Waking from our tax stupor

Sleeping with Royalties

So Amazon, Starbucks and Google avoid tax and British politicians are surprised! So the big accounting firms (KPMG, Ernst and Young, Pricewaterhouse Coopers and Deloittes) follow the banks in Margaret Hodge’s and her committee’s sights.

It is pretty incredible that in 2012, after hundreds of years of banking and secrecy in financial dealings that politicians seem to suddenly wake up to the fact that multinational companies move money around the world to save on tax and that wealthy individuals do the same.

Have the sleeping pills run out? Is the dreamlike state that they were in for so long worn off like a modern-day Rip van Winkle?

All this time, companies have paid large royalties to themselves in low tax jurisdictions, changed prices to do the same, set up secret companies in secrecy-oriented tax havens alongside wealthy individuals and others from the criminal and terrorist fraternity who make the tax havens their home.

As wealthy nations like the UK have slept while such as royalties escape our shores (and our tax revenues with them) to the tax havens, we have allowed even more serious crimes to take place – the looting of the developing world of their natural resources through the illegal and morally repugnant ocean of money that gets sent to such secret jurisdictions. Far more money is transferred out of the third world into such jurisdictions annually than we in the so-called developed world push back in through aid programmes: all because we allow the secrecy to continue while we sleep.

Tax evasion / avoidance and secrecy – lifelong bedfellows

The talk is about how we extract more tax from corporations and the focus has been on HMRC to review the levels of royalties it allows companies like Starbucks to pay to what appear to be false set-ups in countries like Luxemburg. Starbucks solution is to keep on doing this but to pay HMRC £10m for a couple of years as a gift.

Tax avoidance on the scale that we are seeing – tens of billions a year according to experts like Richard Murphy. He shows how little companies are paying (compared to some like Costa Coffee who appear to be paying amounts that equate to their sales and real profits). The problem is that corporation tax is based on profits and, as any good accountant knows, profits are an art form not a science. If there were no secret jurisdictions, then companies would show their total sales and profits (as shifting money inside a company cannot lose it overall – so overall profits stay the same over time) and it would be possible to tax profits based on where the sales were made. Agreements could be made between the nations in which such sales were made on a national scale and by company. So, if Google makes $1bn in profits and 10% of its worldwide sales were in the UK, then it could be taxed on $100m of its profits in the UK at UK rates unless there were good reasons not to – e.g. evidence of excess investments. Of course, the simplest method would be to completely ban royalty payments within a company or connected companies. This would ensure (at least improve the chance that) that real activity and profitability were taxed where they should be. Royalties charged outside the company to another one would continue.

Before such a solution takes hold (or something similar – making real change to dual-tax treaties), the tax authorities have to struggle with long-term negotiation with companies on esoteric and mind-numbing issues and governments have to work to destroy tax havens and secret jurisdictions. HMRC are involved in the first but the progress on the second seems to take place on a geological timescale.

Secrecy is the friend of tax evaders and avoiders. Being able to hide the actual transactions that take place is often the cornerstone of tax minimization. This is why it is so important that the current discussions between the Isle of Man and the British government on opening up all the former’s bank account to UK investigation is so significant – even if just a start. Richard Murphy estimates that this will open up 99% of such accounts.

Good start but hardly the whole picture. As Nicholas Shaxson has written in his book Treasure Islands there are many tax havens in the world from the Channel Islands to Delaware  and from Cyprus to the Virgin Islands. Each one enables secrecy of accounts and company ownership that does not just delay the ability of tax authorities to open up the information but stymies it completely in many cases.

Transparency – letting the light in

Earlier this year, Global Witness issued a report – Grave Secrecy that highlighted the following:

Global Witness believes a further dramatic change  is required: the identities of the real, ‘beneficial’ owners of all companies should be publicly available in the country they are incorporated, and nominee directors and shareholders should be held liable for their clients’ actions. The EU has the opportunity to take the lead on this over the next 18 months as it updates its anti-money laundering laws.

This matters because ‘shell’ companies – entities that are little more than just a name on a piece of paper – are key to the outflow of corrupt money that keeps poor countries poor. Those who loot state funds through corruption or deprive their state of revenues through tax evasion need more than a bank: they need to hide their identity behind a corporate front. Countries such as the UK might have a company registry and consider themselves ‘onshore’, but as long as they only collect shareholder information, they are effectively permitting hidden company ownership – which means they are as offshore as any palm-fringed island and will continue to facilitate corruption, tax evasion and other crimes. This needs to change.

Their investigations showed how easy is was to set up false companies (in one case with a director who was no longer alive) which would often not operate but to which financial transactions would be placed – disguising the remittance of funds from one jurisdiction to another. Money laundering of this type is thus rampant internationally.

This is not much different from the tax avoidance of legitimate companies who, arm in arm with politicians and tax authorities, have been sleep walking to the current position. Now, with so many countries deep in recession and with Governments indebted and working hard to stay financially afloat, the general public is angered at what seems to be the slanting of tax benefits away from those who are working hardest to those who manage money and financial flows.

Robert Peston (BBC financial commentator) writes today (December 8th):

“Companies perceived by people, politicians and media as, in some sense, not making a proper contribution to the societies from which they extract their revenues and profits, will over time become marginalized within those societies”

Secrecy has bred tax opportunism and money laundering and it is right to conjoin those terms even if in law they differ. While the recession keeps its grip on the western world, there will be no let up on the public’s desire for some better form of equality whether against the wealthiest 1% or the top companies who control most of society. This equality of outcome – paying the right tax for the benefits that accrue from the nation that houses that company (such as roads, police, defence forces, education and the like) – is a central theme for this recession.

To become transparent is the requirement for the 21st Century and especially during the economic downturn. The internet has given us all the ability to learn what is happening within seconds and to act on it. So, Starbucks is today hit by demonstrations despite its ploy of giving a charitable donation to HMRC.

However, real transparency will require the ending of tax havens, the ending of impunity for those who are guilty of money laundering and for those who enable it (whether lawyers, firms of accountants or banks – many of whom are now facing corporate fines but few individuals are facing prison).

We should have a transparency law operating in all jurisdictions (similar to the country-by-country reporting) which would require multi-nationals to declare their sales in every country in which they do business, an end to tax havens and secrecy, real Directors allowed to operate companies, an end to the transfer of funds of PEP’s (politically exposed persons who operate with impunity and take billions out of countries desperate for the money they transfer into their own accounts) and a general set of legal requirements which ban artificial tax avoidance schemes.

And Quiet Flows the Money (Apologies to Sholokhov and the Don)

We have recently heard how HSBC have been guilty of extraordinary money laundering that allowed the corrupt and the criminals to export “their” money around the world with impunity.

We are also told by the Tax Justice Network that tax havens contain over $21 trillion of funds – much of that the result of money laundering, all of it hidden from sight.

Money flows around the world in amounts that make ordinary people dizzy – yet, governments are scared to remedy the essential problem that the “hear no evil, see no evil, speak no evil” banks and the laws that allow tax havens permit: at best, a gross distortion of the economic well-being of the vast majority (99.5% or more) of us that don’t work the system; at worst, a criminal shadow state that has the power to dictate our lives because of its financial muscle.

HSBC – dark deception

US Senator Carl Levin called HSBC misdeeds “stunningly unacceptable”. The broad acceptance that money can flow around the banking system no matter where it comes from and no matter where it is going strikes at the heart of a system mired in 19th Century but caught up in the plundering of the 21st.

Mexican drug cartels have (amongst many others) been able to syphon billions of dollars of their income (derived through murder and extortion and leading to the deaths of thousands, the misery of hundreds of thousands and the cost of those nations where demand for their drugs exist) as if they were the local car rental firm.

Regulators (see: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9413299/HSBC-money-laundering-where-was-the-regulator.html) were inept at …regulating. The laws were broken time and time again and there is no question that HSBC’s guilt is equivalent to a conspiracy to flout the legal system.

As the Senate investigation found, between 2007 and 2008 there was around $7bn moved from Mexico into the US via HSBC. Mexican authorities pointed out to regulators and the bank that this was highly suspicious but no action was taken.

Above this, banks in Saudi Arabia and Bangladesh were provided with accounts despite their alleged terrorist connections.

This deception by the banks – where they know all the problems that being found out would cause – cannot be deemed to be a simple error of judgment. The dark deception practiced by HSBC goes to the very core of not just banking but the whole way nations work. HSBC has torn at the very heart of natural justice and ethics by thinking that the banking system is, somehow, not part of the world. The flow of money to them is something else – not the prime culprit and with no one hurt by their deceitful acts. They are, of course, completely wrong!

Banks’ dark deception is the same deception as any launderer of stolen goods. While we prosecute the small criminals, the huge criminal acts are allowed to escape. This costs us all. How?

Money flowing out of control

Without the ability to transfer their huge “wealth”, drug traffickers, corrupt politicians, the mafia and the rest would not be able to use that “wealth”. If an Angolan politician (and I use that country as an example advisedly) wants to gain any benefit from the oil wealth generated and passed into his or her bank account in Angola, the money has to be transferred to another country – somewhere that money can be invested or to buy goods (like mansions or yachts) that effectively launders that money. When Denis Christel Sassou-N’Guesso, the son of the President of the Congo, was shown by Global Witness in 2007 to have spent $35,000 on designer goods and other items (and went to court with them and lost), it may have seemed trivial – even to someone who earns much less than that a year from his “job” in his country. When he failed to pay his court costs, I had to pursue him into France (I was working with Global Witness at the time) and we found his expensive apartments in Paris and threatened him with bailiffs. He paid up!

But, how did he get his money out from a country where the vast majority is completely impoverished – under $2 a day income?

Through the banks, of course. Banks that are supposed to take account of PEP’s – politically exposed persons – and run checks on them to ensure that the money is obtained properly.

So, money flows without barriers around the world – banks appear oblivious to the terrors that their inactions cause.

Dark regulation – FATF

Of course, our guardians are supposed to be the regulators – people and systems entrusted by the “free world” to guard us against the corruption of the banking system.

Under the framework of the Financial Action Task Force – FATF (see:  http://www.fatf-gafi.org/pages/aboutus/) we are supposed to be provided with safety.

FATF’s objectives are stated as:

The Financial Action Task Force (FATF) is an inter-governmental body established in 1989 by the Ministers of its Member jurisdictions.  The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.  The FATF is therefore a “policy-making body” which works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.

It is up to each country to develop its own safeguards and laws, but the system is failing. FATF make recommendations and while they have in recent years opened themselves up to more scrutiny and NGO participation, they are slow to act as any centralized, world organization can be.

If FATF was working, then the HSBC’s “stunningly unacceptable” inactions would not have occurred.

In each country, the laws and practices are separately developed. The US regulation of HSBC has been found to be appalling.  The Office of the Comptroller of the Currency (OCC) had 50 investigations into HSBC between 2005 and 2010 in areas of anti-money laundering and found 80 problem areas. However, in not one of those cases did it require any major changes to take place. This laissez-faire attitude to such a serious problem again strikes at the heart of governance – banking and nation.

This then means that the Compliance management system within the bank was flawed and unable to resist the calls to make money. Compliance officers are weak and under pressure from the moneymaking machine that is the bank. The fact that David Bagley (HSBC’s Head of Compliance) resigned from his role is no surprise – who knows that he will remain in HSBC in a different role????

So, failure at international level (FATF); failure at national level (OCC); failure at HSBC (Bagley) – the whole system is designed to fail and meets that objective.

Darker than dark – islands of tax heaven

If that was all, it would be bad enough, but it gets so much worse. The Tax Justice Network reports that $21 trillion is held in tax havens. Anyone who had read Nicholas Shaxson’s excellent book – Treasure Islands (http://www.amazon.co.uk/Treasure-Islands-Havens-Stole-World/dp/0099541726/ref=sr_1_2?ie=UTF8&qid=1342962917&sr=8-2) will be familiar with how dark and dangerous the world’s elicit affair with tax havens is. $21 trillion of unseen “wealth” is stored away from taxation and from sight.

The USA and UK are especially complicit in this as the UK has its own tax havens in London, Jersey, Guernsey and its protectorates in places like the Cayman Islands. Because it supposedly provides wealth to important people who influence our affairs, successive UK governments have been scared to interfere. Recently, as much to do with the involvement of the Liberal Democrats in government as anything, small steps have been started to end many tax avoidance schemes and the use of moral judgment has entered our language. This is causing such a fuss that the good citizens of Jersey are threatening to break off from the UK – horror of horrors. It is but a small start.

The USA is not exempt from blame as Shaxson shows so well. Delaware – the Blue Sky State – makes its money from tax evasion. Offices in Delaware are home to hundreds of companies located there for tax reasons.

This costs us (the 99.5% who don’t have the opportunity to avoid tax in this way) a fortune. We end up with higher VAT, higher social security, higher income tax, corporation tax, inheritance tax and other sales taxes as a result.

As reported in the Guardian yesterday concerning the $21 trillion

This gargantuan sum is difficult to comprehend, but it becomes more understandable at a parochial level. According to an earlier report by the PCS union, the Tax Justice Network and War on Want, the use of tax havens costs the UK taxpayer at least £16bn a year, double the annual budget of the Department for International Development.

The River of Hades around the world

The confluence of the HSBC horrors combined with the system of tax havens that operate is of a worldwide network of money flows that are outside the law and jurisdictions. While we berate the investment banks for their sub-prime disasters of 2007 and for Diamond’s culture problems at Barclays, the basic banking systems are at fault in a worse way.

For, it is basic banking on which we trust to get money from one account to another. Nat West’s recent debacle in the UK, when its IT systems went haywire, shows what can happen when the basic system goes wrong.

How much worse it is when the basic system of banking and our international management of that system and to where we allow money to flow is completely abhorrent – it is a very dirty hell-hole that allows bad money to flow wherever it wants and to wherever it wants. The international banks are not just bystanders in this – they are culpable and implicit in crime, in corruption and in impoverishing millions (and making all of us poorer).

Banks have had a very bad press but in the 21st Century as digital technology rules our lives, it is too easy for banks and their staff to evade controls.

What should be done?

FATF should have teeth and should be allowed to go beyond recommendation to sanctions.

National governments should ensure that their OCC equivalents are given the means (financially, technically and with highly skilled and well-paid management) to do the job.

Compliance Managers in banks should have complete independence from their senior management and be subject to independent audit (outside the main financial audit and by different audit firms). Independence means that they should report to compliance board which, in banks, should have independence from the main Board and include only non-execs.

Tax havens should be outlawed – tax should be payable where profits are made and any scheme set up to avoid tax should be illegal. We have made a very small start in the UK- but only a tiny one. The moral crusade which happens at a time of worldwide recession is the time to get this in motion so that money can no longer flow illicitly and quietly.

Good Global Citizenship and Tax Havens

Barclays was cornered this week in the UK by Her Majesty’s Revenue and Customs into paying back around £500 million for entering into a tax avoidance scheme – despite signing up to a Government scheme not to do such things. Bob Diamond now looks foolish after his vow to make Barclays a good citizen.

For many years, it has been “OK” for companies and high income earners to shield their earnings behind tax avoidance schemes. Since the introduction of welfare states across the world, companies and individuals have sought to minimize the tax that society needs to work through the system. They have systematically sought to challenge the efforts of democracies to manage the tax base. In some countries like Greece, there has been a tacit buy-in by Governments (and those in Government with their fingers in the till) to allow tax to go unpaid. This leads inexorably to financial chaos and, as we now see in Greece, to progressive civil strife and poverty. This is what has happened in Africa for so long – the wealthy shield their income from the State (who are paid off to look away).

In those countries which do make a real effort to collect taxes, the best tax avoidance comes through the use of tax havens and the real killer for economic equity is the way the world accepts tax havens as a reasonable and acceptable part of our global economy.

David Cameron and many others talk a lot about fairness: the fairness that makes bankers bonuses almost a criminal offence. But, this is two-faced. While George Osborne says that the HMRC will work towards killing off general tax avoidance schemes, we have in our midst a main centre of tax avoidance – the City of London.

Nicholas Shaxson wrote brilliantly in his book “Treasure Islands” about the tax havens that bedevil the world of finance and economics. Tax havens distort, they do not equalize.  Tax havens provide the wealthy (individuals and corporates) alongside the wealthy criminals and wealthy terrorists with the ability to shield themselves from legitimate taxation. Providing a legitimacy to tax havens (and allowing them to proliferate worldwide – even shielding them as the UK does the Cayman Islands and elsewhere) creates massive market distortions and inequalities. Legitimate and democratic tax collection is continuously stymied by the tax havens – just a step from the wealth-grabbing in Angola or the tax avoidance mentality that is Greece.

Taxation is a central plank of democratic society.  While the Tea Party and similar libertarians might rage against central government tax and tax collections as a scourge of society, we know that society is centred on a democratic ideal of the wealthy properly financing the society on which it depends to provide a basic source of welfare to the poor and sick, for defence, for infrastructure. Society is more than just the wealthy and privileged creating an elite life. Angola is a good example of how fortunate elites manipulate the wealth of a nation to appropriate its total wealth and Sonangol (its so-called publicly owned oil company – really commanded by its country’s leadership who reap its financial benefits) has been built to achieve the grabbing of oil and energy wealth from the citizens.

The nations that democratically elect their leaders (and, it is to be hoped the new rich of China and Brazil and others) should take heed to the dangers posed by the examples of the wealth grabbers in the energy-rich nations. It is here, in the UK (City of London, Jersey), the USA (such as the state of Delaware) as well as the better known haunts of the Dutch Antilles or the Cayman Islands, where huge financial flows (from the legitimate wealthy alongside the illegitimate) travel in order to reduce the legitimate tax take of the countries in which the wealth is created. Tax havens are wealth destroyers.

Wealth is destroyed by tax havens because they eat away at the main body of a nation – its mass of people, its true wealth creators. Education and education systems suffer dramatically because taxation is unavailable to finance schools. Health systems suffer for the same reasons – in the UK, where we have moved vast sums to the NHS in the last Government, cut-backs are now biting as the tax take is diminished along with economic growth. In poorer countries, the wealth shift is much more dramatic.

Ambassador Nancy Soderberg (appointed by President Obama earlier this year) was in London this week to campaign for Argentina to live up to its duties in economic areas. She mentioned its lack of adherence to the Financial Action Task Force  (FATF) requirements for responsible national supervision of illegal financing – Argentina was placed on FATF’s grey list over corruption issues. But, FATF and other international bodies have failed to oversee a sustained reduction in how financial flows travel the world and to institute a level of good citizenship on a worldwide scale amongst our companies and wealthy individuals.

While steps have been taken to reduce terrorist financing and, to a much smaller extent, the benefits of illegal drug trafficking and gambling and prostitution, very minor shifts have been made in (a) defining what global good citizenship means (b) reducing tax havens and the financial flows through them.

The G20 states from time to time that tax havens are to be reduced in scope but the battle against them has hardly started. Tax avoidance on a grand scale is as bad as grand corruption (maybe bigger in scale): two sides of the same coin. Good global citizenship requires a new definition to be made – where a global consensus is sought to reduce hugely the ability of companies and individuals to create their wealth in one place and move it offshore to save tax. This simple example of good global citizenship is a cornerstone to increasing wealth creation on a wider scale. It is not socialism but realism and pragmatism. It is good citizenship.