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

I have noted the American Bar Associations submission to the Senate hearing on incorporation and financial crime today.

Jack Blum of Tax Justice Network USA also gave evidence. He said in response to his fellow lawyers:

Some members of the bar are concerned that imposing AML responsibility of lawyers who act as incorporation agents will violate lawyer client privilege.    I believe that there is a bright line between giving a client legal advice, which is protected by privilege, and performing transactional work that requires interaction with government agencies. If a lawyer explains to a client that he must gather certain information and turn it over to the government as a condition of incorporation the client should have no expectation of confidentiality.  

If a lawyer handles an incorporation in a situation where that lawyer knows the corporation will be used as part of a money laundering scheme then the lawyer ceases being a lawyer and becomes a co-conspirator. Under those circumstances neither the lawyer nor the client deserves protection.

Quite so. When I wrote my blog on the ABA submission I had not read what Jack had said. I’m always encouraged when I find I’m in agreement with Jack. I am here, absolutely.

Richard Murphy Corruption, Lawyers

I have been reading more of the evidence submitted to the Senate Committee on Homeland Security and Governmental Affairs hearing on Business Formation and Financial Crime.

That of the American Bar Association is shocking. They say (and I have edited their submission by eliminating but not changing text):

The ABA supports all reasonable and necessary domestic and international efforts to combat money laundering, tax evasion, and terrorist financing activity. 

The ABA, however, opposes the proposed regulatory approach set forth in S. 569 and any other legislation that would unnecessarily regulate state incorporation practices and impose government-mandated suspicious activity reporting (“SAR”) on the legal profession.  The ABA’s opposition is grounded in three fundamental aspects of the proposed legislation.  

First, S. 569 [the bill] would essentially federalize state incorporation practices, meaning that states would be required to obtain,  keep current, and make available to law enforcement authorities “beneficial ownership” information on corporations and limited liability companies.  In our view, the imposition of a federal regulatory regime focused on beneficial ownership information is not workable, would be extremely costly, would impose onerous burdens on state authorities and legitimate businesses, would run counter to formation practices of major countries (including Canada, Mexico, Japan, and China), and will not achieve the laudable goal of assisting federal law enforcement authorities with pursuing and prosecuting criminal activity. 

For instance, obligating state agencies to collect beneficial ownership information would involve significant and expensive hardware and software changes, including the creation of a parallel record keeping system consisting of public and non-public  information.  These impediments, coupled with an unwieldy definition of beneficial ownership and the bill’s focus on only a limited number of entities, would sow confusion into the formation process that would not enhance law enforcement’s goals.

Second, S. 569 would create a new class  of “financial institutions,” known as formation agents, that would be subject to enhanced anti-money laundering (“AML”) requirements.  Because lawyers assist clients in forming corporations and limited liability companies, the designation of formation agents as financial institutions subject to additional AML requirements threatens to sweep in U.S. lawyers and treat them as the functional equivalents of banks.

Third, S. 569 could potentially impose SAR requirements on the legal profession, meaning that lawyers would have to report to governmental authorities a suspicion that their clients are engaging in money laundering or terrorist financing activity.

Let’s summarise this:

a) We want law enforcement but not if it costs anything or might work

b) We want an exclusive crave out for ourselves that provides competitive advantage

c) We wish that competitive advantage to be based on turning a blind eye to criminality.

Yes: I know about client confidentiality. But crime is always a crime and whilst lawyers must be able to defend their clients it is an unfortunate fact that lawyers have also been found,time and again, to be assisting tax abuse in the US. Those lawyers should not be able to use the right of criminal defence lawyers to avoid their obligations when they incorporate legal entities. That seems to me an abuse of the right of the lawyer.

I find these arguments quite shocking. This is a profession that appears to want to allow anonymity so it might profit from it, even if that use might be criminal. That is utterly ethically unacceptable. No wonder lawyers are held in such low regard.

Richard Murphy Lawyers, Transparency, USA