Following my blog on the issue of Russian Money Laundering in London and the new offshore paradigm, my friend, Timon Molloy, Editor of Money Laundering Bulletin invites me to read the Prime Minister's latest letter to the President of the European Council, (https://www.gov.uk/government/news/pm-letter-to-the-eu-on-tax-evasion ) especially paras 7 & 8, to see how the UK is positioned to give a lead in tackling offshore secrecy and tax evasion.
Timon appears to believe that the Prime Minister's letter contains optimistic positive hopes for a better regulated offshore sector in the future.
Unhappily, I cannot share his view.
To quote Jeffrey Sachs in his seminal article in the Financial Times "...Austerity exposes the global threat from tax havens..;"
"...The curtain has been pulled aside on the once secret world of tax havens, and the scale of abuse is nearly beyond reckoning. Week after week, Americans and Europeans worn down by budget austerity have learnt about the secret accounts of their politicians, tax evasion by leading companies and hot money destabilising the world economy. The darker truth is that these havens are not gaps in the world’s financial system; they are the system..."
And this is the most important point of all, it is now the offshore sector that is the real financial market place.
The rest of the onshore banking and financial structures are terminally holed below the waterline, and without the constant massaging of their balance sheets by accountants, coupled with the juggling of interest rates to such an extent that no-one has any incentive to save money, the above-the-line banking and financial sector is to all intents and purposes, destroyed. Oh, it will limp along for the foreseeable future, but it is no longer a viable and vibrant business sector, it is a dinosaur in terminal decline.
Frankly, the retail bankers have no vested interest in providing retail bank services any longer. They have not wanted to engage with ordinary clients for many years because they cannot make money from them. Charge-free banking was always a drain on the bottom line, and most ordinary people only want the most ersatz banking services, so banks really wanted to get rid of them a long time ago. Now having bankrupted the entire system, they are on the way to succeeding. My own prediction is that before too long we will see the break-up of vast swathes of the European banking system as consolidation takes place, and a vast number of retail clients will be left effectively unbanked!
The offshore tax secrecy jurisdictions have won the argument because it is now a commercially acceptable, and regularly-stated principle that a company's first financial duty is to its shareholders, and that the directors have an overriding duty to maximise their returns on investment. If that means engaging in 'aggressive' tax avoidance, and any other form of curly-minded, constructive accounting mechanisms to achieve the maximisation of protection of revenues from the grasping hands of tax collectors, then so be it.
One of the biggest influences on my economic development came from the writings of two social commentators, James Dale Davidson and William Rees-Mogg, the former editor of ‘The Times’, in their seminal work ‘The Sovereign Individual’, first published in 1997.
In this book, the authors identified the way we would be living in 2010 and they identified how the offshore sector would come into its own as a secure repository for the wealth created by entrepreneurs, tax evaders and criminals.
The authors’ arguments predicated the emergence of a new kind of citizen, who they call ‘the sovereign individual’, a new kind of independent wealth-creator, whose access to technology and the power of their own intellect, would mean that they no longer needed to consider themselves as the property of an individual state or political collective, but would be free to negotiate their own terms with which they proposed to deal with governments in the future.
This new individual was placed by the authors in the context of his relationship with the nation state thus;
“…The new megapolitical conditions of the Information Age will make it increasingly obvious that the nation-state inherited from the industrial era is a predatory institution, one from which the individual will want to escape. It is an escape that desperate governments will be loathe to allow. The stability and even the survival of Western welfare states depends upon their ability to continue extracting a huge fraction of the world’s total output for redistribution to a subset of voters in the OECD countries. This requires that the taxes imposed upon the most productive citizens of the currently rich countries be priced at supermonopoly rates, hundreds or even thousands of times higher than the actual cost of the services that governments provide in return…” The Sovereign Individual. p116.
Providing the services those individuals need is no longer considered to be a morally-dubious activity, but a primary requirement, and an entire service industry of lawyers, accountants, and corporate formation companies has developed to service that function, (at a cost naturally)!
Such a business sector also facilitates the needs and requirements of dictators, corrupt politicians, drug traffickers, (we even now have banks willing to openly engage in laundering drug money into the offshore secrecy environment as HSBC have so recently proved), as well as other criminal entities.
As I pointed out in my earlier blog, the UK and the USA are two of the world's principal abusers of the facilities offered by 'peekaboo' secrecy jurisdictions around the world (the third is Switzerland). These three countries probably account between them for the vast majority of the world's most important banking facilities, to say nothing of the corporate operating jurisdictions enjoyed by the World's leading companies!
There is no point in trying to hope that the offshore sector is going to roll over and surrender its hegemony simply because the world's politicians have discovered that they are no longer enjoying their share of the tax take on which they have for so long depended to maintain their welfare subsidies. The reality is that the those who pull the strings for the offshore community have already quietly cemented their controls into place, and as they are virtually invisible to all intents and purposes, the chances of their being forced to make any changes to their systems is illusory.
Politicians the world over have a vested interest in making common cause on the need for greater transparency in tax affairs because they rely so heavily on their ability to maximise the tax take. So, it becomes necessary for them to make public statements full of sounds and fury, but as Shakespeare admonishes us, the question for us to assess is whether their sentiments signify nothing!
In David Cameron's case, we are on notice that his public statements about taxation and the offshore sector fall between two stools. On the one hand, he will regret the loss of necessary tax revenue, but at the same time, he is constrained by the vested interests of the City of London and the British financial sector who benefit hugely from their access to the facilities offered by the offshore sector, the biggest majority of which are British protectorates or in some way associated with the UK. So, anything Cameron may say about wanting to bring greater constraints to the offshore area has got to be taken with a huge pinch of salt. He needs the support of the City and they are not going to be predisposed to support a man who kills the goose that lays such golden eggs!
So, in his letter to the President of the European Council, it becomes necessary to deconstruct Cameron's claims and protestations with care. He states;
"...Firstly, on tackling tax evasion, the introduction of the Foreign Account Tax Compliance Act by the US could move us rapidly to a new global system of multilateral automatic exchange of information. This covers a wide variety of products and entities – and critically, includes requirements, which the UK is implementing, to ensure that we can collectively tackle tax evasion through the use of offshore trusts..."
Well, yes, this all sounds very grandiose, and 'multilateral automatic exchanges of information' has a resounding ring to it, but it amounts to very little in reality. This is the sort of phrase inserted by some Treasury draughtsman which gives the air of great effectiveness and official agreement, but is really intended to be a piece of smoke and mirrors. No doubt the British and the Americans have a great deal of interest in tackling tax evasion through the use of offshore trusts, but the reality will be very different from the expectation.
"...The UK has also taken other concrete steps to clamp down on tax evasion. We recently concluded automatic information exchange agreements, based on our agreement with the US, with our Crown Dependencies – the Isle of Man, Guernsey and Jersey. We are also in advanced discussions with our Overseas Territories to do the same, and continue to work closely with them and the Crown Dependencies on further concrete steps they can now take to demonstrate their steadfast political and practical commitment to tackling tax evasion..."
Yes, whatever, yada, yada, yada! Politicians deal in big sweeping statements, but the devil is always in the detail. On a practical, investigator’s level, you can create all the information exchange agreements you like, but what matters is not the fact that another tax area is willing to share the information of the beneficial ownership of a particular account with you, but where the ultimate beneficiary information eventually lies, because the information you will be sent is certain to be of absolutely no use to you whatsoever.
Why, because no tax structure architect is going to make it easy for any investigator. The first offshore entity will usually be a service company with a bank account facility, but behind that entity will lie another and different jurisdictional entity. So the original request which may be made about a company in the British Virgin Islands, will be answered by details of another company owner, say in Montserrat. This will in turn be owned by a holding company in Monaco, which in turn my be the entire asset of a Trust registered in Jersey, which is owned in turn by a Liechtenstein Anstalt, I could go on and on! This is just an illustration, purists may say that certain links might not work, but the point is to illustrate the problem.
As each article of information is acquired as a result of official requests made through mutual information exchange facilities, each one of which will take many months to achieve, so the trail will lead on to yet another entity. It is like opening a Russian doll, inside each one is another and another. By the time the trail is finally chased down, any assets will have been dissipated and moved on into another new and different structure, so the trail starts all over again. This is why these information exchange agreements are frankly illusory! These agreements sound great, but in practice they mean very little, if anything!
So what else does Mr Cameron want us to believe? He states;
"...The recent announcement by the UK with France, Germany, Italy and Spain to pilot multilateral automatic information exchange based on our agreements with the US is a significant step. I am delighted that other European countries, including Poland, have already signalled their willingness to join this initiative. And to support the development of a universal standard, the UK has also asked the OECD to report ahead of the G8 Summit on how to deliver this effectively. I hope that at our May Council we can give the strongest possible message of support from Europe for the rapid adoption of multilateral automatic information exchange as a new global standard, and encourage other jurisdictions to publicly commit to joining a multilateral system at the earliest opportunity..."
When politicians start talking about sending messages of support for global commitments and the creation of multi-lateral initiatives and universal standards, you know full well that they are talking about "...this year, next year, sometime, never..." Asking the OECD to come up with reports on initiative implementation will be like waiting for Godot! This is H.M.Treasury (who have written this letter), making claims to a lot of high-sounding aims and ambitions, for which they cannot be faulted, while at the same time knowing full well that they will all be drawing their pensions before anything meaningful is achieved, if ever.
However, what it does mean are lots of nice, expenses-paid trips to Paris and other palm fringed jurisdictions for the Treasury civil servants who sit on the UK delegation to the FATF (a subset of the OECD), so that they can ‘liaise’ with their opposite numbers while drawing up reports on ‘initiative implementation’. It is the delegates themselves who decide where they are going to meet next and they have a world of opportunities to choose from.
Oh God, this is such a cynical piece of opportunistic drafting by the Treasury. These weasel words cover a multitude of opportunities for more foreign travel, and they have been included deliberately by the drafters, because they are designed specifically to allow Treasury civil servants to gad about the globe at the public expense.
No politicians will complain because this exercise is all designed to give David Cameron a chance to stake out the moral high ground before the French and the Belgians and the Germans start giving him a hard time about the City of London refusing to engage with the Financial Transaction Tax, which the City wants like a third nostril!
"...Second, we must break through the walls of corporate secrecy. A lack of knowledge about who ultimately controls, owns and profits from companies leads to aggressive tax avoidance, tax evasion and money laundering, undermining tax bases and fuelling corruption across the world. Therefore, the G8 and EU must work together to ensure full transparency in beneficial ownership..."
This benign statement of the glaringly obvious is wholly redundant. It is a statement designed to claim the moral imperative, but the machinations required to get the G8 and the EU to work together to achieve these ends would exhaust the patience of Job! The author of the letter appears to have conveniently forgotten that the original European Money Laundering Directive 1991 had already called for full mutual assistance in exchanging information to combat money laundering.
This letter is a cynical piece of window-dressing, designed to give all the impressions of a desire to set out the highest possible standards for tax compliance, while couched in terms and language that both the authors and the Prime Minister know will never, ever be capable of meaningful delivery.
It is a sad commentary on the standards of our public administration that some civil servant is able to make Cameron feel that he has to come out with this bullshit. It is meaningless and complete gibberish and should have no place on the agenda of a politician who is committed to truth.
I came across a frightening analysis of taxation as a primary function of the Nation State, in my reading of the ‘Sovereign Individual’. Recall this book was written in 1997. It provided a very clear explanation why the conditions of the ‘Information Age’ in which we are now living, meant that governments would find it harder and harder to collect the same level of taxation which they needed, simply to maintain the status quo of society.
The changes being introduced by such facilities as the world-wide-web, digital technology and information networks, meant that tax-payers would find new and more efficient ways of hiding, disguising and disseminating their wealth from governments, whose needs to acquire such money were becoming more and more acute.
“…In the twentieth century, advanced industrial nations have taken between 30 and 60 per cent of national income to finance the welfare state. Between the disintermediation, jurisdictional and encryption problems of global computer networks, this capacity is now vanishing. The welfare state was already becoming burdensome in the early 1990s. By 2010 or thereabouts it will simply become unfinanceable, as will all kinds of unfunded state pension…” The Sovereign Individual. p7.
David Cameron must almost certainly be aware of this bleak assessment. He cannot publicly admit that he and his Government are in complete thrall to the City of London to the extent that they are, and that the City Fathers control the purse strings, and that they call the tune the Government dances to. UK plc will never relinquish their relationship with the global offshore sector, it means too much money for the City, as that is now where the real economy resides. So instead he trots out this kind of unworthy weasel wording in the vain hope that he might just sound like a statesman.
He doesn't, he sounds like a charlatan!