"Experience should teach us to be most on our guard to protect liberty when the government's purposes are beneficial. Men born to freedom are naturally alert to repel invasion of their liberty by evil-minded rulers. The greater dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning but without understanding.'' -- Justice Louis Brandeis of the United States Supreme Court.

The recent British government document "Britain and the Overseas Territories -- A Modern Partnership'' made public on March 17, 1999, is a document which brings together a series of subjects which are not always related such as citizenship, human rights (or more accurately the abolition of capital punishment and the legalisation of homosexual relations), financial regulation, care for the environment, and money laundering, all peppered with high flown moral statements about ethical government written in the inimitable style of the British civil service - an almost irritating combination of good English, British understatement, headmasterish, patronising and threatening - the sort of document that leads the reader to react with a combination of incredulity, irritation and foreboding. The Economist in a commentary stated that it has "all the hallmarks of its much-touted ethical foreign policy.'' That is when I recalled the quotation by Justice Brandeis mentioned above. It might be helpful for the reader to stand back a little from this friendly and sensitive missive from UK and asked ourselves the question of why should it be published now, what are the forces that impel the British government to publish this document in 1999 rather than say five or ten or even 100 years ago - after all Bermuda has been an overseas territory (the new name for a Colony) for almost 400 years and has done rather well for itself and does not have, and never has had, any major dispute with the British government. If the subject matter of the White Paper had been left to ourselves we would have been quite happy to continue on in the way we have always done. I believe the wider economic and political background to the issuance of the Paper is important, in order for us to understand that there are forces which can have a major impact on our day to day lives and can affect our livelihood. We have a tendency to believe that the headlines we read, or see on TV, are something that happens to other people and whilst interesting are not really all that relevant to our immediate business lives. What then are issues in the background which are relevant. There are at least eight of them. 1. The timing is important, being largely influenced by the fact that about 6 million Hong Kong Chinese are not now eligible for residence in the UK. Had the White Paper been issued five years ago, the UK would have been faced with the possibility that a large number of Chinese may have moved in creating all sorts of social and economic problems, but more important it would have been politically unpopular. After all who would want a few million Chinese who work hard, dislike trade unions and are renowned for making money? 2. The introduction of the new currency, the euro, at the beginning of 1999 is seen by many as a prelude to political union within Europe. Once a country gives up its currency, it also gives up its Central Bank and it effectively gives up one of the major instruments of controlling its economy. Once individual national currencies go, taxation becomes the only major instrument of economic policy, but if there is political union it becomes only a matter of time before tax rates within member states are brought in harmony; otherwise low tax areas would have a competitive advantage.

3. Germany and France are strong believers in direct government intervention in the economy (as distinct from the generally free market policies of the UK and USA) -- one reason for their high levels of unemployment -- and are strongly opposed to the tax-friendly regimes in Europe such as the Channel Islands and Luxembourg.

4. All countries, especially those with extensive welfare states, need new revenue but they face severe political limits in their power to tax. Tax levels in Germany and France are almost 50 per cent of GDP; UK is about 40 percent, and USA around 35 per cent. In Bermuda it is about 24 per cent of GDP (up from 16 per cent about ten years ago). The ability of tax havens, as they wrongly describe Bermuda and elsewhere, to siphon off what they consider to be their just revenues, impose constraints on their power to spend. 5. More and more countries , all with their own websites, are entering the offshore financial services industry -- just turn to the back pages of The Economist each week -- and with countries like Hungary and Ukraine now in the business, there is increasing concern by large governments that even more tax revenues will be lost.

6. Globalisation, the utilisation of information technology, advanced telecommunications, growth in international companies, enhanced travel and so on now means that many aspects of financial services are now no longer dependent on time and place, and highly complex businesses like insurance can now be efficiently conducted from formerly isolated and low-tax jurisdictions.

There is no need to be located in London, Tokyo, New York and Paris -- Bermuda and elsewhere have efficient communications and calling London is just as easy as calling Somerset. Moreover, globalisation intensifies competition, and a high tax burden relative to competitors means higher costs and therefore, makes an industry less competitive. Companies which operate from low tax countries like Bermuda have a clear competitive advantage over their rivals.

Another aspect of globalisation which is often ignored is that the decision-making process is considerably speeded up -- business practices which would have taken years, even decades, can now be rolled out worldwide in a matter of months. This has a spill-over effect on the political decision process so that the time frame here is also shortened (see my final sentence).

7. The large economically powerful countries increasingly use their financial influence to implement their "ethical'' foreign policies. Examples are human rights, child labour, and action against offensive regimes like Iraq and Serbia. There is little opposition to such policies which attack repulsive practices like child labour, but an ethical foreign policy is a highly elastic and vague concept which can mean different things to different people -- a charter for political activism. To a corporation or individual who is paying 50 per cent of income in tax, competitors or people who do not pay such swinging taxes are living in unethical regimes. Attacking so-called tax havens, which are not popular with voters, is simply an extension of their ethical foreign policy. It is rare for people living in UK or US to say that it is their high tax rates which are unethical and that the low taxes of Bermuda (and places like it) make more economic sense.

8. For reasons which are not quite clear, low tax jurisdictions are closely associated with money laundering of the proceeds from the drug trade (one of the biggest industries in the world) and the White Paper takes this position even althrough the United States Treasury Department ranks the City of London ahead of many offshore centres as being "of primary concern''. I suspect countries like Bermuda are being used as scapegoats for the conspicuous failure of the war on drugs policies of many governments. For example, Americans spend almost $60 billion on illegal drugs, one third of all Americans have tried drugs, and 13 million are occasional users and 400,000 Americans are in prison for drug offences -- eight times the number 19 years ago.

There may well be other background influences, but the eight mentioned are enough to be going on with and illustrate what I believe to be a more co-ordinated approach by the UK, the OECD, the UN, the European Union, and the G7. It is also worthwhile noting that membership of these organisations is largely composed of the same dozen or so rich countries -- spearheaded by the UK, US and Germany, all of whose treasuries will benefit if the importance of the financial offshore industry was reduced. One should never underestimate the power of self-interest in such matters.

Having dealt with the background to the Paper, what would be our reaction? First, the good news. The Paper states in paragraph 3.7 that "British citizenship -- and so the right of abode -- should be offered to those British Dependent Territories citizens who do not already enjoy it and who want to take it up''. The Paper then goes on to say "there are no such conditions (British tax rates and regimes) attached to the Government's proposal on citizenship''. If that statement can be taken at face value, and it needs to be checked out, then there appears to be no penalty attached to acquiring British nationality. Apart from the right of abode, the offers opens up opportunities for education, training and the acquisition of experience which are now lacking. However, we need to be sure that there are no conditions attached to the grant. If that is the case, the offer is very generous with no reciprocity to UK citizens, and individual Bermudians should decide what is in their best interest.

On the question of things like gay rights and capital punishment I have no strong views, except to state that when the UK government speaks of democratic rights, most people in Bermuda would vote to keep things as they are, as they did in the referendum on capital punishment some years ago. However, democratic governments like the UK do not like too much democracy because ordinary people do not always share the elitist views of their elected representatives. No doubt we shall hear from the religious community and other groups on these issues and I happily leave that task to them.

The proposals (or are they instructions) on financial regulation, contained in Paragraph 5.1 through Paragraph 5.27 fills me with foreboding and is a much more difficult proposition for Bermuda. I suspect this will be the least read part of the White Paper but for the long-term interests of Bermuda it is the most relevant. The following points provide some (but not all) of the reasons for my unease: in paragraph 5.4 it is proposed that "financial regulatory systems must improve, be updated, and be responsive to ever-tighter international standards''. In my opinion, this is a blanket statement designed for the purpose of allowing outside governments to control our business.

in paragraph 5.8, reference is made to meeting "the corresponding international standards of good practice'' in financial services and talk of weak links. Again this is a vague, almost veiled, threat against Bermuda whose financial standards are as good as you will find anywhere in the world -- not because of government regulation but because it is sound business practice.

in paragraph 5.11 it is stated that the key components of the regulatory package are contained in Appendix Two. There is no Appendix Two, and I understand only a few people have seen it. If it contains "key components'', I would have thought that at a minimum it would have been produced with the main report. Something smells here.

Paragraph 5.11 also refers to "fair competition''. Whenever one sees that term one should be guarding one's wallet immediately. What does it mean in the context of this report? Paragraph 5.13 makes reference to the "standard and timeliness of draft and audited accounts'' of government. This is a fair point, and the record of the Bermuda Government in the management of public funds leaves much to be desired as a cursory examination of recent Auditor-General's reports will confirm. We are exposed here.

Several hypocritical statements are made about government financial borrowing -- hypocritical because the American and European governments borrowing records are shameful in the extreme, having caused the worldwide inflations of the 1960s through to the early 1990s. It is only because of the independence of central banks that reckless government borrowing has been reined in. The Bermuda Government's record in this respect (whilst not as good as it could be) has established standards far in excess of those elsewhere.

Paragraph 5.16 speaks about "a calculable and reasonably certain financial and economic rate of return''. I wonder what it was for the subsidy given to Rover cars in the UK, or Credit Lyonnais in France? Governments are incapable of doing this sort of exercise. That responsibility rests with free markets and the rating agencies like Moodys. If investors make a mistake they lose their money -- as they did in Russia -- and if they are right they enjoy a favourable return on their investment.

Paragraph 5.20 makes the illogical link between "harmful tax competition and tax evasion, fraud and money laundering''. The report continues in paragraph 5.21 that the British government "has a responsibility to ensure that their regulatory regimes are effective, transparent and offer adequate accessibility for the legitimate investigation of criminal activity, including tax fraud and evasion''. I believe this to be the most damaging part of the Report, as its main thrust in against tax avoidance -- a legitimate activity. Paragraph 5.23 mentioned the "European Union code of conduct for business taxation'' which I doubt many of us have seen, and it is further stated that the British government is committed to ensuring the principles of the Code are adopted in the overseas territories.

in paragraph 5.24 it is stated that the European Union is considering a directive which would require member states to impose a withholding tax on cross border income from savings, and that directive would be applied to dependent or associated territories. Clearly the impact of any such directive would need considerable study, but I suspect its impact on our banking sector would be severe.

A further statement is made in paragraph 5.25 that the OECD through the UK Government will "persuade (a euphemism) tax haven jurisdictions to modify their fiscal regimes'' as well as statements about money laundering information being passed to tax authorities. My own view is that investigations on money laundering is a pretext for sniffing out suspected tax evasion and tax avoidance.

Paragraph 5.26 states that tax authorities need a programme to improve the amount of information flowing to them in order to "curb international tax evasion and avoidance through tax havens and preferential regimes''. Until now tax avoidance has been legal -- evasion illegal -- but it is proposed that the two concepts be placed on the same footing.

Paragraph 5.27 proposes the "exchange of information on tax matters and improved transparency''. Again details are not given of what exactly this clause means.

I would stress again that paragraphs 5.20 through 5.27 have many features which are designed to undermine and destroy our offshore financial services industry.

Section 6, dealing with drug trafficking and drug related crimes, is not all that relevant to Bermuda but very little is said about the responsibility of European Union governments and the US government to reduce the demand for drugs rather than concentrate on the consequences of their failed policies by blaming small countries in the Caribbean.

I must confess that I am surprised about the lack of public response to the White Paper and the lack of concern about its possible adverse impact on our financial services industry. Clearly, there has to be some considerable debate on the subject but I would hope at a higher level than that which has taken place to date.

We should also be aware of the fact that many of the topics mentioned are not necessarily linked -- citizenship, capital punishment, efficient financial regulation, money laundering and care for the environment are separate subjects but having read the White Paper several times I am convinced that its main thrust is to undermine low tax countries like Bermuda and that this is being conducted as much by the American and European governments as the British government. We should also understand that these threats to our economy can be implemented whether we continue to be a colony or become independent. This was done, for example, when the 1997 Basle Core Principles (of which there were 25) in respect of banks endorsed by the G10 countries were applied to Bermuda (and elsewhere) and were not for negotiation or compromise.

IF we were independent the various OECD governments could do something broadly similar by simply not recognising our banks, insurance companies or collective investment schemes -- effectively putting us out of business. For all its faults, the British government is not arbitrary and is open to argument. We need to marshal the facts, think our policy through carefully, and understand that many of the proposals made are no idle threat to our future prosperity.

And we need to do this soon because Paragraph 5.11 states that "the key components of the regulatory package we wish to see in place by the end of 1999''. The Bermuda Government needs to get off its behind.

If the diagnosis given above strikes the reader as being unduly gloomy, the upside is the fact that governments everywhere are incurably inefficient. I have already referred to the failed war on drugs, but if anyone thinks of government activities like running the mail service, providing an effective education, or an efficient court system it is not difficult to conclude that governments do not function in an effective manner.

Promise or threat It would be reasonable to draw the same conclusion about government's ability to collect taxes and enforce onerous financial regulations against low tax jurisdictions. The revolution in communications and the complexities of international business make it unlikely that governments can control commerce in the way the White Paper envisages. However, it would be prudent to plan for the worst, and hope for the best.

Robert Stewart is the author of "Bermuda: An Economy That Works''. He is the former chief executive officer of Shell Bermuda and was a director of the Bermuda Monetary Authority. He was an unsuccessful House of Assembly candidate for the United Bermuda Party in the November, 1998 General Election.