Treasure Islands - Nicholas Shaxson [124]
In June 1995 the director of Jersey’s Financial Services Department met with a partner in Mourant du Feu & Jeune, a member of the so-called “Offshore Magic Circle,” made up of the ten or so law firms most active offshore. They discussed a corporate form known as the Limited Liability Partnership (LLP).
A letter then began to circulate in Jersey political circles, dated October 9, 1995.
“My firm has been working with the UK partnership of Price Waterhouse (PW) and English solicitors, Slaughter and May, to find a method of obtaining some limited liability protection for the partners’ personal assets without completely restructuring PW’s business and losing the cultural benefits of a partnership,” the letter said. After surveying several jurisdictions, it continued, Jersey was deemed the most suitable. “We are therefore seeking support of your Committee for the introduction of a Special Limited Partnership Law in Jersey during 1996.”
In short, the private firms wanted to write a new law for Jersey. In fact, a draft law had already been prepared in London.
The letter urged Jersey’s powerful Finance and Economics Committee to consider the law by December, then have it debated in the States Assembly the following January or February. “We would also propose that we would prepare any necessary subordinate legislation required in connection with the Special Limited Partnership Law. We appreciate that this is a very short time scale.”
“It would be very important for PW and I believe, Jersey’s finance industry, that the correct messages are sent to the media,” the letter continued, proposing that Jersey’s PR firm Shandwicks and Price Waterhouse’s media team get straight to work.
The Big Four accounting firms—PricewaterhouseCoopers (PWC), Ernst & Young, KPMG, and Deloitte Touche—are giants: PWC employed over 146,000 people and generated $28 billion in revenues in 2008, making it the world’s largest professional services firm. Auditors also occupy a very special place in the global economy. Their audits are the main tools by which societies know about, and regulate, the world’s biggest corporations: In a sense, they are the private police forces of capitalism.24 Audit failures lie behind most great corporate scandals: Enron, WorldCom, and most of the collapses related to the latest financial crisis. Because of the extreme dangers bad audits pose to corporate capitalism in general, and to you and me in particular, governments try to regulate this profession with extra care.
Since the middle of the nineteenth century, limited liability has been part of a grand bargain at the heart of corporate governance. If a limited liability company goes bust, owners and shareholders may lose the money they invested, but their losses (or liabilities) are limited to that: They are not liable for additional debts the corporation has racked up. This concept was controversial when it was first introduced: It was feared that it would erode standards of accountability, but it was justified on the grounds that these investor protections would encourage people to invest and boost economic activity. But there was a caveat: In exchange for the gift of limited liability, corporations must agree to have their accounts properly audited, and have these audits published, to open a true and fair window into what they were up to. It was an early-warning system to keep the risks manageable.
By contrast, a general partnership is very different from a limited liability company. Investors in a partnership are experienced professionals who should know what they are doing, and they have unlimited liability. When things go wrong they are personally liable for all losses: Creditors can theoretically take even the shirts off the partners’ backs. Since they have given up the right to shift losses onto the rest of society, partners are held to less stringent standards of disclosure. Partners were also subjected to “joint and several