Tuesday, September 29, 2009

How secrecy jurisdictions undermine markets

The Economist has a special report this week on mobile telephony and its impact on making lives better for people in developing countries. Among other things, it cites a World Bank study which

"found that an increase of ten percentage points in mobile-phone adoption in a developing country increased growth in GDP per person by 0.8 percentage points."

Even if this sentence isn't entirely clear about the flow of causation, there are plenty of reasons identified in this article, and many others, to consider mobile phones as being good for an economy. Now look at the graph. One country is the laggard in mobile coverage: Kenya. If you believe the World Bank story - which is plausible and backed by bucketloads of anecdotal evidence - something is holding back Kenya's mobile market, and by inference its growth.

Why has take-up been so poor? One reason will likely be this:

"The current GSM (Global System for Mobile Communications) service providers, Safaricom and Celtel, are demonstrating duopolistic tendencies, with each refusing to lower cross-network call charges."

Why could that be? Could this (from last year) have anything to do with it?

"While the government insists it currently owns 60% of Safaricom with the other 40% in the hands of UK giant Vodafone, opposition groups say another firm called Mobitelea also has an interest.

Registered in Guernsey in the Channel Islands, Mobitelea's owners remain unknown. Media reports in Kenya have speculated that Mobitelea owns as much as 10% of Safaricom. "They [the government] should have told this country who Mobitelea is, and whether they acquired the shares procedurally," opposition MP William Ruto told the BBC."

A Kenyan newspaper report said:

"The Government is reluctant to disclose the owners of Mobitelea Ventures, the shadowy company behind a 12.5 per cent ownership of Safaricom. The Minister for Finance, Mr Amos Kimunya, said the Government would not investigate the owners of Mobitelea despite pressure to do so by ODM and non-governmental organisations."

Another report added:

"Documents obtained by the Guardian show Mobitelea was registered in Guernsey on June 18, 1999 - several months after Vodafone had struck a preliminary deal with the Kenyan government. Mobitelea's real owners are hidden behind two nominee firms, Guernsey-registered Mercator Nominees Ltd and Mercator Trustees Ltd. The directors are named as Anson Ltd and Cabot Ltd, based in Anguilla and Antigua."

And some more details emerged here.

Could this mystery company be behind the "duopolistic practices" that have kept competition down, and prices up in Kenya's mobile market -- and, by extension, Kenya's entire GDP growth rate? It is a plausible story, though there could be other reasons too.

Whatever the truth, TJN's director, John Christensen, knows from first-hand experience of working in the financial sector in Jersey that offshore companies are regularly used for this purpose: collusion, market-rigging, insider trading and many other market abuses.

At one stage he administered a company belonging to a prominent South African politician, who used nominee shareholders to disguise his identity and various conflicts of interest relating to transport infrastructure. Another client was a European aggregates business using an offshore company to disguise a monopolistic market position in cement supplies in a west African country.

These are just anecdotes, but the problem is systemic. The secrecy that these places provide serve as a cover for a litany of practices that undermine the integrity of markets, and our faith in them. And they happen as a matter of routine.

Update: October 29th - a very similar question being raised in Belize.


Fear, loathing and a reality check in Jersey

Last week BBC broadcast a Panorama documentary about how banks and bankers have reacted to the financial crisis. One part of the programme dealt with the tax evasion and avoidance activities of banks operating offshore in the British Channel Islands.

Northern Rock and LloydsTSB, both badly affected by the crisis and in partial state ownership, were selected for investigation. The programme used secret filming, which is highly regulated, to show how LloydsTSB staff encouraged prospective clients to use elaborate avodiance structures to route earnings via Hong Kong to circumvent the European Union Savings Tax Directive.

The programme has generated a fascinating online debate on the website of Jersey's only newspaper, the Jersey Evening Post. Some reactions are entirely predictable. Philip Ozouf, the island's treasury minister, has tried to dismiss the issue by saying it was "impossible to draw firm conclusions from the programme." Other comments range from denial of the facts to the outright misleading. But sprinkled between the nonsense there are many fascinating insights into a community that is coming to terms with the fact that its tax haven role is being challenged left, right and centre.

Let's start with the denial of the facts.

Cathy (comment 31) said:

I watched the playback on BBC website and I couldn’t help but feel sorry for the Lloyds employee – I’m a sucker for a fall guy. Seemed to me he was trying to create a relationship with his customer and a little camaraderie. His career is finished and the majority of what he said wasn’t incorrect, if only he has said “you are legally obliged to advise the UK taxman” he does look a bit silly but we’ve all had those moments, fortunately not all caught on camera.

Which rather ignores the point. As Panorama makes clear, LloydsTSB has created an elaborate structure to circumvent the EUSTD, and the "fall guy" was caught out advising on how to use that structure. Presumably the majority of what he said "wasn't incorrect" when he talked about how he and his colleagues brainstorm ways to get around the tax rules. No Cathy, the facts make it clear that this guy was being more than a "bit silly."

Next we have the tried and tested mislead-the-Jersey-public, few of whom are in a position to understand the bigger picture of offshore regulation.

John Harris of Jersey's Financial Services Commission is quoted in the original JEP article saying that "Jersey had very robust and comprehensive anti-money-laundering systems in place, as evidenced by the recent IMF report."

Which is totally irrelevant since the International Monetary Fund and the Financial Action Task Force are almost entirely pre-occupied with combatting the laundering of drugs money and the routing of terrorist funding through banking channels. Tax evasion doesn't feature (yet) on their agendas.

Matt (comment 5) picked up the same theme, arguing that tax evasion is not related to money laundering, but he forgot to mention that under Jersey law bankers suspecting a client of tax evasion should raise a suspicious transaction report. This ought to have happened each and every time a European-based client declined to opt for the information exchange option under Jersey's EU STD commitment. But in practice the STRs just haven't been raised.

Vicki (comment 6) is not taken in by either John Harris or the IMF:

Er thought it was the advice given which was sloppy… this is not an independent case either, have seen this kind of attitude many a time before within our financial services sector in Jersey.. Someone with money= targets met=bonus= new car!!

WAKE UP you incompetent fools.. whats the matter? worried that this proves just how meaningless our IMF ratings actually are? laughing out very loudly (along with a lot of internationally aware)

Funniest thing is that when regulators and auditors are visiting, the companies in question are aware beforehand and have time to make things ready??? Should be spot checks and frequent and by people who know what to look for…

And thicko micko (comment 4) who describes himself as a former relationship manager with a major high street bank, is equally unimpressed by the tax evasion deniers:

Oh come on, he was caught on camera clearly advising how to avoid paying tax on the investment. Key question is did he do this independantly or is it bank policy. I can tell you that when worked as a relationship manager for a major high street bank we were advising high net worth clients how to avoid tax by placing their money in Singapore outside of the EU.

Banks are businesses, they want as much money as possible invested, some are more honest than others but this type of thing does happen. Now watch the bank distance themselves from him and sack him – poor bloke I wouldn’t want to be him.

And this bang in the middle of Obama & Brunes war on tax havens – whoopse!

Whatever (comment 23) is having none of this and falls back on the time-honoured shoot-the-messenger gambit; somewhat undermined, however, by reference to "legitimate" tax avoidance (since when was cheating legitimate) and also the final sentence, which suggests the author doesn't quite grasp the immensity of Panorama's revelations:

It was sensationalist tabloid style journalism. There was no alternative view given, the short clips we saw of the lloyds banker could be completely out of context – for all we know the undercover man incited the comments and the lloyds man trying to find a level with the potential new customer just went with it – even in relation to his cars! The undercover man might have just asked what cars do you like/have? We just weren’t shown that bit. We only got see tiny extracts of the meeting and heard nothing of what the undercover man said about himself.

In relation to the hong kong fund, it sounded like a legitimate method of tax avoidance. In relation to the income tax comment, the lloyds banker was right – what a UK customer includes in his delcaration to the UK revenue is the customer’s concern not the bank’s…. even more so in this case where it was entirely reasonable of the lloyds guy to assume that the multi millionaire businessman he was talking to would know his obligations to the taxman.

Not really sure what the banker actually did wrong other than allow himself to get duped.

Dave Stephens (comment 32) counters with:

To call uncovering what was/is a blatant scheme to circumvent the EU Savings directive as “sloppy journalism” is just ridiculous. Sure there were some annoying keystone-cops sketches during the programme, but the fact is they uncovered a clear cut abuse of regulations. It was definitely more in the “help the client evade tax than avoid it” zone. How many other schemes by other organisations of this type over here? Why do some many of our Trust companies have operations in Switzerland where facilitating tax evasion by non-Swiss nationals is not a criminal offense? I think this undercover reporting actually gave us some good insights into the murkier corner of our finance industry where profits and new business targets can make a mockery of following the spirit of the laws.

Reading the article and comments below suggests that a long overdue debate about Jersey's role as a secrecy jurisdiction is now underway. Whilst some remain in a state of denial (wake up Messrs Harris and Ozouf) others recognise the need for change and recognise the island's vulnerability.

On balance the majority opinion seems to come down on the side of Tax Justice Network: tax avodiance is harmful. So the final word goes to BritAbroad (comment 45) who has grappled with his conscience and now wants out:

To all those above complaining about the quality of invesitigative journalism: you are missing the point by a country mile.

When all is said and done, Jersey does tax avoidance or ‘wealth management’ for high net worth individuals. Now, don’t get me wrong, it is terribly well regulated and totally above board. It is perfectly in accordance with international laws and accords and we were absolutely resplendent in our glory as one of the first movers to the OECD white list. But, you see, none of that, none of it at all, makes it right.

Well and good, you can disagree. But, for me it’s all just a bit to close to home. Because, you see, and I may despise the place and all those who are running / ruining it, but, when all is said and done, I’m actually from the UK. (Which used to be quite a nice little island itself once upon a time). Back there, thnaks to Jersey and places like it, the tax burden is shifting inexorably from those most able to make a contribution to those who can’t quite afford the very best tax advice. So, it’s MY family and friends back home, the affable, muddling, middle class that are now increasingly carrying the burden and that’s simply just not right.

Personally, I’ve had quite enough dinner table arguments with friends and family from home and (beautiful as it is) I’m leaving this place at the end of the year. **cue applause**

Oh and Jersey, stop living in denial please. The first step on the addict’s path to recovery is admitting that you have a problem. Gold stars for regulation are great: be proud of them. But, good regulation only enforces the rules – and be in no doubt that you are not making them.

So to Panorama. Put simply: a poorly executed program, making very salient points.


Monday, September 28, 2009

BNP Paribas to close units on OECD's "grey list

From Reuters:

"French bank BNP Paribas (BNPP.PA) is to close subsidiaries located in countries on the OECD's "grey list" of nations which have not fully implemented global tax standards.

"I think we have around half a dozen or so subsidiaries in tax havens, such as Panama, and it's there (in Panama) that we have decided to close down," chief executive Baudouin Prot told Europe 1 radio station on Monday. "BNP Paribas will no longer have any businesses in tax havens that remain on the grey list," he said."

This is very good news indeed, although the bank needs to explain why it has so many other secrecy jurisdiction affiliates - 189 at the last count. The OECD's grey list system and the criteria it uses are hopelessly inadequate, but there is no doubt that it has provoked changes in behaviour.

BNP Paribas' move follows this:

"According to the French press, Eva Joly, Member of the European Parliament and former French examining magistrate, has called on the Board of French banking giant BNP Paribas to explain the purpose of its secrecy jurisdiction affiliates.

And this:

"The French government is introducing a new measure requiring all French banks to disclose information regarding their links to tax havens."

A good, if insufficient, move from BNP Paribas. Now, who's next?


G20: ignoring the elephant, failing poor countries

The G20 communiqué contains many good things, and some serious disappointments. We have already commented on some. But there is more. Read the innocuous-looking paragraph 22 of the preamble which includes this:

"22. To take new steps to increase access to food, fuel and finance among the world’s poorest while clamping down on illicit outflows. "

This is unfortunate. They should not have talk about "outflows." Talk about "flows." This is tremendously important. Imagine how different this would look if they had written "clamping down on illicit inflows."

"Outflows," like the term "capital flight," points the finger at the country that is the victim of the illicit flows - the developing countries, in other words - whereas "flows" encompasses both the victim jurisdictions and those that actively seek and receive the dirty money -- not to mention the pinstripe infrastructure of lawyers, accountants and bankers that get rich by fostering and encouraging these flows. (Read more on this here.)

Focusing on "illicit outflows" is exactly like considering global financial imbalances, and then pointing the finger only at the surplus countries like China, and letting the United States, Britain, and other profligates off the hook.

The communiqué talks quite clearly about "global financial flows," not "global financial outflows." So why not "illicit flows?" There is a double standard here.

Paragraph 42 in the main text after the preamble dances around the elephant in the room even more overtly.

"As we increase the flow of capital to developing countries, we also need to prevent its illicit outflow. We will work with the World Bank’s Stolen Assets Recovery (StAR) program to secure the return of stolen assets to developing countries, and support other efforts to stem illicit outflows. We ask the FATF to help detect and deter the proceeds of corruption by prioritizing work to strengthen standards on customer due diligence, beneficial ownership and transparency. We note the principles of the Paris Declaration on Aid Effectiveness and the Accra Agenda for Action and will work to increase the transparency of international aid flows by 2010. We call for the adoption and enforcement of laws against transnational bribery, such as the OECD Anti-Bribery Convention, and the ratification by the G-20 of the UN Convention against Corruption (UNCAC) and the adoption during the third Conference of the Parties in Doha of an effective, transparent, and inclusive mechanism for the review of its implementation. We support voluntary participation in the Extractive Industries Transparency Initiative, which calls for regular public disclosure of payments by extractive industries to governments and reconciliation against recorded receipt of those funds by governments.

It talks about "outflows" in the form of "stolen assets" (this would be great if they classified evaded taxes as stolen assets -- which is exactly what they are -- but unfortunately this hasn't yet made it onto the international agenda). It talks about "proceeds of corruption" and about bribery, when only 3% of illicit flows is calculated to come from the proceeds of bribery; it talks about aid effectiveness (remember Raymond Baker's comment about how for every dollar we given in aid, we take back ten dollars in dirty money under the table;) it talks about the UN Convention on Corruption (UNCAC) which doesn't yet, but should, encompass tax evasion explicitly as corruption; and it focuses on the EITI, which is a positive but deeply flawed and limited voluntary initiative in the oil and mining sector. All of these things - stolen assets, corruption, the EITI and so on - are tremendously important. But to focus on them exclusively, while ignoring the bigger picture, is a mistake.

Where is the explicit mention of tax evasion and avoidance? Where is the mention of the responsibilities of several major rich countries in aiding and abetting illicit flows?

Having said that, paragraph 15 is more encouraging. It contains much unjustified self congratulation, but also some more welcome statements, such as

"We are committed to maintain the momentum in dealing with tax havens, money laundering, proceeds of corruption, terrorist financing, and prudential standards. . . . we stand ready to use countermeasures against tax havens from
March 2010."

As far as it goes, this helps. But, appallingly, there is no mention here, either -- or in the entire document -- of "tax evasion" or "tax avoidance" which constitute the real touchstones for reform in this area. Tackle those, and you automatically tackle the others that are mentioned - and not vice versa. By tying tax havens to these lesser problems, you ignore the more important stuff. We wonder which jurisdictions lobbied to have these words removed.

The next paragraph says this:

"We task the IMF to prepare a report for our next meeting with regard to the range of options countries have adopted or are considering as to how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions to repair the banking system."

Interesting. Not entirely unwelcome, notwithstanding the IMF's tendency to be an extremely conservative force in these matters. But could this be a way of delaying deliberations on a much-discussed Tobin-style tax, or a financial transactions tax?

There are plenty of sensible things in the G20 communiqué, such as this:

"We call on our international accounting bodies to redouble their efforts to achieve a single set of high quality, global accounting standards within the context of their independent standard setting process, and complete their convergence project by June 2011. The International Accounting Standards Board’s (IASB) institutional framework should further enhance the involvement of various stakeholders."

Which is positive, though vague, and as Richard Murphy remarks:

"The International Accounting Standards Board has a long way to go. Their record with civil society on IFRS 8 is dire. Their refusal to recognise anyone but a provider of capital as a user of accounts is a flagrant breach of their public duty. Memo to the G20, from civil society: bring them into line."

All in all, some positive messages, mixed with major disappointments. We have a very, very long way to go. The world's leaders won't get there on their own. Civil society needs to push very hard.

Once again, the communiqué is here.


Football, cheating, tax and the community spirit

Will Hutton has a good article in The Observer:

"Governments find it hard to challenge the accounting industry, along with much of the financial services' so-called structured (cheating) investment operations, built around advising the rich how to avoid (and even evade) tax.

Too many people have been allowed for too long to build a career on advising others how to cheat. The lack of vengeance is an explicit signal to everybody else. Meeting one's obligations under the rules is for somebody else – the little people. Almost nobody gets found out and when they do the penalties are trivial. Join the crowd and cheat. Dive in the box. Don't pay tax. Have your racing driver crash. Try to rig the market or bend the rules to win the game."

The full article is worth reading. It's bang on the nail.


Sunday, September 27, 2009

“Unfinished Business:” The G-20’s Statement on Tax Havens and Illicit Financial Flows

Reactions by Tax Justice Network USA / Tax Justice Network International

We are heartened by the G-20’s renewed commitment to cleaning up tax havens, building on the progress that it made at the London summit last April. However, we are concerned that the G-20 needs to do much more to translate this commitment into reform.

While the G-20 communiqué states (para. 15) that its “commitment to fight non-cooperative jurisdictions has produced impressive results,” in our view, it relies excessively on the OECD’s Global Forum on Transparency and Exchange of Information. That program, while helpful, has so far been limited to requiring tax havens to agree to provide information “upon-request.” As experience has shown, this approach is costly, time-consuming, and a very poor deterrent.

We would like to see the G-20 apply more fundamental solutions. As discussed in our September 5, 2009 letter to the G-20’s Working Group Two, these include:

  • Automatic information exchange;
  • Stricter reporting requirements for the ultimate beneficial owners of trusts and corporate accounts;
  • Country-by-country financial reporting, to curb the massive global corporate transfer pricing abuses that are occurring through havens;
  • Stricter codes of conduct for the “global haven industry” – the banks, law firms, and accounting firms that profit handsomely by actively enabling their clients to evade taxes

We welcome the fact (para. 42) that the G-20 recognizes the importance of dealing with illicit financial flows of all kinds from developing countries. The global haven industry provides the platform for all these flows.

It is important to emphasize just how large and profitable this industry is – even in these hard times. By our estimates, at least $11 to $15 trillion of private assets are sitting offshore, invested by way of tax havens, and paying little or no tax back home.

The recent UBS case in the U.S. demonstrated that wealthy countries are being victimized by the use of offshore havens. But the victims of this under-regulated system also include developing countries, which account for more than half of all untaxed offshore assets – almost all of which have been invested in First World banks and stock markets. This costs developing countries at least $100 billion of lost tax revenue per year.

James S. Henry, Board Member of Tax Justice Network, commented:

“Unfortunately, so far, the G-20’s bold rhetoric on the tax haven issue – “ending bank secrecy” (4/09) and “fighting non-cooperative jurisdictions” (9/09) – hasn’t been matched by its actions. Especially at a time when we are asking developing countries to spend tens of billions a year to reduce their CO2 emissions and mitigate the impact of global warming, we should be seeing much stronger leadership on this issue. So long as the global haven industry is permitted to continue business as usual, the G-20’s business with respect to tax havens will remain unfinished.”

The G20 communiqué is here.


Friday, September 25, 2009

What will Cayman do next?

From Cayman Net News:

"A key meeting called by the United Democratic Party (UDP) government to talk about the Cayman Islands' financial future was cancelled at the last minute on Thursday night. . . . just minutes before the meeting was due to begin, it was announced that it had been postponed."

What is going on? A TJN correspondent said:

"there was supposed to be an announcement outside the Court House last night at 7pm in relation to the introduction of taxes - either property or payroll tax to be introduced given the recent problems. . . . the meeting was called off at "short notice.""

As we've already remarked, the Cayman Islands is in big trouble. The BBC has reported:

"Such is the depth of their problems that the Cayman Islands face having a major construction project frozen this week as they have not paid the contractor.
. . .
As things stand, the Cayman Islands government cannot borrow any more money to pay debts as it has hit its borrowing limits, which means it now has to get permission from the UK Foreign Office to borrow any extra money.

The Foreign Office is willing to let them do so, but only if they introduce direct taxation, something the Cayman leader, McKeeva Bush, is wholly opposed to."

Government leader McKeeva Bush is casting around for anything to avoid levying a -- horror! -- tax. What alternatives are there? Privatisation? That's certainly being considered - but it's a one-off thing, and it won't be popular.


"The Cayman Net News reports that its unscientific online polling has discovered a growing and surprising support for direct taxation."

Taxes! Whatever next?


Microsoft's missing community spirit

From Jeff Reifman:

"Over the past thirteen years, I estimate that Microsoft has avoided paying more than $707 million in B & O taxes on sales of its corporate software licenses (see Citizen Microsoft and Microsoft's $528 million Washington tax break ). Although the majority of its software development is performed in Washington State, Microsoft records its estimated $18 billion in licensing revenue per year through a corporate office in Reno, Nevada where there is no licensing tax."

and he adds that:

"If the Washington State Legislature hadn't bowed to industry lobbyists and cut the tax rate by more than 2/3, Microsoft would owe $2.08 billion."

this follows a story in the Seattle Times which says:

"Continued weakness in consumer spending will help drain another $238 million from the state's coffers and push the budget further into the red over the next two years, officials said Thursday."

You can see the problem. Tax competition is alive and well in the United States, rotting its institutions from the inside.

And some comments in 2004 from Microsoft CEO Steve Ballmer -- a man who likes to stick up for tax havens -- apparently without any sense of irony, that

"Taxpayers in the state have to come to grips with the notion that we need to invest in higher education."

As if this free-riding arrogance weren't breathtaking enough, there is this, from The Guardian:

Among the things that Microsoft identified as being needed to be a great community, according to Chris Weber, a Microsoft vice-president, in that interview, is

Community involvement. People want to work for a company that gives back to the local community, Weber said."

Corporate Responsibility: the debate hasn't even started yet.

We haven't yet been particularly activist in this area. We've had quite enough on our plate already.

Tax and CSR - the elephant in the room. Coming soon.


Thursday, September 24, 2009

Un plan d’action contre les paradis fiscaux en 10 propositions

For our French readers, from the think tank Terra Nova:

Pittsburgh et après : un plan d’action contre les paradis fiscaux en 10 propositions
"Depuis la réunion d’avril du G20 de Londres, des progrès certains ont été accomplis dans la lutte contre les paradis fiscaux. Néanmoins, le chemin parcouru reste aujourd’hui très insuffisant pour mettre un terme au rôle déstabilisateur joué par ces territoires dans la mondialisation contemporaine.

La réunion de Pittsburgh des 24 et 25 septembre prochains doit être l’occasion pour la France de porter des propositions politiques à la hauteur de l’intention annoncée le 22 février dernier par le Président de la République d’en « finir avec les paradis fiscaux ». Pittsburgh doit être l’occasion de prolonger la dynamique politique lancée en avril dernier.

Les paradis fiscaux posent trois problèmes : ils attaquent la souveraineté des Etats auxquels ils
soustraient des recettes fiscales, ils nourrissent l’instabilité financière, ils offrent des instruments de blanchiment à l’argent mafieux. La première partie précise ces menaces ; la deuxième propose un bilan critique des actions entreprises depuis le G20 d’avril dernier pour y répondre.

Enfin, la troisième partie propose un plan d’action en 10 mesures pour aller plus loin :
- Promouvoir un échange automatique d’informations
- Renforcer les administrations fiscales
- Créer un centre national permanent d’expertise
- Renforcer l’action européenne : la directive épargne
- Renforcer l’action européenne : la directive Accis
- Mettre en place un reporting comptable pays par pays
- Renforcer la gouvernance fiscale des multinationales
- Réguler les produits d’optimisation fiscale
- Etablir le principe de soupçon d’évasion fiscale
- Publier un rapport national régulier sur la lutte contre les paradis fiscaux"


The $690 billion financial transactions tax

Germany's Finance Minister, Peer Steinbrück, has just written this:

"Citizens are aware of the hundreds of billions of euros and dollars used to prop up banks. Bonus payments in the financial sector now go hand in glove with massive job losses in the real economy.

The political answer to this crisis must encompass more than improved regulatory regimes, risk-management strategies, and capital requirements. How governments handle the burden-sharing between Wall Street and Main Street will determine social cohesion, market stability, and political leaders’ reputations for years to come.

And what are the details of his plan?

"A global financial-transaction tax, applied uniformly across the G20 countries, is the obvious instrument to ensure that all financial-market participants contribute equally. German Foreign Minister Frank-Walter Steinmeier and I suggest the G20 take concrete steps toward implementing a tax of 0.05 per cent on all trades of financial products within their jurisdictions, regardless of whether these trades occur on an exchange. Retail investors could be exempt."

We just signed a letter endorsing this idea, and it follows statements in support of it from Britain's chief regulator, and from France's Foreign Minister, Bernard Kouchner.

Note that Steinbrück's proposed tax rate, at 0.05%, is ten times greater than Kouchner's, at 0.005%. So how much would this new proposal raise?

"Based on calculations by the Austrian Institute for Economic Research, such a global tax at 0.05 per cent could yield up to $690bn a year, or about 1.4 per cent of world GDP. This tax would not unduly burden financial-market participants, yet it would raise a significant amount of money to finance the costs of the crisis."

Phew! (We presume that figure refers to what would happen if the tax prompted no change in behaviour.) And we like the end of Steinbrück's article:

"There is a clear-cut case for a global financial transaction tax: it would be just, would do no harm, and would do a lot of good. If there is a better idea for fair burden-sharing, let’s hear it. If there isn’t, let’s have this tax now."


Time for a proper regulatory blacklist

We are heartened to see this emerging:

"U.K. Chancellor of the Exchequer Alistair Darling called for the Group of 20 to draw up a “blacklist” of countries whose regulatory systems pose a risk to the world’s financial system.

“Just as we have been tackling tax havens, we also need to go after those countries that offer regulatory havens where mainstream regulators here and in America and in Europe can’t get the information they need,” Darling said in an interview on Bloomberg Television today. “If you don’t comply you get until March next year then you will be blacklisted.”

See the video here. It potentially could be very good news - if it happens. Darling seems to have understood the link between the secrecy that secrecy jurisdictions provide, and the financial crisis.

“What we are saying to these companies is, ‘Look, you live in the same world as the rest of us; you enjoy the privileges when you travel that everybody else does,” Darling said. “You can’t shelter behind this veil of secrecy where we can’t get the information we need to understand the risks to which some of our institutions may be exposed.”

We fear it may not, and when it comes, the response will be feeble, and pander to the wishes of big, powerful countries, many of which are secrecy jurisdictions (which is the term we prefer, instead of tax havens.) The next paragraph in the story suggests our hunch may already be right:

"The measures would target countries such as Panama, the Dominican Republic, Turks and Caicos Islands and the banks and hedge funds that operate there. They’re on an Organization of Economic Cooperation & Development list of countries that haven’t implemented international tax standards."

So -- what -- the City of London, that gigantic regulatory black hole, will get a free pass?

If this is what happens, we will have 1998, all over again. The big guys go after the little guys; the little guys point straight back and cry "hypocrites!"; everyone shuffles in their shoes and says "er, they do have a point"; -- and the whole thing falls apart.

The general idea of a regulatory blacklist is right. What is needed now is politicians of courage to make the blacklist the right one.

In the meantime, we've got some fireworks of our own which we will be letting off shortly. Scroll down to the bottom of this blog - Steps 3 and 4 - to get an idea of what's coming.


Bankers behaving badly - the transcript

Below is the transcript of BBC Panorama's exposé of how bankers use offshore structures to continue to support clients engaged in tax evasion (for background, see some stories about it here and here, and a series of BBC links here.) BBC's John Sweeney used secret filming techniques in Jersey to demonstrate that Lloyds' offshore bankers offer secretive structures in Hong Kong to circumvent the European Union's Savings Tax Directive.

Lloyds and the Jersey authorities are trying to dismiss the Panorama programme as unrepresentative: a single rotten apple. But common sense tells us that a lone operator does not single-handedly create structures in Hong Kong to help clients evade tax. And since the interviewee openly admits that he and his colleagues hold brainstorming sessions to work out ways of getting round the tax rules (something which this blogger has also participated in whilst working in Jersey over twenty years ago) this is clearly systemic rather than an isolated incident. Sorry guys, the rot runs much, much deeper.

Anyway, here's the transcript of the relevant part of the programme:

Tax inquiry into Lloyds off-shore
By John Sweeney
BBC Panorama

Transcript of Jersey banker

Lloyds Banking Group is being investigated by British tax officials over allegations that wealthy clients are being encouraged to avoid UK taxes by channelling money through China, a BBC Panorama investigation reveals.

The advice from an employee at the Jersey branch of the bank bailed out by taxpayers was secretly filmed for the BBC by a man posing as a client with £4m to invest.

In response, Lloyds denied any wrongdoing in its offshore practices and said it has suspended the employee in question pending an internal investigation.

During the secret filming, the employee at the branch of Lloyds TSB Offshore told the undercover customer that income earned on deposits made in the tax haven is paid to clients via Hong Kong to "get round" the European Savings Tax Directive.

£17 billion

If that investment or interest income was paid directly from Jersey, then the recipient would be liable to pay the EU savings tax.

Lloyds was rescued last year with a £17bn bailout by the UK government.

The undercover customer told the Lloyds employee that he wanted to avoid paying tax and asked about reporting income to Inland Revenue.

Panorama's John Sweeney investigates off-shore banking

The banker replied: "It's of no interest to us whether you tell the tax man or not. It's not our business."

When told of the practice, Dave Hartnett, permanent secretary at HMRC, said: "That's an incredibly irresponsible thing for him to have said. We might interpret that to mean he was so reckless that he was giving his client a signal that he didn't have to make a return of income. Were we to find that happening we would take a very dim view of it."

Mr Hartnett was not told in advance of the interview with Panorama that the bank in question was Lloyds, but details of the secret filming have since been passed to his department, prompting the investigation.

Other publicly funded banks are also continuing to do business off-shore in traditional tax havens.

Among them is Northern Rock - which was bailed out by the taxpayer with £27bn at the start of the banking crisis in 2008.

It has an offshore subsidiary in Guernsey and has seen deposits almost double to £2bn since the bank was nationalised.

A banker from Northern Rock in Guernsey told Panorama's undercover customer that he could avoid the EU tax rules by opening an account in the name of a non-trading company. The Northern Rock banker said the customer should inform the Inland Revenue. But the bank itself keeps the details secret from the taxman.

In a statement to Panorama, Northern Rock said: "Northern Rock plc refutes any suggestions that its subsidiary is behaving inappropriately and would reiterate that Northern Rock Guernsey informs and reminds all account holders that they are responsible for declaring the interest earned from their savings to their relevant tax authority."

'Paper transaction'

At the Lloyds branch on Jersey, the employee discussed investing in the bank's High Income Fund with the undercover Panorama customer.

"The income made from the fund would go to Hong Kong and then Hong Kong would send it out to all the clients, and that's how we get round it."

The customer asked if it was "only a paper transaction" and was told that it was designed solely to "get round the EU tax".

Lloyds' response to Panorama

With the income officially coming from Hong Kong, "it falls outside the scope", the employee said. He also admitted that he and his colleagues "brainstorm" ways to get around the tax rules. HMRC's Mr Hartnett, said: "Brainstorming in the context suggests to me some complex arrangement for tax avoidance. Or, worse still, potentially facilitating tax evasion. Frankly we simply cannot tolerate that sort of behaviour."

Lloyds High Income Fund has assets of almost £300m. The bank has 10 other funds which also pay income using an agent in Hong Kong.

In response to Panorama, Lloyds said: "Any advice we offer customers is made within the context of the robust anti money-laundering systems and processes we have in place. These processes are designed to ensure that colleagues are able to identify and report any suspicious activity on the part of our customers."

They continued: "We have been provided with information by Panorama which could suggest serious misconduct by a member of staff in one of our Jersey offices. We take these allegations by Panorama very seriously and a full and comprehensive investigation into this matter is already underway. The member of staff has been suspended pending the outcome of our investigation. If the investigation concludes that serious misconduct has occurred, then the company will take the appropriate disciplinary action."

Lloyds has 130 companies in tax havens, this despite an announced crackdown on tax havens made by Prime Minister Gordon Brown at the London G20 summit.

A treasury spokesman said: "The government is clear that tax avoidance or evasion is totally unacceptable, whether it is undertaken by businesses or individuals.

"At a time when many people are facing difficulties from the global downturn, it is vital that everyone pays their fair share of tax. Having received substantial taxpayer support, banks in particular, must convince us that they are playing by the rules and not encouraging, or engaging in, tax avoidance."

Panorama: Banks Behaving Badly?, was broadcast on BBC One, on Monday 21 September at 2030BST.

Now, as Richard Murphy says, answer these questions. All of them.


Wednesday, September 23, 2009

Tax havens help make banks too big to fail

We recently noted how tax havens may kill proposals for living wills, currently all the rage among people who want to prevent a repeat of the conditions that caused the last crisis. Now consider this. First, from the FT this morning:

"European central bankers argue behind closed doors about bank collapses because there is an inherent contradiction between the global structure of large financial institutions and the nationally elected – and funded – governments that rescue them.

Logically, as the Basel report points out, there are two ways to resolve this: either governments must make global arrangements – including agreeing how to share the burden for rescuing institutions such as Lehman – or banks should be capable of being neatly divided into parts when trouble occurs.
. . .
That has alarmed British banks with big international operations such as Barclays and Standard Chartered which – at the extreme – might have to reconstitute themselves into a bundle of national operations, each with ring-fenced assets and liabilities and a separate capital pool, under a global holding group."

In other words, cut them up into neat country-by-country segments. No prizes for guessing what kind of international accounting standards would complement that. (If you can't guess, then click here.) If you haven't already seen it, look at the Barclays quote in this story to see what kind of special pleading the banks are engaging in to try and attack this proposal.

But that is not all. First, along with country by country reporting, we are getting going with another project which could play a massively useful role. More on that to come.

Second - now here is something worth thinking about. Banks say they need to be big to compete in international markets. A large part of what they mean is that - in order to "compete" (this has nothing to do with real market competition, of course, though that's not what we're driving at here,) they feel the need to use tax havens (in conjunction with derivatives, trusts and other off-balance sheet wheezes) so as to dodge regulatory requirements and to dodge tax.

Remember our recent research, highlighting how the largest user of tax havens in every country we surveyed was a bank.

They are saying "we need global reach, via tax havens, in order to compete in the market place. A country like Britain or the United States that tries to prevent its banks diving into the havens will find its national banking champions squashed by its more abusive, offshore-diving foreign rivals. Why is this? Well, there are several aspects to this. First, the banks themselves, boosting their own profits directly, using offshore tricks. Second, there is the banks' wealthy clients, who use the secrecy jurisdictions to boost their profits - and the more strenuously "offshore" a bank is, the more of this money they can attract. A third factor is the governments, especially of Britain and the United States, which have watched over the offshore system with a benevolent eye, in pursuit of this twisted, false notion of competitiveness. It is an unholy trinity: the private sector operators (the banks, lawyers, accountants and so on); their clients; and the jurisdictions that create their secret playgrounds.

In short, Britain and America shy away from cracking down on tax haven activity, and their banks get to keep their gigantic global reach.

And what does that mean? Giant global reach means something else. Too Big To Fail, or TBTF.
And here we get to the heart of the generic problem with banks.

So, not content with having taxpayers subsidise their profit and loss account via tax havens, they also get taxpayers to subsidise their risk-taking.

To tackle the TBTF problem, you have to tackle tax havens. This is not just about information sharing, important though that is. It requires a much bigger offensive than anything we've seen to date.

John Gapper of the FT poses an interesting question for banks at this point. If you think that dividing yourselves into disposable chunks is a bad idea, have you got a better one?

Hat tip: Nick Hildyard, Corner House, for a couple of interesting insights.


Country by country reporting: new US move

Publish What You Pay USA has issued a press release:

"The “Energy Security through Transparency Act of 2009” was introduced today by Senators Richard Lugar (R-IN), Ben Cardin (D-MD), Charles Schumer (D-NY), Roger Wicker (R-MS) and Russ Feingold (D-WI). The bill would require energy and mining companies to reveal how much they pay to foreign countries and the U.S. government for oil, gas, and other minerals.
. . .
The rule change, if approved by Congress, would for the first time require country-by-country reporting of each oil, gas and mining company’s expenditures for raw materials, including energy resources."

This is not specifically a TJN initiative - we are seeking the same thing but for all companies, worldwide; and we particularly want this to be incorporated into international accounting standards. Nevertheless, this bill (the text of it is here) marks a significant step forwards and should be strongly supported.


Cable: the offensive secrecy of tax havens

Amid all the confusion and recrimination of the global economic people, there is one thing that most people seem to agree on in Britain: that one of the country's most prescient politicians is Vince Cable, deputy leader of the Liberal Democrats.

This is what The Economist had to say about him in April:

"By some measure, Mr Cable, the economics spokesman of the Liberal Democrats, the smallest of Britain’s big three political parties, is the most popular politician in Britain. In any putative government of national unity, he would be the default choice to be chancellor of the exchequer. What is all the more remarkable about Mr Cable’s improbable standing is that he is admired in almost equal measure by other politicians and a cynical public."

Here is another assessment:

"He is one of the most respected politicians of our age. His predictions about the recession have been nothing short of prophetic; he made the nation laugh by comparing Brown to Mr Bean; and I am yet to watch an episode of Question Time where any debate about the financial situation hasn’t included a comment along the lines of “maybe we should all just listen to Vince Cable”.

Now what does Cable have to say about tax havens? Now we have a good idea, from his latest article, "The offensive secrecy of tax havens." It is worth reading in full, though perhaps we'll select just this excerpt for now.

"Much of the shadow banking sector, a major contributor to the economic crisis was also only possible because of tax haven secrecy. At the G20 summit in London earlier this year, what some saw as the beginning of the end of the tax havens was agreed, with sanctions proposed for those that fail to comply with international standards. Yet the standards that have been set are hopelessly lacking in ambition and largely exclude developing countries."

Read more about this here. Cable's article says:

"Gordon Brown has made valiant efforts to build a legacy of caring for the poor in developing countries by prioritising debt cancellation and overseas aid commitments. An end to tax haven secrecy may be his last opportunity to ensure that legacy endures. He should seize the chance at the G20 to make the case persuasively."

Quite so.


G-20 - now is the time for a financial transaction tax

TJN is amongst many civil society organisations signed up the following letter to the G-20 leaders meeting in Pittsburgh

To: the Leaders of G20 Countries

International Financial Transaction Tax on the Pittsburgh agenda

22 September 2009

Dear G20 leaders meeting in Pittsburgh,

The undersigned civil society organisations from across the world urge you to take steps at the Pittsburgh summit towards the implementation of an International Financial Transaction Tax.

Such a tax would be levied on all cross border financial transactions including currencies, equities and all kinds of derivatives. Even with a low rate of 0,05% such a tax could generate an annual income of tens of billions of dollars.

This revenue could be used to pay for the cost of the crisis in the North, in particular the heavy burden of public debt, which has been accumulated to rescue the financial system. As well, to assist countries in the South to meet their development objectives, which have been thrown off track by the crisis. We are sure you agree that it is unacceptable for citizens in both the North and South to pay for the damage caused by the finance industry. Those who have benefited so much from the way in which the system has worked ought to be obliged to take responsibility for their actions. This tax is a measure of political fairness and social justice.

Furthermore, such a tax would contribute to a reduction in speculation, which was at the heart of the collapse of the financial system. The tax would thus enhance financial stability and prevent the finance industry from continuing with a ‘business as usual’ approach.

Around the world national financial transaction taxes (FTTs) are commonplace on shares and bonds. Since these transactions are electronic, they are simple and inexpensive to implement. Payment of an International Financial Transaction Tax would thus be automatic with no scope for avoidance, even in off-shore centres. It could, in fact, be introduced unilaterally by those countries wishing to see it implemented; although it would be preferable that all major economies participate.

A measure of this type has recently gained considerable support from the German finance Minister, Mr Steinbrück and his colleague in the Foreign Office, Mr Steinmeier. Two weeks ago the head of the British Financial Services Authority proposed a tax on financial transactions to prevent excessive profiteering by banks. In recent days both Germany’s Chancellor Merkel and France’s President Sarkozy have publicly said they support the idea. Governments in Europe and South America already have experience of specific FTTs, and parliaments in France, Austria, Belgium, Canada and Finland have considered implementing a tax on foreign exchange transactions. In 2005, at the United Nations 115 countries voted to explore the potential of taxing cross-border currency transactions.

One year after the collapse of Lehman Brothers now is the time to consider substantial reforms of the financial system. The introduction of an International Financial Transaction Tax would be a foundation stone in the building of a new and sustainable financial architecture.

Yours sincerely,

European NGOs:
WEED (Germany)
Stamp Out Poverty (representing 45 UK organisations)
Global Responsibility (Austrian Platform for Development and Humanitarian Aid of 39 NGDOs)
CRBM (Italy)
11.11.11 (Belgium)
War on Want (UK)
Glopolis (Czech Republic)
ATTAC - Switzerland
ATTAC – Vlaanderen
ATTAC - Finland
ATTAC - Germany
Terre des Hommes (Germany)
KOO - Koordinierungsstelle der Österreich Bischofskonferenz (Austria)
Both ENDS (the Netherlands)
philippinenbuero e.V. im Asienhaus (Germany)

Japanese, Asia-Pacific, Africa:
Advocacy and Monitoring Network on Sustainable Development - AM-Net (Japan)
Altermonde (Japan)
Association of Citizens for International Solidarity Taxes – ACIST (Japan)
Oxfam Japan
Ugoku/Ugokasu (GCAP Japan)
Public Services International Asia-Pacific Regional Organisation
Asian Community Center 21 - ACC21 (Japan)
ATTAC – Togo

International NGOs:
Global Policy Forum
Global Social Justice Initiative
OXFAM International
Tax Justice Network


Accounting for poverty: new report

ActionAid has an important new report out about tax, tax dodging, tax havens (secrecy jurisdictions, we prefer) and developing countries. It complements their entertaining Outlandish Revenue Service project which we blogged recently. The new report contains such important statements as:

"ActionAid has calculated that, if all developing countries were able to raise just 15% of their national income as tax revenue – a commonly accepted minimum figure – they could realise at least an additional US$198 billion (£99 billion) per year. This amount is more than all foreign development assistance combined, and enough to meet and exceed the annual MDG funding gap."

And they quote the Kenya Revenue authority slogan:

"Pay your taxes and set your country free."

They make three crucial main recommendations"
  • "Country by Country reporting
  • Better tax information exchange
  • Stronger taxing rights for developing countries on cross-border investments and trade."
  • Tax businesses fairly
  • Invest in tax authorities
It contains lots of clear summaries, diagrams, graphs and data to help us navigate through the complexities.


Tuesday, September 22, 2009

Lord Turner versus the Lord Mayor of London

The Right Honourable Lord Mayor of London, not to be confused with the Mayor of London, has been sounding off:

“It is banking activity, international banking activity, which makes the world go round,” the lord mayor said, as he cautioned that regulatory changes “must be designed to strengthen and help grow the financial services sector, not to first paralyse and then shrink it”.

Everyone now knows that the City of London is too big, too powerful, and too dangerous. It is a tax haven in its own right, and the centre of a network of tax havens around the world. The Lord Mayor, who is head of the City of London Corporation (a very curious beast ) is currently Ian Luder (pictured), who has made some very crass statements in the past about protecting London's offshore status, such as:

"The Government has learned not to kill the Golden Goose although it leers at it from time to time. . . . Tax exemption for foreign dividends is very good news, as is simplified asset management taxation and stamp duty land tax relief for alternative finance investment bonds."

Luder's latest words were uttered at a banquet in the City which was also addressed by the very brave Lord Turner, head of the City regulator, who has attracted withering fire for noting the "socially useless" aspect of much of what banks do. Turner said yesterday:

“The financial industry, more than any other sector of the economy, has an ability to generate unnecessary demand for its own services – that more trading and more financial innovation can under some circumstances create harmful volatility against which customers have to hedge, creating more demand for trading liquidity and innovative products; that parts of the financial services industry have a unique ability to attract to themselves unnecessarily high returns and create instability which harms the rest of society.
. . .
Not all financial innovation is valuable, not all trading activity plays a useful role, and a bigger financial system is not necessarily a better one . . . . It is not my job as chairman of the financial regulator to be the industry’s cheerleader."

He won't in his job for long, it seems likely. As one guest at the banquet put it:

“Probably 60 per cent of the people in this room would willingly shoot Turner over that speech."

Turner himself noted the vitriol he has received:

"One City practitioner declared himself ‘appalled, disgusted, ashamed and hugely embarrassed that I should have lived to see someone who commands a senior and crucial important position as head of the UK regulatory regime, making such damaging and damning remarks’. Well, I am sorry I spoilt his breakfast.
. . .
I wonder whether this thoughtful soul realises that those sentiments are precisely what some of the victims of this recession feel about the excesses of some specific parts of the financial system."

Turner added that

"Some comments on my Prospect magazine interview have suggested that any regulator ought to wish their industry to be as successful as possible and therefore as large as possible. That is frankly a bizarre idea: nobody suggests that it is the role of Ofgem to make the electricity industry as large as possible."

Even in Britain's oversize and dangerous financial sector men and women of courage still exist. His full speech is well worth reading.


Timms: tax dodging is immoral and corrosive

Stephen Timms, Britain's financial secretary, has some welcome words:

"It is right for those who pay their fair share to resent – to see, in fact, as morally wrong – the actions of a small minority who use their resources to create a new set of rules for themselves, who think they can pay tax on a 'do it yourself' basis to rob public services of vital resources."

The moral dimension of all of this has been all but forgotten. Part of our goal is to bring morality back into these questions. It's welcome to see an influential British figure saying such things -- though we're under no illusions about the forces ranged against him.

And note something else he says

"Comparing those who sought to evade taxes with benefits cheats, he added: "They not only cheat the public purse of much needed resources, but they undermine the confidence that ordinary taxpayers have in the system. It's corrosive."

The word "corrosive" is rather like the word "corrupt" - and his way of framing this is remarkably similar to our own. Note what we said last year

"Corruption always involves narrow interests abusing the common good. It always includes insiders using guarded information operating with impunity. And it always corrodes institutions, worsens absolute poverty and inequality, and ultimately undermines faith in the rules and systems that are supposed to promote the public interest. Thus, a better basic definition of corruption would go something like this: Corruption is the abuse of public interest and the undermining of public confidence in the integrity of rules, systems and institutions that promote the public interest."

Something to remember.


Monday, September 21, 2009

Anti-tax haven petition launched in France

Our friends and colleagues in France have launched a petition against tax havens and they're calling on activists, trade unionists, businesspeople, faith groups and anyone interested in justice to help them achieve their target of 50,000 signatures.

Let's highlight some of the numbers quoted in the petition:

Tax evasion costs the French state three times the current social security deficit. That's enormous, and partly explains why President Sarkozy and his team are at the political forefront in calling for action.

Tax havens also devastate the public finances of developing countries, which see $800 billion of illicit funds flowing northwards each year, largely through sophisticated offshore structures.

And note this: "Tax havens would not survive without the presence of the banks and the multinational businesses of G-20 countries: 100 per cent of the French banks and other businesses listed on the CAC40 have affiliates in tax havens." Reflect on that statistic and bear in mind that the same applies to most if not all the bourses in Europe and America.

Hence the call for citizen engagement. Bravo to our friends in France


Banks and secrecy: fan the flames, please

Despite the gloom on tax havens generally, we are heartened to see this report, highlighting how existing US efforts againts UBS are providing wider leverage.

"The latest agreement appears to have emboldened the IRS to widen its pursuit of tax cheats to a broad spectrum of wealth managers around the world as part of an intensifying crackdown on tax evaders."

And they quote an attorney:

“It is very possible that the IRS will be able to get strangleholds over the other banks because they’ll have specific information which will permit them to bring specific allegations of wrongdoing before the U.S. courts,” said Robert Fink, an attorney at Kostelanetz & Fink in New York. “This thing may spread like wildfire.”

And he added

"“I feel like I work in a bakery where I ask people to take numbers,” Fink said. “I have never seen such a deluge. I was thinking of getting folding chairs in our reception area.”"

And there is this detail:

The heat got turned up Friday when American clients of UBS AG were issued a letter formally warning them that their undeclared income in Switzerland may be revealed to U.S. tax authorities, Reuters reported. The letter, dated Sept. 10, warned clients they have 20 days to appoint a lawyer in Switzerland, or be assigned one by the Swiss authorities. Taxpayers who come forward are compelled to reveal names of bankers, financial advisers and others who helped hide assets from the IRS."

Let's hope this does spread like wildfire. Fan the flames.


Tax havens may well kill "living wills"

We have just blogged about the return of complacency. This takes us back to an article we should have blogged earlier, but overlooked, from the Financial Times. Written on August 13th, it notes the return of complacency, then notes this about living wills (which we have blogged, and which has been very much in the news of late.) Living wills are, in effect, supposed to be pre-set procedures put in place to make sure financial institutions can be wound down in a timely and straightforward way, should they run into trouble.

How are tax havens likely to stymie the introduction of living wills? Gillian Tett of the FT explains:

"In order to make it easy to wind down a large bank, it is crucial to have structures that are relatively simple and streamlined.

However, in the past few decades, the largest banks in the world have stealthily built corporate structures that are fiendishly complex, straddling numerous borders and plagued with offshore entities. Lehman Brothers was but one example of that.

The pattern, of course, is no accident. After all, large investment banks excel in regulatory and tax arbitrage, and all that cross-border complexity and opacity enables them to exploit such loopholes with ease. The pattern is also one reason that the living will idea could be very controversial, if regulators ever try to push it through.

After all, if the banks were ever forced truly to streamline their operations, it might become that much harder to jump between tax regimes, for example.

To my mind, that is one very good reason that the living will idea should be roundly applauded, almost irrespective of whether it might help stem any future crises. The degree to which large banks have been allowed to get away with tax arbitrage in recent years is nothing short of scandalous (and potentially even more shocking than some of their pay practices).

But sadly, this is also one reason that the living will idea may never fly. Six months ago, the largest global banks were on the back foot in political terms as they reeled from the shock of the Lehman Brothers collapse. However, these days they are regrouping with startling speed.

And regardless of all the debate about moral hazard – or having banks that are “too big to fail” – the system is drifting into a pattern where the most dominant lenders are becoming more dominant than ever. Just look at the market concentrations emerging, say, in the wholesale swaps, foreign exchange or bonds arena.

Given that, the regulators themselves are increasingly wary about pushing too many controversial ideas through, not least because they are badly hampered by being fragmented along national lines. “We have got to pick our fights carefully,” one western official explains. Clamping down on the cross-border tax practices of the banks, for instance, is apt to look a battle too far."

It makes depressing reading, doesn't it? Aside from the related issues of liquidity creation, of evading pay curbs, of candy floss, not to mention all this, the "living wills" debate which is prominent in the media right now constitutes yet another reason why tax havens are right at the root of the economic crisis.


Complacency - it's coming back fast

Jaime Caruana, head of the influential but slightly secretive Bank for International Settlements, was speaking on the weekend:

"The head of the body that oversees global banking regulation has issued a stern warning that the world cannot afford to slip into a “complacent” assumption that the financial sector has rebounded for good."

At a meal with a senior financial sector official in the past week, this blogger was told

"It is becoming quite clear that lessons have not been learned."

And as for offshore, the latest initiatives have hardly made a dent: it is business as usual, as this and this and this highlight. And then there is this to worry about, too.


Lloyds faces offshore allegations

The Guardian is running a story this morning which starts with this:

"The tax authorities are investigating Lloyds Banking Group after evidence emerged that the bank, kept alive by £17bn of taxpayers' money, encourages wealthy customers to avoid tax by channelling money through China."

The story is based on an undercover filming operation by the BBC current affairs programme Panorama. A banker based in (guess where?) Jersey is quoted as saying:

"It's of no interest to us whether you tell the taxman or not. It is not our business."

Which, among other things, makes a joke out of IMF

Read the rest of the story, which speaks for itself. It is one more story highlighting how abuse is facilitated and encouraged by a pinstripe infrastructure to encourage and facilitate abuse. The Guardian highlights the generalised hypocrisy prevalent in Britain:

"At the last G20 meeting, Gordon Brown announced: "There will be an end to tax havens." But not, it seems, for banks funded by UK taxpayers offering tax avoidance schemes."


Offshore private banking: rotten to the core

There are many reasons for being shocked by the revelations of BBC Panorama’s excellent programme on LloydsTSB bank’s activities in Jersey (20h30, Monday 21st September)

Both Lloyds and TSB held important positions on Britain’s high streets for decades. TSB, in particular, in its former guise as the Trustee Savings Bank, was regarded as a quintessentially trustworthy, reliable and public interest oriented institution. Lloyds Bank, which dates back to 1765, was a commercial bank with a reputation for integrity and solid banking values. That was then and this is now. Tonight's programme reveals how LloydsTSB, through its branch in Jersey, British Channel Islands, has been engaged in encouraging and facilitating tax dodging.

These revelations cannot be dismissed as an isolated instance of rotten apples: the Jersey branch of LloydsTSB is a major player in their international operations and nothing, we mean nothing, that happens in Jersey can be dissociated from decisions taken at the highest level within the global organization. So here we have an organization using an offshore secrecy jurisdiction to promote services that purposefully set out to undermine democracy and the rule of law.

The location of these services in Jersey is not coincidental. For decades Jersey has promoted itself as a ‘premier’ financial centre: anyone who labels the island a secrecy jurisdiction faces instant rebuttal by armies of public relations officials. At face value this claim is substantiated by the IMF/FATF assessments of compliance with anti-money laundering procedures. And then Panorama comes along and blows a massive hole below the waterline of both Jersey’s braggadocio and the utter uselessness of the FATF assessments. Hello guys, reality calling. Whilst you’re ticking the boxes the bankers are laughing all the way to the, well, bank.

LloydsTSB hit skid row and was partially nationalised in 2008. It is now desperately trying to re-capitalise on the private markets in order to avoid intervention by European Union competition authorities. But even under partial public ownership it has persevered with illicit activities for the simple reason that abetting tax dodging is highly profitable activity. And the accepted view within the board rooms is that the risk/reward ratio falls down firmly in the latter camp.

This needs to change. Our friend Eva Joly, formerly an examining magistrate, now Chair of the European Parliament Development Committee, says that the only way of re-balancing this equation lies with punitive measures. We agree. A period spent at Her Majesty’s pleasure (for our non-British readers that means JAIL!) might allow the directors of LloydsTSB time to reflect on why bankers have a responsibility to the societies on which they currently predate.

Well done to the Panorama for this astonishing exposé. This is journalism at its finest, and demonstrates why the BBC should be protected from sniping by the likes of James Murdoch, who let’s face carries awkward baggage. As for claims that Jersey is a clean jurisdiction, well what can we say? We were never taken in by the PR nonsense or by the IMF ticking boxes in the sky. Now the rest of the world can see which of us was right.