Montebourg's City assault fails to draw blood

City report; Railtrack U-turn
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Arnaud Montebourg, the French MP who has put his name to a 400-page report on the City of London depicting it as a festering hotbed of illegal money laundering, falls into that class of politician that believes much of business and commerce to be essentially theft. A lot of his report is out of date, unfair or just plain wrong, and it scarcely needs saying that to the extent that he is right about high levels of dirty money passing through London, the City is just a victim of its own success. If you are looking to hide a needle, what better place to do it than in the giant haystack of the world's largest international financial centre.

However, Mr Montebourg's timing could hardly have been better and his underlying point that the "war on terrorism" looks suspect when "the City, stronghold of world finance, continues largely to ignore its duties in the domain of money laundering" is bound to strike a cord with some.

Nor can his criticisms be lightly dismissed as just anti-British sour grapes – Paris having notably failed to mount any form of serious challenge to London as Europe's leading financial centre. To the City's eternal shame, the £1.3bn deposited with 15 City banks by the former Nigerian dictator, Sani Abacha, is still fresh in the memory. The Home Office's failure first adequately to address the issue, and then the Financial Services Authority's inability to act either by naming or disciplining the institutions involved, is all grist to Mr Montebourg's mill.

Mr Montebourg is also right in a number of his other assertions. The number of people taken to trial in Britain for suspect financial transactions is far lower than in other developed economies, even though the existence of the City in its midst might warrant a rather higher level of prosecution than others. Moreover, Mr Montebourg accuses the British authorities of being uncooperative with foreign counterparts with some justification. Nigeria repeatedly complained about Abacha's cash but got little or no response.

The widespread use of offshore trusts and name-plate companies, and the sometimes lax anti-money laundering procedures that exist in some City banks are also reasonably criticised. Secrecy is the badge of fraud and much else which is suspect besides, and there's no doubt that the City positively wallows in the obfuscation that makes it possible. As we know from belated attempts to tighten up post the events of 11 September, it is not just banks which are at fault here. Lawyers and accountants are far too prone to turn a blind eye too.

As it happens, the Financial Services Authority had made cracking down on money laundering a priority well before Osama bin Laden became a household name or the international money trails that stand behind him came to light. Little or no evidence has yet been produced that specifically links the City to al-Qa'ida or international terrorism. Indeed, it is much more likely that these links will be found in Mr Montebourg's own back yard, France, than in Britain. A number of French banks were heavily implicated alongside the City in the Abacha débâcle, while Paris has always been as much a home for those with terrorist intent as London. French law and practice, it would seem, is no guarantee against dirty money.

The City's success as a financial centre in any case owes very little these days to our own indigenously controlled banks and securities houses; rather it is based on the huge number of foreign owned organisations that set up shop here. Regulating them for money laundering purposes must rely as much on their own home authorities as the FSA. Mr Montebourg's point is that London has thrived as a centre for international finance largely because conditions are so lax here, but that's not really fair. Organisations that have poor anti-money laundering procedures in London tend to have the same faults the world over.

Mr Montebourg may anyway be a bit behind the times. A recent report by the independent Financial Action Task Force found the FSA's rules and procedures for laundered money to be among the best in the world and urged that they be adopted as a model by others. From 1 December, the FSA gains new powers that will enable it not just to impose anti-money laundering systems on organisations, but to discipline and fine them for failure to comply.

With money laundering as with so much else, it is always going to be a fine line that the FSA must tread between over regulation and under regulation of the City. Too intrusive an approach risks killing off perfectly legitimate lines of commerce alongside the quite limited amount of illegal activity. There's no point in taking a sledgehammer to crack a nut. On the other hand, too lax an approach and dirty money will thrive.

It is always dangerous to be complacent, but by concentrating on prevention and helping organisations improve their money laundering controls, the FSA seems to be getting the balance about right. Mr Montebourg has highlighted some continuing areas of concern, but he protests too much.

Railtrack U-turn

Over the last few days, we've been inundated at The Independent with letters and e-mails from readers complaining about the stance taken by this column on the collapse of Railtrack. Very few of our readers have much sympathy for Railtrack or its shareholders, and that includes some readers who are Railtrack shareholders themselves. If you are an investor, you have to take the rough with the smooth, is the general view, and to believe that Railtrack would always be underwritten by the Government was foolish in the extreme.

One of them rightly takes us to task for citing the Rolls-Royce bankruptcy in 1971 as a precedent for the Railtrack débâcle. In fact, Rolls-Royce was not deliberately nationalised, but voluntarily called in the receivers. The then Tory government reluctantly picked up the aerospace assets because of their strategic and industrial importance.

The same reader points out that a large part of Railtrack's failure was down to its inability to control the costs of the west coast mainline upgrade and the post Hatfield programme of renewal. This is a private sector failure in management, he contends, no more deserving of government bailout than that of Marconi. We had no idea there were still so many free market purists out there. But valid though this point of view is, it doesn't alter the nature of the argument. Stephen Byers, the Transport Secretary, made a serious error by putting in Railtrack into "railway administration" without any apparent alternative strategy for the network.

As far as we know, the Treasury still intends to rely heavily on the private sector for money to renovating the railways. Its whole public private partnership initiative is geared to the same thing in other areas of the public sector. The shabby way in which it sought to wind up Railtrack without a care in the world for its investors cannot help but be a serious blow to those ambitions. At the very least, the cost of private capital will rise precipitously to take account of the risk of the Government reneging on its side of the bargain. All these points Mr Byers seemed belatedly to acknowledge yesterday with the news that enough money is to be left in the kitty to provide Railtrack shareholders with a 70p a share payback.

Even so, this hardly looks likely to solve the problem. There is no evidence whatsoever that the "not for profit trust" that Mr Byers proposes for the rail network will be any better than what went before and plenty of reasons for fearing it might be worse. The whole policy looks like an ill thought out, leap in the dark.