The Cambridge International Symposium on Economic Crime
Jesus College, Cambridge CB5 8BL - September 9th to 16th, 2001
International Financial Regulations
The Rule of Law
Dr. Gilbert NMO Morris
Executive Director – Institute For Economic Freedom (IEF)
Chairman –Security Policy Group International (SPGI)
Professor, George Mason University
My Lords, Ladies and Gentlemen, I am pleased to have been invited to address you on these pressing matters concerning the international financial system…particularly, the Qualified Intermediary (QI) rules enforced by the US Internal Revenue Service (IRS) and the hoard of Financial Services legislation recently enacted in Offshore
Financial Centres (OFC) at the insistence of the Financial Action Task Force (FATF) and its non-state auxiliaries; such as the Financial Stability Forum (FSF). I will try to be frank in what I must say, unperturbed by the fact that many of you gathered here belong to these groups and are responsible for the new financial regulatory regime to which I am – with all due respect - so diametrically opposed.
I must caution that my opposition is not frivolous…and I do not oppose the new regulations unmindful of the ostensible objectives with motivated them. I oppose them, not for reasons of
nationalism, nor directly on the grounds of civil liberties. On the question of the legitimacy of the new regulations, there is I fear no halfway point: one of us must be shown to be wrong as a matter of law. I say
this because, these new regulations imply that we are not simply discussing here in this honourable place, a means to deal with financial transactions; suspicious or otherwise. Rather, we are deciding the economic
philosophy of the future, and determining the role and powers of government vis-à-vis the rights and privileges of the citizen. This is the classic dichotomy with which Plato (427-347 B.C.E.) struggled in the Republic; in hopes of determining the right balance between the government and the governed.
From Plato to the anti-colonial movements of the 1960s, the anvil upon which this balance was hammered out was the principle of the Rule of Law. I ask your indulgence to hear me on this
principle, since it is at the heart of all I wish to say.
What is meant by this principle The Rule of Law?
It means this, and nothing else besides: that each individual is insulated from every other individual's opinion becoming a rule which governs life. It means, that I need not know any
governments official's name, or rank, or religion, or personal philosophy, since I am protected from him by a set of rules; which also protects him from me. The Rule of Law is the first ground in any principle –
indeed the only legitimate principle – of equality: that each citizen, regardless of race, class, rank or gender is equal before the law.
Let us give some consideration to this question - of the role of the Rule of Law - from the perspective of the History of Jurisprudence and Political Science. I shall offer my explanation
in two ways, as definition and as application.
First, Hannah Arendt (1906-1975) in her seminal philosophical work "Totalitarianism" identified the opposite categories to government by the Rule of Law. For instance, Arendt placed
totalitarianism on a list of the variety of government from antiquity; which has – she argued - altered little since then: "monarchy (the rule of one) and its perversion in tyranny; aristocracy (the rule of the
best) and its corruption in oligarchy or the rule of cliques; and democracy (the rule of many) and its distortion in ochlocracy or mob rule". I paraphrase her definitions here:
- Dictator: one who governs by – and even insists upon -law, but the law is limited to achieving his vision of the state. Under this regime life is predictable, but harsh.
- Despot: one who appeals to law only if it suits his needs. Generally, he does not believe in anything, so does not have the discipline of the dictator or the insatiable cruelty of the tyrant.
- Tyrant: one who makes no pretence at law at all. Under the tyrant life is miserable, unpredictable and usually short.
Why are these categories important? They are because they are the extremes in each direction, and they help explain the function or application of politics, and how a society may evolve
from one condition of government to another. The point is that societies are always moving from one of these extremes to the other, and in each case, power shifts between those who govern and the governed.
Another way of explaining this is the notion of the "Leviathan". In the work of Thomas Hobbes – the English Philosopher (1588-1679) this meant nothing short of "absolute ruler". Hobbes thought very little of mankind, and decided that nations required paternalistic governments, which made all the rules, without possibility recourse. Hobbes, therefore, along with the extremes of the categories identified by Arendt represent government by men or by individuals; if you please, the rule of persons.
However, it was Europe's great contribution to the "rise" of the 'American west' or the Atlantic world, that opposition politics in the 18th century rejected Hobbes for the ideal of the Rule of Law. You will recall that after 1776, the new Americans thought they could survive without rule by law or by men. They soon discovered that they had to institute between themselves a code, which has become the basis of its juris-culture: the US constitution in 1789.
A firm – time-honoured principle of the western legal tradition which demonstrates the turnstiles of citizen-state relationship under law is that ignorance of law shall form no excuse. This
because excuse itself is an exception to breach in certain cases. Earlier today, I argued this point with an official from the treasury's office: on the question of tax evasion (illegal) and avoidance (legal) I put
to him the notion that the law must be clear. He accepted. I put to him that he was an expert in this area of law. This he very much accepted. I put to him that he should list for me the absolute distinction between
evasion and avoidance. Alas, he could not. You cannot therefore prosecute, I put to him finally, but he insisted he could.
I proposed another argument. He accepted. That in the US it is reported that 77 million suspicious transaction reports were filed, and there were less than 500 convictions, and so a clear
proof that the policy rested on nothing which could be called law. He conceded that the record was poor. I answered that the US Presidents Chief Economic Advisor, Dr. Lindsay had called the policy "99.99 %
ineffective". That the Federal Reserve had cancelled plans for its own "Know Your Customer" rules, and that the policy was a fishing expedition which was an unjustifiable cost to business. "You have to hope" he
said, "that you do not get caught". At this point, it would have been improper to pursue the matter further. However, what does this betoken for the western legal tradition, which we are being called upon this day
to defend in the face of lawlessness?
Out of these legal traditions came great cases which has sustained the hopes of millions in the ideal of the Rule of Law. If you will permit me, I shall mention only two of them.
First the Olmstead Case (1928) in which the judgment was rendered by Mr. Justice Brandeis – as he then was. In the 1928 U.S. Supreme Court case of Olmstead v. United States, decided by a 5-4 vote, Justice Louis Brandeis's dissenting opinion argued for a constitutional right to privacy and warned future generations about the advancement of technology and its possible intrusion into constitutionally protected areas. In 1924, Mr. Ralph Olmstead stood accused of violating the Volstead Act (1920) which outlawed the transportation or sale of alcoholic beverages anywhere in the United States. The evidence against Olmstead was gathered through the use of electronic wire-tapping of Olmstead's office and home. Olmstead claimed his Fourth and Fifth Amendment rights had been violated. Olmstead believed the search of his house and office was illegal and that his conversations should not be used to self-incriminate him in court. The U.S. Supreme Court, however, did not agree with Olmstead. Chief Justice William Howard Taft argued that the search of Olmstead's property did not violate the Fourth Amendment's protection against unreasonable searches and seizures because the police did not physically enter Olmstead's house or office and seize physical evidence. Rather, the police overheard telephone conversations over "...wires
reaching into the whole world from the defendant's house or office."
Justice Louis Brandeis, one of four justices dissenting in this case wrote, "The progress of science in furnishing the Government with means of espionage is not likely to stop with
wire-tapping. Ways may some day be developed by which the Government, without removing papers from secret drawers, can reproduce them in court, and by which it will be enabled to expose to a jury the most intimate
occurrences of the home." Justice Brandeis further argued that the "right to be let alone" was the most important right available to mankind.
Brandeis went on to say, that governments were not at liberty to break the law under claims that a greater good was achieved, since this opens the opportunity to justify any government actions as
doing an illegal thing to achieve something legal.
Why is this relevant here today? It is because here I am, explaining a legal tradition which gave birth to this place, and which this place gave life to; and I am explaining it to those for whom it is
a direct legacy. I am explaining it because, by the recent international financial regulations enforced upon OFCs by the OECD/FATF/IRS initiatives you have broken the law because – in your view – there is some
greater good to be attained.
The initiatives of the OECD on Tax Harmonization found in its Memorandum of Understanding which aims to equalize tax levels around the world, thus eliminating tax advantages in each region - particularly the OFCs - is illegal at international law according to Assembly General Resolution 2131 of 1965 which limits intervention in the domestic affairs of other nations.
In addition, the Memorandum calls for "spontaneous" exchange of information between OFCs to aid governments in their investigations on tax matters. It provides that any nation that makes a
public declaration followed by a letter to the OECD will be considered party to the Memorandum. This has all the thereabouts of a treaty when, in fact, the OECD has no capacity in law to form treaties since it is
not a nation. Secondly, there is no basis in law for the instant provision of private financial information, as Justice Brandeis' judgment in the Olmstead case demonstrated. The protection of the individual from
intrusions is the basis of the western democratic state model, and the first principle of the legitimacy of democratic government. As such, no supra-national body can - in law - demand an action that is a direct
assault on the sovereign character of a state.
The Group of Seven Countries (G-7) established the FATF at its 1989 Summit in Paris. Its basic document is the 40 Recommendations that bear much resemblance to the OECD's Memorandum. However, they
concern money laundering and are ostensibly directed against international financial crimes. The Recommendations appear to be in breach of international law as in the case of the OECD. The regulations forced by the
OECD, FATF, IRS on the OFCs have effectively redefined under duress the legislative personality of the nations against whom they are directed. Under the Vienna Convention on Treaties (1969) a treaty is void if its
conclusion has been procured by the threat or use of force in violation of the principles of international law embodied in the Charter of the United Nations.
Are these initiatives not void treaties extant? In the Bahamas, Bahamians are not permitted by law to hold US dollar denominated bank accounts. The banks which do business in US currency are the banks
domiciled in Europe and the United States. These are also the banks which laundered monies belonging to tyrants who have raped their state's coffers. Now, for the sake of controlling your own banks, the whole
Bahamian people must alter their relationship with their financial institutions and provide private information according as external forces dictate.
The Dutch lawyer, Hugo Grotius (1583-1645), wrote that "sovereignty and equality of all states is the basis of international law". He asserted that "sovereignty was an attribute of the
State". Since Grotius, national sovereignty has been commonly considered as an attribute of national "governments", and the substance of sovereignty is the right and power to enact and enforce the nation-state's Defense, Economic, and Foreign policies; and this dependent on the legitimacy of the government by a process of law: the Rule of Law. In this connection, any international regulation or obligation, which is "freely" accepted by the "legitimate representatives" of a nation-state, in exchange for "the guarantee of reciprocal treatment" by other nation-state, constitutes an exercise of national sovereignty, regardless of which nation-state actually wins or loses something in the exchange.
What this says is that the principle means of association between states – given to rule by law - is negotiation. Further, that no state can – in law – demand of others what it refuses for
itself. I realize that states act outside of these parameters with shameless frequency. But we are not arguing across the competitive powers of nations. We are at an academic institution which is the seat of first
principles. Our proper role here is to say rightly what the law is. And on the two grounds of negotiation and reciprocity again – I fear I must charge you insofar as the OECD's initiatives are concerned, and insofar
as you are responsible for enforcing them – you are in breach of the law.
The examples are plain on their face and show a prima facie disregard for the Rule of Law. For instance, the imposition of target dates for compliances and the threat of sanctions offend the first principle. The fact that in Europe France and Germany have "ring-fencing" arrangements which mean the taxes are not harmonized within their very own states offend the second principle. But there is more. None of you have mentioned Colorado, Delaware, Nevada or Alaska as tax havens, and certainly none of you have demanded of them what you demand of the OFCs. Why? This offends the World Trade Organization's (WTO) framework rules on non-discrimination, and the Most Favoured Nation (MFN) framework. Moreover, in respect of the United States, under section 30 of the Mutual Legal Assistance Treaty in Tax Matters, it has made such reservations that it reserves the right not:
I must put it to you: What exactly then is the "mutual" assistance?
Some of you have argued that persons such as myself are right to argue concerning sovereignty as we do, but that times have changed and so too, perhaps, the concepts which guide
international relations. This may be so. But the very nature of law is that the change comes in process, and not by the arbitrary demands of particular parties acting ultra viries. It is in the nature of law,
that changes in law are done by law. Nothing that is law, can permit its alteration by chance and force.
Some of you have argued that extraordinary circumstances has brought these change wrought by the OECD initiatives. We are all well aware of the demographic changes in the G-7 nations. Bu that is
insufficient to justify a unilateral alterations in rules you propose to call laws, after you have secured them by force. This brings me to my second case in the annals of western legal history; a case which
demonstrates that I need not speak to you with reservations or apologetically. This case is renowned for the law students as Liversidge v. Anderson (1942). In Liversidge, Lord Atkin viewed with
apprehension the attitude of judges who on a mere question of construction when face to face with claims involving the liberty of the subject showed themselves more executive minded than the executive. He reminded
us that it is the judges who "stand between the subject and any attempted encroachments on his liberty by the executive, alert to see that any coercive action is justified in law". He described the
arguments for the Crown, upholding executive power to detain a citizen for an unlimited period without access to the courts because it was a time of emergency, as ones "which might have been addressed
acceptably to the Court of King's Bench in the time of Charles I".
Essentially, Lord Atkin argued that there was no time at which it was reasonable - even if convenient - for the government to disobey the law. There must be no cheering on the parts of
attorney's general from respective nations on this point. For it applies to them as much as to the OECD, since the former broke the law for the conveniences of the latter.
These points bring me to my conclusion: I teach young people the history of the western legal system from the Athenian Constitution to the Truth and Reconciliation Commission's Report in
South Africa. The understanding is that no body of rules will be perfect and compliance will be less so. We are not naïve. But the presumption is that habitual compliance with the law is the basis of rule by law.
Should this presumption fail, the understanding ceases to be sustainable.
I am left to paraphrase Mr. Maurice O. Glinton – a Bahamian alumnus of this institution: is it now the expressed policy of the G-7 that so long as they achieve their ends, the rest of us
may mutilate our laws and constitutions at their convenience? If that is so, then let us be done with the pretence that the OFCs are sovereign nations. Let us turn in our passports, and declare new allegiances, as
it can no more be doubted that we are administrated territories subject either to the vision of external powers, to no vision but power or to a new form of tyranny which must signal a need convenience which our own
legal history rejects, but you have decided supercede what must be called law.