(This is an unedited version of my Sunday Business Post Column from yesterday.)

Iceland knows how to deal with bankers who commit illegal acts in the course of their duties. This week, four former bank officials from the Kaupthing bank were sentenced to between four and five and a half years in prison, and asked to pay their full legal costs of close to €700,000. Ouch. The same bankers face further charges of fraud and market manipulation. Corporate malfeasance meets personal consequences for those who break the rules.

Iceland is an outlier in its treatment of bankers, as it is in many things.

A consortium of journalists discovered banking giant HSBC, and in particular HSBC’s Swiss banking arm, helped wealthy customers avoid taxes and conceal millions of dollars of assets using untraceable cash by advising their clients on how to circumvent domestic tax authorities.

The Scandal has highlighted the deep connections between governments, commercial banks, auditing firms, regulators, and the press.

In the UK, a conservative peer and former Tory treasurer implicated in the scandal, Lord Fink said: “The expression tax avoidance is so wide that everyone does tax avoidance at some level.”

Everyone’s at it, apparently, so that makes it OK. From generous party donations to the rapid movement between regulators and the entities they regulate, the connections between governments, commercial banks, auditing firms and regulators run deep. In a sense the HSBC scandal is a scandal of the system itself.

In France, Le Monde has ignited a debate about press freedom. It owners, who saved the paper from bankruptcy a few years ago, have criticised its editorial decision to name and shame business people, politicians and celebrities. They referred to the leaks as ‘informers’ and have forced a standoff between the editors of the paper and the owners of the same paper. It’s all very dramatic but the fundamental issue of who owns the news we read and what their incentives are runs directly to the core of the HSBC scandal. Without independent outlets and deep resources, scandals like this just won’t be uncovered.

(It almost goes without saying that the Sunday Business Post is just such a paper.)

Even for Sunday Business Post readers who have just lived through a global economic crisis and the collapse of the Irish economy, the numbers involved in the HSBC scandal are eye-watering. The leaked files show HSBC maintained more than 30,000 accounts holding almost USD120 billion of assets in its Swiss private bank between 2005 and 2007. Their clients were able to avail of Switzerland’s lax rules to save themselves, and by extension cost the taxpayers of their home countries, several fortunes.

Another investigation has begun into HSBC’s clients on the Isle of Man and Jersey, where hundreds of millions of Euros have been identified as at least suspect.

Last year a consortium of newspapers published a list of tax agreements between Luxembourg and several multinational corporations like IKEA, Aviva and, yes, HSBC, revealing the activities of the big four accountancy firms, companies like Deloitte, KPMG and Ernst & Young in securing ‘fiscal optimisation’, where firms use alternative rule structures to aggressively plan to save tax. KPMG were HSBC’s auditors from 1991 to 2013.

Meanwhile, in the HSBC story which has just broken, the UK’s Revenue Commissioners have decided, somehow, that it is “not in the public interest” to prosecute criminal tax avoiders and their bankers and accountants who facilitated them. Ireland’s Revenue Commissioners have also decided on legal advice they won’t pursue the bank either.

This behaviour by some European tax authorities is in stark contrast to the US, where massive fines have been extracted from banks and other financial intermediaries operating illegal schemes. Deutsche Bank was fined USD 554 million. UBS was fined USD780 million. Credit Suisse was fined USD2.6 billion. A lot of money, yes, but even in the US, very few executives have been pushed toward a perp-walk. Personal consequences for malfeasance are few and far between when it comes to global capital. Unless you live in Iceland.

It is important to acknowledge the moral argument for paying tax. Precisely when the State needs income to recover from a crisis caused by bankers and regulators, those same bankers and regulators deprive the state of much-needed cash.

As an economist I’m more interested in the opportunity cost of the income to the State foregone by wealthy individuals sheltering their money offshore, especially in a time of crisis. The tax avoidance might be individually rational, but trying to save themselves money, these individual behaviours are collectively harmful for society.

We know banks which are too big to fail face a massive moral hazard problem. Bankers can behave as recklessly as they like when the downside risks of their activities are felt by others. The state, in a sense, is the effective backstop. The HSBC scandal paints a terrible picture of wilful tax evaders, who required tax payer largesse during the crisis they helped create, now escaping any effective sanction.

Any rational banker staring at the outcome of this process has to think, surely I could do that too, bigger and better?

The risks to financial stability from excessive risk taking by banks are very high. Any sense that banks and other financial intermediaries are in collusion with regulators has to be dispelled. The sanction of breaking up the bank, rather than simply removing a percentage of its profits, has to be considered.

In Ireland there is no doubt investigations into the behaviour of our large banks, auditors and regulators are required to satisfy the public that the revolving door we see in the UK and US is not taking place here. Given the social network analyses of board memberships done by TASC and our own relationship with gigantic brass plate companies with single employees, my feeling, and it is only a feeling, is that there may be something to discover. I hope there isn’t.

We don’t want to see a situation like that of Mr. David Hartnett, the UK Revenue Commissioner who negotiated the deal to allow HSBC’s bankers immunity from prosecution for any crimes they might have committed during the Swiss Scandal. In January 2013 Mr. Hartnett went to work for HSBC. You can’t make this stuff up.  We don’t want to see a situation where the President of Mexico can give a speech in London sponsored by, you guessed it, HSBC, the bank fined in part for laundering Mexican drug cartel money. Where a Tory peer can admit to ‘vanilla’ tax avoidance and face no sanction.

The deep connections between the financial and the real sides of the economy mean that, ultimately the taxpayer pays the cost of a culture where taxes are for someone else.

We need to see these connections and disrupt them if possible.

Amazingly despite everything, only the whistleblower, Hervé Falciani, the former HSBC employee who leaked the information, is wanted by the police.