By Peter Apps, Political Risk Correspondent
LONDON (Reuters) - Britons love to lecture the world about integrity and the rule of law, but the News of the World phone hacking scandal has laid bare a web of collusion between money, power, media and the police.
Far from the innocent, upright democracy of its self-image, Britain is showing a seamy side that anti-corruption campaigners say is getting worse and may be politically explosive as society becomes more unequal due to the financial and economic crises.
Behind a facade of probity, London offers a haven for oligarchs and despots, a place where foreign media magnates have bought access to and influence over the government.
The scandal engulfing Rupert Murdoch's media empire has already destroyed a newspaper, cost two top police officers their jobs, seen the arrest of powerful media figures and embarrassed the prime minister and political elite.
But it points to a bigger problem in British society -- overly cozy relationships among elites that are ethically dangerous, even when they does not involve outright criminality.
Britain says it has been bolstering its legal system and regulatory. Just this month a new law on bribery tightening rules for UK firms operating abroad entered force.
But some of the world's leading transparency campaigners say that the hacking scandal exemplifies unhealthy links between power and money.
"The bottom line... is that for some time there has been undue influence on UK governments and public policy by powerful private interests," says Daniel Kaufmann, senior fellow at the Brookings Institute in Washington DC.
"It is ... often a more sophisticated form of high-level political corruption. It may not be strictly illegal -- or it may be more subtle -- but that does not mean it is not very costly for society or the economy," said Kaufman, a former director of the World Bank Institute and creator of the closely watched Worldwide Governance Indicators.
If unchecked, "elite capture" of political systems can become "privatization of public policy" -- a growing danger in both Britain and the United States, he said.
As with media barons such as Murdoch, the influence of the financial services industry is so strong, Kaufmann argued, that politicians have long avoided questioning it.
That acquiescence contributed to the global financial crisis. It has also made Britain one of the key banking centers for the world's most corrupt oligarchs and despots.
Financial secrecy arrangements -- such as Britain's system of financial "trusts", which allow powerful figures to mask the ownership of assets -- have rarely if ever been challenged by the government, say financiers and campaigners.
MONEY LAUNDERING "DESTINATION OF CHOICE"
When power elites in the Middle East looked for somewhere to send their money during the "Arab Spring" uprisings this year, wealth managers told Reuters London was the prime beneficiary. Much may have been legitimately earned, some almost certainly not.
Both Egyptian President Hosni Mubarak's son Gamal and Libyan leader Muammar Gaddafi's son Saif owned property in London through complex trusts and front companies in Panama and the British Virgin Islands.
Through its close links with tax haven satellites such as the Channel Islands, Gibraltar and the Isle of Man, experts say Britain is at the center of many such schemes.
"London has become the money launderers' destination of choice," says John Christensen, a former economic adviser to the Channel island of Jersey, who now runs the Tax Justice Network, a group campaigning for tighter regulation.
"If you look at the way we talk about and measure corruption in the West, it's either Africa or Asia which comes out worse. But we are using a distorted prism."
It's not just Britain. A Reuters investigation this month showed how some U.S. states -- notably Wyoming and Delaware -- were failing to meet international standards, offering "shelf companies" to help hide assets and avoid tax.
Christensen argues that states have been losing control of the financial system for more than 30 years and now find themselves increasingly at its mercy.
Even groups such as Transparency International -- which has traditionally focused on criticizing "conventionally" corrupt states in emerging economies -- are beginning to shift their attention to developed world corruption.
TI published a report earlier this month entitled "Britain: more corrupt than you think", showing that a majority of people believed corruption was worsening in the country.
"It is not that corruption is endemic in the UK as it is in some other countries but there is a worrying degree of complacency," said Chandrashekhar Krishnan, Executive Director of Transparency International UK.
"The focus (now) is on corruption in the media and allegations about bribing the police... but we are also particularly worried about political party funding, parliament, sport and the prison system."
RISING BACKLASH AGAINST "CORRUPT ELITE"
Even recent gains are not always what they seem. For example Transparency International points to the UK Bribery Act.
The law's introduction was delayed after frantic lobbying by companies who said it would make them uncompetitive, prompting officials to effectively water down some of the guidance on how rigorously it would be enforced.
The institution responsible for enforcing it, the Serious Fraud Office, is also suffering budget cuts -- as are other bodies aimed at tackling grassroots corruption in prisons, police, local government, and taxation.
The previous government halted bribery investigations into arms sales to Saudi Arabia, citing the national interest.
Not everyone despairs. Some argue that the Internet and social media may prompt a new era of transparency, raising the reputational risks for governments that fail to clean up their act.
The Brookings Institute's Kaufmann argues that antimonopoly regulations and diverse political systems involving more than two main parties could help by making it harder for oligarchs to control the system.
Activists warn of growing public discontent. In Britain, lobby group UKuncut has organized direct action including flash mobs outside firms they accuse of avoiding tax -- although they say they had no hand in throwing a cream pie at Murdoch on Tuesday at a parliamentary committee.
"It's a bit like the beginning of an avalanche where it is very hard to predict where it will end up," said Tim Hardy, a left-wing blogger describing himself as a cheerleader for the officially leaderless group.
Nor is discontent limited to the political fringe. One former senior British official said on condition of anonymity that groups such as UKuncut "have more of a point than they know".
Political advisers to banks warn of a growing global anti-establishment backlash.
John Bassett -- a former senior official at the British signals intelligence agency GCHQ and now a senior fellow at the Royal United Services Institute -- says that coming after the financial and economic crises the hacking scandal "has revitalized the narrative of a corrupt elite.
"The long-term result is likely to be a further erosion in the credibility of the British establishment, particularly the media and police, in the eyes of citizens."
(editing by Paul Taylor)