I love this from the BBC File on Four web site:
A BBC investigation has uncovered questions over whether Iranian ships have been registered in the Isle of Man to evade international sanctions.
That, of course, is typical secrecy jurisdiction abuse*. But so too is the situation where a secrecy jurisdiction director has absolutely no idea about what the company they supposedly manage is doing. This is beautifully noted on the same web site
Captain Nigel Malpass, a marine consultant based in the island's capital Douglas, is one of two directors named for these companies, the other is Ahmad Sarkandi, an Iranian who is also a leading executive in the state shipping line.
There is no suggestion that Captain Malpass had any knowledge of the activities of the ships owned by the companies of which he was the director.
Well of course he wouldn’t. The nominee directors of secrecy jurisdiction companies never know what the companies they supposedly direct are doing. That’s fundamental to the blind eye that these places turn to the activities of the companies registered in their domains.
The same blind eye is equally graphically attested to be Tony Brown, Chief Minster of the Isle of Man. The BBC report:
Brown maintained that an investigation had revealed no wrongdoing and he denied that the island had aided any breach of the sanctions.
"We have to be realistic we can't do any more, we shouldn't be expected to do any more."
He added: "Why should we shut down legitimate businesses.... we shouldn't be expected to take action the rest of the world won't."
Which was not quite the view taken by the British and Israelis:
In a statement to the BBC, the Foreign and Commonwealth Office said in regards to sanctions: "The issue is a matter for the Isle of Man government."
Who as we note deny responsibility, whilst:
[Brown’s] attitude has been sharply criticised by Israeli official, Ran Gidor, a political adviser at its embassy in London.
"Even assuming the resident in the Isle of Man had no clear knowledge of the contents of the ship the very fact he chose to get involved with shipping traffic going in and out of Iran would expose him or risk.
"We think the word should spread IRISL and its straw companies and subsidiaries are untouchables. You may think you know what you are getting involved in but you don't really"
The reality is obvious: of course the Isle of Man should regulate this trade. But it doesn’t, by choice. That choice is inherent in its corrosive business people that ensures the regulation it complies with is that which applies in the Isle of Man alone.
This company is presumably non resident in the Isle of Man. In that case all it has to do to be compliant according to the Isle of Man is to pay its annual fees and to submit an annual return form but no accounts or tax returns to anyone. This they claim is compliant with international regulations.
The shabby hollowness of their argument is apparent.
Their willingness to turn a blind eye is apparent.
The cost to the world is apparent.
And still the abuse goes on.
So the question has to be asked — when will the UK shut these sordid places down?
* Secrecy jurisdictions are places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. To facilitate its use secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.
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Well we wouldn’t want to offend the Israeli’s would we, seeing as they are such a shining example of a perfect state that always follows International law…..
Richard
For once I am in total agreement with you.
The vast majority of trust and corporate service providers will not get involved at all with active trading companies. Indeed, their PI insurers will often insist that they don’t. The risks are unacceptable as its crystal clear that there is no such thing as a “nominee director”. Sadly there are some people who refuse to acknowledge this. Sark was and is a prime example. You are either a director of a company, with all responsibilities that entails, or you are not. It should be a pretty easy situation for anyone to understand.
Whilst those who are active in providing regulated activities have the offshore regulator looking closely at what they do, those who operate standalone companies, and who do not handle funds in a fiduciary capacity, are beyond the regulator’s reach. That can be incredibly frustrating for those of us who are regulated, and unavoidably get tarred by the same brush.
Let’s hope that if this report is accurate, the Isle of Man authorities send out a tough and meaningful message.
This is actually quite funny, that you and the BBC can get worked up about an equipment financing trust. This is a very common arrangement in cross border fianance, particularly to third world countries, and is most often used in ship and aircraft finance, particularly export credit backed arrangments.
The idea is to provide a loan secured on a ship or aircraft that is registered outside the jurisdiction of the end user, but operated on international routes. Because the asset is registered in the third country, in the event of a default the lender can perfect his mortgage by arresting the aircraft/vessel at a third country port with an order from a court that has relevant jurisdiction. If the vesssl/aircraft had been registered in Iran, most third countries would only accept a judgement from an Iranian court, which gives the lender an Iranian political risk that it is not willing to accept.
The registration usually takes place in a tax haven because although the arrangement leaves little or no taxable profitl, the asset is owned in the tax haven trust, fnded by a loan and leased out under a full payout lease. Putting the arrangement in a tax haven means that there is litle risk of any adverse tax costs because of mismatches in the timing of the recognition of income and expenses or the imposition of withholding taxes on interest under the loan into the trust.
The nominee directors do not need to know much because the leadse charter income is assigned to the lender and the trust is fully indemnified against all losses by the lessee/end-user, so there is nothing left for the trust’s directors to do apart from filing the relevant documents.
What the BBC and the New York Times have picked up is the remains of a 6 ship financing transaction entered into wth a German bank (possibly Europaisch-Iranishe Handelsbank AG but there are several banks in Germany and London with Iranian links).
For evidence of a similar deal on aircraf, the fleet of Mahan Air (http://www.airfleets.net/flottecie/Mahan%20Air-active-a310.htm) shows 2 aircraft registered on the Franch aviation register (F-OJHH & F-OJHI), that were financed by a syndicate of Euro-Iranian banks fronted by a South African bank in a French GIE.
Once again blown out of proportion.
The IOM like England, both place a fiduciary duty on the directors. The courts regulate this.
If the Captain is not fulfilling his fiuciary duties then let the shareholders sue him.
I’m frankly more worried about the KYC controls in place that allowed any “sanction busting” in the first place
@Rupert
Thanks
@Creg
“If the Captain is not fulfilling his fiuciary duties then let the shareholders sue him.”
This has to be one of the most stupid comments of all time
You know the shareholders are likely to have employed him not to do his duty
That’s what offshore does
And why this type of abuse has to be closed down
@Alex
You may be amused by offshore regulatory abuse
The rest of us see it for what it is
You tellingly reveal your complete amorality
Alex/Creg
Are you inferring that its ok to ignore official sanctions against trading with Iran?
@Rupert
There’s a worrying outbreak of similar thinking between us this morning Rupert!
@Rupert
Not at all, but I think you will find that the idea that the scope of the existing sanctions was grossly exaggerated by the media reports, which were intended to give the impression that there is a worldwide general ban on trading with Iran, which is far from the truth.
Apart from the US which has a general ban on trading with Iran, and a general worldwide ban on sales of sensitive (i.e. military) technology, there are no sanctions against Iran. Russia supplies them with their electricity generation and distribution network, China supplied them with the Tehran subway, France built the new Tehran airport (using virtually the same plans as for Charles de Gaulle 2), Argentina sells them soya and Australia sells them wheat, none of which are clandestine trades.
Shell, BP, Total and ENI all have substantial interests in Iranian oil fields and even the US multinational Halliburton operates in Iran through its subsidiaries.
At the time of this ship financing was set up the UK government was actively encouraging trade with Iran who were actively helping UK/US forces in the Iraq war by letting them use Iranian airspace.
And the lawyer acting for the Iranians in the aircraft deal I mentioned was the husband of a UK minister.
No Richard, I am amused by your financial ignorance, and that you see a perfectly regular financial arrangement as an abuse, even though you clearly don’t understand what is going on in the transaction, why it is being done that way or what the relevant issues are. I can assure you that none of the issues are abusive, but are merely intended to ensure that the lender doesn’t have to resort to the Iranian courts to get his ships back.
Putting the assets in a “clean” jurisdiction simply assures the borrower that there is little risk of an increased cost from a gross up of withholding taxes or similar costs on a change of law.
Perfectly normal practice and well understood and approved by ECGD, Coface, Hermes and US EXIM and all the international banks that fund ships and aircraft.
More on Captain Malpass:
http://www.ramsey.gov.im/default.aspx?ArticleID=308
@Alex
The husband, or ex husband?
And the convicted, or not convicted?
Names please
@Alex
I understand all right
I understand that the whole process is abusive
I understand that it is solely designed to get round regulation
What have I missed?
I’ve even diligently noted your enthusiasm for doing so
And “clean” is an interesting term ion this context, don’t you think?
Richard
Don’t get carried away – we’ll never agree on some things!
Alex
I accept that there may be a timing aspect of when that transaction was entered into, which might mean that no sanctions were in place at that particular time, but would the regulator in the Isle of Man really condone any regulated businesses dealing with Iranian trade currently?
As far as I am aware the currently seperated (and still not divorced) husband of Tessa Jowell although at the time of the aircraft deal in 2003 they were living together, and if the Observer is to be believed, frequently taken by Jowell to Labour party social events where he was able to promote his Iranian clients business interests quite freely, even to the extent of asking DTI ministers for assistance with purchases of BAe aircraft.
The only “regulation” that is being avoided is the jurisdiction of a third world court in bankruptcy proceedings. Since the potentially bankrupt shipping company or airline is usually owned or guaranteed by by the third world government, offshore registration is nothing more than a sensible commercial precaution.
Since these arrangements are quite acceptable to all the world’s export credit agencies and international development banks, I see no reason to differ.
@Alex
Calling in the support of a convicted fraudster – only squashed on a technicality – just reveals the depravity of your argument
http://en.wikipedia.org/wiki/David_Mills_(lawyer)
So not a convicted fraudester then, but the spouse of a Cabinet Minister, who we must presume knew what he was doing when he was popping over to Tehran for a meeting with his clients?
Nor do you have any argument against the many well- reputed companies, such as Shell and BP who invest in Iran, nor to the fact that British Airways flies to tehran regularly, that Airbus and BAe sell spare parts for and support aircraft (within the limits of US sanctions) to Iran.
Nor do you have any real response to the original point that using special purpose vehicles for aircraft and ship finance is a standard procedure, as exidence by the attached minutes of a US EXIM bank approval for loan financings for AIr India and others. See all those references to SPV? I think you will find they are “special purpose vehicles” serving exactly the same role as in the BBC programme.
http://www.exim.gov/article.cfm/B955AAB7-B496-3E5F-04305C383D695CF6/
@Alex
A fraudster – undoubtedly – let off by his co defendant
And for the record – I do utterly object to such SPVs which are classic regulatory abuse
And for your pains of promoting such abuse I suggest you leave off posting for a while
Those who promote abuse as you do won’t get airspace
Without being flippant you would have to ask him because things are clearly different form 2002/3 when most of the west, excluding America and Israel, were very open to rapprochement with Iran. US sanctions are aimed at delas with all Iranian entities, whereas UN sanctions are generally aimed at government agencies.
But even the scope of these sanctions are limited in their effect. There are thousands of Iranian ex-pat businessmen involved in the import and export of goods on behalf of the Iranian government, often through Dubai, so how would sanctions operate to stop a ship transporting wheat from an Australia to an independent trader in Dubai, even if they knew that the trader was going to ship the wheat over the straits of Hormuz and sell the wheat to the Iranian government?
The reality is that in practice your question is not likely to arise at present because the Isle of Man is only likely to have that question posed if there are further financiers willing to do business with Iran in a way that requires offshore asset registration, which is not likely to happen at the moment.
http://www.ft.com/cms/s/0/fba3bc1a-b9cb-11df-8804-00144feabdc0.html
This comment has been deleted. It failed the moderation policy noted here. http://www.taxresearch.org.uk/Blog/comments/. The editor’s decision on this matter is final.
Repitition is time wasting and does not change an argument
Alex
The fact is thst Dubai is about 35 miles from Iran across the Straits of Hormuz. Dubai has around 400,000 residents of Iranian descent and has a trade account of around US$15 billion per annum with Iran. Not easy to stop that overnight, and the simple (but sad) fact is that the US isn’t going to come down hard on the UAE because its such a major oil supplier (not Dubai per se, but the USA through Abu Dhabi).
But that does not mean that the Crown Dependencies should be conducting such business now, even if it was perhaps(more) acceptable in 2002/3.
Any such business should be identified and eradicated by any offshore jurisdiction which wants to be seen to be respectable in 2010. Surely there are other non-British, non-EU connected jurisdictions through which such business could be run without compromising the commercially-valid legal protection to which you refer, such as the Bahamas, Mauritius or Hong Kong?
@Richard Murphy
I can’t comment on the specifics, and wouldn’t touch anything Iranian with a barge pole. But as a general matter this kind of thing can be entirely kosher. Assert-backed lending to Middle Eastern countries – whether by bank loans or bond issuances – often takes place through special purpose vehicles in third party jurisdictions. The Netherlands is occasionally used but the Caymans or the Channel Islands are also common. The sole purpose is that nobody trusts the court process in Dubai, Saudi etc.
There is no tax saving, as the Middle Eastern States generally don’t tax this kind of thing anyway. No regulatory advantage, as the bank’s regulatory position will the same as if it had lent directly. Nor is there any secrecy advantage – loans are private arrangements in any event, and bond issues are public by their nature.
I don’t see why this should apply specifically to Crown Dependencies. If it is OK for a UK airline like BMI to fly daily to Tehran, for UK companies like BP and Shell to do business in Iran (all compliant with US and UN sanctions), I see no reason why any Crown Dependency should apply a stricter regime to themselves, provided they do not contravene applicble international sanctions.
As to the use of equipment ownership trusts for financing per se, that is wholly respectable.
@Marc Daniels
I disagree
You commit the age old fallacy of getting an ought from an is
Just because this is done does no mean it ought to be done
And secrecy is an issue – or it would not be done offshore
The reality is that this does abuse a country’s law and secrecy is used
And that’s unacceptable in the modern world
And does lead to abuse and a misallocation of resources
Tony Brown, Chief Minster of the Isle of Man, has more than one blind eye and this is yet another example of the Isle of Man failing to regulate trade by choice… a choice that ensures that regulation complies only with that which suits the avarice of the Isle of Man regardless of international law and the suffering of vulnerable people…
Yes Richard … the shabby hollowness of their argument is apparent, their willingness to turn a blind eye is apparent and the cost to the world is apparent. Yet still the secrecy jurisdiction abuse goes on.
@Richard Murphy
Richard, I just explained why it is done, and that there is no tax, secrecy or regulatory advantage.
@Marc Daniels
And I reiterate:
a) it should not be done
b) there is at least a regulatory and secrecy advantage or it would not be done in the way it is.
You say there is a regulatory advantage
And of course there is a secrecy advantage – this would be done in the UK if not
So on these counts you are, I’m afraid to say, wrong
But I accept there may be a no tax advantage. So what? That’s by no means the whole of secrecy jurisdiction abuse
There is no regulatory or secrecy advantage – the position as precisely as private (in the case of a loan) or as public (in the case of a bond issue) as it would be had the loan/financing been made directly to the underlying borrower.
These financings have little or nothing to do with the UK, so there is little reason to use a UK SPV. You might as well ask: why not France? The Ukraine?
When picking an SPV jurisdiction people look for legal certainty, fairness of court systems, expertise and efficiency of local service providers and other factors. Tax complexity often militates against the UK (although the actual corporation tax liability of a UK SPV will typically be lower than most other jurisdictions).
@Marc Daniels
I find this quite bizarre
Assuming disclosure is not needed because if an SPV was not used is ludicrous
A limited liability SPV is being used
And limited liability carries with it the obligation to be accountable
Extend your argument and accountability to shareholders in a plc and no accounts will be due to them – why not just assume the plc does not exist as it meely acts as their agent – and they therefore know what it is doing?
Sorry – but if you use the veil of incorporation then you should be accountable for doing so
Otherwise we’ll be living in the land of make believe you and many lawyers like to occupy – at cost to the rest of us
Richard
You say “And limited liability carries with it the obligation to be accountable.” To the best of my knowledge that “obligation” is owed solely to the shareholders of the company and not to any other party, unless new legislation has been introduced while my head was turned?
I think we are speaking at cross-purposes. I said you were mistaken to think an SPV in a typical asset-backed structure is used to provide a regulatory or secrecy advantage. The extent to which the SPV has to disclose accounts etc will vary from jurisdiction to jurisdiction but is not generally a driver for these structures.
Actually I think the real ball dropped is the continued KYC that should have picked this up or at least sent alarm bells when an annual review was done on a client.
Recently I personally had a deal that matured after 20 years land in my inbox dealing with the North Korean government. It turned out everything was legal and above board, but the alarms should start to ring
It should also be pointed out there is plenty of legitamate business going on in Iran that are not covered by the sanctions so doing business with a company in Iran is not illegal or even frowned upon.
@Rupert
I am saying what I think -ought to be – not what is
I am not deriving an ought from an is but am doing so from first principles – the basis for all real change
@Creg
Lets summarise this
Marc may be right – I think there has been some discussion at cross purpose
And of course I ma making points in furtherance of my campaigning issues
And what I want is not what the law always requires
And I do think what the law allows is frequently unacceptable – especially in places like the Isle of Man
And I do think it my right to say so
And as is apparent – what’s being done here is legal – I don’t think I said otherwise
The actions of the director are legal – it’s been argued so here – and the IoM I suspect thinks such SPVs are fine
And it’s been argued a director of such an SPV need have no knowledge of what a ship is doing – it just exercises a legal charge
All so good – legally
And all so utterly unacceptable ethically
This a is a legal construct undertaken to secure regulatory and secrecy advantage which it is suggested has not further implication
The BBC and I disagree – absolutely disagree – on ethical grounds – on the grounds of transparency, accountability and proper regulation of trade
So the company can do what it wants no w – legally
And I can say what it is doing should be illegal – just as appropriately and legally
This is a right to proper debate