Regulation » Tax Research UK

Portugal faces the rationality of markets

Banking, Economics, Regulation 4 Responses »

Feb 052010

FT.com / Europe – Portugal near political crisis over debt .

Portugal is facing a debt crisis. Whether justified or not I do not know: I am not an expert on Portugal and won’t claim to be.

But the follwoing is reported:

He [the Prime Minister] said Portugal had taken over from Greece as the main victim of the “animal spirits” of financial markets that were often “irrational”. The concern in the case of Portugal, he said, was not justified.

Now here’t the rub: the markets may well be rational – according to their own highly perverse definition. Undermining states, democracies and currencies is completely rational following the logic of the market. If there’s a financial gain to be had destroying well being is entirely rational according to currency and debt traders.

Which is precisely why they need to be regulated quite differently.

Limited liability: the ultimate cause of moral hazard

Accounting, Banking, Economics, Ethics, Regulation, Secrecy jurisdictions 7 Responses »

Dec 012009

The Guardian has noted:

The Dubai government refused to guarantee the huge debts built up by its conglomerate Dubai World, dashing investor hopes that the latest episode in the global financial crisis might be swiftly resolved.

In an interview on local television, the director general of Dubai’s department of finance, Abdulrahman al-Saleh, appeared to suggest that investors only had themselves to blame for the unfolding crisis. "Creditors need to take part of the responsibility for their decision to lend to the companies," he said.

"They think Dubai World is part of the government, which is not correct. Dubai World was established as an independent company; it is true that the government is the owner, but given that the company has various activities and is exposed to various types of risks, the decision, since its establishment, has been that the company is not guaranteed by the [Dubai] government."

Moral hazard describes the phenomena where a party that is insulated from risk behaves differently from the way it would behave if it were fully exposed to that risk.

It is very easy to see in this case that the limited liability status of Dubai World – an entity created and owned by the Dubai government, presumably (although I have not checked this) registered under Dubai law that the Dubai government created – means that the Dubai government can deny responsibility for the risks that it created Dubai World to assume in pursuit of its own economic strategy for which it now denies responsibility. A better example of moral hazard is hard to imagine.

Unless, of course, we consider the case of banks in the UK and elsewhere that also trade with limited liability but in their case with the implicit unlimited guarantee of the taxpayer to back them, creating another form of moral hazard.

In both cases the moral hazard has, of course, been created by a form of asymmetric information: Dubai World knew the risks it was taking and the fact it could not enjoy a state guarantee. those who lent appear (as is the way of the market – so ill informed is it) to have been unaware of the risks they were taking and assumed there was an implicit guarantee.

I am not suggesting as a consequence that we should get rid of limited liability entities: as a matter of fact I suspect that near enough impossible to do, although I know some argue for it.

I am arguing that if we are to have limited liability then there is a special duty of care imposed on those who take advantage of it, which no one is obliged to do. That duty of care is to provide considerable information concerning the beneficial ownership, true nature of management and financial performance of each and every limited liability entity that exists – anywhere in the world and for whatever purpose it is used. The argument is simply that without this information, including country-by-country reporting. those who engage with a limited liability entity are, without exception, the potential victim of moral hazard of the form now being suffered by the creditors of Dubai World.

That is not acceptable: if markets are to be effective, if unjust enrichment and straightforward fraud is to be avoided, if risk is to be allocated appropriately then the price of limited liability is transparency.

Secrecy jurisdictions promote secrecy: they promote moral hazard, risk, distorted markets, unjust enrichment, fraud and more besides as a consequence.

That is why secrecy jurisdiction undermine the effective operation of all markets.

And opacity undermines markets in exactly the same way.

You cannot support markets and support either opacity or secrecy jurisdictions: they are incompatible.

Dubai should teach us an expensive lesson. It is time it was learned and action taken.

Walker – the missed opportunity of recommendation 15

Banking, Regulation 3 Responses »

Nov 262009

The Walker report on corporate governance in UK banks and other financial industry entities includes the most extraordinary missed opportunity. On page 17 it has the following enigmatic paragraph:

Recommendation 15

Deleted.

What might it have said?

What opportunity has been missed?

Could it have said:

All banks shall be tax compliant: tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes?

Might it have said:

The use of secrecy jurisdictions increases governance risk and the chance that insufficient information on the risks and rewards of banking and other transactions are reported to a board of directors and other users of the financial statements of banks, both internal and external. As such detailed quarterly reporting of the activities of any bank located in secrecy jurisdictions, whether on or off balance sheet, shall take place?

Or was it:

The location of risk within a bank is vital to overall assessment of viability, As such the bank shall report not less than quarterly to the Board on a country-by-country basis?

What a tease Walker is: we’ll never know which of these great opportunities was deleted.

That is a loss to us all. The mystery of recommendation 15 might never be known, but we can be sure we’re worse off without it.

We have to stop chaps regulating chaps – or we will destroy all we value, including democracy itself

Banking, Economics, Ethics, Regulation 1 Response »

Nov 262009

The world of banking has won two more victories over the rest of society.

The challenge to its right to charge excessive fees to people who make the smallest error in running their bank accounts has been overthrown by the new supreme court. This is regressive tax in all but name: it is now the poorest in our society who will continue to be charged excessive fees to bail out our banks.

And the Walker report on banking reform in the light of the banking crisis has proven to be even weaker than anyone feared. Julia Finch has put it well in the Guardian:

Nine months’ work. One hundred and eighty submissions of information and opinion. A weighty interim report, and 167 pages of final recommendations: so much work for so little. Sir David Walker‘s review of the corporate governance of banks, ordered back in February, is a crashing disappointment – an anti-climax of even greater proportions than the anodyne code of practice he drew up for the private equity business in 2007. Here was a chance to rewrite the rulebook in a bid to ensure that there would be no re-run of last year’s crisis when two of Britain’s biggest banks, it has now emerged, needed £62bn of secret Bank of England support to keep their doors open. Instead we have some relatively minor tweaking.

Walker says he is "sympathetic with Guardian types … it is outrageous that we have been left all this debt". But he is an investment banker and an old-school City man. He was never the man for this job.

The question is: why was he ever given it?

Given that for all practical purposes his report changes nothing at all – except disclose the number of employees earning more than £1 million a year – for fear ‚Äòtalent might go abroad’ – this is the only relevant question.

We had the stupidity of the Foot report on tax havens – written by a tax haven insider with clear intent to excuse them of all wrongs – and now the Walker report on banking – written by a bank insider with clear intent to excuse them of all wrongs.

In the meantime the abuse goes on. The capture of the state by an elite in banking is becoming more and more apparent. And we are all paying for it.

When will politicians stand up and challenge this?

That question is at the core of the future of democracy – because have no doubt about it, these people don’t believe in democracy. If they did they would not treat it with such contempt. For them the state is just one thing – a mechanism for diverting resources to them for their use. I give them credit: they’re good at doing just that. But the process has to be brought to an end.

King on banks: reform has to happen

Banking, Regulation 2 Responses »

Oct 212009

The Telegraph has done a rather useful summary of highlights from last night’s speech by Mervyn King, Bank of England governor. he said:

On support given to the banking system:

In the UK, in the form of direct or guaranteed loans and equity investment, it is not far short of a trillion (that is, one thousand billion) pounds, close to two-thirds of the annual output of the entire economy.

To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.

On the creation of moral hazard:

The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history. The "too important to fail" problem is too important to ignore.

On separating utility and risky banking:

In other industries we separate those functions that are utility in nature – and are regulated – from those that can safely be left to the discipline of the market.There are those who claim that such proposals are impractical. It is hard to see why.

On the current state of banks:

It is important that banks in receipt of public support are not encouraged to try to earn their way out of that support by resuming the very activities that got them into trouble.

On regulating the banks:

Although there are no simple answers, it is our collective interest to reduce the dependence of so many households and businesses on so few institutions that engage in so many risky activities.

To summarise:

Banks are in our dent. We should call the shots
Banks need to be broken up
We must separate investment banking from High Street banking
there must be much stronger control of Lloyds and RBS
More regulation is needed.

He’s a bit late on the block – some of us have been here for some time – but he’s welcome nonetheless.

This is the time for massive banking reform.

Will Alastair Darling do it before may? I hope so.

The Cynical Tendency: Libel Laws, Financial Losses, Life & Liberty

Regulation 1 Response »

Oct 042009

The Cynical Tendency: Libel Laws, Financial Losses, Life & Liberty.

Do English libel laws increase the risk of another financial crisis/

I share the beloief that they do.

If there was a law that needed reform this is it.

More on the harm secrecy jurisdictions cause to society

Regulation, Secrecy jurisdictions, Tax Havens 1 Response »

Oct 022009

Two more football stories this morning to demonstrate the harm offshore secrecy creates. The first if about premier League team Hull City, and is from Private Eye via the web:

What is going on behind the scenes as the Premier League club’s disastrous season continues? Last year’s accounts for both the club and its parent company Tiger Holdings, due in May and February respectively, have still not been filed – an offence for which directors can and are prosecuted, despite club chairman Paul Duffen maintaining it is no crime. Meanwhile, the club’s newly disclosed major shareholder, property man Russell Bartlett, resigned last month as a Tiger Holdings director having only been appointed in July. The directors are now presumed nominees in Jersey. And last week the registered office was changed from Bartlett’s company in Essex to that of accountants Grant Thornton. This may not be good news.

So, another football club whose ownership is hidden by Jersey nominees, whose main contribution to British public life is likely to be facilitation of another long standing institution of little football note, but of enormous significance to those who live in Hull – one of the poorest places in the UK.

And that’s not all. Portsmouth, another Premier League club with offshore owners is in trouble:

Portsmouth’s owner, Sulaiman al-Fahim, will this weekend make a desperate attempt to attract fresh finance to the club after the chief executive, Peter Storrie, admitted "there is no money left".

I think the term ‚Äòowner’ should be applied loosely here: the structure is, of course, offshore.

So that’s 10% of the Premier League looking to go insolvent due to offshore involvement and a complete lack of accountability – or even knowledge of, true owners.

maybe, just maybe, this will be what tips the public perception in favour of accountability because what is becoming clearer by the day is how extraordinarily harmful places like Jersey, Cayman and Switzerland are to society. And when ordinary people are affected maybe, just maybe, we’ll get change.

Why declaring beneficial ownership matters

Regulation, Secrecy jurisdictions 3 Responses »

Oct 012009

Thos who campaign for tax justice are often challenged about why having a record of the beneficial ownership of companies on public record matters.

Well, let’s use a real example to demonstrate this, reported in the Guardian today concerning an issue I have commented ion before, the ownership of Leeds United, which ahs been unknown since the company was ‚Äòtaken over’ by Ken Bates (or maybe not, as it now transpires) four years ago. As they note, Ken Bates has just changed his evidence on ownership to a court in Jersey where there is a long running legal dispute about the club:

The revelation by Bates that he made “an error” when he said he jointly owned Forward, and the Ch?¢teau Fiduciaire letter, means the ownership of Leeds, still one of English football’s potential giants, is undeclared. The Yorkshire club apparently belongs to the holders of 10,000 shares in a company registered in the Cayman Islands, administered in Geneva by trustees who refuse to reveal the owners’ identity.

Why does this matter? For several reasons. First, as the litigation proves, those dealing with the club have no real idea who is behind it and how to assess its credibility. second, here we have an institution of public significance (I think) that is owned by unknown persons, maybe paid for out of criminal funds.Who knows? Third, there is a fit and proper process meant to apply to owners of football clubs. It cannot apply in this case. Fourth, most owners of private companies exercise considerable management influence. Many are shadow directors. We have no idea who these people are in this case. Fifth, the relationship between a private company and its owner is a matter of tax significance in the UK. Why should tax authorities not be able to access data on this issue without having to commence enquiries to find out?

The points I make are these:

1) The market cannot operate properly here – as the litigation proves, since key data is absent;

2) Tax may not operate here;

3) Regulation may not operate here;

4) Law may not operate here e.g. with regard to money laundering.

This is unacceptable.

Beneficial ownership records would shatter this.

As would registers of trusts and who benefits from them.

This is where the next stage of secrecy jurisdiction reform ahs to go.

Welcome, and overdue move on anti-money laundering

Banking, Corruption, Regulation 9 Responses »

Sep 282009

We ask the FATF to help detect and deter the proceeds of corruption by prioritizing work to strengthen standards on customer due diligence, beneficial ownership and transparency.” (Paragraph 42 of main text)

Sad that it had to say that: most secrecy jurisdictions claim they are perfect in this regard. The reality is that he money still flows far too easily. Anthea Lawson at Global Witness has said of this:

The G20’s call for a focus on corruption provides some of the necessary political will that has been lacking. Our investigations have shown that banks do not always take this seriously enough, and one reason is that they are not hearing a strong message from governments that they must do so. The taskforce meets in Paris next month; that meeting will be a decisive next step in this process, as it will now have to decide how to make the anti-money laundering laws more effective

State looting has a devastating effect on developing countries. Efforts to lift people out of poverty and lessen dependence on aid are undermined by banks’ keenness to do business with corrupt officials. Let’s be clear: corruption could not occur without the help of the international financial system – the amounts being stolen are too big to keep under the mattress.

Anthea knows this stuff better than most. I believe her.

But what worries me is that secrecy jurisdictions still brandish their IMF reports and say ‚Äòwe’re well regulated’. No, they’re not. they just have the right bits of paper in place. But that means nothing if they don’t enforce them, and I genuinely believe they do not. The G20 clearly shares that opinion. After all, if anti-money laundering procedures are not even done properly for corrupt politicioans, what hope for the ordinary person?

Except I know the answer to that. It was shown on panorama last week: banks just don’t care.