London and Hong Kong set to ignore EU money-laundering rules
Jake van der Kamp
The European Union proposed a tax on financial transactions that could be collected worldwide as soon as next year by the 11 countries that have so far signed up to participate. To escape the proposed tax entirely, firms in other countries would have to cease financial services business with the 11 countries involved.
Bloomberg, SCMP, February 15
This one has actually been in the works for some time. It's news only because the EU chose Valentine's Day to confirm that it is going ahead with this beauty.
It's a beauty because it's custom-made for what Hong Kong has traditionally done best, which is offer reliable corporate services at low cost and look the other way when that is the option most likely to avoid trouble. We may, of course, continue making noises to the effect that we are utterly opposed to money laundering but, as long as we don't mean what we say, everything should be fine and a new line of service exports open to us.
Let's review what the EU has done here. First, it introduced a single currency under a regime that imposed strict limits on the fiscal deficits that any member country could incur and counted on their honesty to report their fiscal positions accurately.
In the event no member stayed within the limits and some of them, most notably Greece, reported dishonestly. When this had the predictable result of bringing about a financial crisis, the European Central Bank, set up as the independent guardian of the euro, surrendered its independence at the first push.
It instead made itself a lender of last resort to irresponsible governments, ran its debt load up to gargantuan levels and induced private lenders to join it in rewarding irresponsibility by forgiving massive amounts of member country fiscal debt.
Meanwhile, the position of many private lenders was further worsened by the bursting of property bubbles, most notably in Ireland and Spain. These property bubbles were largely blown out to huge proportions by governments' low-interest-rate policies and lax supervision.
And now the EU has determined that the cause of its fiscal difficulties lies not with itself but with banks that engage in financial transactions. They will be made to pay for it through a new financial transactions tax that is expected to raise €35 billion (HK$362.77 billion) a year.
In order to plug the loopholes the EU has also adopted an "R plus I" (residence plus issuance) framework. If the transaction has any European angle, you will have to pay. There will be no offshore havens, you hear?
There are loopholes, nonetheless. This tax is to be levied only on institutions, not individuals except those who trade too often for the liking of EU bureaucrats. It was institutions, not individuals, who were guilty of having caused the crisis, you see, and therefore only fitting justice to structure things this way.
It certainly is a good way to weaken a financial sector that the EU professes to want to strengthen, but we shall leave this aside, as the idea has one enormous loophole big enough to float a supertanker through and leave room for a Super Bowl stadium.
Britain won't go along, and it hosts Europe's biggest financial centre. Under internal EU free-trade rules any member country is entitled to trade in goods and services originating in or destined for any other member country and levy only such taxes and fees as it chooses to do on these transactions.
And the UK government has made it plain that it will not charge the EU financial transactions tax on deals done in London. Thus the EU faces the choices of kicking the UK out of the bloc, losing all of its financial transactions to London, or abandoning the tax.
And I shall be very surprised if what London finds easy to ignore won't be found just as easy in Hong Kong. This town stands to add to its allure as a listing and trading centre.
But we will have to accept that what silly laws in the EU treat as money laundering will not be regarded so here. It's either that or we will just have to accept that money laundering is what we do anyway.
Someone had better clue our judiciary in.