Tax Research UK

There’s a new report out on the secrecyjurisdictions.com web site. It’s entitled Key Data Report 4: Number of banks, accountants and lawyers. The report does exactly what its title says: it looks at the number of banks, lawyers and accountants in each of the secrecy jurisdictions surveyed. As the report notes:

Having a large number of banks, lawyers and accountants in a jurisdiction is likely to generate two effects. Firstly, bankers, lawyers and accountants offer and support financial services and, by interaction and collusion, have the knowledge and means to handle and hide illicit financial flows if they so wish. Secondly, banks, lawyers and accountants active in financial services will have considerable power in any secrecy jurisdiction that is heavily dependent upon financial services (for discussion and explanation of this second effect, refer to Key Data Reports 2 and 3)

There is another issue: if bankers, lawyers and accountants are present in high numbers a culture of constructive non-compliance can be created. In effect this means that the appearance of compliance is present but the rate of reporting of potential money laundering offences is low in proportion to the likely risk that they occur.

The report gives numerous examples.

Accountants can contribute to hiding financial flows by devising complex multi-jurisdiction business structures and aggressive tax avoidance schemes, and giving questionable annual accounts a seal of approval by auditing them with little scrutiny. As example in 2005 the Big 4-firm KPMG “…agreed to pay $456 million to avoid criminal prosecution by the U.S. government over abusive tax shelters…” whilst Professor Prem Sikka noted the following sequence of events in the Guardian newspaper:

On February 27 2008, Carlyle Capital Corporation published its annual accounts for the year to December 31 2007. These accounts were audited by the Guernsey office of PricewaterhouseCoopers, the world’s biggest accounting firm, which boasts revenues of $25bn.

Amid one of the biggest credit crises, the accounts claimed on page five that the directors were “satisfied that the Group has adequate resources to continue to operate as a going concern for the foreseeable future”.

The auditors were satisfied, too, and on 27 February 2008 gave the company a clean bill of health (page 6).

Less than two weeks later, on March 9 2008, Carlyle announced that it was discussing its precarious financial position with its lenders. And on March 12, the company announced that it “has not been able to reach a mutually beneficial agreement to stabilize its financing”.

The company says that it paid $2.5m in fees “principally … to our independent auditors, our external legal counsel, and our internal audit service provider”.

Yet In less than two weeks, the mirage of assurance offered by auditors vanished.

So much for offshore assurance.

However, as the report notes:

While data on the number of credit institutions and banks in a secrecy jurisdiction is often readily available, that on the number of lawyers and accountants is often more difficult to secure even though lawyers and accountants, like banks, are subject to scrutiny within international anti-money laundering frameworks.

In the end we concluded the only reliable data was on banks – itself a damning indictment of the regulation of lawyers and accountants who play such a major role in secrecy jurisdictions.

The data on banks is, however, significant in its own right. Data was available for 57 of the 60 jurisdictions surveyed. although the US had to be excluded from the results presentation as it had far more banks than all other jurisdictions combined. The number of banks in other locations was as follows:

The absurd fact that Cayman has more banks than London is already apparent. Ranking the number of banks by head of population shows how over-banked secrecy jurisdictions are:

To put this in context this is similar data for a number of quite successful economies;

There appears to be capacity to survive on a low density per 100,000 of population exist in classic secrecy jurisdictions.

As we (for I am an author of this paper, with Markus Meinzer) conclude:

There is a clear and undoubted conclusion that can be drawn which is that as Graph 3 shows the smaller secrecy jurisdictions have far more banks than are necessary to meet their domestic banking needs and as such these institutions can only be in existence to manage international financial flows, some of which will undoubtedly, as alternative evidence shows, be illicit. It follows therefore that the population of lawyers and accountants in these places have the same purpose, with the same risk attached.

The conclusion that can be drawn is this: illicit financial flows through secrecy jurisdictions could not happen but for the presence of a disproportionate population of bankers, lawyers and accountants in these locations.

Richard Murphy Accounting, Banking, Cayman, Lawyers, Secrecy jurisdictions, Tax Havens

There’s a new report out on the secrecyjurisdictions.com web site. It’s entitled Key Data Report 3: The Share of the Workforce Engaged in Financial Services. The report does exactly what its ttitle says: it looks at the proportion of the workforce working in financial services in each of the secrecy jurisdictions surveyed. As the report notes:

A high proportion of people working in financial services in the overall economic activity of a country is likely to indicate the existence of considerable political influence by the financial services industry on the government of the jurisdiction. It is almost universally true that the more reliant a territory is upon a particular economic activity the more deferential it is likely to be to the demands of that sector. Such influence can undermine democratic decision making processes, can facilitate corruption, in the case of financial services can create a strong orientation towards the needs of those outsides the territory who would not normally be the prime concern of its government, and can be (but we stress, is not always) conducive to a criminogenic environment.

This is especially so as the issue of employment is always emotive and totemic in politics. A financial services provider in many secrecy jurisdictions will only have to claim that new regulation to limit its activity is “business-damaging” and will therefore threaten employment and if that sector is one of the largest in the economy then politicians will take great heed and the more likely it is that appropriate regulation will be rejected.

Alternatively, and as is well known, abusive regulation may be introduced at the behest of the financial services sector if it has influence of this sort. It is well known that Ernst & Young and PricewaterhouseCoopers paid for the creation of limited liability partnership law in Jersey to suit their own purposes and to bring deliberate pressure to bear on the UK. It is also recorded that the Society of Trust and Estate Practitioners has been active in promoting what many consider abusive forms of trust, including the VISTA trust in the British Virgin Islands. When Jersey introduced broadly similar trusts in 2006 the law was passed without discussion by its parliament at the behest of local professional firms.

The problem is at the end of the day, as we note:

[I]f a high proportion of the labour within a jurisdiction works for the financial services industry there is likely to be considerable and increased tension between the conflicting goals and interests that the state must address. In extremis the end result may be an overt dependency of the government on the financial services industry. Political scientists call such a situation “state capture”, when narrow and particular interests impose their will onto the state and society at large.

There is no doubt that this is happening.

So where is the problem most serious?:

This really is a case of ‘the usual suspects’. And a fairly comprehensive list of those likely to be subject to ’state capture’.

There are, of course, places with more employees:

Powerful as the influence of financial services is though inn a place like the UK it will not be as serious as is the impact in places like the Crown Dependencies.

Note that the UK cannot even make the top 20 by proportion of work force.

Which does, however, make it important to note that data was not available for all secrecy jurisdictions for which we sought data. Full details are in the report.

Richard Murphy Accounting, Banking, Cayman, Guernsey, Isle of Man, Jersey, Secrecy jurisdictions

A sure sign of the Tories attitude to Cayman and other tax havens is revealed in news from Cayman yesterday:

A Conservative government would immediately rebuild the UK’s relationship with the Cayman Islands and Britain’s other overseas territories. This was the welcome news conveyed to Cayman Islands Premier McKeeva Bush at a meeting in London on Tuesday organised by Cayman Finance.

A delegation of influential Conservative MPs led by former Chief Whip David Maclean met the Premier, Cayman Islands Monetary Authority (CIMA) chairman George McCarthy and Cayman Finance chairman Anthony Travers in the Shadow Cabinet room.

The Conservative MPs collectively assured Bush that he would see a transformation in attitude with a Conservative government, with one MP even stating that the current administration was merely jealous of the Cayman Islands tax regime, noting that tax competition was both desirable and healthy.

It was unanimously agreed that the current UK government does not appreciate or understand the value of the Cayman Islands or the other overseas territories and that a “more grown-up” attitude was required.

Maclean’s closing remarks echoed those of his colleagues, calling for the UK to get back to the previous relationship they had with the Cayman Islands - one of friendship and mutual respect and an appreciation of the vital role Cayman plays in the global financial markets.

Which is unsurprising. John Maples MP – responsible for Tory candidate selection did once upon a time give his name to a firm of lawyers – Maples & Calder – the occupiers of the notorious Ugland House in Cayman. Maples is predicted fro high office in a Tory government.

So that’s all right then. The money will, once again, be flowing as freely as the champagne around Cayman.

At cost to the rest of us.

And most especially the world’s poor.

Richard Murphy Cayman, Conservatives

Fascinating response from Cayman to the Financial Secrecy Index. They have said:

Although the Cayman Islands government said it has engaged in dozens of third party reviews regarding the country’s financial services industry, it has admitted that it chose not to participate in the Tax Justice Network (TJN) secrecy index review as the organisation has a stated bias against offshore financial service centres. The report, which slams the Cayman Islands for its secrecy, says that the jurisdiction achieved a positive result on only one of the 12 criteria that it used to measure secrecy and it has given the jurisdiction a score of only 8% when it comes to transparency.

Ted Bravakis said that the CIG has supported many reviews of its financial sector and continues to do so, especially in the context of the global financial situation and when conducted by objective experts and academics. However, the TJN has made no secret that it is fundamentally opposed to offshore financial centres and therefore, Bravakis explained, the CIG made a policy decision not to engage with this particular review as it was clear it would not be objective.

This, very politely is bunkum. Actually, Cayman just does not do surveys. It is part of the culture of opacity that we highlighted. How do I know? Because this has also been reported:

Officials in the financial industry gave a series of recommendations to increase the efficiency of the Economics and Statistics Office (ESO) at an economic statistics seminar for policy, planning and business analysis hosted by that office on Tuesday, 29 October in the Cayman Islands Investment Bureau’s Conference Room.

A panel of industry officials, including former chairman of the Cayman Islands Monetary Authority, Tim Ridley, and CIIB executive director, Dr Dax Basdeo, gave suggestions for improvements to ESO’s data collection and survey practices.

The seminar sought to highlight the preliminary results of Gross Domestic Product (GDP) estimation for years 2006 and 2007 taking into account the Cayman Islands System of National Accounts (SNA) and the Balance of Payments (BOP) of the Cayman Islands.

Representing the ESO, Miss Yvonne Newland presented on the System of National Accounts.

Highlighting some of the challenges facing the ESO, she pointed to the unavailability of detailed data and the low survey response rate in some industries, including manufacturing, construction, hotels and restaurants.

She said, “The greatest challenge is the anti-survey culture in the Cayman Islands and the weakness of the statistics law which does not support us.”

I think that neatly sums it up. Opacity comes first for Cayman, excuses come second, and analysis a long way after that. I can say that with confidence: all the comments they have made on the FSI show they have not read the methodology used.

Richard Murphy Cayman

Much as expected, the Foot report into the Crown Dependencies and the Overseas Territories is disappointing. Appoint the wrong man to do the job – and Michael Foot was always the wrong man to do this job – and he has even defected to the Tories whilst undertaking it in an extraordinary show of poor etiquette – and you will get the wrong answers. How could a man who makes his living from offshore have ever done this job?

But the report, none the less seeks to delivers some small punches. It is, for example,  adamant that these places must raise enough tax to bear their own risks. I agree, of course. It is only too obvious that they have delivered tax haven facilities on the basis of subsidy from the UK, direct or indirect. The UK subsidy of £230 million VAT to the Isle of Man each year was just the most obvious example – and at least that has been reduced now, albeit I think a subsidy of maybe £90 million a  year remains. The demand that each place raise more tax is reasonable and appropriate. The fact that sales taxes are promoted shows that Foot, true to his Tory colours, understands nothing about social justice. This makes the local population of these places, many of whom are really not very well off, pay the price of tax haven activity for the world’s rich.

And the fact that this is the centrepiece of the report also shows a poverty of thinking on Foot’s part. He may have noticed that some of the world’s largest banks have failed of late – despite claims to have been profitable. That was because they were massively under-capitalised to withstand the risks inherent within their business models. Raising some VAT or its equivalent in Guernsey and other such places is the equivalent of what a small rights issue did for RBS in 2008 – it utterly failed to correct the inherent flaw within its balance sheet. The reality is that these places promote risk which it is way beyond their capacity to manage or bail out. In which case this focus is completely wrong. The only way to manage financial risk in these places is to dramatically curtail the risk they deliberately, provocatively and inappropriately underwrite without capacity. And that would have required their financial services sectors to be radically curtailed. Foot is not saying they should do that. And therein lies the flaw in his report. It has missed the real issue: Foot thinks the risk is in the weakness in government revenues in these places, and there’s no doubt it’s true. But nothing they could raise could in any way help manage they risks they face. So whilst the proposals marginally reduce UK government risk they do nothing for the real issue.

The same is true of his focus on improved regulation. I think Foot realises the regulations with which he urges enhanced compliance were drawn up by bankers to let offshore happen beneath a veneer of respectability whilst permitting the flow of funds to continue – cutting out just the smallest and most egregious part of the business. He knows because he was part of the elite – in the UK at the Financial Services Authority and offshore in various appointments – that made sure the system was designed to deliver constructive non-compliance. He was also one of those most responsible for setting up the system of bank regulation that has so spectacularly failed. That is the veneer of respectability that allows the abuse to continue. And just as the rules he delivered at the FSA were useless – so are the offshore rules he is now promoting. They were never designed to really regulate financial abuse, were never intended to stop tax abuse, were never intended to stop the creation of asymmetric information that encourages market abuse, and were never intended to curtail this abuse in the social interest. So encouraging compliance with them now is absurd: the only thing he should have been doing is to demand automatic information exchange on the identity and income of all users of offshore tax havens, the introduction of country-by-country reporting and massive increases in the transparency of offshore structures so that the accounts, beneficial ownership and true nature of the identity of management of all offshore entities (including those in London, Delaware, and beyond) be available on public record, freely accessible and subject to massive penalty (yes, massive – including forfeiture and more) if inappropriately recorded. There are only at best very tentative steps in this direction.

Then we would have seen change. Instead we have a weak apology for a report that is going to do little, but allow it to be claimed the issue has been tackled – especially by George Osborne, who has every reason to promote the abuse no doubt beloved by many of his friends. I never had high hopes for this report. And even then I have been underwhelmed. A weak man, born to be an apologist, has delivered a weak report. It was what I expected but after a period of real progress this is, without doubt, a set back.

The moral: never again appoint insiders to undertake reviews. It does not work. Strong outsiders do work. Just look at the contrast with the Nimrod review to see what I mean.

Richard Murphy Cayman, Guernsey, Isle of Man, Jersey, Secrecy jurisdictions

Rumour reaches me the Foot Report will be out tomorrow.

It’s interesting to speculate on what this report can now add to the issues the Crown Dependencies and British Overseas Territories now face. Since it was announced almost a year ago the Turks & Caicos Islands have passed into British control, Cayman has seen its economic wings clipped and has been ordered to tax, all three Crown Dependencies have been told their system of corporate taxation is unacceptable and must be reformed and the Isle of Man has had £140 million of its VAT subsidy withdrawn leaving it in economic turmoil – but definitely delivering a clear message to those in the place who responded rather aggressively to Alastair Darling’s comment that it was a tax haven.

And yet, there is much still to be done. Regulation in these places has a long, long way to go. They remain secrecy jurisdictions - places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain that is designed to undermine the legislation or regulation of another jurisdiction. They do in addition 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. If they are to be sustainable that needs to be tackled.

For details of what needs to change read the individual jurisdiction reports here.

Let’s hope Foot does something to shine light into these very dark places, because that’s very necessary.

Richard Murphy Cayman, Guernsey, Isle of Man, Jersey

Spot the trend:

• G20
• ‘Maundy Thursday letters’ to Crown Dependencies and British Overseas Territories
• Turks & Caicos taken over
• Cayman told to tax in return for permission to borrow
• Isle of Man told VAT subsidy to be reduced
• UK refuses to support ‘zero/ten’ regimes in the Crown Dependencies

These are not unconnected events. They show that the tax havens have always, and only, existed with tacit political support.

And it seems very likely that London has now withdrawn that support.

This is the really big news.

How big? well my blog as already (and it’s only 6.50pm) had its third biggest ever day of traffic. It’s a crude guide – but it certainly says something is up – and people are worried.

They should be. The next step is what to do about it. Some may think my offer if help is not serious – but it is. I have proven I really o understand this issue. Now it’s time to get these places out of the mess they’re in. And I’m keen to see them do that.

Richard Murphy Cayman, Guernsey, Isle of Man, Jersey

Raise taxes or no bailout, UK tells Cayman Islands | Business | guardian.co.uk .

The Foreign Office has forced the Cayman Islands‘ government to investigate the possibility of introducing direct taxes on businesses and residents based there.

An independent assessment of diversifying the Caribbean tax haven’s revenue base is the main condition stipulated by the Foreign Office for allowing the Caymans to borrow from banks CI$50m (£38m) immediately together with a further CI$229m loan. The Cayman government has also agreed to make significant cuts to its public expenditure programme.

The deal, which is close to resolution, should avert the embarrassment of the island authorities being unable to pay their staff. It also means the Cayman government will be able to unveil a budget as soon as tomorrow after it was forced to postpone it last week.

This is welcome: the UK is using its influence appropriately to require reform that is good for Cayman and coincidentallty the world at large.

Richard Murphy Cayman

Schools talks collapse | Cayman News Service.

Cayman’s government is rapidly descending into chaos. On Friday a major contractor stopped work on two projects.

Cayman, of course, blames the UK.

The UK requires Cayman to show capacity to repay loans - top line, revenue generating capacity called tax. The UK is right to do so. If Cayman goes bust the burden is the UK’s.

Cayman refuses to tax.

The corruption of tax havens / secrecy jurisdictions is writ large here: ultimately the rfusal to tax on behalf of the wealthy hits hardest those most vulnerable in any society. In this case it’s Cayman’s children. But that’s just a metaphor for the bigger picture.

This is an issue the UK has to win and Cayman has to lsoe, for the sake of us all.

Hat tip: Chris Hopkins.

Richard Murphy Cayman

Cayman Islands budget on hold as debt crisis worsens | Business | guardian.co.uk .

The Guardian take:

The Cayman Islands leader, William McKeeva Bush, was today forced to postpone his annual budget as the British overseas territory’s debt crisis worsens.

The situation prompted financial leaders of the Caribbean territory to launch a blistering attack on the British Foreign & Commonwealth Office (FCO) minister, Chris Bryant, for demanding the tax haven introduces an employee tax to ward off disaster.

Anthony Travers, chairman of the Cayman Islands Financial Services Association and its stock exchange, argued: “The move from an indirect to a direct system of taxation is a seismic shift which has not been thought through and which is not justified on the facts.”

Despite its huge wealth, the overseas territory is strongly resisting pressure to levy taxes to escape a black hole caused by the cost of a large public infrastructure programme and dwindling licence fees from the financial institutions.

“I have canvassed senior business players in Cayman and they have indicated that at the first sign of a payroll tax they will have to consider their options,” said Travers. “I believe this will inevitably lead to job losses and it will affect both the highly paid and more junior members of staff and lead not to a revenue increase, but a decrease.”

So it least one person in the world believes in the Laffer curve.

And just for once, it may be right because 0% tax is not sustainable when you have nothing else to offer.

I also note:

Cayman Islands leaders are furious the islands and other tax havens have been blamed by G20 world leaders for helping to bring about thefinancial crisis. But campaigners argue so-called “secrecy jurisdictions” were central to creating financial instability that exacerbated the crash.

Too right we say that.

Richard Murphy Cayman