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As a contribution to the debate on the proposed new “Global Standard” (see: www.oecd.org/globalstandard) an  Italian-led working group has drawn up, with the assistance of the OECD, a list of 12 “common principles and standards” designed to support efforts to relaunch the world economy on a new and more stable growth path.

Drawing on existing agreements and instruments where available and on newly developed codes where needed, the 12-point proposal would provide an ethical and legal framework to underpin propriety, integrity and transparency in international business dealings.

The proposed “12 commandments” were prepared with OECD help by a working group including legal and financial experts, academics and politicians in support of discussions hosted by the Italian Ministry of Economy and Finance in Villa Madama, Rome, on 11-12 May 2009. Those discussions fed into the so-called Lecce Framework for the global economy endorsed by G8 Finance Ministers at their meeting in Lecce, Italy, on 12-13 June 2009.  G8 leaders will further discuss the principles of propriety, integrity and transparency at their L'Aquila Summit later this week.

The working group’s proposal takes as its starting point the notion that “a strong, fair and clean economy must be based on the values of propriety, integrity and transparency (and that) these values should be promoted by public policies and be upheld by business.”

The proposal calls for international cooperation to avoid any “race to the bottom” in labour, socal and environmental standards and regulatory arbitrage. It condemns tax evasion and corruption, and calls for accountability and fairness in relations between company management, boards, shareholders and other stakeholders.

The full text is as follows:

Common Principles and Standards on Propriety, Integrity and Transparency

1)          A strong, fair and clean economy must be based on the values of propriety, integrity and transparency.  These values should be promoted by public policies and be upheld by business. Effective monitoring of the implementation of these principles and standards should be undertaken on a regular basis.

2)          Governments, companies and all business entities, irrespective of their legal form, around the world should recognise that these values are the keystone of a market economy which serves the needs and aspirations of citizens of every country and which deserves their respect and confidence.

3)          Any “race to the bottom” in labour, social and environmental standards and regulatory arbitrage among jurisdictions should be prevented through international cooperation and convergence of domestic legal frameworks.

4)          Tax evasion and avoidance are harmful to society as a whole and companies and all business entities, irrespective of their legal form, should fulfil their fiscal duties, including by respecting the arm’s length principle in transfer pricing practices.

5)          Government / business interaction, including lobbying and “revolving door”, should be conducted in accordance with principles which are balanced, transparent, fair to all parties, and enforceable.

6)          Business practices and governance of companies and all business entities, irrespective of their legal form - whether traded or non-traded, private or State-owned - should ensure accountability and fairness in the relationship between management, the board, shareholders and other stakeholders. Financial structures and instruments should not be misused in order to hide the true beneficial owner and corporate vehicles, in their various forms, should not be used for illicit activities, including money laundering, bribery, shielding assets from creditors, illicit tax practices, self-dealing and diversion of assets, market fraud and circumvention of disclosure requirements.

7)           Disclosure of timely and accurate information regarding the activities, structure, ownership, financial situation and performance of companies should be ensured.

8)          Pay and compensation schemes should be sustainable and consistent with companies’ and all business entities’, irrespective of their legal form, long-term goals and prudent risk-taking.

9)          Bribery, including bribery in international business transactions, should be established as a criminal offence and effectively prosecuted and punished.

10)   Money laundering should be criminalised and the crime of money laundering should be applied to all serious offences, with a view to including the widest range of predicate offences.

11)   Any form of protectionism should be banned.

12)   Bank secrecy should not constitute an obstacle to the application of the above mentioned principles , including tax compliance worldwide.

by Prof. Dr. Uwe H. Schneider, Director of the Center of German and International Law of Financial Services, Johannes Gutenberg-University Mainz, Germany.

 

 

Globalisation has lead to an open market without common legal rules. However, there are a number of common standards, principles etc. such as:

 

 

-         the OECD Corporate Governance Principles

-         the OECD Guidelines for Multinational Enterprises

-         the UN Global Compact and

-         the Basel Committee Principles: Enhancing corporate governance for banking organisations.

 

 

These principles are a useful start for a common framework for national, cross border and international behaviour of market participants. Recently we have learnt a lesson from the financial crisis. This urges us to revise these codes, principles etc. Among others the duty to implement a risk management has to be laid down in the OECD Principles of Corporate Governance.

 

 

But why do we need a new Global Standard? The idea is persuasive! It is obvious that such a Global Standard should not just repeat what has already been regulated. So, what is the added value to the existing codes, principles etc.? After consensus about the benefit of a Global Standard we should be more concrete.

 

 

First: What type of principles and standards are we talking about? It is a common place that companies and their directors should follow legal rules such as anti-bribery-rules, anti-trust-rules, tax-rules, etc. These legal rules are national rules; they may differ and create conflicts in a global market. National rules are complemented by international principles and standards.

 

But for many reasons the legislator has reached the limits of his scope of action. Ethical rules cannot be decreed, trust cannot be ordered, evasion cannot successfully be regulated and to often the law can not be executed. The actual financial crisis is both namely a crisis of the rule of law and a rebirth in the trust into a common rules.

 

 

But: We need a new, an additional level of standards.

 

 

Therefore: The principles and standards of the Global Standard should connect and limit. They should connect all addressees global wide and they should limit their behaviour. The Global Standard should contain ethical and social standards for the behaviour of all addresses in the market. The Global Standard should stress propriety and integrity, sustainability and transparency.

 

 

Second: Who should be the addressee of the Global Standard? Only the directors and the members of the board? Legal duties are only imposed on the company, its directors and to some extend to the shareholders. The Global Standard should have wider implications. The well being of the company is in the interest of all stakeholders, even in the interest of the society. And the common principles should address all stakeholders including the legislator and the administration.

 

 

Third: The Global Standard should recognise self-determination of individuals, freedom of contract, freedom to form companies, a free market including cross border and international trade. But the goal of the Global Standard is to bring into mind that there are limits for human behaviour, short term and long term responsibilities and ethical rules.

 

 

Fourth: One of the most important reasons for the actual crisis is the permanent attempt of the intellectual elite to find a way to evade rules. Evasion of accounting rules, supervisory rules, tax rules, etc. has become a global sport – and a big business. “Evasion” is one of the hottest issues in town – even in countries where principle based regulation has a long tradition. For the national legislator it is nearly impossible to tackle this problem as evasion also includes the exploitation and capitalisation of the differences between legal systems (“legal systems shopping”).

 

Therefore: The Global Standard should condemn the evasion of rules and standards.

 

 

Fifth: Often the ultimate shareholder, the ultimate contracting party, the ultimate holding company, the ultimate debtor and the ultimate creditor is not known to the public. Groups of companies, various forms of intertwining, international cross holdings are not transparent. Therefore the public is not aware, who is bound by the standards. European and national laws foresee that important holdings have to be disclosed. In reality instead of the real shareholder nominees are registered and major shareholders try to remain anonymous by hiding in the bushes.

 

Therefore: The Global Standard should stress the idea of transparency of market participants.

 

 

Sixth: Companies, their boards, their directors and officers have to follow the rules, principles and standards. In groups of companies not only the individual company, their boards, etc. have to follow the rules, principles and standards. In addition the holding company carries a responsibility for all subsidiaries.

 

Therefore: The Global Standard should express the idea that the holding company carries a special responsibility for the group.

 

 

Seventh: Even on a national basis the “race to the law” takes too much time and has to cross many obstacles. In an international setting it is too often nearly impossible to execute the law.

 

Therefore: The Global Standard should remind that only law executed is good law.

 

 

Eighth: The Global Standard should not be a legally binding code. But it should be made public, whether the addressees feel, that they should follow the principles and the recommendations – and act in this way.

 

 

 

by Avi Singh (barrister, admitted to practice in California and India)

 

Regulations and laws often reflect prevailing wisdoms, or ideologies, though the latter is a label often labeled on ideas and assumptions one opposes. The current crises has certainly called into question prevailing wisdoms, as crises are wont to, and any reform will have to address the failures of assumptions that have guided past policies and frameworks, and norms on international and national regulation of financial markets, capital flows, taxation, and financial globalization and integration. New assumptions will necessarily be contested, not merely from differing normative ideas on the “should” of the system, guided in part by differing emphasis on efficiency, equality, justice, and in part by historic experiences, but also by lingering habits and proponents. Any attempts at globalised norms or principles, essential to a globalised response to a globalised problem and a problem with a particular type of globalization, must address the question of normative assumptions that are no longer viable, and are merely ideologies which contribute to the crises in global financial capitalism rather than to making attempts such as the Lecce Framework constructive efforts.

            There has indeed existed a normative assumption, unrestrained by factual evidence, that unfettered global financial markets, with their abstractions of efficiency, must be beyond municipal, multinational and international law because they not only contributed to, but were essential to, economic growth. A normative consensus had formed around such a principle that survived the arguments and questions posed by the East Asian crises of 1997, a crises whose causes lay, as they do, in the assumption of markets being efficiency, and thus, driving economic growth. Ironically, the response of international finance policy-makers was to prescribe a strengthened emphasis on unregulated and unfettered integration with global financial markets, with the hope that the rationality of markets would eventually lead to a growth equilibrium. National responses, understandably and rationally, did not necessarily concur, and in their varied responses all sought to hedge against the rationality of markets by carrying significant dollar reserves.

            Thus, global financial capitalism, in general terms, was granted a zone of legal exclusion because of its role in encouraging economic growth. It was not to be heavily taxed, subject to restrictions on movement, disclosure, rules of ethical conduct, anti-monopolistic rules, protection for consumers and invesors, transparency, rules derived from principles of trust. Such rules were not necessary because the system was rationally positive, leading to paraphrase Reverend Martin Luther King, towards an arc of growth, bending towards prosperity. The difference of course was that Revered King spoke as a man of hope with faith in the course of history, while the assumption for financial markets let to a framework of international principles that effectively sought to exclude global financial markets and global financial capitalism from meaningful regulation. Law and regulations, were applicable, were designed to facilitate the efficient functioning of the rational market, not ensure that it was consistent with public policy. The entitlement, not granted to the local butcher, was to ensure that it would lead to economic growth and prosperity.

Such an assumption seems topically naïve today, but its strength of endurance and elegance of proponents are not to be underestimated. Some have categorised the current crises as distortion brought about by bad actors rather than systematic issues. However, there is growing evidence to suggest that even in its hey day, global capitalism never, in itself, has tended towards causing economic prosperity, unless prosperity is measured solely as returns from capital. For instance, India achieved almost equal growth rates in the 1980s and 1990s, and while it may be argued that India has never been integrated into the financial markets, India changed its policy to attract capital flows in 1991 markedly, and did attract capital flows exponentially higher in the 1990s.

However, even from the narrow perspective on returns of capital, it is unclear that global financial markets maximize returns on capital. Interest rates in India, like in other developing countries, are approximately 10%, and capital is at a premium t businesses and individuals. Credit to farmers or those on the economic periphery is even more dear, and often informal at close to usury rates. The dearness of credit is unrelated to the risk to capital, as microcredit institutions have proven in practice. Financial markets invested in sub prime mortgages, and derivate products, backed by increasingly sophisticated mathematical models, whose abstractions of efficiency are necessary rhetoric for globalised, impersonal systems. The economics of efficiency of global financial markets require large economies of scale, rather than an efficient balancing between risk and reward for capital invested. Global financial markets as a vehicle for maximizing returns on capital is also an assumption that is no longer sustainable.

Indeed, as financial engineering has replaced real engineering, even growth has been abstracted to echo the assumptions that financial markets encourage growth. As real incomes in most developed countries have stagnated, growth of financial transactions has continued unabated, with the pressure being somewhat eased by the availability, at least till recently, of cheap credit. Financial assets intermediated through banks reached an astonishing USD $ 477 trillion (McKinsey) while the export of good and services totaled USD $6.1 trillion.

The only other legal rational for offering capitalism unfettered international and transnational exclusion from meaningful regulation is an argument from classical legal thought that one has the right to invest private property, in this case, capital, without interference, and be allowed to earn returns from the capital. Such an argument, even further back in history, has never reflected the practice of global capitalism, which as often dependent on public enforcement of private property rights, sometimes with colonial armies and gunboats. Thus, the private property right of global capital is heavily dependent on public enforcement of such a right, even more heavily dependent on enforcement than the property rights recognized in immovable or movable property. Yet, the latter forms of property rights are heavily regulated, and subject to taxation, and other regulations to ensure that property rights are practiced consistent with public order and public policy of promoting moral, ethical, and values of justice. No man’s home is his castle! Further, that the market benefits of monopoly warrant extreme regulation is an acceptable norm which applies to systematic players, the lead actors in global financial capitalism, who advantage from their systematic advantage in the system, and from the systematic risk that their failures would endanger.

Thus, economic efficiency or promotion of economic growth do not justify the entitlement, and even the right, to be excluded from public regulation. The Lecce Framework is an important beginnining, along with other frameworks, to state the principles that will inform the setting of rules that will form the basis of what needs to be a formation of public international law. As in all exercises in establishing norms and rules in public international law, the articulation of principles without rules is a more realistic, albeit modest, goal, and there have been some principles that have already been articulated. Morality and ethics – the foundations of propriety and integrity – are necessary, but cannot be assumed as the norm, but one that rules must incentivise.

The principle that the principles of propriety, integrity and transparency require public regulation that effectuates public policy in a pluralistic, democratic manner is a principle that must be addressed. Without such a principle, the entitlement of legal exclusion will continue to exist, even without any foundation for the assumptions that justify it. Indeed, such a principle is already the basis of numerous rules to regulate other forms of global flows of capital, which for numerous reasons, are considered as contrary to international public policy. The work of the Financial Action Task Force, the institutionalized information exchange between tax authorities  to combat money laundering, terrorism financing, and increasingly tax evasion, are all examples of international rules that strictly regulate forms of global capital flows. There is no normative reason to draw the line short of regulating the citadels of global financial capitalism, for the cost to the international community from the formalised system is far greater than the cost from peripheral activities such as money laundering.

by Giulio Napolitano, Professor of Public Law - Roma Tre Universitygnapolitano@uniroma3.it

 

Every political, economic or social crisis may have a silver lining. It becomes a learning experience, changing the mainstream of the political process and the existing patterns of economic and legal analysis. This is exactly what happened at the time of Wall Street crash in 1929, with the rise of the Regulatory State in the U.S and of the Welfare State in Europe. Also the 2008 financial crisis is going to change radically the economic role of the State.

 

In the last few months, in a context of economic emergency, private losses have been made to weigh on the public purse, assets and securities have been brought under State control and banks have been nationalized. But what we do still need is to establish a new global order for economic activities in which prosperity, welfare and fairness can be assured all over the world. To achieve these objectives global leader must face four main challenges.

 

The first challenge is to assess the proper economic role of Government. The increase in paperless financial operations and the deregulation of oversight has led to the emergence of the State as savior of the financial and economic system. What just happened reminds us that the stabilization role performed by the State is fundamental. This is often overlooked in times of economic and market expansion, but it is bound to re-emerge suddenly in crisis situations, particularly financial ones. That’s why we must provide the Government with the tools it needs to manage financial and economic emergencies.

 

The second challenge is to enhance transparency and accountability of bailout and stimulus programs. These measures, even if necessary to avoid the collapse of the economic system, put taxpayers and future generations money in the hands of financial institutions and economic actors. That’s why they might be intended just as the result of a market exchange in the political process, at benefit of the most organized pressure groups.

 

Bailout and stimulus packages, even more if partially failing and eroding the financial stability of States, could be strongly questioned in next months and put on crisis democratic institutions. That’s why discretionary powers given to the Executives to manage the emergency must be balanced by parliamentary oversight and public opinion scrutiny. Moreover, collective money injected into the market must arrive to the people, assuring an adequate credit flow to the economic operators and to the families affected by unemployment and adopting new social welfare programs.

 

The third challenge is to address an effective regulatory reform in order to extend the scope and the efficacy of rules and supervision to banking and financial markets, with a view to the prevention of future crises. We need to extend the area of public oversight; to find a new balance between command and control and market incentives regulation; to protect consumers and investors from financial abuse; to intensify the level of cooperation and integration between supervisory authorities, both at national and supranational level.

 

The fourth challenge is to establish a more stringent and effective global standard for all economic activities than what is currently in force. The objective is to prevent competition between legal orders from giving rise to a race to the bottom capable of overwhelming any value and protection and to reduce the margins for dangerous regulatory arbitrage by operators.

 

Today, in different areas of international trade, there are already multiple rules and standards. But they are unrelated one to the other, with many loopholes in the middle; often they are set by private regulators, some times very close to regulated actors; finally they are entrusted to soft law instruments and provide only for limited and often ineffective enforcement.

 

That’s why we need a codex of existing legal rules of international trade; to fill the gaps; and to adopt new enforcement mechanisms, clearly mandating both supranational and national authorities to enforce and implement set standards at the international level.

 

In the last two decades we left a global disorder came out at the expense of the weaker countries and people. Time has come to move the visible hand of the law and to establish a new global order.

 

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