Human Rights v Trade

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The Independent today (3rd October) reports that the Foreign Office is placing human rights below trade in its international efforts.

Sir Simon MacDonald, Permanent Secretary at the Foreign Office, said this to the Foreign Affairs Select Committee, chaired by Crispin Blunt – a Conservative MP. The outrage to this frank admission from those like Amnesty International is understandable but the news is not a surprise. The UK has a default mechanism – overseas trade at almost any costs. It is this default that has, at times, been tempered by those heading our foreign ministries (such as Robin Cook and his “ethical foreign policy” and Douglas Hague more recently) but over more than 200 years, Britain has pursued a trade policy which has been usually unyielding.

Mercantile Britain

From the 17th Century onwards, this island nation has pursued conquests and material gain in overseas territories that enabled a minor nation (by population) to erect a massive empire. It was a mixture of bravery, opportunism, single-mindedness and adventurism that took Britain throughout the world as searchers for new lands and the rewards that would come with them. Along with the supreme invention of the joint-stock company that somewhat de-risked such ventures, companies like the East India Company not just took advantage of these overseas territories but set themselves up as military governors of them. This company ruled India until as late as 1858 (after the rebellion of 1857).

From then on, British military might was handled directly by Government. Thus, the mercantile underpinning of our international trade, by then as much as the need to export the produce of the industrial revolution as the need for raw materials, was in place. This was an extrovert linkage between might and trade in the nineteenth century, now it is implicit. One of the worst examples of mercantilism were the Opium Wars in China where Britain fought to ensure that the sale of opium into China would continue.

20th Century Mercantilism

More recently and especially since the end of World War II, when British military might was used to vanquish an evil Nazi regime and almost bankrupted this country, Britain has used its ability to aid overseas trade more subtly. We have now ceased to follow the Palmerston gunboat diplomacy of the nineteenth century but our ability to promote trade along with military capability is still firmly in place.

For much of the twentieth century an example was the Defence Services Organisation (DSO) that promoted our arms exports throughout the world. This was an effective sales force for arms exports that retained the UK’s ability to remain in the top three or four internationally until very recently. Our embassies were (are?) and our military attaches in particular represented not just our Government but the companies that sought to trade in the countries where they were situated.

Alongside this, the UK has developed a record on human rights that is one of leadership on a world-wide scale. In the nineteenth century, our Gladstonian free trade mindset was tempered with a humanity in a section of the population that sought to restrain the might of an empire and restrict its natural tendency to the Benthamite utilitarianism that sought to consider overseas peoples as no more than collateral. While we may seek to measure natural resources in 2015 as “natural capital”, in the nineteenth century, even after we abolished slavery in Britain in 1809, we would still value people our dominions numerically as we would a piece of equipment.

Liberal Free Trade was built on this and while Tories (Conservatives) may have initially tried to stem the Free Trade tide (because of their natural affinity to those that ruled by their ownership of land), they became as fervent in their pursuit of capitalism and mercantilism until now they have adopted the mantle to themselves.

So, while this country spends 0.7% in overseas aid (and trumpets this, rightly, as an example of our desire to alleviate poverty and disease), in this progressively post-Industrial world (where all countries are now so interlinked by trade) we maintain an extraordinary linkage to many tax havens around the world that ensure that companies can reduce their tax burdens at the expense of much of the world’s poorest. London is itself a crucible of money laundering and Tax Justice Network assesses London and its affiliated tax havens in places such as the Cayman Islands, Jersey, British Virgin Islands and elsewhere, as the most secretive combined jurisdictions in the world. This is today’s example of the UK and its desire for financial trade above the rights of the poorest.

Trade vs Human Rights in the 21st Century

Since WWII, the UK has (as stated above) been at the forefront of much that is good in the development of human rights world-wide. Apart from our leadership in the establishment of UN and other basic norms for human rights, this country houses many NGOs that lead in this sector. This is now at risk.

Not only is the current government suggesting that we opt out of various human rights bodies (unable it seems to allow ourselves to be subject to best-case international norms), not only are we potentially removing ourselves from the historical capability of being a home for immigrants that are subject to terror in their own countries, but we are looking to enhance our ability to trade in nations that continue to abhor basic human rights in their own countries.

This is a pandering to economic welfare and materialism that has not been seen since the days of Bentham and the focus on such utilitarianism (then at the expense of the poor working class in this country but now internationalized) is a stark throwback to the default mechanism of our forbears – those who maybe knew they were wrong but had no experience to turn to.

Now, we have no such excuses. The desire to trade unabashed world-wide and not concern ourselves with the dire consequences of the countries with which we trade points to a shallow materialism that is in danger of throwing aside all that so many have worked for so many years. That this country, one of the world’s richest, should consider that the problems faced by those in the countries with which we do business are not of any concern to us is not just wrong but a short-termist mistake.

George Osborne’s recent visit to China is a good example of this. He is not just a head of finance but a senior Cabinet Minister that goes with the blessing of the Government. He left China with the endorsement of the Chinese government as voiced through their newspapers for not overstating human rights issues. Apparently, the UK cares less about people than about profits or increasing our GDP.

So, Mr MacDonald’s statement before the Foreign Affairs Select Committee is no surprise but it is a statement that will have chilling effects. It states that we are giving up our responsibilities on the back of a desire to enrich ourselves at the expense of those outside the UK that suffer oppression and poverty. While we maintain out 0.7% (although some of that is being deflected into defence spending) much of that, in effect, buys us more ability to sell products and services.

Robin Cook did not last long in office as a result of his ethical foreign policy beliefs. We no longer even hint that this remains our aim but the lesser aim of maintaining human rights and challenging those that do not follow our example is now not just under threat but clearly is seen as history. It may be that quantity of life is the belief of this government (and the defocusing on climate change is another example) rather than quality of life and the desire to lead lives that are worth living. We do have average levels of material wealth in this country that are envied in many countries and much that our democracy and ability to live relatively freely within out nation that propels many to want to live here.

Yet, in a global economy, it appears that materialism is now the only objective as we go back in time to the nineteenth century. This time, we have no excuses. Human rights as enshrined in the United Nations Declaration of Human Rights are essential components of how we should not just run our own country but how we should see the world.

On December 10, 1948 the General Assembly of the United Nations adopted and proclaimed the Universal Declaration of Human Rights the full text of which appears in the following pages. Following this historic act the Assembly called upon all Member countries to publicize the text of the Declaration and “to cause it to be disseminated, displayed, read and expounded principally in schools and other educational institutions, without distinction based on the political status of countries or territories.”

 

PREAMBLE

  • Whereas recognition of the inherent dignity and of the equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world, 
Whereas disregard and contempt for human rights have resulted in barbarous acts which have outraged the conscience of mankind, and the advent of a world in which human beings shall enjoy freedom of speech and belief and freedom from fear and want has been proclaimed as the highest aspiration of the common people, 
Whereas it is essential, if man is not to be compelled to have recourse, as a last resort, to rebellion against tyranny and oppression, that human rights should be protected by the rule of law, 
Whereas it is essential to promote the development of friendly relations between nations, 
Whereas the peoples of the United Nations have in the Charter reaffirmed their faith in fundamental human rights, in the dignity and worth of the human person and in the equal rights of men and women and have determined to promote social progress and better standards of life in larger freedom, 
Whereas Member States have pledged themselves to achieve, in co-operation with the United Nations, the promotion of universal respect for and observance of human rights and fundamental freedoms, 
Whereas a common understanding of these rights and freedoms is of the greatest importance for the full realization of this pledge,

 

Now, Therefore THE GENERAL ASSEMBLY proclaims THIS UNIVERSAL DECLARATION OF HUMAN RIGHTS as a common standard of achievement for all peoples and all nations, to the end that every individual and every organ of society, keeping this Declaration constantly in mind, shall strive by teaching and education to promote respect for these rights and freedoms and by progressive measures, national and international, to secure their universal and effective recognition and observance, both among the peoples of Member States themselves and among the peoples of territories under their jurisdiction.

Article 1.

  • All human beings are born free and equal in dignity and rights.They are endowed with reason and conscience and should act towards one another in a spirit of brotherhood.

Article 2.

  • Everyone is entitled to all the rights and freedoms set forth in this Declaration, without distinction of any kind, such as race, colour, sex, language, religion, political or other opinion, national or social origin, property, birth or other status. Furthermore, no distinction shall be made on the basis of the political, jurisdictional or international status of the country or territory to which a person belongs, whether it be independent, trust, non-self-governing or under any other limitation of sovereignty.

Article 3.

  • Everyone has the right to life, liberty and security of person.

Article 4.

  • No one shall be held in slavery or servitude; slavery and the slave trade shall be prohibited in all their forms.

Article 5.

  • No one shall be subjected to torture or to cruel, inhuman or degrading treatment or punishment.

Article 6.

  • Everyone has the right to recognition everywhere as a person before the law.

Article 7.

  • All are equal before the law and are entitled without any discrimination to equal protection of the law. All are entitled to equal protection against any discrimination in violation of this Declaration and against any incitement to such discrimination.

Article 8.

  • Everyone has the right to an effective remedy by the competent national tribunals for acts violating the fundamental rights granted him by the constitution or by law.

Article 9.

  • No one shall be subjected to arbitrary arrest, detention or exile.

Article 10.

  • Everyone is entitled in full equality to a fair and public hearing by an independent and impartial tribunal, in the determination of his rights and obligations and of any criminal charge against him.

Article 11.

  • (1) Everyone charged with a penal offence has the right to be presumed innocent until proved guilty according to law in a public trial at which he has had all the guarantees necessary for his defence.
(2) No one shall be held guilty of any penal offence on account of any act or omission which did not constitute a penal offence, under national or international law, at the time when it was committed. Nor shall a heavier penalty be imposed than the one that was applicable at the time the penal offence was committed.

Article 12.

  • No one shall be subjected to arbitrary interference with his privacy, family, home or correspondence, nor to attacks upon his honour and reputation. Everyone has the right to the protection of the law against such interference or attacks.

Article 13.

  • (1) Everyone has the right to freedom of movement and residence within the borders of each state.
(2) Everyone has the right to leave any country, including his own, and to return to his country.

Article 14.

  • (1) Everyone has the right to seek and to enjoy in other countries asylum from persecution.
(2) This right may not be invoked in the case of prosecutions genuinely arising from non-political crimes or from acts contrary to the purposes and principles of the United Nations.

Article 15.

  • (1) Everyone has the right to a nationality.
(2) No one shall be arbitrarily deprived of his nationality nor denied the right to change his nationality.

Article 16.

  • (1) Men and women of full age, without any limitation due to race, nationality or religion, have the right to marry and to found a family. They are entitled to equal rights as to marriage, during marriage and at its dissolution.
(2) Marriage shall be entered into only with the free and full consent of the intending spouses.
(3) The family is the natural and fundamental group unit of society and is entitled to protection by society and the State.

Article 17.

  • (1) Everyone has the right to own property alone as well as in association with others.
(2) No one shall be arbitrarily deprived of his property.

Article 18.

  • Everyone has the right to freedom of thought, conscience and religion; this right includes freedom to change his religion or belief, and freedom, either alone or in community with others and in public or private, to manifest his religion or belief in teaching, practice, worship and observance.

Article 19.

  • Everyone has the right to freedom of opinion and expression; this right includes freedom to hold opinions without interference and to seek, receive and impart information and ideas through any media and regardless of frontiers.

Article 20.

  • (1) Everyone has the right to freedom of peaceful assembly and association.
(2) No one may be compelled to belong to an association.

Article 21.

  • (1) Everyone has the right to take part in the government of his country, directly or through freely chosen representatives.
(2) Everyone has the right of equal access to public service in his country.
(3) The will of the people shall be the basis of the authority of government; this will shall be expressed in periodic and genuine elections which shall be by universal and equal suffrage and shall be held by secret vote or by equivalent free voting procedures.

Article 22.

  • Everyone, as a member of society, has the right to social security and is entitled to realization, through national effort and international co-operation and in accordance with the organization and resources of each State, of the economic, social and cultural rights indispensable for his dignity and the free development of his personality.

Article 23.

  • (1) Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment.
(2) Everyone, without any discrimination, has the right to equal pay for equal work.
(3) Everyone who works has the right to just and favourable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection.
(4) Everyone has the right to form and to join trade unions for the protection of his interests.

Article 24.

  • Everyone has the right to rest and leisure, including reasonable limitation of working hours and periodic holidays with pay.

Article 25.

  • (1) Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.
(2) Motherhood and childhood are entitled to special care and assistance. All children, whether born in or out of wedlock, shall enjoy the same social protection.

Article 26.

  • (1) Everyone has the right to education. Education shall be free, at least in the elementary and fundamental stages. Elementary education shall be compulsory. Technical and professional education shall be made generally available and higher education shall be equally accessible to all on the basis of merit.
(2) Education shall be directed to the full development of the human personality and to the strengthening of respect for human rights and fundamental freedoms. It shall promote understanding, tolerance and friendship among all nations, racial or religious groups, and shall further the activities of the United Nations for the maintenance of peace.
(3) Parents have a prior right to choose the kind of education that shall be given to their children.

Article 27.

  • (1) Everyone has the right freely to participate in the cultural life of the community, to enjoy the arts and to share in scientific advancement and its benefits.
(2) Everyone has the right to the protection of the moral and material interests resulting from any scientific, literary or artistic production of which he is the author.

Article 28.

  • Everyone is entitled to a social and international order in which the rights and freedoms set forth in this Declaration can be fully realized.

Article 29.

  • (1) Everyone has duties to the community in which alone the free and full development of his personality is possible.
(2) In the exercise of his rights and freedoms, everyone shall be subject only to such limitations as are determined by law solely for the purpose of securing due recognition and respect for the rights and freedoms of others and of meeting the just requirements of morality, public order and the general welfare in a democratic society.
(3) These rights and freedoms may in no case be exercised contrary to the purposes and principles of the United Nations.

Article 30.

  • Nothing in this Declaration may be interpreted as implying for any State, group or person any right to engage in any activity or to perform any act aimed at the destruction of any of the rights and freedoms set forth herein.Human Rights
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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.

Do Companies Exist???

David Cameron is an astute politician and he understands that, at last, there is a popular movement for equity in taxation. This equity includes companies paying a reasonable share of profits. Ian Birrell in The Independent sees this as the start of a movement but this is a campaign that people like Richard Murphy have waged for many years.

True, much of the publicity around his work and that of organisations like the Tax Justice Network and Action Aid have revolved around tax and the developing world. This is where multinationals – especially in the energy and mining sectors – have often connived with governments with a corrupt result that siphoned off hundreds of billions of dollars from the state into the pockets of individuals, elite groups and corporates.

The Dodd-Frank Act – and its focus on country-by-country reporting of tax in such areas – was aimed at opening up governments and companies payments.

However, the taxation effects of tax havens, low tax jurisdictions and multinationals with expertise in moving their tax affairs wherever they want has also created the opportunity for such multinationals to pay if they want, where they want. Organisations like the Institute of Directors, whose members are mainly smaller companies with less multinational options, have recently come out in favour of zero corporate tax rates – on the basis that it is people that should pay tax, not companies.

What’s a Company for?

There are many who believe that a company should not pay taxes – that the market economy needs to ensure that companies are free (within the law) to grow and prosper and that their assumption of human qualities (they are seen as entities under the law) is a fiction. It is people that need to be taxed – not companies and the IoD, for example, in its paper “How to get rid of Corporation Tax” (written following a similar paper from the 2020 Tax Commission) strongly advocates the elimination of all corporation tax as the company is a mere conduit for shareholders, staff etc who should pay all the tax on disbursements from the company.

This begs the question about the essential qualities of a company in a market economy – what is it that makes a company different from an individual – why shouldn’t it pay tax?

Limited liability provides individuals with the scope to take risks. It is a formula from which individuals seeking to build a business can bring in investment knowing that the only requirement to repay (if managing a legally proper business) is limited to the value of the shares as well as any loans taken out. It is limited liability that was fully developed in the Netherlands in1602 when stock was tradable on the Amsterdam Stock Exchange that gave the push to enterprise in Europe. Taken up by the British, it heralded the industrial revolution.

Joint stock companies (having limited liability) were the original, defining force that differentiated companies from individuals pursuing business opportunities. Now, most business is done with limited liability.  Governments have lost track of the ability of such joint stock companies to register in whatever jurisdiction they want and to appoint Directors that have nothing to do with the business – often purely there to hide ownership.

Clearly, companies have a huge presence. Their marketing ability is as the company – not the individuals that are behind it. Advertising and brand management is aimed at providing the public with an identifiable face. A company relies on its customers seeing it as a tangible and identifiable organization with which customers can do business. It has a legal basis (and can take action as such and be actioned against as a result) as well as a moral requirement – the advent of CSR is merely a tangible outcome of the way that companies are seen to be real and impact the environment and society in many ways.

If it quacks…..

We all know that companies are the centre of entrepreneurship and product and service creativity. In a market economy, the rise of joint stock corporations have worked to de-risk investments so that competition has been developed and economic growth maintained since the early 1800’s. This growth has developed some enormous corporations in businesses as wide as energy, food, utilities, construction, defence and aerospace, pharmaceuticals and beyond. Every area of opportunity is mined by the evolution of companies across the globe. Governments have progressively sought to assist business but, under pressure from society (people) laws have been passed which inhibit them to what society believes are proper norms.

These laws include health and safety and employment laws but also include tax laws. As a result, companies make decisions on where to locate – although this often includes where it needs to sell as much as where it can find skilled staff or suppliers.

Apart from rogue traders, set up with the need to hide its affairs within foreign jurisdictions and behind false Directors, many MNC’s (multinational corporations) are able to move their profits around by manipulation of licensing and other features. Rather than pay tax on profits in the areas in which they make the money, accountants can provide companies with boltholes in which the rates of tax are very low.

The IoD and others believe that companies are not real – that Governments should give up on them and rely on the payments they make to people on which tax should be paid.

The question arises: if a company is a distinct entity in law; if it can be held responsible for its impact on the environment, its impact on people, its duty of care to customers – why, oh why, should it not pay taxes? Why should society not look to some repayment from the company itself – which benefits hugely from joint stock activities as well and huge benefits that are introduced for companies such in terms of infrastructure, government regulations, and a myriad of other incentives – rather than (in this instance only) having to seek tax purely from receivers of income from companies. Taxing companies is, in principle, correct as it is the company that derives the income from a location.

If tax is to be separated, then the long-term outcome for companies would be potentially the loss of other benefits (such as joint-stock arrangements) as the legal distinction becomes blurred. Not just the thin end of the wedge – but a potentially disastrous change.

Companies have to play their part

If companies exist in law as distinct entities, which they do worldwide, then it is reasonable that they face up to the reasonable demands of the society in which they operate. Company law, however, may set up companies as distinct but the reality is that the company has no moral code except that which society imposes. People have moral codes, companies (which are organisations of people) do not. CSR is reactive to society, not pro-active and while companies have a need to become sustainable (in terms not just of resources but sustainable in terms of the relationship with its customers and the societies in which they operate) it is extremely rare for them to lead – to take such societal risks.

This is true in most areas. Health and safety leaders in companies were years ahead of the legal changes in places such as California but were reacting, quite properly, to likely long-term changes. Those that did so were ahead of the game when laws changed in areas such as environmental restrictions.

This reactive ability (changing as the environment changes in an evolutionary way) makes the best companies resilient – sustainable. It shows they are real entities as much of society as any other organizational form or the individuals that self-organise around them and within them. Companies are a part of society and should contribute to society as a key part of it. This means that opting out of a crucial element of the system – taxation – is ludicrous on grounds of the companies’ relationship with society – whether that opting out is legal or not.

The dangers are obvious. The crack in society would be potentially dramatic – companies would be seen to have no fiscal contract with society. This may well be the case for MNC’s now but the public backlash is starting to inhibit their ability to prosper in this environment. Companies that properly pay their tax are now selling this proposition to their customers – companies such as J Sainsbury whose pride in paying proper company tax in the UK is seen in distinct contrast to those MNC’s like Amazon, Starbucks and similar. The latter is threatening to disentangle itself from future investment in the UK if David Cameron (and his “time to smell the coffee remarks”) persists in trying to get them to pay tax where they trade rather than using licensing and royalties to hid their true profits.

Companies are a key part of society. They have to act as such and not just contribute to society solely through CSR documents. They have to be seen to contribute and tax is one of the most obvious manifestations of that contribution.

Let tax be paid where the trade is made

Let’s end the notion that companies should not pay corporation tax and let’s get on to the next step of the ladder – working out how to ensure that royalties, tax havens, tax schemes, fake Directors and the like are no longer tolerated and that tax is paid where the trade is made.

 

See: Do Companies Exist – Part II

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.