There has been much comment on the size of the fines given by the Financial Services Authority to Warren Buffet's company General Reinsurance. Most only went as far as to note that the penalty was for two transactions that, to quote the SA were:

designed without legitimate purpose and effect

Hang on, I thought, what can their purpose be then? So popped over to the FSA web site where they say:

The Financial Services Authority (FSA) has fined General Reinsurance UK Limited (GenRe UK) £1.225m for arranging two improper reinsurance transactions. In doing so, GenRe UK breached FSA Principle 2 by not conducting its business with due skill, care and diligence and FSA Principle 3 by not organising and controlling its affairs responsibly and effectively.

The reason for imposing the fine was:

The FSA found that GenRe UK did not have sufficient systems and controls in place to prevent these transactions from being signed

But what were the transactions? The FSA says:

The first transaction was signed in 1999 and renewed three times until 2003. It enabled a German insurer to gain tax benefits by transferring money between Germany and Ireland where the German insurer had a subsidiary. The second transaction was signed in 2004 and was used to compensate for premium reduction on a reinsurance programme agreed with a client insurer by GenRe UK.

But still no real clue as to why the FSA were upset. Thankfully the Times is more explicit:

The first transaction, signed in 1999 and renewed three times, allowed a German insurer to gain tax benefits by transferring money between Germany and Ireland. The second, signed in 2004, was an additional agreement in a reinsurance programme with a UK insurer that compensated General Re UK for accepting a lower premium in the main part of the deal.

So, let's be candid. One is a blatant exercise in tax abuse. It had no 'legitimate purpose' according to the FSA. And nor did the second, which was an exercise in mispricing (or was it?). I suspect that in both cases the use of language was the subject of some considerable discussion before the penalty was agreed. But it does lead to the reasonable question as to what the absence of legitimate purpose might mean when tax abuse and mispricing are suggested to have taken place. And to the further question of whether prosecutions should follow.

I won't hold my breath whilst answers are forthcoming.

PS General Reinsurance Corp., a Berkshire Hathaway unit based in Stamford, had earnings of $357 million through the first nine months of 2006, excluding taxes and minority interests. In that case is the fine appropriate?