort to harmonize banking regulations across borders. Agreements among BCBS member states – called the Basel Accords – were negotiated by national leaders, finance ministers, and central bank governors. These agreements do not operate like treaties in the normal sense, with each country signing and ratifying them, but rather are intended as an international standard that national bank regulators can use when creating their domestic regulations. Implementation is left to each country’s discretion, but most regulators do in fact implement the accords (95 national regulators have committed to implementing the most recent accord by 2015). They aren’t applied uniformly however, since national regulators may include local variations on the rules.

The first agreement, now called Basel I, was agreed in 1988. It was designed around the concept of minimum capital requirements: the minimum amount of cash banks have to keep on hand relative to their total assets (loans they are owed). Basel I created 5 categories of assets based on risk level, and required banks to keep capital equal to 8% of the assets, weighted according to risk. It was implemented by BCBS member states by 1992. The second accord, Basel II, was agreed in 2004, and served to “upgrade” the original accord, creating a three-pillar structure. The first added nuance to the capital requirements of Basel I, distinguishing between three different categories of risk. The second gave new tools to regulators to better review compliance with capital requirements. The third pillar promoted market discipline in order to foster stability and predictability. Negotiations for Basel III were undertaken in response to the recent global financial crisis, and the G20 summits are a key part of the process. Proposed changes to Basel II include: revising the categories of capital (tiers) to improve transparency, strengthening risk coverage requirements, introducing a leverage ratio to supplement the risk rules, requiring the creation of capital buffers to promote counter-cyclicality, and a minimum liquidity standard for international banks. G20 finance ministers see the eventual implementation of Basel III as inevitable.

Mike believes it’s crucial for the protestors to have their voice heard while the Basel negotiations proceed in Toronto. “In pushing for a stateless society, we have to make the most of times when the different parts of the machine – government and big corporations and banks – turn on one another. First they’ll fight about international regulations, and then the next step is complete mutual annihilation. Basically what I’m saying is that we want the most stringent risk coverage and capitalization rules possible.”

The challenge for the collectivist anarchists is ensuring that they have a clear position on every financial reform issue, lest they appear to the public as an incoherent rabble. “Right now at our meetings we’re trying to hammer out what stance we’ll take on phase 2 of the International Accounting Standards Board’s new Financial Reporting Standards, and their impact on the life insurance industry.” Finance Minister Flaherty has supported Canadian life insurers in their appeal to the board for an exemption from the new rule. “On the one hand, big corporations shouldn’t be exempt from accounting best practices, but on the other hand these new rules would definitely create a lot of volatility for insurers– particularly with regard to long-term products. So I guess we’re not sure if this is a step forwards or backwards in the march to the destruction of the state. We hope to have decided by next week.”

Despite the complexity of the negotiations, Mike is confident his group’s nuanced message will get across to the public and to world leaders. “I’m optimistic. We’ll print out our arguments in an executive summary, and see if we can submit if for consideration by the delegates.”

Asked if there was a backup plan for conveying their opinions, Mike considers: “…probably firebombs.”

THE FIRE REPRESENTS EMBEDDED CONTINGENT CAPITAL

“Africa could rightly be described as the major theatre of contemporary cases of shared sovereignty.”[1]

It is the hope of many African leaders that greater cohesion in African trade will lead to more firm patterns of national development. Formalizing the international trade sector within Africa could lead to greater national tax revenues, a freer exchange of ideas, labour and technology across borders, the stabilization of regional agricultural and natural resource markets, and greater cooperation over shared infrastructure projects such as the creation of highways, waterways development, and even the deployment of green technology such as wind energy projects.[2]

While more flamboyant African leaders such as Muammar Gaddafi stress the need for pan-African unity (Gaddafi even calling for a United States of Africa), smaller regional unification bodies are already active. Most Westerners might be surprised that much of West Africa, the nations of the Economic Community of West African States (ECOWAS), already has a unified currency between fifteen nations. Since its creation by treaty in 1993, ECOWAS trade commissioners from a diverse array of fields attempt to integrate trans-national policies on social affairs, water resources, energy, and security matters. Just as NATO intervenes in foreign conflicts, when civil unrest unfolds in member states, such as recently in Guinea, ECOWAS applies strong diplomatic and military pressure to uphold the rule of law.

The East African Community (EAC) was first launched in 1967, but was then dissolved and later re-launched after a treaty agreement was signed in 1999 between its three original member states: Kenya, Tanzania and Uganda. Burundi and Rwanda later became full members of the EAC. The EAC has worked to harmonize national and municipal laws and strengthen the training of the judiciary within the community. The East African Passport was introduced with the creation of the modern EAC, and alongside efforts to decrease trade tariffs it has been integral to helping people and goods move across borders with relative ease. Citizens of NAFTA countries should be so lucky! The EAC envisages sharp integration in terms of foreign policy and a full monetary union under its common market – although no timetable has been set for this.[3]

Another strong regional body in Africa is the Southern African Development Community (SADC), which was established in its modern form during the waning days of Apartheid via treaty in 1992. The SADC also tackles a variety of issues, including the reduction of drug trafficking, preservation of shared waterways, and legal harmonization. A free trade area was launched in August 2008 and the SADC’s member states are now collectively pursuing investment in their national economies. The relatively light hand applied to the deteriorating situation in Zimbabwe demonstrates that the SADC lacks the diplomatic strength of a body like ECOWAS. Instead, the organization seems to focus on shared goals in economic development more than on the cultivation of shared political institutions.

An interesting development has been the launching of the Common Market for Eastern and Southern Africa (COMESA), which since its creation via treaty in 1993 has fostered closer links between the nations of the SADC and the EAC, among other nations. The United Nations Economic Commission for Africa (ECA) has long pushed for regional integration in this region,[4] which is bound together through aspects of its colonial and post-colonial identity, as well as geographic avenues of trade that makes such integration beneficial to regional development goals.[5] COMESA also extends to other nations not involved in formal regional political integration schemes, such as Ethiopia, Eritrea, Egypt and Libya. However, not all nations of the aforementioned bodies have taken part in COMESA, notably Tanzania who quit its involvement in the year 2000.

It is also notable that the nations of the Maghreb and North Africa have to this date made very few concrete efforts to engage in regional economic integration. While The League of Arab States has as its goal the promotion of commercial relations between Arabic speaking peoples, this has not translated into large-scale economic integration in the Arab world, including North Africa. Rather, the Arab League has served as a socio-political organization. Maghreb states have toyed with the idea of further economic and political integration but planning is still in the development phase.

ECOWAS, the EAC, the SADC and COMESA can all play a role in driving economic development in Africa. In particular, they can help businesses feel safe to expand across borders through more strict and clear regulation and through ensuring that proper arbitration systems are in place. Amazu Asouzu writes that post-colonial African states have traditionally not trusted larger arbitration regimes such as the International Centre for Settlement of Investment Disputes (ICSID). These states viewed “arbitration as an alien system of justice devised to subvert the institutions and interests of developing states.”[6] Political enforcement of such legal mechanisms, through mutually beneficial regional development, can play a role in helping businesses enter new markets, create jobs, and improve the lives of African peoples.

The right to development stresses the indivisibility off human rights, and the inter-linkages between civil and political rights, on the one hand, and economic, social and cultural rights, on the other.[7]

However, this brand of economic development must be coupled with a human rights and social agenda in mind – one that is backed up by diplomatic and military force if national leaders get out of hand. ECOWAS, however belatedly or poorly, has flexed its muscles to bring its member states into line on these issues. The SADC has failed to recognize these principles in its dealings with Zimbabwe. Using a dualistic socio-economic approach, the aforementioned regional bodies can be active members in helping African peoples recognize their collective right to development.

[The author will spend six months in 2010 blogging from Cape Town, South Africa, covering topics related to regional integration issues in African governance, particularly energy, trade, and security concerns.]

[2] Henry Kibet Mutai, Compliance with International Trade Obligations: The Common Market for Eastern and Souther Africa (Boston: Kluwer Law International, 2007) at 104.

[3] Ibid at 119.

[4] Ibid at 129.

[5] Ibid.

[6] Amazu A. Asouzu, International Commercial Arbitration and African States (Cambridge: Cambridge University Press, 2001) at 412.

[7] Tiyanjana Maluwa, International Law in Post-Colonial Africa (Boston: Kluwer Law International, 1999) at 312.

The idea was subsequently picked up by UK PM Gordon Brown and presented to the G20 at their meeting in St Andrews, Scotland on Nov 7th.  Brown presented the tax as an instrument to fund future bank bailouts.  Moreover, he sees the tax as increasing accountability in the financial sector.   However, the idea was not received as well as had been hoped.  The USA has rejected the idea, and Canadian Finance Minister Jim Flaherty also came out against the tax.

While things looked dismal for the tax proposal following the G20, it seems that at least as far as the US is concerned, the idea in principle may still be kicking around Congress.  U.S. House of Representatives Speaker Nancy Pelosi has spoken out in favor of a similar proposal, affectionately named the Wall Street tax, from which funds would be used for job-creating legislation sought to be passed in December.  The Democratic proposals are citing nearly a $150 billion per year fund to help with economic recovery. However, the US is staunch about the necessity of the tax being an international one, otherwise it stands the risk of losing financial jobs to markets overseas.

So what would these taxes practically look like? Democrat Representative John Larson proposes a 0.25 percent tax on over-the-counter (OTC) derivatives transactions.  But once again, we see the Democrats in favour of the tax being adamant about applying this potential tax internationally.  These OTC derivative transactions go on primarily between banking and financial institutions and include interest rate contracts, credit default swaps, foreign exchange contracts, commodity contracts and equity contracts among others.    To contrast, France was looking at roughly 5 cents on every 1,000 euros.

As long as the US dollar remains as a standard trading currency, there is an opportunity to achieve the goals set out by this potential tax proposed by some Democrats.  Even when money is traded in US dollars between two foreign banks, the transaction passes through New York.  However, a potential tax only on USD transactions thus would tally another minus for the already weakening use of the USD as a currency of trade.

However, it leaves one to wonder how feasible a truly solidified global financial tax really is.  While places like New York and London have been seats of financial power for ages, there’s no telling what might happen if the tax isn’t uniformly implemented.  All it takes is one or two countries with a relatively stable currency to withhold to cause a great threat to the goals of the tax.  The danger is not just in the abandoning of the US dollar as a currency of trade, but rather corporations moving operations overseas.  Like the phenomenon of ships leaving the US to be registered under Flags of Convenience, a non-uniform global tax might cause corporations to do the same.  And that certainly wouldn’t help raise funds for stability or any future bank bailouts, nor would it help create more jobs in this continued time of high unemployment.