Charter Cities Podcast Episode 19: Creating Global Financial Centers with Mark Beer
Creating and enforcing a watertight contract between two global parties is a challenging task. For starters, the world is rapidly evolving, and as a result, many contracts are in dispute. Though not unheard of, contract disputes are becoming commonplace and there is an increasing need to evolve systems. Today we talk with Mark Beer, a world-renowned lawyer and once Chief Executive of the Dubai International Financial Centre’s Dispute Resolution Authority. We open the episode by taking a peek at the process behind setting up and running the Dubai International Financial Center. Mark tells us about customer segments, their habitual trust, and how to create trust in new systems. We then turn our eyes toward the future and dissect what a de-globalized world looks like. Mark touches on democracies, autocracies, and the rise in nationalism, as well as how new systems can and have been built without civil resistance. Stay tuned and you will hear Mark’s thoughts on the Belt and Road development project and the changing scope of global commerce systems. In the latter half of the episode, Mark describes oracles, their uses, and why digitization is a major catalyst for change. After hearing about AI-based judgment, we talk to Mark about the transsystemic system and dive into its characteristics before finding out how new, neutral financial systems are created. Toward the end of the show, we take a deeper look at these systems and uncover their favorable and less favorable characteristics. Be sure to tune in with us today!
Transcript (edited for clarity):
Mark L: Hello and welcome to the Charter Cities Podcast. I'm your host, Mark Lutter, the founder and executive director of the Charter Cities institute. On the Charter Cities Podcast we illuminate the various aspects of building a charter city, from governance to urban planning, politics to finance. We hope listeners to the Charter Cities Podcast will come away with a deep understanding of Charter Cities as well as the steps necessary to build them. You can subscribe and learn more about Charter Cities at chartercitiesinstitute.org. Follow us on social media, CCIdotCity on Twitter, and Charter Cities Institute on Facebook. Thank you for listening.
My guest today is Mark Beer, a world-renowned lawyer. He was previously Chief Executive of the Dubai International Financial Centre’s Dispute Resolution Authority, as well as the Registrar General and Small Claims Tribunal judge of the DIFC Courts.
Welcome to the show, Mark.
Mark B: It’s a pleasure. Thanks very much for having me.
Mark L: To start, you helped set up and then run the Dubai International Financial Center. Tell us about what that process was like.
Mark B: Well, certainly I was involved in the setup of the dispute side of that Center, which you might call the trust element to the Center. When you're thinking about building a city or thinking about building a country, when you're thinking about getting people to invest in the economy, when you're thinking about citizens trusting the environment, the key to it is that they feel safe and secure. And particularly in today's world, one route to safety and security is familiarity.
So when designing a system, some people say, “No. No. Let's break everything apart and put something completely new out there,” but the challenge with that is you've got to persuade people that that entirely new system is as trustworthy as a system that they know. And so what we were doing is we're balancing between the familiar, the traditional, but overlaying it with perhaps more modern approaches. So we built, to my mind at least, the first virtual courts the world had ever seen. And of course, now we're accepting that that is probably the way that justice should be delivered going forward.
We built the Court of the Future Forum to look at how courts will be able to enforce decisions into a distributed ledger, into a smart contract. How will it enforce its contracts over a company in Asgardia, in space? We're starting to consider those issues. What should the rules look like for solving problems in the future? Should they be like they were 300 years ago, or should they be something different? And what do people want from a new system? What's going to encourage them to be excited by a new environment or a new city? And we were working hard on that too. So we covered a lot of ground, and in 10 years we went from a startup that nobody had heard of to being one of the top three commercial courts in the world. So it was a pretty good journey. And I see that that journey continues today.
Mark L: Tell us about balancing the familiarity with the newness and building that trust. So who did you see as the customers? Because if I think about the DIFC and the courts there, there are two sets of customers. There's the local groups and there's the multinational corporations that you want to attract, the regional financial companies. How did you actually go about identifying that customer segment and then really building relationships to build up that trust and to build out that set of knowledge and understanding?
Mark B: Well, I think the core for any environment to succeed, and it may be an open city, it may be a financial center. And remember, the financial center concept, which DIFC pioneered, is not one that would be as accessible today in a de-globalized world as it was when it was invented or come up with back in a globalizing world. So the dynamics of building these environments has changed considerably.
But if you go back to the early days, what's required is a very clear strategy. Not just a strategy around one facet, one customer base, one dispute mechanism, one regulatory model, one legal model, but actually you start with a vision for what do you want to create. For Dubai, the vision was set out in 1985 and refined in 2004, but largely it was about acting as a hub. It wanted to move things between east and west and west and east, because it was so perfectly positioned to do that. It wanted to move people between east and west and west and east and it wanted to move the money to pay for the things and the people between east and west and west and east. So it wanted to position itself as a hub economy.
And to do that in 1985, Jebel Ali Free Zone was developed and we had the infrastructure there and it's now one of the top 10 container ports in the world. So big tick there. It wanted to move people. Emirates Airlines was founded in 1985. So big tick there. Most fantastic airlines. Then the third element, the money piece, was critical to its success. Where Switzerland has a larger gross domestic product than the whole EU put together. Why? Not because of the lovely cheese with holes in it, not because of the watches, not because of the skiing, not because of the chocolate, because it manages other people's money on the Bahnhofstrasse in Zurich and elsewhere.
So, it needed that financial component. And actually, the institutions that they wanted to attract said that the environment that the UAE had at that time just wasn't familiar. It was Arabic language, it was civil law, the legacy laws. Some of them were quite outdated at the time, although they've caught up since. So the institutions that Dubai needed to attract to fulfill its vision as a global hub were saying that they wanted something more familiar, more familiar like London, more familiar like Singapore, more familiar like Hong Kong, more familiar like Sydney, more familiar like New York. All of them English language, all of them common law. And that's what Dubai created.
So when you say what are your customers? Well, at the end of the day your customers are the community that you build, a corporate community and obviously the people living and working in your community. But the starting point is always, “What's our vision? What does success look like? What do we want to create and then what do we need to build in order to attract the investment, the corporations, and the individuals to make our strategy come good?”
Mark L: So you mentioned that it would be different to do this today given that now we're in a de-globalizing world. Well, in the late 90s early 2000s, we were in a globalizing world. So how does this current change in the trends of globalization affect your vision for, one, how financial centers will grow and evolve in the future? And then, two, more generally, how, maybe as broader term, free zones, special economic zones, the use of transplanting law will change?
Mark B: Well, if you look back to the studies that were done in the 90s, they said to reform a judiciary takes about 14 years. So if you want to reform a judiciary, it takes a very long time. And the reason for that is you don't have the usual sticks, levers and carrots, with a judicial system that you do with a governmental or a private sector system, because you can't fire judges. You can't demote judges. You can't lower their salary. If they don't like the new strategy, they simply don't have to go along with it. And in some countries they're appointed for life. So if you do want to institute reform and you're going to do that through the judiciary, which has to buy-in, it takes a long time to bring people around, much longer than governments are willing to wait. So the model in a globalizing world was, “Okay, well we'll leave what we've got over here and we'll build something brand new over there,” and they'll be totally distinct.
So if you look at ADGM courts and the Onshore Abu Dhabi Judicial Department or the AIFC courts and the Onshore Supreme Court of Kazakhstan, or the DIFC courts and the onshore Civil Dubai courts, they actually are totally independent. They don't go to a common supreme court, if you will, that has ultimate oversight of both courts. And that was fine back in the 2000s when it was felt that the dream of globalization, the riches of globalization were worth effectively carving out sovereignty from your existing system and plonking something very alien into it; foreign language, foreign system, foreign judges, right?
So in those days, the price of that was seen to be greater than what you might call sovereign damage that some people would argue that it does. No longer, because I think certainly in democracies and even to some extent in autocracies, the leaders realize that the population is getting more nationalistic, has greater pride in its sovereignty, and doesn't want foreigners coming in and setting up fundamental institutions like courts and running them by foreigners for foreigners. That's the way they see it.
So today what we're looking at when we work with governments on building these institutions is, how do you build them within your system? So Singapore has built an international commercial court within its supreme court. China has built an international commercial court within its supreme court. Albeit that languages are less prevalent in Singapore, they've still taken a view not to carve something out. They say “What we have we can use as a division of in order to deliver what foreigners want.” But at the same time, a citizen doesn't feel they've had to create something new. And I think that's the same for the regulatory model. I don't think going forward we're going to see two separate regulators in one jurisdiction. And I think we've also seen it from a licensing model where traditionally the license gave you permission to operate in a very small geography. What we're going to look at now is actually a broadening where the license you get should allow you to operate in not only the whole country, but actually a license that goes beyond the boundaries and becomes more global in its thinking. So I think those are the fundamental differences that we're seeing now in the way that governments and judiciaries are looking at developing newer financial centers.
Mark L: Great, thanks. And I think the other main trend that we're seeing today is Belt and Road. In my initial intuition thinking about Belt and Road and how disputes get resolved, because it's primarily Chinese companies, my intuition is that a lot of the disputes are going to be resolved with Chinese dispute resolution mechanisms. Is that an accurate intuition? How is Belt and Road and these mega infrastructure projects altering the scope of global commerce and then particularly the scope of resolving disputes within these multinational systems?
Mark B: I think it's a great question. And I suppose it starts off with the presumption that there's something wrong with the Chinese system. I'm a visiting professor in Shanghai, and I can tell you that actually the most advanced court system in the world is currently in China. They have access to greater data. Now you may question the underlying legislation. I'm talking about the mechanism of the court system. They have access to greater information than almost any other sovereign. They know what people want. There's constant feedback loops with the citizenry saying, “What do you want?” And the courts are able to give advice to people, legal advice through AI-based chat bots so that people don't need to use lawyers, expensive lawyers. Most of the mechanisms are set up to help people solve their problems, not fight their problems.
So in many senses you'll find that corporates will get a better process in the courts in China than they would in many other court systems around the world, which are currently clogged up because they didn't adapt to a digital age fast enough. But I think your question may well be, “Is the mechanism to resolve disputes along the Belt and Road under Chinese law?” And the answer to that is probably no. Not for the larger infrastructure projects.
I suspect that what we'll see, and there's some research being done at Oxford University by Professor Erie on this. But what we'll see is that, like every negotiation, it'll come down to the balance of power. So it'll be a negotiation. You see some effective negotiations in Pakistan with the China Pakistan Economic Corridor, CPEC, where there's a lot of balance going into the commercial investment terms. And you'll see other jurisdictions which are desperate for investment, which will perhaps be more willing to sign up to dispute terms that are unfavorable to them. And that's the real world, right? If you and I are desperate, desperate, desperate for some work, we'll sign anything that somebody puts in front of us. If we've got a commercial balance, then we won't.
I think the last thing I'd make on that is that still a lot of these agreements are put in the realm of international arbitration, and they go to Paris, or Stockholm, or more recently, Singapore for resolution. And that seems to be something that both the Chinese and the international counterparty are comfortable with. It does beg the question of enforcement. How enforceable are these awards in the countries for both parties? And therefore if I was signing a contract and I wanted to get paid, for example, I may well choose to litigate or arbitrate in China where I know the decisions are enforceable, versus in London where I'm fairly certain they're not.
Equally if I was the Chinese paying party and I owed money, I'd be much happier in London where the decisions are unenforceable against me than I would be in Shanghai. So I think like all these things, you have to consider in whose best interest is it to choose which forum and which laws should apply. So finishing up on the legal point, yeah, you're absolutely right. If you and I had to sign a contract under the laws of we can pick a country, Ruritania. We would have to spend a lot of money with lawyers to understand what that meant.
And for many businesses, particularly on the Belt and Road, they don't have a huge amount of money to spend on the niceties of initial legal advice. They shake hands and hope it'll be all okay. So if they do sign a contract under the laws of Ruritania, it's only when it goes wrong that they look at it and think, “Oh, I shouldn't have done that, because those laws aren't very favorable to me.”
And so what we are starting to see, certainly on the Chinese side, is Chinese companies are starting to think early on about the law that's applicable. What law is best for the contract? The court system that they're going to use, which supervisory court? Remember, every arbitration award needs a court to make it, if you will, valid. So which court system do they want supervising the contract? If they want arbitration, where's the best place for them to arbitrate?
So the Belt and Road as a project, $7 trillion project, I think you're right, did start off with a lot of acceleration and perhaps not too much thought to the legal niceties. But nowadays, there's a lot of thought going into it. Where will it go though? I think where it's going to go is into a smart contract environment. I predict that 50% of all international contracts will be smart contracts within a decade, because the efficiency that smart contracts bring to the Belt and Road, particularly if we see the Renminbi cryptocurrency as the payment mechanism for the smart contracts. The efficiency that brings to all contracting parties will be worthwhile people signing up to. And that begs the question, “Which court or arbitration center can enforce their decisions against a smart contract that sits on a thousand nodes in 50 countries?” And the answer is none. Not a single court or arbitration center has the authority to amend the majority of nodes that these decentralized contracts are sitting on.
And so what does that mean? Well, it generally means that the owner of the contract dictate is the judge jury and executioner, and that's far from ideal. So what I’ve been talking about for a long time is the need to build a court of the blockchain. A court of the distributed ledger. Not the DAO, which people – It's had its challenges. There are pros and cons. But something where parties that are contracting on the blockchain can say that if things go wrong, there's a single point which we give permission to adjust the ledger or to redo the blocks to get you back to where you started. And I suspect that that's what we'll see, and future cities are not going to have bits of paper with wax and cotton through the corners and all of that. They are going to be issuing digital decisions that are directly enforceable through all arms of a decentralized state system such that you don't have to, once you've won, you don't have to worry about collecting. The state apparatus will do that. And I think that's what we're going to see on the Belt and Road contracting process.
Mark L: I want to better understand that. So if you and I get in a signing contract and we agree that this is easier to save on attorney costs if it's a smart contract. Then there is a dispute. So then, one, how is the resolution of that dispute entered? If we look at, for example, some of the prediction markets like Gnosis, like Auger, they use oracles. This is this is basically the challenge, because you need some real world input to say, “I said I was going to deliver you five cars by X-date and I did not deliver you those five cars.”
And so then there needs to be a real-world consensus input where you will say, “You did not deliver those cars.” And I will say, “Yes, I did. It's not my fault that one of the doors was falling off, the ship is damaged, or whatever the dispute is,” right? And so then there needs to be a input to the blockchain, or if it's not blockchain, whatever digital system that is. And so then it becomes a key of how do you decide on what that input into that system is and how it resolves. Can you help me teeth that out?
Mark B: Yeah, you're absolutely right. You've hit the nail on the head. And people are using oracles. And you may well say that the oracle becomes the court, right? Because, number one, with a smart contract, you don't get anywhere near as many disputes, because the contract has covered the majority of issues in advance. People have already thought it through. So the smart contract model eliminates a lot of the inefficiencies of a contracting model. But where you do get to a question mark and your example is a good one, which is, “Well, I didn't perform because of something that somebody else did.” Then you need to go to an oracle, pre-agreed in the contract that the smart contract says, “There's been a challenge. I'm giving it to this individual or even this piece of technology.” For example, it could be plugging into the weather channel. I'm going to go out and I'm going to seek an opinion and I will then, based on that opinion, continue as if that opinion was the valid input. And that's exactly what's happening today.
But as I say, what that means is normally the people that design the smart contract become the oracle, because they own the infrastructure that they've built for their smart contracting environment. What I'm not seeing yet is the establishment of what you might call independent private sector oracles for the determination of smart contract disputes. And even if we do start to see that, even if you start to see subsets of lawyers or arbitrators come together and sell their services as oracles, effectively as courts for smart contracts. Are we comfortable that we're outsourcing justice to a commercial entity? Because, as I say, if you do that, then still the courts have no ability to exact justice on the contract, because they don't have the tools to do it. And I think that these are some of the challenges that when you're thinking of building a new society, you have to say, “What's the role of our justice system?” Is it sort of to stop people hitting each other on the head? And if so, how are we going to do that and how do we use technology to determine? Through triangulation? Through cameras? To whatever it might be, whether that took place. Or do you have a broader role in protecting all elements of society, including commerce? And if you do, to what extent do you feel comfortable outsourcing that to a bunch of private sector people who think that they should be judging commercial contracts?
You may say, “Well, that's what arbitration is.” And I agree with you. I think to some extent that's right. But the safety valve of arbitration is it always needs to go to a court. You get your reward and it's still only a piece of paper until the court says, “Yes, we will recognize that and enforce it.” In our example that you and I are talking about, currently there isn't a court which could take an oracle's decision and say, “Yup! Look, we've stamped it. Now it can be enforced,” because they don't have authority over sufficient nodes to be able to make the change.
And I think that's really where systems have to start looking fundamentally at how are the courts designed and how do they build a regulatory system which allows for courts to have some form of authority over smart contracts that pass through their digital jurisdiction.
Mark L: The other aspect, because if we’re talking about smart contracts in terms of, let’s say it’s on Ethereum or something, I think you mentioned the challenges. There are some people, for example, talking about putting land registries on the blockchain. And I’ve always been a little bit skeptical about that with what I would call the grandmother test. Would I want my grandmother’s land to be on the blockchain? Because she’s not particularly tech savvy. And so what happens if she clicks the wrong button or somebody scammed her and now it is an immutable ledger that is uncensorable. And so it’s very difficult to revert decisions.
To me having a land registry, for example, whether it is a trustworthy centralized party who is able to reverse the occasional decision, whether if that decision is done through fraud or by accident or through mistake, or even if somebody just loses their keys. I mean you read stories about people who threw away their hard drives with 50 Bitcoin in it.
And so that’s the other aspect of the question. “Okay. So you have this oracle, which is like a pseudo arbitration committee in the sense that they’re trying to determine matters of fact. And then two is, you have this challenge with being able to change the ex post inputs where there may be a mistake or fraud or something like that.
Mark B: Look, you’re absolutely right. If you take the land registry example, you do want everything digitized, because if you look at emerging nations, if you look at war-torn nations, one of the first things that happens is people go and set fire to the land registry, because if you set fire to the paper-based land registry, you can go and exert title as the victor, to the victor the spoils. So quite often you'll find that title deeds and anything in paper are destroyed by those that are looking to take over the land, which is harder to do if the thing is on an immutable ledger. So I can see great value in having the register of assets in a form that is extremely hard for people to abuse. I think that's great for your grandmother. I think it's great for emerging nations that want to build an economy with investment in real estate, right? Certainty of real estate.
But I also entirely agree with you that in that example you want the owner of the platform to have some determinative power, to have some quasi-judicial power. Whether that's delegated to them or whether they require a court order to exercise it. You want the owner of the platform to be able to do it. That's different if you're contracting. So if you and I have a contract and I say, “Listen. Don't worry, I'll build the smart contract and send it to you. And if it goes wrong, I'll just take a view on whether you're right or not and I'll adjust it accordingly.” You’d probably think that that was a bit unfair, because I'm not an independent, trusted intermediary.
So it takes us back to the point you've made, which is you and I would be perfectly happy if the intermediary was an entity that we trusted like a land registry, right? We feel pretty comfortable with the land registry. But what if it's just a bloke or a woman who says, “I know a bit about land. So let your grandma write to me. I'll have a look at it. And then whatever I decide is whether your gran keeps her house or not.” We wouldn't be very comfortable with that.
So somewhere in between, between the power of an institution and the power of the private sector, we need to draw a line and say, “What are we comfortable with?” If we're comfortable only at the extreme of having a state institution get involved, then that means the state institution effectively has to own the platform on which the smart contracts are taking place, otherwise they can't control it, right? They're not going to have control on a decentralized ledger. But then if you said to contracting parties around the world, “Well, in my nation, in my city, the only way you can do digital commerce is on my platform.” That's not very appealing either. So finding the solution to it, which allows the market to find the appropriate platform that it wishes to use, but at the same time allows an organ of state that we would trust to have some overlay, some view, some ability to correct an injustice. That's going to be, I think, the balance.
And then that leads to the next question, which is, is the court of first instance in that situation actually going to be a human? We're now starting to see research which tells us that AI and machine learning judges are doing a better job at predicting outcomes in the justice system than real judges. So are we getting to a point soon where the court of first instance for these smart contracts is actually going to be a piece of technology? And only when you get to the court of appeal, if you choose to appeal, will you get the ability to access a human. Is that the way that court systems are going to look like in the future? And if they are, who builds the robot? We get into those tricky things. Is a biased robot that's less biased than a human better? Some would say, “Yeah, of course it's better,” and others would say, “No, I'd rather have a biased human, because humans are fallible, and I don't mind that. But I want my robot judge to be absolutely perfect.” That is a bit of a pipe dream, right? I don't think we're ever going to code anything to perfection.
But these are some of the challenges that designing these systems people will face along the way. The lobby groups are very vocal. There's a lot of, what you might call, those that don't want to see change. The legal community I think would rather chop off his own leg than move into a technical world where you don't need lawyers. And they've got a very loud voice. I haven't met judges yet who are comfortable with the concept of computer-led judging to the extent that judges are issuing binding determinations. I think that's a long way off for the judiciary to get comfortable with that. So you've got two pretty powerful lobby groups who are uncomfortable. On the other hand, who's fighting for it? Well, I don't know the voices are not so loud when fighting for justice, which is why 95% of people with a serious legal issue don't go anywhere near a court. That's the travesty of society today, is that 95% of people kept awake at night with the pain of a legal problem don't go to court. And 84% of people kept awake at night with the pain of a legal problem don't even see a lawyer. And you put that in the medical sense and you think, “Well, we've got a great society. Our society in Ruritania is fantastic.”
When people are in such pain at night, physical pain that they can't sleep, only 5% percent of people go to a hospital and only 16% of people see a doctor, because they don't think doctors are right for them. They think they're too expensive and they think they’re already for the rich and powerful. They just lie in bed in pain. They just suffer. They try and remedy themselves, right? We’d say that’s totally unacceptable for a medical system. But we’re perfectly happy to accept it today for a legal system. So the voice fighting for justice isn’t as loud as the voices that are fighting against innovation. To some extent that’s why legal systems are so slow to adjust.
Mark L: I think I read a few years ago that Amazon was effectively using an algorithm to resolve all their disputes under like $500 or something. So at least in some sense there already are AI-based judges, except they’re operating on a relatively low scale for a dispute resolution in a more private context.
I want to return to a point you made previously, that Chinese courts were the most efficient, procedurally efficient. The common argument for common law courts, is that it’s not a procedure argument, it’s a content argument. Common law, because it evolved over this long period and dealt with this very wide variety of disputes. It has this very large body of case law, and that’s why it has become really the predominant form of a court system, legal system in the world. And if you look at, for example, common law countries or civil law countries, common law countries tend to outperform them.
Is this the right understanding? Should we judge the content in Chinese law versus the content in common law? Is the Chinese law catching up? Is this a right summary of where we’re currently at? And how this relates to, as you mentioned, the Shanghai court that is the most procedurally advanced, versus the content of common law courts generally believed to be more effective for economic development?
Mark B: Certainly, that’s a misnomer, misunderstandings, and I say an error, in people thinking that common law jurisdictions are somehow better or faster or more accessible than civil law jurisdictions. That’s simply wrong. That’s simply not right. You only have to go back to the origins of both systems to find that they share many common areas. And if you talk to a civil law judge, they’ll tell you that their job is identical to a common law judge, which is deliver justice based on the law and the facts.
So think through when is the longest case in the history of the world, would you think it was an in a civil law jurisdiction or common law jurisdiction?
Mark L: I guess it’s common law.
Mark B: Common law. Right. 141 years in England, the land dispute. So why is that? The reason is, that generally speaking, common law courts work on the basis that they don’t do anything unless they’re asked. So one lawyer says to the court, “Could you have a look at this matter for me?” And the other lawyer says, “Oh, could you give me some more time?” And then the first lawyer says, “Well, can we have a couple of months?” But generally, the court is there to determine, not to pursue. So they get the information and the common law judge’s job is to listen to both sides and give a decision. And that leads to tremendous inefficiencies. And it was only really in the last 10 to 15 years that we’ve seen common law courts – I mean to some extent, from the 90s, that we’ve seen common law courts become more efficient. Why was arbitration created? It was created because the courts were so incredibly inefficient. And those are in common law jurisdictions if you look at the origin of arbitration.
So what does civil law courts do differently? What they do differently is they manage a case. Civil law jurisdictions manage cases better. They’re much better at forcing a case along, at keeping the parties going, because the judge takes an active interest in progressing the case.
In addition, civil law countries are largely better at enforcement because their processes, largely speaking, are far faster allowing you to collect once you’ve got a judgment. So I would say that neither system is better than the other. Both have good and bad. You argue that having precedent is a good thing, because it gives you a body of knowledge, which gives you greater certainty. If I wanted to argue against you, I’d say that, “Well, you’d rather go to a court where the judge can come up with a decision which is largely against what the law says or the body of precedent?” And the answer to that is, “Well, yeah, that’s the benefit of common law. That’s how common law evolves, because a judge finds a set of facts, which don’t tie in with resident and says I’m creating a new precedent. And if the supreme court endorses that, then that’s it. The law changes, whether it’s Lord Denning with High Trees or any of those other pivotal cases, which have changed the way that the common law works. The people who lost that case would say it was desperately unfair. The judge hasn’t followed precedent.
So in the civil law system, as you know, the judge is a lot more restricted to saying, “What does the law say? And I’m not that bothered by what previous courts have said. I’m just going to go on the law.” So neither system provides the certainty that it promises. However, and I think this is what we built in Dubai and many of the more modern courts are looking at, is you need to synthesize the two. And I think you need to synthesize civil and common law and you need to synthesize arbitration and litigation. You need to get the best of arbitration and litigation, bring those together. Get the best of civil and common law, bring those together and then you get what Canadians are calling a transsystemic legal system, and that is the answer in building a system going forward, is to create the new common law, right? The common law was a blending or four or five systems into one common system. And I think we’re at the stage now where if we were designing a system, we’re going to blend arbitration and litigation. We’re going to blend civil and common law and create the new common law, let’s call it environment. I think probably common law is the wrong word, because it will upset civilian lawyers and vice versa. So it’s going to have to have a name. I don’t know what the name is, but I’m pretty sure it isn’t going to be “transsystemic system.” So perhaps the competition that we should have is what is the name for the future system, which brings the best of all possible worlds together.
Mark L: That’s interesting. And recently you’ve been working with a new financial center in Kazakhstan. So can you talk a little bit about that?
Mark B: Absolutely. Well, as Dubai became the hub for investment, its economy went from 3% financial services to 14% financial services in GDP terms in 12 years. It totally transformed the economy. Employed 22,000 new jobs and built an ecosystem for finance, which is really world-class, and it became the leader for investment and FDI and growth in the financial services sector for the Middle East, the whole region. And Kazakhstan is doing the same. It’s one of the most advanced economies in Central Asia, despite the films. And it’s doing a fantastic job and it’s developed a model, which is very similar to the other international financial center models. And why is that important? It goes back to what we started with. Don’t create something too out there that people say, “That’s too strange,” right? Create something very similar, but have a nuance.
And the nuance in many senses is that focus on investment green technology, which is a reasonably new thing for financial centers to focus on. It’s focused on Islamic finance, where it’s really taking a strong lead for the region, and its focus on legal technology, one of the – I think the first international financial center to focus on legal tech as supposed to fintech, which it does focus on, but it also focuses on a much faster growing market of legal tech.
So they’ve positioned themselves to be extremely familiar as a gateway to the CIS that the only country in the world where you can take a decision and enforce it by treaty in Russia and China. So if you’re a US business doing business in China, you can’t use the American courts. Their decisions aren’t enforceable in China. You can’t use arbitration, because despite what lawyers will tell you, their decisions are largely unenforceable in China.
So where do you go? Well you could go to China. You could to some extent go to Hong Kong, or you could pick a neutral place, a more neutral place, which would be Kazakhstan, and where decisions from the Kazakhstan AIFC court, English language common law and enforceable by committee in the US and they’re enforceable in China by treaty. So you start to create a safe harbor for anyone looking to invest in Central Asia, Russia, China, which hasn’t existed up until now. So they own a real niche there and they’re going absolutely fantastic. I think in the first year they got more registrations than some of the other financial centers got in the first 5 years. You can really see that that investment environment that they’ve created, accessing some high-growth markets of Central Asia. Providing secure routes into China and Russia is something that the world of commerce is excited by.
Mark L: If you wanted to create a financial center in Latin America or one in Africa, you mentioned that for Kazakhstan, the selling point is access to Central Asia, is dispute resolution or enforceability of contracts in Russia, in China. These things that are somewhat unique. And then they are also focusing on green tech, on legal tech. It seems as though there are some key strategic factors to think about when developing a new financial center. And so if we’re looking at areas that don’t really have one, in Latin America, Miami is sort of the financial center, maybe Panama, but neither of those rules. Maybe there’s space for another one? Would you agree with that? Would you disagree? And if there is space for another one, do you have an intuition about what the focus might be on?
Mark B: Well, I think in Africa we’ve seen the rise now of the Kigali International Financial Center, which talks to exactly what I started by saying, that they’ve created a system for the whole country. They haven’t tried to carve out a novel zone. They’re actually creating a financial center that covers the whole country. So they’re working within the existing model. They’re not actually building something that’s sort of alien or foreign, and that is a sensible transition. So we’ve got the Kigali Financial Center and we’ve Rwanda as the gateway into Africa, I would say. We’ve got South Africa. Naturally, that’s English language in common law. So that has been traditionally – The court system there is, if I may say so, not as advanced as it might be given its important status for Africa. I think the Kigali Financial Center is going to give Africa a run for its money. It’s got great connectivity in terms of physical connectivity, but it's also got great connectivity in terms of regulatory and enforceability. I suspect that that's going to be the one to watch for Africa.
For Latin America, it's such a disappointment that they haven't actually built one. I mean the real opportunity is sitting in the mega economies of Brazil or Argentina. You hear talk from Honduras, they're looking at something, Panama. But maybe that's where the opportunity lies, but it's very odd that not a single nation has decided to copy what's been going on all around the world from Singapore to Dubai and Abu Dhabi, to Qatar, to Kazakhstan for Central Asia, and to some extent what we're seeing in Europe now with the rise of people looking for a post-Brexit dispute platform and financial center. And they're all having a go at trying to take it away from London.
So I'm really surprised that we haven't seen it in Latin America. And to some extent you might even argue it's lacking in North America. We don't have that environment that you have in the international financial centers in America at all, and that may well be because it's a state-by-state determination. But I would have thought for South America, let's say, versus Latin America. And I'm sorry I was talking more broadly about South America rather than Latin America. But if you look at South America and Latin America and Central Asia together, I would have thought they deserve an international financial center, which is a gateway for investment. Now if they do have one, all I'd say is that they don't advertise themselves very well. But if they don't have one, the question is why don't they have one when the rest of the world has proven that a financial center boosts your economy by 50 basis points a year and decreases your cost of credit by 200 basis points? It's a no-brainer. If you're an economy of a billion and you can enhance your economy by 50 basis points a year, your one-year gain is three or four times the actual cost of setting up a financial center. It's an economic no-brainer. And I always wonder why don't organizations do it? Why don't countries do it? I don't know. What do you think?
Mark L: Politics?
Mark B: You're in the heart of politics there in Washington, D.C.
Mark L: Breaking this down exactly, what would a financial center mean for Latin America? Better understand the Kigali example, because my understanding of the DIFC is it works in part because, one, there is a huge amount of capital flowing around the Middle East. Two, because at least until Qatar and Abu Dhabi launched theirs, there was no really safe place to park money. You had the Lebanese Civil War, Beirut to a certain extent was a financial capital. But there wasn't really a place that people wanted to park their money, wanted to do business. So there was this nascent demand combined with the fact that given the cultural attitudes of many places in the Middle East, there was also this demand for multinationals to have somewhere to put their headquarters where their staff would be treated with the kind of culture that they were more accustomed to versus some of the more restrictive environments.
If I'm thinking about Latin America. One, it's a bit more economically integrated already. So there isn't like a huge pool of money that's being dumped in like there has been in the Middle East over the last 40 or so years. Miami, for example, was built by Latin money. Every high net worth individual in Latin America has a guest house in Miami and presumably bank accounts there as well. So if I think about that, that's kind of the pseudo financial capital, as well as like Panama also being a financial center. So I guess what I'm trying to do is really tease out what makes something a financial center and how does that work within the regional context.
So if we think about Kigali, then is it that if you're doing a project in Africa or maybe in the region surrounding Rwanda, kind of Uganda, Kenya, Zambia, then you decide that you want that contract to be signed in Kigali because they have a better court system as opposed to London or Dubai or somewhere else. Or how should we think about that interplay there?
Mark B: I just want to go back to this concept of, “Is it better than London or Dubai?” That's not really the question. The question is, is it enforceable? And I think what most people forget when they sign a contract is they say, “Well, look if I can get the courts of the Southern District of New York to determine the matter, then and I'm going to get a fair, balanced, efficient hearing,” right? So if you're a US corporation, put Southern District of New York in on all your international contracts. Fantastic. If you're a European company, you may say, “Well, I'll put London in. All of my problems are going to be solved in London. London, it's the heart of justice. It's independent. That's what it stands for.” Of course, Mark, what is the value of a contract that can't be enforced?
Mark L: Very little.
Mark B: Very little, right? So people sign off these things. And I've seen London law firms sign off contracts into jurisdictions and they've put arbitration clauses in London, which are totally unenforceable against the counterparty. So the counterparty, if you think the example, the London banks lends to – we’ll will go back to Ruritania. London bank lends to Ruritania and its general council and its legal firms say, “Yup. Tell you what? We're going to lend you money, but it's got to be under laws of England and Wales and it's got to be the English courts.” Ruritania will say, “Thank you very much. Yeah, we'd be delighted,” because if the London bank wants its money, it has to go to the London courts. London courts give it a judgment. And Ruritania says, “Well, we don't honor judgments from London or arbitration awards from London. So thanks very much for the gift.”
On the other hand, if the bank defaults and doesn't extend the loan, Ruritania can go to the courts of London, get an order and enforce it directly against the bank in London. So when people choose their jurisdictions, they forget that they've got to think about enforcement, because if you don't think about enforcement, what you're giving is a gift because you’ve got no power in the contract. So when you talk about these financial centers, one of the things they offer is greater security for the contract. So take an example. Let's say you're doing business in Russia. We'll talk about Russia. You're an American business doing business or you’re an American company doing business in Russia and you put Southern Districts of New York into your contract and it goes wrong. What's the value of the contract?
Mark L: Very low.
Mark B: Nil. So you've put in the books of the company, the contract is worth $100 million. In reality that contract's worth nil. And they only find out because I mean most lawyers don't even give a thought to enforcement. Then you find out when it goes horribly, horribly wrong, and that's why we see so many of these big fights, arbitrations going on for decades and decades and money being poured in ultimately to have a pyrrhic victory.
So the heart of these regional financial centers is to provide a safer environment than elsewhere. So you're much better with a judgment from the AIFC court if you're doing business in that part of the world than you would be from any other court in the world, because they have built a network of enforcement rights that allow you to take your judgment and convert it to cash. So when we look at South America, let's look at South America, or even at Latin America. Countries in Latin America already have interconnectivity for trade purposes, as you say. So if they built a financial center, I would be much better operating through that financial center, which I trust, which is familiar, which operates in a language of commerce. 80% of all financial transactions are still written in English. So it's operating in the language of commerce. It's very familiar, but the key to it is my contract goes from valueless as it would be if I chose Southern District of New York, for example, to having value because it actually has the ability to be enforced. And that, from a regulatory standpoint, from a legal standpoint, suddenly you go from very dangerous business where you're entirely dependent on your counterparty's goodwill to having safe business, which you can bank and rely upon. That's the major distinction that most people overlook when they're thinking about financial centers. They're not real estate plays. They're credibility plays.
Mark L: Our guest today has been Mark Beer. Thanks for coming on the show, Mark.
Mark L: Thank you for listening to the Charter Cities Podcast. For more information about this episode and our guest, to subscribe to the show or to connect with the Charter Cities Institute, please visit chartercitiesinstitute.org. Follow us on social media, CCIdotCity on Twitter and Charter Cities Institute on Facebook. I'm your host, Mark Lutter, and thank you for listening to the Charter Cities Podcast.
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