The war on se­crecy

Financial Mirror (Cyprus) - - FRONT PAGE -

What do the re­cently re­leased Panama Papers, ExxonMo­bil and a Cana­dian min­ing com­pany op­er­at­ing in Gu­atemala have in com­mon? They are all cases in which pow­er­ful in­di­vid­u­als and or­gan­i­sa­tions tried to ob­fus­cate, de­ceive or hide be­hind a front. And they are all cases in which that ef­fort didn’t work.

The global uproar trig­gered by the Panama Papers – 11.5 mil­lion files taken, ap­par­ently by com­puter hack­ers, from the world’s fourth-largest off­shore law firm, Panama’s Mos­sack Fon­seca – is likely to con­tinue for some time. The files’ re­lease has re­vealed the ex­treme, and some­times costly, lengths that in­di­vid­u­als go to hide their as­sets and avoid tax­a­tion. What has been un­cov­ered thus far ranges from le­gal but eth­i­cally sus­pect use of tax loop­holes to ef­forts to stash or laun­der money gained through cor­rup­tion or other il­le­gal ac­tiv­i­ties.

The re­ac­tion has been swift, harsh, and al­most univer­sally ex­co­ri­at­ing. Al­ready, the prime min­is­ter of Ice­land has been forced to re­sign, af­ter it was re­vealed that he held stakes in off­shore com­pa­nies with his wife. Rel­a­tives of se­nior Chi­nese of­fi­cials, in­clud­ing Pres­i­dent Xi Jin­ping, as well as mem­bers of Rus­sian Pres­i­dent Vladimir Putin’s in­ner cir­cle, have been im­pli­cated as well.

Xi and Putin may have lit­tle to worry about. But the sheer hypocrisy of gov­ern­ment of­fi­cials pro­claim­ing the need for aus­ter­ity and en­cour­ag­ing pub­lic sac­ri­fice for the sake of long-term pros­per­ity, while se­cretly avoid­ing that ef­fort, is a galling vi­o­la­tion of trust in demo­cratic coun­tries. If their off­shore shell com­pa­nies and bank ac­counts are le­gal, why go to so much trou­ble to be se­cre­tive? And if se­crecy is le­gal, what is wrong with it?

Mean­while, cor­po­rate se­crecy has placed ExxonMo­bil in the crosshairs of the at­tor­neys gen­eral of New York, Mas­sachusetts and the Vir­gin Is­lands, and many more states are wait­ing in the wings. The in­ves­ti­ga­tion is fo­cus­ing on whether the com­pany know­ingly made false state­ments about cli­mate change, start­ing from the 1980s.

In­ter­nal doc­u­ments in­di­cate that Exxon, and later ExxonMo­bil, knew about the dam­ag­ing ef­fects of cli­mate change but re­vealed no in­for­ma­tion to in­vestors or the pub­lic. In fact, the com­pany’s pub­lic state­ments – in­clud­ing as re­cently as last year – rou­tinely dis­missed the risk of cli­mate change. When given an op­por­tu­nity to come clean and op­er­ate trans­par­ently, ExxonMo­bil opted for ob­fus­ca­tion.

In Canada, Hud­bay Min­er­als is em­broiled in a law­suit that could open the door to real con­se­quences for com­pa­nies that off­load onto sub­sidiaries all re­spon­si­bil­ity for their over­seas oper­a­tions. In­stead of ap­ply­ing their home coun­tries’ eth­i­cal re­quire­ments and stan­dards in the coun­tries where they op­er­ate, Western com­pa­nies draw a veil of sub­sidiaries, con­trac­tors, and sup­ply chains over be­hav­iour that con­sumers and in­vestors would con­sider rep­re­hen­si­ble. Hud­bay Min­er­als is be­ing sued over an episode of mass rape and prop­erty de­struc­tion in Gu­atemala, af­ter sol­diers and peo­ple claim­ing to be se­cu­rity of­fi­cials from the com­pany that owned a lo­cal mine ar­rived in a small vil­lage with or­ders to evict its res­i­dents.

The case is seem­ingly com­plex, as it in­volved mul­ti­ple own­ers, nu­mer­ous sub­sidiaries, and an ar­ray of ju­ris­dic­tions. But the prin­ci­ple at stake is sim­ple: a par­ent com­pany must be held re­spon­si­ble for over­see­ing the ac­tions of those rep­re­sent­ing it. Cre­at­ing layer upon layer of own­er­ship to pre­serve se­crecy must not con­tinue. And it will not if a three-prong ap­proach is em­braced. Call it the car­rot, the stick, and fresh air.

The car­rot – the in­duce­ment to be­have eth­i­cally – should be to recog­nise and re­ward those who ad­mit past mis­takes and demon­strate the will and an ef­fec­tive strat­egy to cor­rect them. The stick – pun­ish­ment of mis­con­duct – re­quires stricter en­force­ment of le­gal and eth­i­cal re­quire­ments, whether con­cern­ing tax avoid­ance and eva­sion, or the abil­ity to hide be­hind sub­sidiaries. And fresh air takes the form of re­port­ing, whether draw­ing at­ten­tion to wrong­do­ing in lo­cal com­mu­ni­ties or deep in­ves­tiga­tive re­ports, like the ex­tra­or­di­nary global ef­fort by the hun­dreds of jour­nal­ists who co­op­er­ated in bring­ing the Panama Papers to light.

This ap­proach must not be turned into a mar­ket­ing ex­er­cise by com­pa­nies, gov­ern­ment of­fi­cials, or me­dia com­pa­nies. In­stead, the re­pu­di­a­tion of se­crecy should re­sem­ble a truth and rec­on­cil­i­a­tion process, with wrong­do­ers pro­vid­ing a full pub­lic ac­count of their be­hav­iour, per­haps ac­com­pa­nied by tes­ti­mony from vic­tims.

Most im­por­tant, if cor­po­rate boards – and the lawyers, bankers, and ac­coun­tants who ad­vise com­pa­nies and in­di­vid­u­als – are to be vig­i­lant about le­gal and eth­i­cal com­pli­ance, they must be­lieve that they will be held ac­count­able for their ac­tions. Once every­one gets the mes­sage that se­crecy car­ries un­ac­cept­ably large risks, they will act in ways that min­imise those risks. Whether they like it or not, it is time for our lead­ers to be­have in ways that are good for them – and us.

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