Banking » Tax Research UK

Why the UK has most to fear from a collapse of the banking system

Jan 062012

This graph has been used before, but it remains highly relevant.

Anyone watching Newsnight last night would have seen Paul Mason saying the Euro crisis can now be only weeks away from exploding. I think he’s right.

And the Euro crisis is fundamentally a banking crisis. It is not a government debt crisis, although of course there is such an issue. And in the short term it is not an issue of imbalances in trade, although of course that is fundamental to it. In the short term this is a banking crisis because it was banks that over-lent, mostly completely recklessly. And that makes this a UK crisis. Why? Well this graph explains all:

We have financial debt within the City of London of more than 600% of GDP in the UK, dwarfing the issue for everyone else.

That’s why banks are going nowhere – because no one wants this debt.

And that’s why when or more likely if the Euro busts then London has the biggest crisis of all.

I said 2012 wasn’t going to be pretty.

Hat tip: Howard Reed

Swiss bankers may not be honest?

Banking, Corruption, Switzerland, Tax evasion 3 Responses »

Jan 052012

The Guardian reports this morning that:

Switzerland’s central bank was embroiled in an insider trading scandal after bank chief Philipp Hildebrand was accused of speculating on currency transactions only weeks before he instituted dramatic policy changes that shifted prices in his favour.

The accusations, which have rocked the Swiss banking industry, were made by Swiss weekly newspaper Die Weltwoche.

First it has to be said these are allegations, and from a source with an axe to grind. But what really amused me is not the substance of the issue, but the fact that a Swiss banker may be dishonest has “rocked the Swiss banking industry”. The whole Swiss banking sector is built on the basis of dishonesty. Indeed, much of the Swiss economy is built on dishonesty. As I noted in 2009:

Tax havens handle stolen property. This is not by accident, this is by design. The tale of the creation of Swiss banking secrecy says it all. As noted in a letter in the Financial Times today, Swiss secrecy laws date back to 1934. They were not created to protect German Jews and trade unionists from the Nazis as the Swiss like to claim.This is a big myth.

The reason bank secrecy was strengthened in 1934 was a scandal two years earlier, when the Basler Handelsbank was caught in flagrante by the French tax authorities facilitating tax evasion by members of French high society, among them two bishops, several generals, and the owners of Le Figaro and Le Matin newspapers.

Rather than risk their clients being found to be breaking the law again the Swiss introduced banking secrecy and the notorious numbered bank account system to ensure that customers of Swiss banks could evade their tax at will.

Tax evaded funds are money claimed by fraudulent means. they are stolen property. tax havens have, following in the wake of Switzerland, set out to handle that stolen property.

In March 2009 a Swiss banker quoted in the Financial Times said he believed that half of all funds deposited in that country would leave if bank secrecy was abolished – implying they must be tainted by tax evasion – and that the bankers know it.

This is what Swiss banking is all about. So why be surprised that a Swiss banker might be dishonest?

There’s more on Swiss banking secrecy and its creation here.

Barclays, tax and the cost of fiddling

Banking, Barclays, Tax avoidance 20 Responses »

Jan 042012

Barclays has been a long term target of those of us concerned with tax justice, as you will find by searching them on this blog. Our aim has always been to create reputational risk for the company because of its use of tax avoidance activity that is of harm to society and, I would argue, to is shareholders as well. So it was good to see this in the Telegraph today:

Bruce Packard, an analyst at Seymour Pierce, said Barclays risks “a fierce customer backlash” if it does not reduce its exposure to offshore tax havens or limit legitimate tax avoidance, and focus instead on service.

In an attempt to restore trust in the industry, Britain’s banks “have changed their marketing to appear friendlier”, Mr Packard said. But he warned that in Barclays’ case the marketing may be “inconsistent with the reality” and that although the bank “has stuck to the letter of the law … we can’t help thinking the brand is being tarnished”.

It looks like we’re succeeding.

In bankers don’t we trust

Banking 8 Responses »

Jan 032012

As the FT notes this morning:

Large financial groups were ordered to shell out more than £160m in compensation to customers in 2011 as the UK Financial Services Authority cracked down on mistreatment of retail investors by some of the UK’s best-known firms.

The compensation payments dwarfed the £55.7m in corporate fines imposed last year by the City watchdog on firms including HSBC, Barclays and Royal Bank of Scotland

Of course £205 million is peanuts in relation to the assets of these organisations. The point is more significant:they can’t be trusted to undertake even the most basic of tasks properly. And yet we still bow to their demands.

Why?

The City of London – waging economic warfare on Europe and the 99%

Banking, Tax avoidance 17 Responses »

Dec 182011

My friend and now Task Force on Financial Integrity and Economic Development colleague Nick Mathiason also works for the Bureau of Investigative Journalism where he has exposed a new type of tax avoidance activity centred on the City of London today. As he wrote today in a story that also featured in the Observer:

Some of the city of London’s biggest banks are behind a huge tax avoidance trade ‘cheating’ European countries of hundreds of millions of euros a year in a development that sheds fresh light on David Cameron’s decision to wield Britain’s EU veto to protect the Square Mile.

A two-month study by the Bureau has uncovered a discreet $102bn market in European shares whose ‘central’ purpose is tax avoidance. The Bureau’s analysis suggests the European tax loss – mainly to France, Germany and Italy – is up to €595m a year. The scale of tax avoidance will fuel further anger within the EU towards the Square Mile, where the vast majority of the trade known as dividend arbitrage is conducted.

The number, like all such numbers, is an estimate. The point is it’s happening. And London’s arranging it. And UK banks are doing it. And David Cameron’s defending it. As Nick notes:

Dividend arbitrage is complex. But at its heart, a bank or hedge fund lends equities in often high yielding French, German or Italian companies to another institution. The receiving institution then passes the equities through a network of low or no tax jurisdictions before returning the equities to the original owner using a subsidiary in another tax haven. In this way, banks can avoid the 15% average withholding tax levied on dividends in European countries.

For hedge funds based in the Cayman Islands or Bermuda, the trade is particularly useful in slashing tax bills.

There had, of course, to be a tax haven dimension. There always is in London. And a Swiss dimension too. As Nick again notes:

Credit Suisse, the giant Swiss financial services institution, is among a host of international banks and hedge funds involved. The Bureau has seen a Credit Suisse document that details how to implement dividend arbitrage strategies and has received confirmation from a senior derivative executive that the bank was an active participant. When asked whether Credit Suisse engaged in aggressive tax avoidance, the bank declined to comment. Among other banks said by City sources to be major dividend arbitrage players are Barclays Capital, Bank of America and Morgan Stanley. All declined to comment.

There are more details in the article. The key point though is a simple one. The culture of abuse in london has not been broken: indeed, it is flourishing and whilst it is Europe is right to believe London is profiting at its expense as London positively seeks to undermine its claims to tax arising in EU states – who lose most heavily from this arbitrage.

And this has to endif a new economic order that is stable and sustainable is to be built.

It’s as simple as that.

Banker contempt

Banking 6 Responses »

Dec 152011

FT Alphaville has reported this morning that:

A senior UBS private banker allegedly sanctioned the creation of an illegal offshore investment vehicle for one of India’s most powerful businessmen, saying that Anil Ambani’s status as a “mega-client” could justify waiving the rules, a London tribunal has been told.

The FT says the claim, contained in email evidence submitted to the hearing this week, has been made in a case brought against two of UBS’s former wealth management executives by the UK’s financial regulator.

The evidence shows that Kurt Kumschick, the Swiss bank’s recently deceased former marketing head for wealth management in the India-Pacific region, told two junior colleagues that whether the bank should create the Mauritius-based investment vehicle for Mr Ambani would be a “business decision” if the bank could not confirm its legality under Indian law. Mr Kumschick died this week, according to UBS officials. His estate has no representation at the tribunal.

Now, I stress, it’s just an allegation.

But we’ve seen this attitude to the law too often from financial services companies. And the penalties need to be very high indeed.

Diamond on banking: not just missing the point, but being wholly misleading

Banking, Barclays 56 Responses »

Nov 032011

Bob Diamond has posted an extraordinary article on the Guardian’s Comment is Free today – apparently drawn from a lecture he’s doing for the BBC (and why? is the very reasonable response to that news).

I have posted a comment in response to his absurdly misleading comments on bank responsibility, saying:

Bob Diamond presents a quite extraordinarily misleading and patronising view of the role of banks and what their consequent responsibilities are in this article. Many points could be drawn out: two suffice.

First of all if Diamond were to be believed he is nothing much more than a glorified Captain Mainwaring, taking in local people’s deposits, counting them carefully, storing them in the vault behind his desk and lending them on with great care to others well known to the bank manager. This is utterly untrue. This is not in any way remotely related to the model of banking we have in this country.

Of course banks handle deposits, but as anyone who has reviewed rates available to depositors for the last few years will know just how contemptuous banks have been of those who wish to use their services for this purpose. There is good reason for that: banks do not (and never have) needed depositors for enable them to make loans. The simple fact is that the money banks lend is created by them out of thin air. It’s offensively easy for them to do so. All that happens when someone asks for a loan is to credit a current account with the amount of the loan and debit a loan account with the same sum. That’s it: that is how 97% of all money in the UK is created, but as is clear, deposits play no part in that process. Instead banks literally create the cash they lend and can get away with this trick so long as people think they’re good for their promise to pay – which they will be so long as, as is now the case, the government clearly considers them too big to fail and explicitly and implicitly guarantees all they do. The insult to the injury is that having made this cash out of thin air they then charge heavily for it – vastly more than they pay for deposits. No wonder an organisation that can costlessly create what it sells is so profitable.

Bob Diamond acknowledges none of this, and the fact that much of the profit he and his colleagues supposedly generate is effectively licenced to them by the fact that the government has failed to claim for itself the right to he profit made on the creation of money; money which only the state can legitimise, but which banks have claimed for their own benefit and which they have used to speculate at considerable social cost to society at large, as Adair Turner and others have noted.

Secondly Bob Diamond fails to make any mention of tax, or the tax havens that banks use to mitigate their liability to pay tax. The payment of tax is the single biggest indicator of social responsibility in my opinion. Diamond does not even mention it, but his bank has been shown to be a persistent avoider of tax liabilities by me and other tax analysts. It’s hard to be sure how much Barclays avoids in tax so opaque is its accounting but it’s also safe to say it is likely to run to hundreds of millions of pounds, probably a year, and over the period he reviews in his article much more than that.

Associated with this is the clear commitment of his bank to the active promotion of tax havens for its own sue and for the use of its customers. Tax havens, or secrecy jurisdictions as I prefer to call them, can be defined as 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 the use of that regulation 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. As such these places are fundamentally anti-democratic since they seek to undermine the mandate of democratically elected governments to elect the tax that is due to them.

Worse still, they create a criminogenic environment of secrecy where a lack of accountability (at best) and the deliberate turning of a blind eye (at worst) facilitates aggressive tax avoidance (at best) or outright tax evasion and illicit behaviour (at worst). Banks may protest that they do not want such business, but they persistently demand secrecy, resist all measures to ensure the information they hold is made available to those investigating tax abuse and other crime and by their actions they make clear where they stand on this issue, and that is on the side of the abusers.

Diamond ignores all this. As a result I regret to say his article, and presumably the lecture from which it is drawn, is just a PR exercise that deliberately otherwise seeks to draw a veil over the real operations, duties and responsibilities of banks and how they fail to deliver on them.

As a result it’s fair to say Diamond misses the mark on this issue by a mile. The case for reform of so many facets of banking remains compelling, and urgent and articles such as this only confirm that’s true.

The hole St Paul’s has dig itself into

Banking, Ethics, Uncategorized 13 Responses »

Oct 232011

I spoke at #occupylondon this morning outside St Paul’s Cathedral.

I, and my family, had a great time there. It was a relaxed morning. You could not have asked for a nicer autumn morning in London and I had a great audience for what I found to be an exciting exchange of ideas that over-ran its schedule until the BBC asked me to go and do a live broadcast.

Throughout I emphasised what those campaigning can demand. I believe in practical, pragmatic, deliverable politics. And I believe there is a very great deal that those with empathic concern for the people of this country can demand. I’ll come back to some of those issues soon, but I have to touch on an issue that vexed me throughout last week and now utterly perplexes me, and that is the way in which St Paul’s have managed this situation.

For all those saying St Paul’s was not the target of this protest I say you’re quite right: it wasn’t, and it isn’t. The London Stock Exchange was, and rightly so. And the fact that the free right to walk the pavements of London around the Stock Exchange has been suspended is sure sign of how effective that targeting has been. For those in doubt, the camp is 200 metres or so from the LSX: it just so happens that St Paul’s is even closer.

But, once camp was made where it is and not as planned 100 metres away in Paternoster Square St Paul’s came into the frame. I’ve said, and I’ll repeat it: St Paul’s had only one duty in this situation and that was to welcome the protest and to open its doors as a place of sanctuary to all those undertaking it. The Christian teaching is explicit: if the church is to fulfill its duty to the poor then that is what if must do.

But of course, after one rather ambiguous moment on the first day of the protest when Giles Fraser appeared to tell the police to back off the Cathedral has made a PR disaster out of the situation it has created for itself.

Today was perfect example of this. The Cathedral is supposedly closed because of the health and safety concerns they have that supposedly have left them with no choice but close the cathedral on legal grounds.

Well, let’s be clear, the entrances and exits to the Cathedral were wide and clear this morning. Thousands could have gone in, and out, without problem.

And let’s also be clear, every business with premises around the Cathedral likely to have been open on a Sunday morning was open. Not one seemed to be concerned at the health and safety risk. None were turning people away. Finding a loo was easy – if you bought a coffee. And there were plenty of places selling it.

You have to ask the simple question – how come the Cathedral had been advised to close when M&S, Starbucks, Pizza Express and many others were open? What was the difference? All these are trading in close proximity without any apparent concern.

The one thing that can safely be concluded is that Giles Fraser, Canon of the Cathedral, was right yesterday when he said yesterday:

Those who are claiming the decision to close the cathedral has been made for commercial reasons are talking complete nonsense.

Of course that’s nonsense. No one has said they’ve closed for commercial reasons. And candidly they are simply not telling the truth when they say they have shut for health and safety reasons – a claim that lacks any hint of credibility, at all. They’re shut for one reason and one reason only, and that is politics. No other explanation is possible.

The press suggestion tonight that:

Officials from St Paul’s Cathedral and the wider City district are considering legal action to force protesters to remove a camp set up outside the church more than a week ago, following an impasse between the two sides.

There is no impasse: people are exercising their right to protest. That’s fundamental to democracy. When you deny the right to protest, to assemble, to deliver your message then you challenge democracy itself.

Here is nothing at this moment more profoundly political that the Cathedral could do. If they take this action they make clear on whose side they are. Giles Fraser will be shown to be a hypocrite when he said yesterday:

I remain firmly supportive of the right of people peacefully to protest. But given the strong advice that we have received that the camp is making the cathedral and its occupants unsafe then this right has to be balanced against other rights and responsibilities too. The Christian gospel is profoundly committed to the needs of the poor and the dispossessed. Financial justice is a gospel imperative.

And then he sides with the greatest oppressor of the people of this country (the City of London) to suppress that right to protest peacefully in a way that cannot in any way possible be threatening to his Cathedral, and which in no possible way justifies the suspension of Christian worship in his church? It is simply impossible for his comment to have any credibility in that context.

So, the only possible interpretation of the action of the Cathedral is that it is political. This, incidentally, is unsurprising. The Cathedral’s Dean is Graeme Knowles. He was formerly Bishop of Sodor and Man – and yes that does mean the Isle of Man where I can find no record of his opposing its tax haven activity and where he did sit in the Tynwald and is not recorded as opposing the tax abuse that legislature facilitates. No wonder he was an ideal candidate for the post of Dean of St Paul’s – and no wonder he appears to feel so comfortable with the mechanisms of financial exclusion and abuse promoted by so many of his near neighbours, many of whom appear on his list of sponsors.

So yes, let’s be clear: I am suggesting that the only plausible explanation for St Paul’s acting as it is must be that it is acting in association with the City of London to close down this demonstration. Nothing could be more profoundly political. It’s moving onto very dangerous ground. Not least because it is not at all clear that for all the risk that action to suppress democratic freedom by the church will entail that they will actually win.

So let’s look at the hole the church is digging. It’s on the one hand shut on wholly spurious grounds and how it can now reopen is hard to say. When you spin a yarn as big as that one how on earth do you justify reopening, even though all those around you never apparently saw the threat in the first place? It’s almost impossible for the Dean to reopen the cathedral now without looking very stupid so long as the camp stays.

And to get themselves out of this mess of their own making they have to go to court to evict people from land they do not own; whose ownership is unknown, and where there is no sign at all of any breach of the peace occurring.

And there are those who say #occupylondon has no apparent aims? Well it has so far made very clear that St Paul’s and the City are very definitely on the back foot, panicking and out of control in their desire to oppress the ordinary people of this country and their democratic rights.

You’re in trouble Dean.

Stop digging.

How to find €1trillion and $1 trillion, at the same time? Easy – just recruit the tax inspectors

Banking, Economics, Secrecy jurisdictions, Task Force on Financial Integrity and Economic Developm, Tax evasion, Tax Havens 3 Responses »

Oct 182011

Doug Saunders of the Globe and Mail in the USA had an article in his paper at the weekend saying:

How do you scrape together an extra trillion? That, in the end, is what the world needs to know. And the answer is right in front of us.

A trillion euros, more or less, is what needs to be put up by [Europe]’s governments, and soon, to stabilize the economies and get banks lending and companies hiring again. And, across the Atlantic, a trillion dollars is what many observers feel ought to be put into the U.S. economy, quick, to get growth and employment back on track. (Instead, hampered by Congress, Barack Obama’s jobs bill offers a pale fraction of that.) Without spending a trillion, both these huge economies could lose a lot more, fast.

The analysis is a bit simplistic, but not far out. We do have to nationalise banks in Europe. And the US badly needs a real stimulus. But as he notes:

But a thousand billion in anyone’s currency is not to be found by looking under sofa cushions. Nobody has it lying around; quite the contrary, everyone holds a lot of debt, and the sums needed to kick the world’s economies into gear could raise that debt to crisis levels.

But, as it happens, there’s a trillion to be found. It could easily be obtained without raising taxes: We just need to start applying our current taxes to all the money people actually earn. In fact, the debt crisis would end overnight if we did that in a concerted way.

That’s the answer. There’s no ifs or buts. We have to raise tax. But not any tax. Very specific taxes. As Saunders notes:

The monitoring group Global Financial Integrity estimates that people and companies are stashing away $9.4-trillion in secret offshore banks in places such as Luxembourg, Singapore and the Virgin Islands to avoid paying taxes on it. That’s $2-trillion more than all the money held in all the banks in the United States. Taxed at 11 per cent (a fraction of what’s actually owed on it), this would yield an instant trillion.

Now of course that’s a tax on the capital, not the income. But that capital is there because much of it is illicit and has never been taxed, so taxing the capital is wholly appropriate. Taxed at proper rates due at the time this cash was hidden from view, with interest and penalties applied most of this offshore money belongs to the governments of the world. So as Saunders argued:

At a time when ordinary people are being asked to bear heavier burdens and lose vital government services in order to pay for rescuing the economy, it’s unconscionable that large sums go untaxed. It’s particularly galling that most of this money is held by extremely wealthy people who are taxed, legally, at lower rates than those who struggle to feed their families. As Congress revealed this week, there are 94,000 people with earnings over $1-million a year who pay lower tax rates than their secretaries.

The Swiss Bankers’ Association has admitted half the money it holds may be illicit. Much of that is moving to Singapore right now.

We have a choice: we can save the world from its financial crisis. We can do so without punishing ordinary people. We can raise the money we need. We just have to tackle tax havens head on. We have to employ the tax inspectors to do this. We have to out in place the measures to do this. We have to tackle the political issues to do this.

If we don’t we make a choice to make the rich rich and the poor poorer. And if we don’t we acquiesce in the plan of a wealthy elite that this should be the outcome of the recession the banks created to achieve this goal.