Two recent examples of the long arm of US law enforcement prompt me to return to this favorite subject. First the somewhat amusing story of the US tax bill being contested by Mayor Boris Johnson of London. Second the decidedly less amusing account of BNP and other foreign banks that have run afoul of US sanctions against providing services to designated rogue nations.
Boris Johnson is the erudite and disheveled Mayor of London. This old Etonian is a towering figure in the UK Conservative Party and a sharp-tongued journalist. He is also a US citizen having been born in New York and raised in the United States until age five. In 2009 he sold his London house for a £730000 profit. Under UK tax law profit on the sale of a first home is not taxable. Under US tax law the worldwide income and profits of US citizens are taxable regardless if they have lived outside the US for the prior 45 years – as in the case of Boris Johnson. The US is one of very few nations that tax the worldwide income of its citizens; the Mayor does not see why he should be required to pay capital gains tax to the IRS since he has not resided in the US for decades and the property itself is in England. All I can say is welcome Boris to the extra-territorial application of US law.
The second example is more complex. The United States benefits from the status of the dollar as the reserve currency of the global economy. From energy trading to international finance global trade is commonly settled or at least denominated in dollars. From time to time the US Government adopts sanctions against other nations as an instrument of foreign policy. Cuba is a long-running and counter-productive example; Iran and Sudan are more recent and perhaps more understandable targets. Earlier this year BNP Paribas plead guilty to the charge of violating US sanctions and agreed to pay a record $8.9 billion fine. While I have no direct knowledge of the facts in the BNP case the French bank does appear to have angered the US authorities for its knowing and senior-level disregard of US sanctions against Iran. However while I am no fan of the radical theocracy imposed on the Iranian people by its current autocratic regime I also wonder how we would like it if China decided to prosecute an American bank for violations of a ban it had imposed on money transfers to (say) Vietnam. While we in the US view Iran as an “evil empire” China may view things differently.
Now of course China has yet to expand its banking laws outside its borders (but newly enhanced Chinese antitrust laws provide a precedent) and the Chinese Renminbi is not (yet) the global reserve currency; however this could also change. My point is that in an increasingly multilateral world marked by electronic commerce and finance that easily pass national physical borders we need to be careful not to end up with a tangled web of national laws purporting to extend internationally. Thanks to the strength of the US military and economy during the past 50 years the United States has occupied a privileged position which has permitted it to set global norms from the reserve currency status of the dollar to the domain-naming authority and freedom of the internet. As other nations most notably China begin to assert their authority to apply laws beyond their borders we risk ending-up in a balkanized world with reduced trade reduced prosperity and reduced understanding. Instead we need to develop mechanisms and institutions that can harmonize differing local laws or at least mediate the clash of conflicting rules. After 10000-plus years of civilization we should be up to the task.
Great article.