Cutting through the Fog – Corporate Secrets and Beneficial Ownership

David Cameron promised last week at the Open Government Partnership Summit that companies registered in the UK would be obliged to reveal their ultimate ownership and that the public would have access to those records.

This was a major statement of intent: evidence that the UK was not going to condone the opacity of companies or owners that could possibly be engaged in criminal dealings or those who are perfectly innocent but choose to inhabit the same smog-bound territory of corporate secrecy.

Why the secrets?

More accountability is a hard-won struggle in an era where our secrets are open to secret services like the NSA and where government secrecy is hard to lessen, Through all this opening up, companies (and Trusts) operating on an international level have reatained an unwelcome ability to shield themselves from public view. At a time of real debate about privacy (Snowden, The Guardian, the NSA, Angela Merkel’s mobile), companies that seek privacy have remained relatively immune.

Companies are treated as individuals under the laws of most countries yet have the ability to hide their ownership and deal with their taxation (if operating multi-nationally) wherever they choose. This means, of course, that they usually choose what is right for them not for the wider society in which they operate. That is their remit. The recent shake-down of Starbucks, Google and others over taxation – which, to date, has yielded not much more than the voluntary promise of payment of a few tens of millions by Starbucks – was a tip of the iceberg moment. With corporate taxation in the UK heading downwards, the current government coalition seems determined to accept the Institute of Directors’ call for companies not to be taxed on their profits at all!

However, one thing about tax is that we can all see how much a large corporate pays in the UK (about a year after the event when it publishes its accounts). What we don’t see easily is where a company has overseas affiliates with which it “trades” – such as paying royalties for the use of its name – in secret jurisdictions where tax is often negligible.

This nonsense of transfer payments and royalties (which HMRC showed last week to the Public Account Committee it has no real understanding over) shifts massive amount offshore and out of the country where real business was done to tax havens.

The fear often cited that proper taxation would force companies out of the UK is nonsense. They do real and profitable business here – the UK is the world’s seventh biggest economy (or thereabouts). Why on earth does anyone believe that they would move away from doing business here? Can anyone imagine that Apple would close its Covent Garden store if they had to pay real tax in the UK rather than shift profits to where the name “Apple” is deemed by a tax expert to reside? Being afforded the space to sell its (excellent) products in the UK, to use our roads, lights, take on people educated here and all the other benefits of selling in the UK (which includes the iconic area of Covent Garden in London) are well worth the entrance fee of corporate taxation.

Offshoring the owners

However, David Cameron’s speech was not specifically about offshoring taxation – it concerned beneficial ownership issues and these are, of course, linked to taxation in a major way but it is much more than that.

The fog of hidden beneficial ownership means that companies are set up which can channel profits or simply flows of revenue to places where tax does not apply and where no-one knows the beneficiary. This is a typical and easy-to-organise ruse of the criminal world. For many years, criminal networks have laundered their revenues offshore – it used to be through the transportation of suitcases full of notes; these days, it is a little easier. This not just saves tax – it transforms illegal earnings into clean money that can then be brought back again into the real economies via the normal banking system.

With the improved ease of transmission of money across the world, it just takes complicit banks to enable the movement (along with some accountants and lawyers to get things under way) and, hey presto, money surfaces wherever it is wanted without anyone knowing.

Just watch the antics of Breaking Bad attorney Saul Goodman – now getting his own series. The essence of monetary manipulation is built around secrecy and contacts. Governments cannot easily stop the development of the latter, but they can do much to stop the former – making beneficial ownership transparent.

Lining Up for Secrecy – the Fog of War

To the vast majority of us, this is obvious, but to many it is a declaration of war. Many secrecy-led jurisdictions are concerned about their future. It is not just Cyprus where the dominance of “financial services” is far too big for the country – Cyprus became completely over-dependent on banking, Russia and lack of due diligence. According to the Tax Justice Network there are 73 secrecy jurisdictions around the world that they analyse.

Of these, a staggering 35 have some substantive connection with the UK. One of those is Jersey and Jersey Finance’s CEO, Geoff Cook, voiced his concern on Friday when he heard David Cameron’s pitch. In his blog he refers to the public register:

It is not yet clear what will be on such a register but unless this is adopted by the G20, I would confidently predict that  Mr Cameron is likely to have lots of friends in the AID world and insufficient food on the table at home.

Protecting business interests, trade secrets, safeguarding personnel from fringe, sometimes violent campaigning groups, from corrupt political elites and from criminals are all real and weighty concerns.  It is telling that the NGO community are happy to  subject those who have worked hard and done the right thing to a much greater degree of scrutiny than almost any other constituency in society.

There is little difference from opening up the private company arrangements of business owners to the public glare of NGOs, journalists, cyber criminals and the assorted flotsam and jetsam of the worldwide web, than for ordinary bank accounts. If the logic holds good do we not need to know the balance publicly of all personal bank accounts so that all can be sure we came by our cash by legitimate means?

We have nothing to hide in Jersey and we have been active supporters of government to government information exchange. However, the voyeuristic tendencies of politically correct elites should not be indulged and indeed will not be by the vast majority of countries, leaving the UK out on an uncompetitive, uncomfortable and potentially impoverished limb.

It is extraordinary that arguments for secrecy over beneficial ownership are now wrapped up in screams about safety from “violent” campaigning groups and cyber criminals. These are the words of fear – fear for a future that may have been predicated on the Cyprus model and lack of such due diligence.

Secrecy over beneficial ownership allows vast amounts of money to be electronically channeled out of not just the UK developing nations. That cannot afford the losses. Huge amounts of wealth properly owned by citizens of countries such as Guinea, DRC, Angola and others are secretly moved and laundered – often with the help of banks (who are now in the firing line of authorities especially in the USA). As TJN itself states:

Secrecy jurisdictions facilitate illicit financial flows.

Illicit financial flows stem from three major sources: bribery (corruption in its narrow sense), criminal activity and cross-border tax evasion. In doing so, secrecy jurisdictions and the secrecy providers operating through them play not only a major role in preventing the poorest countries from developing out of a state of dependency and poverty, but they help creating a criminogenic environment in which all sorts of crimes can thrive and feast on the fruits of breaking the law.

The crimes that are facilitated and whose financial reward is secured by financial opacity and the resulting secrecy comprise, but are not limited to: tax evasion, aggressive tax avoidance, money laundering, terrorist financing, drug trafficking, human trafficking, illegal arms trading, non-payment of alimonies, counterfeiting, insider dealing, embezzlement, fleeing of bankruptcy orders, illicit intelligence operations, insider dealing, all sorts of fraud, and many more.

Clearing the Fog

David Cameron has made a real commitment but there are real obstacles to further progress.

The first is implementation.

Those involved in celebrating the introduction of the Bribery Act in 2011 are rightly concerned that its implementation is suspect. As Jack Straw, then Minister of Justice, said in the original White Paper, there was unlikely to be many cases brought before judges as a result of the Act. This has been borne out in practice along with insufficient funding of investigations, low numbers of court actions and Bribery Act guidance that was aimed at stifling the Act’s powers. Proper and funded implementation of real transparency and public availability of that information is now key to ending secret beneficial ownership for UK-registered companies.

The second issue is around Trusts. These are not covered by the PM’s statement or commitment yet Trusts are a key secrecy weapon for criminal activity across the globe.

The third issue is that the commitment only applies to the UK. This will serve some purpose in helping to clear money laundering from this country but the UK should now use its leadership wherever it has influence. This is direct in the 35 secrecy jurisdictions mentioned above but also in other forums where the UK has any influence – such as the G20, EU, FATF (Financial Action Task Force).

The fog remains but the UK is beginning to spy a way through – taking a lead on an issue on which millions of lives depend outside the UK. It is not the problems of those in Jersey’s Finance Ministry we should most be concerned with but the problems of those in countries where massive corruption by those in power is facilitated by banks and secrecy jurisdictions – resulting in billions leaving the countries (far higher than Aid going in) and that means millions having to survive on a $ a day with no medical facilities let alone schools or economic opportunities.

Time to see above the fog.

The G8 at Enniskillen – No Hospitality to Tax Dodgers

Spendthrifts and tax dodgers

Six years on from the bank-induced recession, governments in the G8 are in Enniskillen, Northern Ireland to consider problems that they have failed to solve since the invention of taxation. While not as old as Enniskillen’s oldest building, built by Hugh “the hospitable” Maguire (who died in 1428), it is high time serious politicians acted.

Large sovereign deficits (spendthrifts pre-2007 and financial system saviours post-2007) and the inability of Finance Ministers to take more tax from their citizens has caused some nations to focus their attention after hundreds of years on the anomalies of the corporate tax system. This system enables companies (tax dodgers) to shift their tax burden offshore – away from where they make their money – through transfer prices, royalties and the like to places where the tax burden shrinks to almost nothing.

Margaret Hodge (the chair of the UK Parliament’s Public Accounts Committee – PAC) has pursued a fierce campaign against large companies that have, in her view, not paid their due corporate taxes in the UK.

The HMRC (the UK’s tax collectors) have, for many years, decided to be “pragmatic” and reach deals with those same companies on the basis that tax law is insufficient to compel the larger companies to pay reasonable rates of taxation – and the companies have more and better (and better paid) tax lawyers and accountants than the HMRC could dream of.

The PAC has not accused companies of illegality but has stated often that they should pay tax where they earn profits and has cast doubt on the companies’ honesty and morality. Google claims its sales take place in low tax / tax haven Ireland despite the reality of closing the deals in England – as the PAC has claimed and has brought forth witnesses who have testified to this.

What the debate between public and private sectors have shown is clear (to most of us). It is that corporate taxation is very hard to collect currently and that companies believe they are duty bound to reduce their tax to the minimum possible. For there is no social heart in a company – it is not really a person (even if it is granted that status in law), it has to meet the demands of the legal system and its shareholders (while ensuring its customers are satisfied on the way).

Tax-dodging Companies Have No Afterlife

There is a misinterpretation that great companies can find a soul but we should understand that, while they are all made up of real people, companies (especially large ones) take on a life of their own and are propelled by the dynamics of corporatism. A company knows that it has but one existence – there are no stories of “good” companies going to heaven.

Companies that pursue good CSR (corporate social responsibility) do often have good people working for them but the CSR is there because civil society (which includes a lot of customers – real people) demands it. Sustainability is best developed with a good understanding of the society around the company. This means understanding social responsibility where it is seen to be legally needed or where it will benefit the company in the medium term.

This rarely stretches to paying more tax than is needed. For every Starbucks (frightened by bad publicity to throw money in the direction of HMRC) there are 1,000 Googles and Amazons and Apples. Tax is not for sale and paying tax not required by law does not gain a company angel’s wings.

The Spendthrifts’ dilemma

However, since 2007, there have arisen massive deficits in many sovereign nations’ coffers. Suddenly, there is a need to fill those cavernous holes and the substantial drift in the share of income from individual wage earners to high net worth individuals and companies (companies don’t have a vote – outside of the city of London and there are not that many rich people – even if they control most of the wealth) means that the attention of government has shifted in times of recession.

Angel Gurria, Secretary General of the OECD, said recently that taxing the “man on the street” wasn’t economically desirable or even politically possible, so for many finance ministers the only option was “to cut, cut, cut more, rather than have a proper balance between revenue and the expense”.

He said this while overseeing the signing by more countries of automatic exchange of tax information – Austria, Switzerland and Singapore coming to the table.

However, other than austerity, which is now causing huge unemployment in countries such as Greece and Spain, the only target is corporate. This may be a turning point after hundreds of years – a Clause 4 moment – or it may be just rhetoric.

Spendthrifts chasing tax-dodgers – Tax Havens and Beneficial Ownership

Linking this to the G8 and David Cameron is obvious. Companies are able to avoid tax if they can somehow show that their profits are made outside of the higher tax areas. This can only be done if there are places with very low taxation that will accommodate them – these are the tax havens. Nicholas Shaxson’s excellent book “Treasure Islands” tells the story of these tax havens extremely well and also the appalling impact that they have on the poorest countries of the world.

Developing nations are rife with corruption and the corrupt are big users of tax havens – really, they are laundering their money.  Today’s Sunday Times article on the use of Latvians as front Directors for companies operating scams tells this story.

This is possible because of the secrecy that exists in most jurisdictions. If there was transparency and the only issue was lower taxation, then we would have a real competitive environment. Unfortunately, that is not the situation – although it is changing quietly with projects like the one above. If transparency becomes the norm, then the corrupt and criminal (whether they are terrorists or drug barons) will have far fewer places to go. There is no better place to learn about beneficial ownership than at Global Witness – which has driven this issue from the start – see their “Idiot’s Guide to Money Laundering.” It’s so easy anyone can do it – trouble is, most are!

This is why transparency is so critical and why politicians are attempting to use transparency to open up tax havens – at last – and the end to ownership secrecy.

Once there is transparency, then the next step is to determine where profits are legitimately made. This means that the policing of royalties and transfer pricing cannot be at the whim of large corporates but there has to be international agreements that specify what is allowable. International tax laws should not predetermine rates of tax, but double taxation should not equate to zero taxation – it has to mean that tax is payable in the countries where the business is done.

The final requirement is to ensure that beneficial owners of companies are known by the taxation authorities. Why companies and trusts are allowed to be secret is beyond the comprehension of almost all of us. As Richard Murphy (Tax Research UK) has written, over 500,000 companies in the UK are struck off each year. Around a third never file accounts.  He estimates that the tax lost as a result could be upwards of £16bn per year from companies that trade but do not file accounts or tax returns.

That is in the UK alone.

Can’t Spend, can’t stop spending

Can’t tax, can’t stop taxing

 

The dilemma of western Governments that find austerity too much, too soon and who (outside of those in serious trouble like Greece, Cyprus and Spain) are unwilling to torment their citizens with mass unemployment and soup kitchens is great. This means that the deficiencies that have been all too apparent in corporate taxation for so long are seen as the final option. The 2007 banking-induced calamity has made such huge financial contortions in countries such as the UK and the USA that even the precious not-to-be-disturbed tax havens and secrecy laws are under pressure.

The G8, chaired by the UK and in Northern Ireland (rather than one of the many UK protectorates that operate as tax havens), does provide an opportunity to generate support for the ending of the nonsense that the current corporate tax system provides. Gleneagles (eight years ago) was all about international development and led to significant and positive change (even if not all the promises have been fulfilled). The same pressure and openness about tax havens and secrecy in international finance could lead to more sensible and pragmatic tax systems and, eventually (if pursued vigorously) to far less exporting of illicit funds from developing nations (such funds leave developing countries at a faster rate than aid money is put in). At least $50bn a year is lost to developing nations in Africa alone every year.

This is a great time for Enniskillen – ancient home of Hugh the Hospitable – to be remembered for its lack of hospitality to tax dodgers.

 Follow @Jakdaw09