Monday, September 29, 2008

Britain's capitalist casino

George Osborne, Britain's opposition Conservative Party shadow chancellor (finance minister,) is in the papers today, warning city bankers they would have to pay for the mess they have made in the "capitalist casino."

We couldn't resist this - here's something we've just added to our quotations page, also from Britain's Conservative party, very recently:

"The last ten years in particular have been good years for the world economy as a whole. They have been characterised by two massively favourable trends. The first is an era of easy money. The main central banks worldwide have opted for low interest rates, the ready creation of credit, and tolerance of innovatory means of financing public and private sector activity through big increases in debt. It has been the era of public/private partnerships, specialised credit-based funds and funds of funds, collateralized debt obligations, collateralized loan obligations, credit default swaps, special purpose vehicles and many other similar ways of raising borrowing throughout the financial system.
Britain's Conservative Party, Policy document "Freeing Britain to compete", August 2007, amid the start of global economic turmoil triggered by collateralized debt obligations, collateralized loan obligations, credit default swaps, special purpose vehicles and many other similar ways of raising borrowing throughout the financial system."

London bears a large share of responsibility for much of the current mess, as this New York Times piece, looking into the fall of the insurer AIG, notes:

Although America’s housing collapse is often cited as having caused the crisis, the system was vulnerable because of intricate financial contracts known as credit derivatives, which insure debt holders against default. They are fashioned privately and beyond the ken of regulators — sometimes even beyond the understanding of executives peddling them.

Originally intended to diminish risk and spread prosperity, these inventions instead magnified the impact of bad mortgages like the ones that felled Bear Stearns and Lehman and now threaten the entire economy.

In the case of A.I.G., the virus exploded from a freewheeling little 377-person unit in London, and flourished in a climate of opulent pay, lax oversight and blind faith in financial risk models. It nearly decimated one of the world’s most admired companies, a seemingly sturdy insurer with a trillion-dollar balance sheet, 116,000 employees and operations in 130 countries.

“It is beyond shocking that this small operation could blow up the holding company,” said Robert Arvanitis, chief executive of Risk Finance Advisors in Westport, Conn. “They found a quick way to make a fast buck on derivatives based on A.I.G.’s solid credit rating and strong balance sheet. But it all got out of control.”

(Hat tip: Richard Murphy.)

Philip Blond, writing in The Independent, said this:

"We allowed a tax-evading, off-balance sheet, offshore economy to speculate with the savings and assets of an onshore, on-balance sheet, tax-paying public."

Quite. For more background on the financial crisis, see our recent blogs "Tax Havens and the Market Turmoil," Part One (an example from Dublin,) Part Two (how bad it is,) Part Three (what to do,) and Part Four (nation states) We plan to add to this series in due course.


Britain's Doha disgrace

This story, uncovered by the Tax Justice Network, is in Britain's Observer newspaper:

"The British government is attempting to torpedo a section of an international plan to eradicate tax evasion in a move that has sparked widespread condemnation.

The Observer has established that the UK is lobbying to remove paragraph 10 from the draft Doha Outcome Document. The document, which is scheduled to be ratified in November, is the most important element in the international process intended to help developing countries wean themselves off aid and establish sustainable economies."

World leaders are due to meet in Doha, Qatar from November 29-Dec 2 this year to try to help figure out ways to finance development. It is a crucial event - read more here. The US, Canada and Australia are also opposed to the paragraph in the draft outcome document, according to sources in the UN. As currently drafted, it reads:

"We will strengthen efforts to increase tax revenues through more effective tax collection and modernization of tax legislation including through simplification of the tax system, broadening of the tax base, and strongly combating tax evasion. To support individual country efforts in these areas, it will be important to enhance international cooperation in tax matters and broaden participation in the development of international tax norms and rules. We will consider strengthening the UN Committee of Experts on International Cooperation on Tax Matters by upgrading it to an intergovernmental body."

It would seem extraordinary that any government could object to the the first two sentences at any time, let alone right now. Given Gordon Brown’s claimed commitment to Africa, you might have thought he was promoting this clause. But no, the Treasury is blocking the whole paragraph. It told the Observer:

"The UK makes an active contribution to the existing UN tax committee. It is not clear that an upgrade to the existing committee … would deliver any additional benefit."

Why is this important? Let's refer to an earlier blog of ours, which said this:

"The only other forum for international discussion of tax matters is the OECD, a rich countries' club, which has adopted a timid approach to international information exchange. THe OECD's harmful tax competition initiative, launched ten years ago in 1998 at the behest of the G-7 group of industrialised countries, foundered after support was withdrawn by the administration of George W. Bush in 2001, and its focus on information exchange by request is too feeble to be effective. The same can be said of its transfer pricing rules, which are not working at all well. What is more, the OECD and the UN adopt different approaches to the issue of source-based and residence-based taxation (see here for more details) with the OECD model less favourable to poor countries than the UN approach. If the UN is to start pushing properly for appropriate tax practices in development, it must upgrade its Tax Committee as a first step."

Let's contrast these countries' positions with a communiqué put out recently by a group of high-level African tax officials. It's well worth reading in full, but here is an extract from a significant section:

"We believe that taxation is essential to sustainable development. Developed and developing economies, NGOs, private investors and international organizations should work together to promote fair and efficient tax systems and administrations that will ensure each country receives the fruits of its own economic achievement and, at the same time, improves its overall governance.

We agree that one of the most pressing issues facing our continent is to embark on a path to free African countries from their dependence on foreign assistance and indebtedness. An indispensable condition of this is the strengthening of our capacity to mobilize domestic resources. Domestic revenue should be one of the main sources for fiscal space expansion because of its sustainability, thereby reducing dependence on donor assistance.

We are concerned at the international findings on the issues of tax havens and capital flight. Billions of dollars per year have left the African continent between 1991 and 2004. These outflows are estimated at 7.6% of the annual GDP of the region and, in effect, makes African countries net creditors of donor countries. They also undermine African countries’ tax bases. While developed countries are providing ODA and some debt relief on the one hand, action by the international community is required to ensure that the potential tax base of developing countries is not undermined through tax evasion. We encourage the UN and the OECD to vigorously pursue their work in this area by promoting better international cooperation.

We are well aware that many African countries, like most countries globally, face significant challenges in respect of the effectiveness of their tax systems. Overall revenue yields and voluntary compliance are low; the tax bases often remain narrow, while the informal sector continues to grow; the taxation of international transactions, in particular transfer pricing, has become increasingly difficult; the overall tax gap remains unquantified.

We recognise that, over the coming decade, we will need to enlarge our sources of tax revenues and broaden the tax base considerably, in order to compensate for the move away from trade taxes resulting from WTO obligations and from regional trade agreements."

John Christensen, director of Tax Justice Network, said:

"The European Parliament last week made a strong statement demanding the commission support this document. Britain is out on a limb within Europe. It's the usual suspects of the US, UK, Australia and Canada. These are the countries that created the toxic financial crisis undermining the global economy. Seemingly lessons have not been learnt."

We'll leave the last word to Richard Murphy, who puts this into perspective:

"Remember, this whole issue is about raising the cash needed to meet the Millennium Development Goals. This is about helping developing countries build sustainable tax systems. Giving them access to the information they need to ensure that the cash due to them by multinational companies in particular is paid. It’s about ensuring that they are not abused by tax haven structures. It’s about ensuring higher status is given to the UN tax committee, which is the only place where countries from outside the OECD (and that’s most by far) get any say on international tax.

But the UK is saying no to all of that. It’s saying these countries can’t have a say. It’s saying they can’t have the information they need to collect tax, and that the status quo that leaves them exploited and aid dependent should be maintained. It’s about saying cash should not be raised to fulfil the MDGs. It’s about saying these countries should not be encouraged to build fair, open and accountable tax systems.

It’s more pernicious still. In reality it’s about saying that the UK’s tax havens are more important than developing countries; that our multinationals should be allowed to continue their abuse of developing countries and that accountants, lawyers and bankers should still be allowed to set up the abusive offshore structures that facilitate the corruption that plagues these countries, because let me assure you - none of that corruption would happen without the assistance of those banks, lawyers and accountants.

This is about choice: choice about whether to support developing countries, choice about ending poverty, choice about fairness, choice about equal treatment, choice about respecting democracy. Or choice to support abuse, corruption, the maintenance of unlevel playing field in which developing countries are given no chance and have no hope."


Friday, September 26, 2008

Major progress for TJN's agenda

Amid the tumult in global finance, we have been pointed to an important report that has just been adopted by the European parliament. This is part of the EU's follow-up to the UN Financing for Development process, which is ultimately aimed at finding ways for poor countries to finance themselves.

First, and on a rather calm, sober, note, the EU resolution says this:

"Regrets that the Commission does not place more emphasis on the mobilisation of internal resources to finance development, as these are sources of greater autonomy for developing countries."

Good. They want more emphasis on tax, in particular. Naturally, in a stronger statement, they add this, too: that the EU parliament regrets that its package on aid effectiveness

"does not mention capital flight as a risk factor for the economies of developing countries; points out that capital flight does serious damage to the development of sustainable economic systems in developing countries and points out that each year tax evasion costs developing countries more than they receive in the form of ODA; calls on the Commission to include measures to prevent capital flight in its policies, as required by the Monterrey Consensus, including a frank analysis of the causes of capital flight, with the goal of closing down tax havens, some of which are located within the EU or operate in close connection with Member States;

Very good. It also mentions the figures promoted by Raymond Baker of Global Financial Integrity estimating that the illegal component of this capital flight amounts to $1.0-1.6 trillion each year, half from developing countries, and then provides stronger medicine:

"supports the international efforts made to freeze and recover stolen assets and asks those Member States that have not done so to ratify the United Nations Convention against corruption; deplores the fact that similar efforts are not being made to combat tax evasion and calls upon the Commission and Member States to promote the global extension of the principle of the automatic exchange of tax information, to ask that the Code of Conduct on tax evasion currently being drawn up at the United Nations Economic and Social Council (UN ECOSOC) be annexed to the Doha declaration and to support the transformation of the UN Committee of Experts on International Cooperation in Tax Matters into a genuine intergovernmental body equipped with additional resources to conduct the international fight against tax evasion alongside the OECD;"

as if that was not enough, they then drop a bombshell:

"Calls on the Commission to ask the International Accounting Standards Board (IASB) to include among these international accounting standards a country-by-country reporting requirement on the activities of multinational companies in all sectors."

We cannot stress the importance of this enough. A campaign has been underway for quite some years to achieve country-by-country reporting for extractive industries like oil or copper mining (which we strongly support; indeed TJN's Richard Murphy has been instrumental in designing the policies); indeed the US Senate held hearings on this, also on Sept 23.)

The striking thing about the new EU report is that it contains the words "in all sectors" when it refers to the Country-by-Country accounting standard for multinational companies. Yes, that means banks and accountancy companies, among many others, too.

All of this represents big progress. There's a long way to go, but we are greatly heartened to see that people in positions of power are listening to us.

If we could achieve Country-by-Country reporting, for example, it would be nothing short of a revolution in global transparency. Among many other things, it would enable us to see just how big companies shift money around through tax havens. And, oh, as Richard Murphy has remarked: "It is an essential part of the regulatory reform that will resolve the credit crunch."

The European Network on Debt and Development (Eurodad) has issued its own analysis here.


Singapore - a clean state?

It looks as though our recent blogs (here and here) on Transparency International, remarking on how TI has just ranked Singapore as the world's fourth "cleanest" country, have been noticed in that Asian country. This is from an opposition Singaporean political party, the Singapore Democratic Party, which, like many other organisations, doesn't exactly have an easy ride. See this, from the Committee to Protect Journalists, for example:)

State control of the media in Singapore is so complete that few dare challenge the system and there is no longer much need for the ruling party to arrest or harass journalists. even foreign correspondents have learned to be cautious when reporting on singapore, since the government has frequently hauled the international press into court to face lengthy and expensive libel suits. The ruling People's Action Party (PAP) controls most local media . . (continues in the same vein for some time.)

(Or try a more recent example, here)

We said this about Singapore:

one of the world's most toxic, and fast-growing, tax havens, hoovering up dirty money from all around the world.

And the Singapore Democrats, who hadn't come across us before, had this to say about us:

The Tax Justice Network, or TJN, is a not-for-profit group focused on the role of taxation and the harmful impacts of tax evasion and tax havens. The Network opposes "all the mechanisms that enable owners and controllers of wealth to escape their responsibilities to the societies on which they and their wealth depend."

The PAP (the ruling party in Singapore, which has 82 of 84 seats in parliament) won't like them.

There's something else it won't like about the Network. TJN is working with TI to create a new Financial Transparency Index. It recommends an alternative methodology that looks at a more comprehensive definition of corruption, one that takes into consideration money-laundering and tax evasion.

. . .
Of course you'll not see this issue raised in our press.


Tuesday, September 23, 2008

From Norway: Welcome to a world without rules

The title of this blog, inspired by a recent Batman film, refers to a speech that TJN's director, John Christensen, gave today to the Norwegian Association of Tax Auditors and Accountants. (the speech refers to several charts, which you can find here.) It is a wide-ranging speech, but much of it follows the theme pursued by a number of recent blogs, which analyse the role that tax havens have played in the current global economic turmoil. A few excerpts help distil some of the points:

"Until now virtually no-one has made the link between the chaos on the global financial markets and tax havens. But it is important that we recognise that these links exist, and that tax havens - or secrecy jurisdictions as they are often called nowadays – are not just used for tax evasion, but have also played a key role in creating the turmoil on the globalised financial markets.

The core of my argument is that secrecy jurisdictions are corrupting agents operating in a clandestine fashion at the core of the global financial markets. They have played a wholly destructive role in allowing economic players to circumvent onshore regulation and evade financial oversight. By providing what academics call “secrecy space” they multiply market risks by facilitating the creation of complex and opaque corporate structures, for example Special Investment Vehicles used to hold assets off-balance sheet."

How does he know this? He used to be an offshore practitioner, and a senior adviser to the States of Jersey.

"From personal experience I have seen how companies festoon their financial affairs all around the world, slicing and dicing complex structures between multiples of jurisdictions, in response to offshore incentives. A company incorporated in the Isle of Man, might be owned by a trust established in Jersey, with trustees in Bermuda and a bank account in Luxembourg. Even if each tax haven’s claim that it is well regulated were true, the regulation falls between the stools: such transnational entities are regulated, in effect, nowhere, since each jurisdiction only accepts responsibility for what happens in its domain and none for the entity as a whole. This is deliberate.

. . . In practice secrecy jurisdictions only regulate transactions occurring within their territorial boundaries, and since almost by definition the majority of transactions booked within their jurisdiction occur elsewhere, the regulators feel under no obligation to regulate them. The outcome of this officially sanctioned game of smoke and mirrors is that a huge proportion of offshore transactions occur in a regulatory void which we can only describe as ‘Nowhere’. . .

Secrecy jurisdictions might appear as small and relatively insignificant places. They seldom feature in mainstream academic texts and most analysts and journalists either ignore them or treat them as externalities beyond the political economic mainstream."

But if you think that this is small beer, we've got news for you. Try these for size.
  • Over half of all international bank lending and approximately one-third of foreign direct investment is routed via secrecy jurisdictions;
  • Over 50 percent of global trade is routed on paper via secrecy jurisdictions even though they only account for some 3 percent of world GDP;
  • Personal wealth totalling US$11.5 trillion has been shifted offshore by the super-rich (known in banking circles as High-Net Worth Individuals, or Hen-Wees), evading taxes of over US$250 billion annually;
  • Over two million international business corporations and hundreds of thousands, possibly millions, of secretive trusts and foundations have been created in secrecy jurisdictions;"
And so on. John then asks the question: how do secrecy jurisdictions add value to the global economy?

"When I have put this question to bankers and officials in the secrecy jurisdictions, they speak vaguely about ‘oiling the wheels of the international markets’ or providing ‘regulatory certainty’, or promoting tax competition, by which countries keep offering tax incentives to attract mobile capital from other countries. I will deal with each of these in turn."

You will find the rest contained in his speech. Read it.


Voices from the past

At times like these, it's interesting to pull a few told-you-so quotes from the past. Here is a short selection from our quotations page, where you can also find links to the quotes.

There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is a part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.

John Kenneth Galbraith, A short history of financial euphoria

If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.
Thomas Jefferson

At the core of the financial system remain the big banks, which are insured, explicitly and implicitly, by governments. Regulators have to ensure that excessive risk-taking is not going on, with the gains once again privatised and the losses shifted on to taxpayers.
Financial Times editorial, June 25, 2007

I may like many bankers, but I rather dislike banks. I recognise their necessity, but fear their irresponsibility. Worse, they are irresponsible partly because they know they are necessary. No industry has a comparable talent for privatising gains and socialising losses. Participants in no other industry get as self-righteously angry when public officials – particularly, central bankers – fail to come at once to their rescue when they get into (well-deserved) trouble.
Martin Wolf, Financial Times, Jan 15, 2008.

As Anthony Hilton wrote in the Evening Standard last week, “the entire UK economy has become, in effect, a giant hedge fund with a massive one-way bet on financial services - and no Plan B for the day when the City goes off the boil.” If and when it does, the costs of the government's failure to understand the managerial economy will be high - for all of us.
Simon Caulkin, The Observer

Bad money drives out good.
Sir Thomas Gresham (c1519-1579), a merchant, financier and government under Elizabeth 1. This phrase is sometimes known as "Gresham's Law"

The whole culture of Anglo-American finance is increasingly subversive of regulation, taxation and democratic values, even where it remains within the law.
John Plender, "The hijack that made Enron happen", Financial Times, 28 January 2003

There are plenty more where those came from.


Backsliding from Transparency International

Just as we predicted in our blog yesterday, Transparency International has brought out its Corruption Perceptions Index (CPI) for 2008, and Singapore, one of the world's most toxic tax havens, is ranked as the fourth "cleanest". Right behind it, in fifth place, is another singularly unpleasant receptacle for dirty money, Switzerland.

Worse still, the accompanying press release appears to have lost touch with reality. Whereas at least the 2007 blurb accompaning the CPI's release recognised the centrality of these kinds of dirty money centres faciliting flows of dirty money, this one simply quotes a Professor, Johann Graf Lambsdorff of the University of Passau, who compiles the index, who says nothing that we didn't know already. In terms of the responsibility of western countries for corruption, the blurb then goes on to focus on bribery, which as Raymond Baker has shown, only accounts for an estimated three percent of the problem, in terms of cross-border financial flows.

Anyone involved in analysing corruption -- and that, we hear, includes many people inside TI (and, if you read German, see here), should be aware by now that there is a new game in town. It's been out there for some time now, and nobody has ever told us that (or how) we are wrong. It's called Phase Two in the corruption debate. Plenty of people inside Transparency International are with us. Switzerland and Singapore, along with all the others up there in this wrong-headed table, are simply not clean states. It is time for real change.

We will end with a quote from John Christensen's speech which he has just given in Norway.

We must reconsider what constitutes corruption. It is right to be concerned by bribery and embezzlement of public assets, but tax evasion is generally overlooked even though it represents theft of public assets and, in terms of orders of magnitude, has far greater impact on public revenues than bribery and embezzlement.

Tax evasion involves abusive behaviour at the intersection between private activity and the public interest. It involves minorities bypassing accepted social norms, and provides one set of rules for the rich and well-connected, and another set of rules for the poor and weak. More insidiously, it involves privileged elites, who use secrecy jurisdictions to undermine the will of elected parliaments. It is time that secrecy jurisdictions are recognised for what they really are: a full-on assault on the sovereignty of nation states, a direct attack on democracy, and a cancer running through the veins of contemporary capitalism.


Monday, September 22, 2008

Tax havens and market turmoil, Part 4 - on nation states

Our recent blog, explaining clearly why tax havens lie slap, bang in the middle of this whole evolving mess in world markets, looks particularly at whether or not to regulate, at the difficulties inherent in regulating, and at the context in which regulation is embedded.

But we can consider this in an even broader context. As Philip Stephens put it in the Financial Times:

"Once the storm abates – and FT colleagues better versed in these matters tell me that it will take some time – the task for politicians will be to ask some bigger questions. Putting aside the technicalities of collateralised debt obligations, capital ratios and the rest, what does the crisis tell us about the nature of the world in which we now live?

The messages are not straightforward; some appear contradictory. Overall, they speak to a growing tension between global integration and a shortage of credible international governance. Governments have been left with responsibility without power."

This is arguably the central question in the world right now. It applies to high finance, it applies to climate change, it applies to trade and outsourcing, and many other issues. How do we attain global governance in a world of sovereign, and often mutually mistrustful, states?

Once again, we return to tax havens. We won't claim that they are always central to everything - though they are, as we've shown, central to the current crisis. And we return to our submission to the UK treasury committee, and to our recent blog:

"Tax havens “deliberately set out to undermine the impact of legislation passed in other jurisdictions” and to make things appear other than they are. This is their core business. Regulation can work only if such obstacles are removed."

And tax havens (or "secrecy jurisdictions"), and the tax competition that is intertwined with them, are, at least in the domain of finance and regulation, at the root of Stephens' observation that governments have been left with "responsibility without power."

The current crisis will focus minds, inevitably, on the tax justice agenda. The essence of our approach has always been this: to shift the frame of reference from the local to the global, and from the individual case to the systemic analysis. It is the same in our corruption analysis, our analysis of tax competition, and so on. Now, with the current crisis, the systemic aspects of all this are front and centre of the debate, and will remain so. As Philip Stephens said:

"The tensions are not susceptible to neat solutions. But all point in the same direction. Interdependence is no longer an abstract noun. Governments need to find ways to reclaim some of the sovereignty lost to globalisation. That means more global governance: credible international rules.

Capitalism will survive these financial shocks. The risk, though, is of a retreat to economic nationalism. The stresses of globalisation are visible everywhere. Ultimately, if the politicians want the liberal market system to work, they will have to make multilateralism work."


Transparency International divided on corruption?

It's almost a year since Transparency International published their famous Corruption Perceptions Index, which, followers or our blog will know, does not please us (if you aren't aware of our overall critique, which ultimately hinges on our shifting the focus of enquiry from individual countries up to a global level, click here, or look under "corruption" in our A-Z index here.)

It has been suggested to us that there is currently a fierce debate going on inside TI about the forthcoming index, and the debate hinges on our analysis. We understand that insiders are furious that their veteran methodology for calculating their index has produced a draft table that records Singapore as the fourth "cleanest" country in the world, when many of us know all too well that Singapore is one of the world's most toxic, and fast-growing, tax havens, hoovering up dirty money from all around the world. (This is by no means the only problem jurisdiction: in the last table, noxious tax haven states such as Switzerland, Luxembourg, Hong Kong, the United Kingdom, and others, also crowd right up there as "clean" states.)

In fairness to TI, they have recognised clearly and explicitly that they have a major problem with their CPI, and with the fact that their table analyses individual countries, but not the global picture. A statement accompanying the last CPI says:

"Corruption by high-level public officials in poor countries has an international dimension that implicates the CPI’s top scorers. . . . global financial centres play a pivotal role in allowing corrupt officials to move, hide and invest their illicitly gained wealth. Offshore financing, for example, played a crucial role in the looting of millions from developing countries such as Nigeria and the Philippines, facilitating the misdeeds of corrupt leaders and impoverishing those they governed."

Absolutely spot on. And they quote Akere Muna, Vice Chair of Transparency International:

“Criticism by rich countries of corruption in poor ones has little credibility while their financial institutions sit on wealth stolen from the world’s poorest people.”

Well said. But the problem is that journalists and many others are busy people, and they so often simply do not have the time or inclination to read through the blurb accompanying the index. What they want is something that handily enables them to say "Transparency International ranks X as the world's tenth most corrupt country" and then move on. So this ranking, by giving many extremely dirty countries a clean bill of health, does not please us.

There is clearly a big problem here. As our recent article in The American Interest explains, the world is now gearing up for Phase Two in the fight against corruption. And we are pleased that TI is working with us on creating a new Financial Transparency Index. It will take quite a long time to crunch the data to produce this, so it won't be available soon. Click here for more details.


Sunday, September 21, 2008

On buccaneering financiers

From The Observer this morning, in an article entitled: "Britain can no longer indulge these buccaneering financiers."

It is not just the trade in arcane assets that must be driven out of the shadows. The whole culture of City opacity - the tax havens, the seclusion of liabilities off-balance sheet, the offshore investment vehicles - must be subjected to the harsh glare of public scrutiny. For a generation, the City and Wall Street have assumed an inalienable right to make as much money as possible, in whatever way they saw fit, while paying as little tax as possible. Policy-makers accepted that such unchallenged greed served the greater good. That consensus must end. A free market in financial services can still be a powerful engine of wealth-creation, but not if the financiers serve only themselves.

We just had a text message this morning. Translated from text-ese into English, it reads:

"Morning! Bet you're having the last laugh. Where's the follow-up letter saying 'told you so!'?


On the bailout

We are (all) still getting our heads around the astonishing week that has passed in global financial markets. The subject now is the bailout plan, whose size was summarised by the New York Times like this:

"A $700 billion expenditure on distressed mortgage-related assets would roughly be what the country has spent so far in direct costs on the Iraq war and more than the Pentagon’s total yearly budget appropriation. Divided across the population, it would amount to more than $2,000 for every man, woman and child in the United States."

Well, there's a thing. Now, here's a thing: separately, the New York Times has also published the draft proposal for the bailout. Look at this part of the text.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

This, in the context of the earlier sub-clause:

"The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation: . . . "

One commentator had this to say about the actions of US Treasury Secretary Henry Paulson:

`He's asking for a huge amount of power,'' said Nouriel Roubini, an economist at New York University. ``He's saying, `Trust me, I'm going to do it right if you give me absolute control.' This is not a monarchy.''

The usually market-savvy blog site Naked Capitalism added this:

"This puts the Treasury's actions beyond the rule of law. This is a financial coup d'etat, with the only limitation the $700 billion balance sheet figure. The measure already gives the Treasury the authority not simply to buy dud mortgage paper but other assets as it deems fit. There is no accountability beyond a report (contents undefined) to Congress three months into the program and semiannually thereafter. The Treasury could via incompetence or venality grossly overpay for assets and advisory services, and fail to exclude consultants with conflicts of interest, and there would be no recourse. Given the truly appalling track record of this Administration in its outsourcing, this is not an idle worry.

But far worse is the precedent it sets. This Administration has worked hard to escape any constraints on its actions, not to pursue noble causes, but to curtail civil liberties."

This is a quintissential tax justice issue: it is, as we have just explained (and we urge you to read our last blog in particular), the result of the world's wealthiest individuals and institutions shifting risks, and the consequences of risks, onto taxpayers, and walking away with the proceeds - with (as we explained) tax havens slap bang in the middle of it all.

To end, the economist Paul Krugman at the New York Times added:

There’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving. . . Treasury needs to explain why this is supposed to work — not try to panic Congress into giving it a blank check. Otherwise, no deal.

This will be debated in decades to come. We'll (of course) return to this theme too. But for now, we'll just leave it at that.


Thursday, September 18, 2008

Tax havens and market turmoil, Part 3 - what to do

The context for this blog is the article by Jim Stewart, looking at the role of one tax haven in the current market turmoil, and this morning's blog looking at how bad it seems to be. If you haven't already, you are urged to read them both.

We start with a kind of debate that has emerged in the Financial Times between two of Britain's leading economic commentators (and FT columnists), Martin Wolf and John Kay.

Kay argues that regulation is not the answer, because it does not work: history has shown us that regulators cannot successfully second-guess the decisions of huge institutions staffed by better paid and more motivated people than themselves, who will find ways to escape regulation. The right approach, he argues, is to "insulate the real economy from consequences of financial instability."

Wolf find's Kay's position

"both attractive and unrealistic. . . . governments cannot credibly promise to wash their hands of a financial breakdown. . . greater regulation is, alas, inescapable, even if doomed to be imperfect."

There is a way to slice right through these arguments.

Instead of looking at whether and what to regulate, we should be looking at the context in which regulation takes place. And that means looking at -- you guessed it -- tax havens and tax competition. To be more precise, we should talk about tax and regulatory havens and tax and regulatory competition.

The world, to date, has taken tax havens as a given, and given them a free pass. We seek to overturn that long-standing global consensus.

What role have tax havens played in the current crisis? Let's start with the submission that we made to the UK House of Commons Treasury Committee inquiry into Offshore Financial Centres earlier this year, substantially prepared by Richard Murphy. Tax havens, he says,

"deliberately set out to undermine the impact of legislation passed in other jurisdictions. . . These are deliberate acts of economic aggression targeted at sovereign states. . . . In the last decade new and highly abusive forms of offshore company and trust have developed. These evolutions have been little documented and much less understood, but have allowed both companies and trusts to float free of almost any regulatory control. . .

The offshore world is designed to make things appear other than they are, and by and large succeeds in doing so. This, in a nutshell, is the threat that they pose to the world."

This is the first part of our case. The facts are unambiguous. We are just describing, in plain terms, what tax havens seek to do. Undermining other nations' laws, whether on tax, financial regulation, criminal legislation, or whatnot - this is their meal ticket, and indeed their very raison d'être. It follows automatically that if we want regulation to work, then we need to remove the obstacles that are deliberately put in its place. Which means taking on the offshore world.

There is another reason we don't agree with John Kay. He is, in effect, saying this: getting regulation to work is too difficult, so we shouldn't try. This is a bit like arguing that drug smuggling is too hard to crack down on, so we should give up. (OK: to be fair, Kay also argues that regulation not only will not work, but can even be counter-productive. But, as Jim Stewart's article illustrates, the context for regulation, not regulation itself, that is the problem. So our argument stands.)

Let's consider some other things that tax havens do, that are relevant to the current market crisis. First, numerous players and observers of the crisis have remarked that opacity is at the heart of the crisis. John Plender said this today:

"What makes the management of this crisis so difficult is the opacity of the modern financial system."

Nobody can be sure about their counterparties' market positions in terms of assets, risks, and so on. Amid all this uncertainty, everyone's afraid to lend to, or trade with, other parties, and in this climate of opacity and mutual mistrust the financial system has become gummed up. Better transparency is essential, people are (belatedly) saying - but how to achieve it?

First, as an aside in the context of opacity and transparency, Professor Ronen Palan and Dr Anastasia Nesvetailova of Birmingham University, in a separate Treasury Committee submission (reproduced in the same document as TJN's,) said this:

"Opacity (benefits) those who are, as one of the directors of Enron is reputedly quipped: ‘the smarter man in the room’. The small investor, by definition if not the stupidest in the room, at least the one least equipped to handle complex and rapidly changing information. Opacity is used and abused in effect to shift risk from big financial institutions to society at large."

This is quite true. In this context, it seems reasonable to say, in response to Kay, that it is not only desirable to regulate (and to enjoy a context in which regulation can work), but it is indeed a democratic imperative that governments responsible to their citzens should do so.

Opacity has several dimensions -- some which are applicable on a case-by-case basis, some systemic, and some a mixture of the two. Tax havens are core to each dimension, in the context of the current crisis.

The first dimension is straightforward secrecy. Tax havens allow investors to hide things. Once the dust settled in the Enron affair, it was clear that its hundreds of tax haven subsidiaries, and the veil of secrecy laid over each, were core to the opaque accounting that lay behind its frauds.

The next dimension is complexity.

And tax havens generate complexity, in spades. They provide companies with powerful incentives to festoon their financial affairs all around the world, pushing them into places where there is no economic substance to their activities, and then allowing them to use accounting rules that enable them to keep their activities melded into one big set of accounts, that cannot be unpicked. Complex structures are artificially sliced and diced between multiple jurisdictions, adding to the mess. Cocoon each part in secrecy, bathe them in lax regulation, and you have impenetrable complexity and opacity, where it would otherwise not have been.

That is not all. Tax havens love to call themselves "well regulated" - and in some cases they may be right, from a narrow technical perspective. This is a confidence trick. What they do is that they make sure that the regulation happens "elsewhere" - and that "elsewhere" is, as a result of the regulated activities falling between the stools of different jurisdictions, effectively "nowhere." The tax havens can then wash their hands of responsibility, and say they are clean. As our treasury submission put it:

"An example might be where a person resident but not domiciled in the UK creates a trust in a tax haven such as the British Virgin Islands that in turn owns a company incorporated in the Isle of Man that has a bank account in Jersey and directors in Cayman. The income of that company and trust are retained within the company. This sort of structure is costly, but that is a price of being ‘nowhere’."

How can there be any transparency if that which you are looking for or seeking to regulate exists "nowhere"?

But there is more. Let's return to the submission by Palan and Nesvetailova. What else do tax havens do? They make investors uncertain about who owns what.

"There is a link between offshore finance and financial stability. We believe that this connection lies in the financial cycle and more specifically in the maintenance of illusion of liquidity. The moment the mood in the market turns sour, as happened in August 2007, this creates an added dimension of fear as no one can be sure who will honour debts of what are legally speaking, separate entities. . .

Financial actors are perfectly aware of these manipulations, which includes ambiguities in asset ownership and distribution and responsibility for risk. Such ambiguities are used largely for tax purposes as a way of transferring profit-making financial activities to zero or near-zero jurisdictions and/or to obtain higher rating for ‘innovative’ financial instrument from the rating agencies. But as we will see, in the case of tax havens/OFCs one can kill two (or even more) birds in one go: tax avoidance and evasion schemes can easily be used for other purposes as well. Offshore entities can be used, for instance, with great ease for the purpose of isolating ownership of offshore financial vehicles from their onshore parents in order to obtain higher credit rating from the rating agencies. This exactly what happened and eventually precipitated the current financial crisis."

Their work, they acknowledge, builds on Richard Murphy's research into the failed British bank Northern Rock, and its offshore Jersey-based "shadow company", Granite, which had 50 billion pounds of debt and no employees.

"Confusion arose as to whether (Granite) was onshore or offshore. In practice it included elements of both. And, when Northern Rock was nationalised the House of Commons held late night debates on whether this meant that Granite was also nationalised."

(Richard Murphy, who exposed the Northern Rock/Granite sham, wrote about this here and here. The complexity, and legal and philosophical gymnastics, are shocking.) This confusion is replicated across the system. This kind of thing is not exactly going to inspire confidence in investors uncertain about the financial state of their peers. It is integral to the current crisis. And the offshore world is the creator of the confusion. As Palan and Nesvetailova rightly remark:

"the link between the type of offshore financial centres (OFCs) commonly known as tax havens and financial instability has not been widely researched and is not well understood."

Well said. Much more research into this -- forensic research is now needed, urgently. Take a look, for example, at the bankruptcy filing of Lehman Brothers. It starts like this:

"Lehman Brothers Holdings Inc., a Delaware corporation . . . "

Delaware, as we have pointed out, is the nasty little tax haven that is rotting the United States from the inside: the product of lobbying and tax and regulatory competition between U.S. states which saw Delaware as the clear victor in the race to the bottom, underbidding its competitors on regulatory laxity at every opportunity. Half the Fortune 500 companies are incorporated there. Take a look at this example of the kind of thing that Delaware has to offer. What other financial disasters will Delaware lie behind?

Let's now step back a bit, and return to Martin Wolf:

"In deregulated financial systems crises are inevitable, like earthquakes on a fault zone. Only timing is uncertain."

That is surely true. But, once again, that is not to say that regulation cannot work. Not at all. Regulation must be geared to looking at the way that economic cycles happen, and managing them and addressing their outcomes.

So here's something else to consider. As the real effects of this financial crisis spread through the rest of the economic system, and more banks and companies go to the wall (as seems likely), it will emerge that alongside all the excessive risk-taking and so on, it will turn out that plenty of criminal activity has been taking place, which nobody paid too much attention to while the going was good. The offshore world is a hothouse for trans-national crime - and, once again, societies have a democratic imperative to rein it in. Regulation is essential.

Oh, and then there's this. As we've noted many times before, tax havens are at the core of processes of international competition on tax and regulation - both of which are driving tax rates on capital down. They are also, in many cases, magnifying the incentives for (tax-deductible) leverage. As we remarked earlier, in a discussion of private equity companies:

"Private equity firms load the companies they buy with debt – typically “lent” by a subsidiary of the company based in a tax haven: it will therefore pay little or no tax on its subsidiary’s interest income, and the borrowing company will write its interest costs off against tax. The net result is that the company as a whole cuts its tax bill. Typically private equity companies use very high “leverage” rates – just 20% from the wealthy private equity owners, and 80% in borrowings. This financial engineering is just that: it does absolutely nothing to improve the efficiency, innovation, or overall quality of the business in question. What it does is abuse our tax system and our democracy: in effect, the rest of us pay their taxes for them."

This blog is long enough already, but we have a couple more things to say. First, while we think that regulation is essential, and can work in many useful ways, another thing needs to happen. The climate of accepting tax havens as a given, and tolerance for offshore monkey business, has to end.

Newspaper editors need to prohibit phrases like "financial innovation" when used as a catch-all term. This term means two things: first, useful things like using clever tricks to provide better services for customers; and second, the bad things: using clever tricks to get around the regulations of democratic nation states. Always consider, and specify what you are talking about. (see our offshore dictionary for some more examples.)

We also need to start thinking in new ways. We need new codes of conduct on taxation, as soft guidelines for companies, governments, individuals, and their agents, to follow. We need to wrest the language and culture of taxation away from the tax avoidance industries, which have for so long held a near-monopoly on them. We need country-by-country reporting - it would constitute a revolution in international transparency.

And there is another powerful insight from our Treasury submission which we must not forget. We distinguish between tax havens (the jurisdictions) and the offshore financial centres (OFCs, the commercial communities located there) and note that the OFCs have all the power, because they can play the tax havens off against one another to get what they want. We must bear this in mind when considering regulatory responses.

We'll leave the last word with John Gapper, musing on the troubles of American Insurance Group (AIG).

"In presentations to investors this year, it emphasised how thoroughly its AIG Financial Products arm assessed the risks of insuring CDOs. It ran all the data and decided that, in the worst case, it risked losing $2.4bn on the portfolio. Well, $24bn of write-downs later – a mere 10 times its maximum estimate – the company has burned through its equity, spread financial chaos to all corners of the earth and humiliated the US Treasury. The job of insurance companies is to guard others against catastrophes, not cause them.

Call me a spoilsport, but I do not believe that AIG or any other capital markets institution should be allowed to play like that with my money (I am a US taxpayer) in future. If this means going back to basics, and redesigning the global regulatory system so that a renegade insurance company is denied the chance to blow up the world’s banks again, so be it. Regulation cannot solve everything but enough is enough."


Tax havens and market turmoil, Part 2 - how bad is it?

Yesterday, in reproducing Jim Stewart's excellent article on the role of the Dublin International Financial Services Centre in the market turmoil, we promised a long blog on tax havens and the market turmoil. We've decided to split this into two parts. This first part will simply show how bad it is, using a few quotes from different commentators out there. Another blog, later today, will look at what might be done.

This, it seems, is the big one. We start with the billionaire speculator George Soros:

"We are not through it at all – in some ways we are still heading into the storm, rather than coming out of it, and this minute we are at a very precarious moment."

Next, John Gapper in the FT:
"We are now, unquestionably, in the worst financial crisis since 1929."

His FT colleague Martin Wolf had this to say:

"Is the worst now over? Certainly not. Unwinding of excesses on such a scale involves four giant processes: the fall of inflated asset prices to a sustainable level; de-leveraging of the private sector; recognition of resulting financial sector losses; and recapitalisation of the financial system. Making all this worse will be the collapse in private sector demand, as credit shrinks and wealth falls. None of these processes is even close to completion. Some have barely begun."

Then Ken Rogoff, former chief economist at the IMF, wonders how much it's going to cost the US government, and what the consequences might be:

"It is hard to imagine how the US government is going to succeed in creating a firewall against further contagion without spending five to 10 times more than it has already. If the US were an emerging market country, its exchange rate would be plummeting and interest rates on government debt would be soaring. Instead, the dollar has actually strengthened modestly, while interest rates on three- month US Treasury Bills have now reached 54-year lows. It is almost as if the more the US messes up, the more the world loves it."

A comment on yesterday's blog, which seems to have been deleted by the blogger programme, noted that we spend an awful lot of time focusing on the US and UK, and urged us to look at other parts of the world such as Asia. We agree - but we need to remind people that we are an absolutely TINY organisation. We have plans to build up our network in different regions of the world, but this will only happen slowly. Please be patient - we just don't have the staff or resources yet.

But here's a short Asian angle on today's story. From a New York Times blog:

"a wariness toward the United States is setting in that is unprecedented in recent memory, reaching from central banks to industrial corporations."

This has obvious implications for the US dollar. But, it continues, America's broken economy may be in a position before too long when others will see it as "bargain time."

"If cash is king during the current global financial crisis, then Asian governments and financial institutions are emperors. China’s central bank alone has $1.8 trillion in foreign reserves. Those reserves grew $280.6 billion in the first half of this year — a pace of $64 million an hour."

Interesting times. Another blog will build on this one, hopefully later today.

(Photo hat tip:Naked Capitalism)


Wednesday, September 17, 2008

Tax havens and the market turmoil - Part 1

We have been watching the turmoil unfold in world markets with alarm. We will prepare a long blog about this, and the role that tax havens have played in all of it. We hope to bring you that tomorrow.

In the meantime, to provide context for that future blog, and others that will doubtless follow on this economic earthquake, we are re-publishing another article from the last edition of Tax Justice Focus. It was written for us by Jim Stewart, Senior Lecturer in Finance at Trinity College, Dublin. As a primer on tax havens and economic instability, it's essential reading.

Shadow regulation and the shadow banking system
The role of the Dublin International Financial Services Centre

There has been much analysis of this topic and various policy reforms have been proposed: these include looking at the role of ratings agencies, mark-to-market rules, greater transparency, and especially reform of financial regulation.Very little has been written, however, on the role in this crisis played by tax havens and offshore financial centres with “light touch” regulation. This article focuses on their role in the crisis and looks specifically at the Dublin International Financial Services Centre (IFSC,) where many of the funds that have collapsed or have been in difficulties are located.

A shadow banking system

The Bank for International Settlements (BIS) in its 78th annual report identified one of the main
roots of the crisis. “How,” it asked, “could a huge shadow banking system emerge without provoking clear statements of official concern?”

This shadow banking system has boomed over the last decade or so, as a variety of new players have evolved or emerged in the international financial system. Some are hedge funds or investment banks, or more arcane Conduits or Structured Investment Vehicles (SIVs) which are artificial structures created by banks or other institutions, off their balance sheets. These players in the shadow banking system behave rather like traditional banks – they borrow short-term money and then lend it again at longer-term maturities – but outside traditional regulatory structures. Instead of taking deposits, like “normal” banks do, they raise funds in other ways, such as by issuing commercial paper.

The emerging financial problems in global markets have been described as “the worst financial crisis since the Great Depression.” The crisis is ongoing, and it is uncertain how deep or protracted it will be.

Most of the activity associated with the so- called ‘conduits’ (off-balance sheet vehicles) is regulatory arbitrage: it exists to avoid restrictions placed on banks. Bank supervisors turned a blind eye to it. Bill Gross, founder of the US financial firm Pimco, said this shadow banking system “has lain hidden for years, untouched by regulat
ion, yet free to magically and mystically create and then package subprime loans into a host of three-letter conduits that only Wall Street wizards could explain.”

Bank regulation exists for very good reasons. Banks must set aside cushions of capital to protect the banks against downturns and other unforeseen events, to prevent problems turning into systemic panics. Such panics are rare, but the collapse of Britain’s Northern Rock last year was a clear example of one. In the shadow banking system, institutions were able to sidestep this kind of regulation and borrow money against much smaller capital cushions than traditional regulators would accept. As a result, systemic risk increased dramatically. “Perhaps,” the BIS report said, “it is simply that no one saw any pressing need to ask hard questions about the sources of profits when things were going so well.”

The role of tax havens

One important reason for the lack of official attention to the growth of the shadow banking system was the extensive use of tax havens. Historically, hedge funds were often domiciled in the Cayman Islands, Bermuda or the British Virgin Islands. However, competition between financial centres on regulation (and tax) is considerable, and more recently European jurisdictions, notably the Channel Islands, Ireland and Luxembourg, have been “streamlining” regulation, among other things, to attract funds.

In Ireland, for example, if the relevant documents are provided to the regulator by 3 p.m. the fund will be authorised the next day. A prospectus for a quoted instrument is a complex legal and financial document (a debt instrument issued by Sachsen Bank ran to 245 pages) so it is unlikely it could be adequately assessed between 3 p.m. and the normal close of business (5 p.m.) Even worse, Luxembourg has a new law stating that as long as the fund manager “notifies” the regulator within a month of launch, the fund can enjoy pre-authorisation approval. The Financial Times has noted that the Luxembourg regulator does not “scrutinise promoters”.

It was not especially the low-tax regime that attracted funds to Dublin, but other features: Ireland ticks certain boxes for funds and the regulators in their home countries, including the fact that certain EU directives apply, and being within the Euro currency zone is also highly attractive. Perhaps most alluring of all, however, is its “light touch regulation.”

Bear Stearns is so far the biggest institution to have collapsed from this credit crunch. Problems emerged in June 2007 when two Bear Stearns hedge funds incorporated in the Cayman Islands announced considerable losses. Bear Stearns had two investment funds and six debt securities listed on the Irish Stock Exchange, and it also operates three subsidiaries in the Dublin IFSC through a holding company, Bear Stearns Ireland Ltd., for which every $1 of equity financed $119 of gross assets – an exceedingly high (and in most circumstances dangerous) ratio.

Where is the regulator?

How, and by whom, was Bear Stearns Ireland Ltd. regulated? The accounts state that the Irish group and subsidiaries are regulated by Irish Financial Services Regulatory Authority. EU directives seem clear the host country – Ireland in this case – has responsibility for regulation. (See Box 1.)

Yet despite the location of managed funds and substantial operations in Ireland, the Irish regulator does not feature in any media analysis or discussions relating to the insolvency and subsequent take-over of Bear Stearns. In an interview, the Irish regulator considers his remit is to ‘Irish banks’ – that is, banks that have their headquarters located in Ireland.

Nineteen funds reported as facing difficulties in the sub-prime crisis, have been identified as located at the Dublin IFSC. Almost always, the IFSC link is not discussed. There is an exception, however: the case of four German banks (see Box 2). Between them, they required state aid from the German taxpayer totalling €16.8 billion as a result of the losses from the shadow banking system. Some people argue that financial innovation associated with risk management has been a major source of economic growth, particularly in the US. But “financial innovation,” in the current crisis appears to have motivated by opaque shifting of risk, and avoidance of regulation.


We also recently re-published our editorial from the same edition, which provides more context, and is also worth reading.


Tuesday, September 16, 2008

Publish What You Pay - a big step forwards

We try not to reproduce entire blogs, but this one speaks for itself. It is about country-by-country reporting in the extractive industries. From Richard Murphy, TJN senior adviser.

"The Publish What You Pay coalition and others met in a large scale private meeting with the International Accounting Standards Board, investors in the extractive industries sector and representative companies working in that industry yesterday. The meeting was private. All comments were made unattributably. But I do feel able to comment. I was PWYP’s technical lead.

The mood of investors present was unambiguous: they want country by country data, and most want it on revenues, costs, profit, taxes and other benefits paid to individual governments. Most thought an IFRS the only possible delivery mechanism. Few present sought to disagree.

The EI companies represented saw reasons for not supplying data: candidly I think we dealt with all the issues without difficulty. One industry representative ended up concluding that the data we are asking for could be supplied at relatively small cost given enough notice of the change. Of course I wanted to believe that commentator. I also happen to believe their comment accurate.

Some present, whether from civil society or the investor community were shocked when it was made plain that many subsidiaries of at least some of the companies present were never subject to audit inspection. One investor, shocked by this, made clear that by acting in this way the companies in question were transferring risk to the shareholder without their knowledge. She clearly felt our demand would not just provide new information, it would increase the quality of the consolidated data already reported. She had no doubt about the benefit of that for investors everywhere.

The claim by one party that to audit country by country tax information would increase audit and reporting costs by at least 25% was treated with some incredulity: if such limited additional information would cost so much how little data was being validated now was the obvious, and somewhat shocked response of some I spoke to.

But perhaps most interesting was the comment to me from a senior representative of the profession present. He was categoric to me: we have shattered forever the previously accepted belief that regional data is either useful for the purposes of investment appraisal or analysis of this sector.

I, of course, believe that true for all sectors. But less than six years after I wrote the first version of country by country reporting I am pleased to have got this far.

Now we have to see how matters progress: this is for from being a closed case as yet. There is still a long way to go to agree on what needs to be disclosed on a country by country basis and whether, as we and the investors present argued, all countries must be disclosed for fear of what transpires to be material information being lost in aggregation.

But in a very small way I think the world of accounting changed yesterday. The fact that there is risk in multinational corporations that can only be properly appraised if data is reported on a country by country basis has, I think, been clearly recognised. That’s a massive step forward.


Lawbreaking is part of the case for tax havens

The Center for Freedom and Prosperity has just published one of its little videos making what it says is "the economic case for tax havens." It is a mixture of confused thinking and, worse, it condones and consequently promotes financial crime.

Dan Mitchell, the presenter of the video, remarks that “no wonder the global economy is so much stronger today.” Which is a spectacular piece of poor timing, given the turmoil in world markets right now (he seems to make a habit of it - click here.)

It's worth noting that Mitchell has, as usual, not chosen to tackle our arguments head on - and by contrast we have, on many occasions, and from many different angles, taken a full-frontal approach to these arguments, and disposed of them directly and smartly. Here's just one example: Mitchell claims to make "the case for tax competition" - look at his claims, and then see what we have to say about it. You decide.

We won't dwell on this - except to note that they routinely use another tactic commonly used by those who have lost the argument: the smear. Take a look at this rather comic text, for example, from Mitchell, Grover Norquist and others, attacking TJN for, among other things, putting at risk homsexuals in Saudi Arabia, Jews in France, and so on. Much of the text is concerned with putting into our mouths things we never said or advocated, and then adding it all up to create their nasty smear. We urge them to confront our arguments head on. (As an aside, let's confront their argument about homsexuals in Saudi, here, simply by asking the question: who is more likely to avail themselves of offshore secrecy: the human rights activists and other oppressed citizens, or the corrupt dictators and their cronies who oppress them? You know the answer. . . .)

We do agree with Mitchell on one thing. He agrees with the offshore analyst Marshall Langer:

"The most important tax haven in the world is an island. They are surprised, however, when I tell them the name of the island is Manhattan. Moreover, the second most important tax haven in the world is located on an island. It is a city called London in the UK."

Mitchell goes on to say that the US and UK have "laws that enable foreigners to invest money and then not have to report income to tax police. That is good for the US and UK economies and good, of course, for the foreign taxpayers." First, it may be good for foreign "taxpayers" (read wealthy élites) but it is certainly not good for the average citizen of those foreign countries. Second, and just as importantly, this statement is endorsing tax evasion. Tax evasion is a crime.

And then try this comment, arguing that tax havens near large countries increase their prosperity.

"Citizens from high-tax nations often move their money to a neighbouring tax haven, then then pretend that they’re foreigners, and they use that haven as a platform to invest back in their own countries."

Let's unpick that. They "pretend," do they? What he is talking about here is concealment - outright lying to your tax authorities. This is the foundation of tax evasion. Which, as we have mentioned, is criminal activity. It is not only the foundation of that, either. Tax havens are regularly used by crooks to indulge in market-rigging in their home markets, by using the veil of offshore secrecy to disguise their identities and pretending to be "competing" in a market when in fact the participants are all related, and in cahoots to fix prices. Many other forms of crime are hidden using these round-tripping mechanisms.

The press release accompanying the video claims that the video "looks at the empirical data" to make its case.

No it doesn't. What it does is to look at the narrowest possible sections of the data, then use that to draw false conclusions by scrupulously avoiding the bigger picture. They note that by being a tax haven, offering secrecy and low taxes you can attract a lot of hot money and get rich - and then they use that as "evidence" that tax havens are a good thing. This is a bit like focusing on the yachts, fast cars and large palaces owned by rich dictators and their cronies - and then saying "corruption is a good way to get rich - so clearly corruption is a good thing."

Please. Is that the best the promoters of offshore can do? Their game is up.


International News - Sept 16

** Also see our permanent list of past story summaries; see for the latest offerings, and Offshore Watch for more stories.

Europe and the anti-states
Sep 13 (TJN) – Observations about the European Savings Tax Directive.

We are not a tax haven
Sep 10 (TJN) – All the world’s tax havens, it seems, like to say “We are not a tax haven.”

Tax: the Cinderella issue
Sep 11 (TJN) – An outline of some of the recommendations made by TJN’s director John Christensen, speaking in Brussels at a meeting organised by the French government on behalf of France's presidency of the European Council, in the context of preparing for the Doha finance for Development conference later this year.

Tax justice and the superclass
Sep 11 (TJN) – That big business was a major contributor to George W. Bush’s 2004 re-election campaign was no surprise. But seen from a TJN point of view, an interesting pattern begins to take shape.

Tax "whorehouse" slings Nazi allegation
Sep 11 (TJN) – Crown Prince Hans-Adam II levels some rather strong allegations against the German government, and sparks begin to fly…

Troika of Bolsheviks
Sep 12 (TJN) - Nouriel Roubini, a former Cassandra now widely regarded as a presient sage -- the "Dr. Doom" we recently blogged - has just published an article about the US government rescue of the mortgage giants Fannie Mae and Freddie Mac, effectively the biggest nationalisation in history.

UBS aims for speedy US deal
September 14 (FT) - UBS, the Swiss bank, is trying to strike a settlement with the US over alleged breaches by its offshore private-banking unit for rich Americans within the next fortnight, in time for its shareholders’ meeting on October 2.

Swiss finmin urges UBS not to breach bank secrecy
Sept 13 (Reuters) - Swiss Finance Minister Hans-Rudolf Merz has warned UBS not to breach Swiss banking secrecy rules by handing over client details to US authorities investigating tax evasion.

Jersey’s tax morality
The Jersey Evening Post has reported that: “Forcing [tax exile] residents to pay more tax would be immoral.” So said Treasury Minister Terry le Sueur. The man has a strange perception of morality.

Cable brands tax avoidance 'corrosive'
Sep 15 (Accountancy Age) - Tax avoidance is 'deeply corrosive of the ethical basis of taxation,' the according to the shadow chancellor (shadow Finance Minister) of the Liberal Democrats, Britain’s third party, as he unveiled a package of anti-avoidance measures at the party's conference.

5 Days of Pressure, Fear and Ultimately, Failure
Sep 15 (NYT) - A crisis of confidence in financial markets on Wall Street culminated in a weekend of brinksmanship and failed appeals that caused the demise of some of the nation’s most storied financial institutions.

Bank of America buys Merrill Lynch for $50bn
Sep 15 (Telegraph) - Bank of America (BoA) has bought Merrill Lynch for about $50bn after pulling out of talks to save Lehman Brothers, capping an astonishing 24 hours on Wall Street.

Foreign shipping registers here to help tax-hit cos aid
Sep 9 (Economic Times) - A host of international shipping registers has opened shops in the city to provide Indian companies, badly hit by the huge tax burden, opportunities to register them in tax havens. The list of foreign registers include St Kitts, Union of Comoros and International Register of Marshall Island.

Evading tax since 2005, Indian oil trading firm to pay Rs 6 cr
Sep 12 (Express India) - In one of the biggest tax evasions in the state ever, a Mullanpur-based oil trading company has been asked to pay a whopping amount of Rs 6.67 crore for the period 2005-07. The State Excise and Taxation department has slapped the notice on the company for not paying any tax since 2005.

Taking liberties (and tax dollars)
Sep 15 (Guardian) - Financial institutions have long devised ways of avoiding tax. Now they're relying on taxpayers to bail them out.

Multi-million pound fraud ring is smashed
Sep 14 (Financial Mail) - Insolvency practitioners and lawyers have for the first time reclaimed millions of pounds stolen in a giant VAT fraud and hidden in an offshore tax haven.

Company paying tax in Germany can claim tax concessions in India
Sep 15 (ET) - In what could open a floodgate to tax concession claims, a tax tribunal has ruled that if a company, irrespective of its location, pays trade tax in Germany, it can claim concessions provided by the tax treaty with Germany.

Brazil Declares Delaware a Tax Haven. Nevada and Wyoming Might Be Next
Sept 11 ( - On June 23, 2008, Brazil's Congress published Law 11,727/2008, which, effective as of January 1, 2009, will amend Brazil's transfer pricing regulations and expand the legal definition of tax havens. It is widely believed that these changes were made specifically so that the exotic state of Delaware could be designated as a tax haven.

Fifth of wealth funds ‘unaccountable’
Sept 14 (FT) - One fifth of sovereign wealth funds are not accountable to their domestic legislatures, according to a new survey supported by the International Monetary Fund.

Lord Ashcroft funds UK Tories from Belize tax haven
and also see here
Sept 14 (Times) – Lord Ashcroft, deputy chairman of the Conservative party, has channelled money into party funds from the Central American tax haven of Belize, despite a ban on overseas donations.

Now is the time to seize power from the markets
Sept 14 (Observer) – Following intellectual, economic and political pressure from the US to keep the state out of finance, Britain has a massively unbalanced economy. Financial services are overblown; industry undernourished. Every chief executive I have spoken to has mounting concern that the financial markets do not value what business values: research, innovation, motivated people, brand, loyalty, trust, independence.

Sierra Leone's ghetto taxpayers
Sept 12 (BBC) - People have been flocking to pay their local council tax of 5,000 leones (about $1.5, 90 UK pence) in the Sierra Leonean capital, Freetown. "To see unemployed people paying taxes has surprised a lot of people," said Herbert George-Williams, the new mayor. "We were able to talk with the unemployed and convince them they should pay their taxes to show their patriotism."

EU To Delay Common Corporate Tax Base Proposals, by Ulrika Lomas,, Brussels 
Sept 12 ( - Proposals for a common method of calculating corporate taxes across the European Union have been put on hold while the European Commission continues to iron out the plan's finer details, Tax Commissioner Laszlo Kovacs has revealed.

Wall Street tax avoidance ‘gimmicks’ rebuked
Sep 11 (FT) - Leading Wall Street banks have been using complex derivatives “gimmicks” to help hedge funds and other offshore clients avoid billions of dollars in taxes owed to the government, US congressional investigators say.

US tax liability figures under scrutiny
Sept 11 (FT) - A majority of large businesses operating in the US reported no tax liability for at least one year between 1998 and 2005, according to a study released by the Government Accountability Office on Tuesday.

Report: Banks helped foreigners escape US taxes
Sept 12 (AP) — Big Wall Street investment banks have designed and marketed schemes enabling non-U.S. taxpayers, including offshore hedge funds, to evade millions of dollars in taxes each year on U.S. stock dividends, Senate investigators have found.

Les autorités abkhazes souhaitent créer un paradis fiscal (Novye izvestia)
Sept 8 (RIA Novosti) – The Abkhaz president Sergueï Bagapch has said that the republic wants to become an offshore state: he said all the conditions are in place for Abkhazia to become a free zone. In French.

Fannie Mae and Freddie Mac's accounting branded a 'house of cards'
Sept 10 (Accountancy Age) - US mortgage giants Fannie Mae and Freddie Mac's accounting rules have been branded as a 'house of cards' by a senior US Senator. About half of the troubled mortgage lenders regulatory capital was made up of deferred tax credits, which could be deducted from taxes on profits.

Are banks relying on deferred tax as part of their capital here?
Sep 1 (Tax Research UK) - Adam Lent of the TUC has asked an obvious question following on from Richard Murphy’s blog about Fannie Mae and Freddie Mac relying on deferred taxation as part of their capital structure.

The IASB doesn’t buy Incidence
Sept 10 (Tax Research) - From an IASB draft report. They, correctly say that companies stand independent of those who own them. Then they are very definitely taxable in their own right and the withdrawal of funds from them should be subject to tax consequence. That somewhat blows the incidence argument apart. Also see here

Mexico's top court says Cemex owes tax haven money
Sept 9 (Reuters) - Mexico's Supreme Court ruled against the world's No. 3 cement maker Cemex on Tuesday when it overturned a ruling that protected the company from paying taxes linked to investments in offshore tax havens.

Tax system overhaul calls grow: Thaksin put loopholes in spotlight
Sep. 8 (Bangkok Post) --Thailand's tax code needs sweeping reforms that emphasise substance over form to curb tax evasion, according to the dean of the law faculty at Chulalongkorn University. Cases such as the high-profile tax liability owed by former premier Thaksin Shinawatra's family over its sale of Shin Corp to Singapore's Temasek Holdings highlighted the need for legal reform.