U.S. court: Barclays tax avoidance scheme a 'reprehensible . . . waste of human potential

Sept 25: updated with Sikka quotes

A commentary from the U.S. Court of Federal Claims, on a giant tax avoidance scheme peddled by Barclays and several others, called STARS (“Structured Trust Advantaged Repackaged Securities”). Various entities were involved, but this was essentially a ploy by two banks - UK's Barclays and BB+T bank in the U.S., with nearly three quarter of a billion dollars in play.

"The Court concludes that the entire arrangement must be disregarded for lack of economic substance
. . . 
The conduct of those persons from BB+T, Barclays, KPMG, and the Sidley Austin law firm who were involved in this and other transactions was nothing short of reprehensible. Perhaps the business environment at the time was “everyone else is doing it, why don’t we?” Perhaps some of those who participated simply were following direction from others. Nevertheless, the professionals involved should have known better than to follow the STARS path, rife with its conflicts of interest, questionable pro forma legal and accounting opinions, and a taxpayer with a seemingly insatiable appetite for tax avoidance. One of Defendant’s experts, Dr. Michael Cragg, aptly stated that “enormous ingenuity was focused on reducing U.S. tax revenues.” Cragg, Tr. 4687.  After wading through the intricacies of the STARS transaction, the Court shares Dr. Cragg’s view that “[t]he human effort, the amount of creativity and overall effort that was put into this transaction . . . is a waste of human potential.”

We couldn't have said it better ourselves. Our emphasis added. Hat tip: TaxProf.

And these highlighted sections go for the peddlers of tax avoidance schemes more generally. As Prof. Prem Sikka notes, here:

"KPMG introduced the STARS transaction to BB&T at a January 17, 2002 meeting and used a slide show to outline the steps necessary for the scheme to work. KPMG had little prior business relationship with BB&T."

This reminds us of a paper by the Bank for International Settlements, cited in our recent Finance Curse paper, and in our latest edition of Tax Justice Focus, published today.  As the BIS paper notes:

"Finance literally bids rocket scientists away from the satellite industry. The result is that erstwhile scientists, people who in another age dreamt of curing cancer or flying to Mars, today dream of becoming hedge fund managers."

Those are some very clever people at these banks. Indeed: what a tragic waste of their lives.

To understand more about these schemes, see the TaxProf summary here, media articles here and here, or, for a more detailed look at this industry, see the book reviewed here.

Update: for further information on the Finance Sector, see here.