Time to Choose: Transparency for All, or Competition to the Bottom?

March 25th, 2011

It’s an interesting moment of flux for Task Force issues, especially if you’re sitting in London. On the one hand, you can see a key piece of UK legislation on financial integrity at serious risk; on the other hand, you can see the potential for a powerful step forward at the European level. Both are still in the balance, so if you’ve got any political pull at all – now’s the time to choose.

The nature of both discussions points to a broader point, however, which is this: national- or regional-level responses to financial integrity issues will always risk a competitive dynamic, in which legislators seek to gain short-term economic advantages by undercutting their rivals with successively weaker integrity measures. This risks a competition to the bottom, instead of a progressive raising of standards that could come through multilateral measures that create a level playing field through mandatory minimum for issues such as corporate transparency.

In the UK, the much-delayed implementation of last year’s Bribery Act is now close – but the same discussions with business that have held up implementation have also resulted in a ‘guidance note’ that appears to limit the scope and power of the Act from what was widely understood when the legislation was passed with strong cross-party support at the end of the last Parliament.

As a press release by a range of NGOs, including Task Force members Christian Aid and Global Witness pointed out:

“Arguments that the bill is too complex or stringent for businesses to implement do not bear scrutiny. The bill underwent extensive consultation with business and NGOs before being passed with support from the business sector. The Act was passed with cross party consensus, as a much-needed update to legislation dating back to 1906, which was roundly criticised by the OECD. The Act will bring the UK into line with countries like the U.S., which already have robust legislation, and meet the recent call of the G20 for every member country to introduce legislation to combat bribery.”

Nonetheless, the arguments behind the scenes seem to be being driven by concern that a serious interpretation of the Act could make the UK a less attractive location for international business – hence consideration of providing guidance that would seek to exempt companies with UK listings but little UK presence; and potentially exempting key foreign subsidiaries of UK multinationals, in a way that would risk making clear where any bribery should be located in order to avoid legal liability.

The key point is this: once arguments about financial integrity measures become dominated by national self-interest concerns, it is difficult at best for longer-term integrity benefits to be accepted over short-term economic considerations. If this is true now, it will not become any less so as memories of the global financial crisis fade over time.

At the European level, in contrast, civil society have recently been able to report a partial victory as ministers called for a country-by-country reporting standard for the extractive industries. At a civil society event in the UK this week, the representative of the European Commission’s DG-Development was clear that the remaining debate was about the breadth of the measure that will be enacted – not whether any steps will be taken.

The options appear to be, on the one hand, a Dodd-Frank equivalent; and, on the other, a measure that would extend to all industries. To a lesser extent, questions remain over the detail of reporting to be required – but the fundamental decision appears to be over whether the measures apply to extractive industries or more broadly.

Once again, we hear that the terms of the debate have been influenced by assessment of whether there might be costs to the EU of requiring ‘too much’ transparency – just as the U.S. Treasury apparently began applying pressure on its UK and other counterparts after Dodd-Frank passed, with the aim of seeing equivalent legislation passed and so preventing a ‘competitive disadvantage’ from the U.S. being a transparency leader.

This is a frustrating dynamic for those like the Task Force concerned with financial integrity, but one that cannot be ignored. Ultimately, we will win some, lose some at national level; but the squaring of the circle will come through multilateral measures, such as an international accounting standard requiring country-by-country reporting, implying a level playing field and no role for competition to the bottom.

Written by Alex Cobham

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