Tax avoidance takes centre stage in UK election (Part 2)

In late January, this writer was enjoying a drink offered by a large UK-based asset manager during the World Economic Forum in Davos, discussing how this particular group would manage a mooted emerging markets private equity fund, and specifically how it would avoid inadvertently passing money to the cronies of corrupt regimes in its target markets.

Up stepped a well-dressed young man who presented himself as a minister of the UK government, and said corruption was part of his mandate. I asked him whether his government was looking to prevent corruption or facilitate it.

It seemed like a reasonable question, given the current and previous UK governments’ culpable lack of action on the misuse of Limited Liability Partnerships; the current government’s use of PricewaterhouseCoopers as an advisor on the redrafting of UK tax law in 2012 when PwC was already known to have advised countless companies on how best to minimise their UK tax by using pass-through companies in Luxembourg and other artificial structures; and its repeated backtracking on the non-dom issue discussed in Part 1.

Twice during the conversation the minister assured me that his government would ensure LLPs were obliged to have named owners, perhaps even before the end of the current legislation. The minister concerned was asked by email dated March 13 to confirm his Davos comments, but did not reply, presumably being too tied up with his election campaigning. Which is why we have not identified the minister in question…

As noted in Part 1, UK journalist and former tax inspector Richard Brooks documented much of the misuse of UK companies in a 2013 investigation published in the satirical UK fortnightly Private Eye, yet UK business secretary Vince Cable had until recently continued to deny that abuses are facilitated by the fact that offshore companies can be directors or owners of UK LLPs.

The U.S. and UK governments have been aware of the potential misuse of shell companies, often in the form of Limited Liability Partnerships or Companies, for some time. For example, in a November 2006 paper entitled “The Role of Domestic Shell Companies in Financial Crime and Money Laundering: Limited Liability Companies,” the U.S. Department of the Treasury Financial Crimes Enforcement Network noted in a November 2006 paper that:

“By virtue of the ease of formation and the absence of ownership disclosure requirements, shell companies – generally defined as business entities without active business or significant assets – are an attractive vehicle for those seeking to launder money or conduct illicit activity.”

“While business entities generally, and shell companies specifically, have legitimate commercial uses, this lack of transparency in the formation process poses vulnerabilities both domestically and internationally,” the paper said. The U.S. has however backpedalled on curbing any such abuse when it comes to, for example, companies registered in the state of Delaware, a tax haven to all intents and purposes.

The UK’s role in international crime

Similarly, UK-mandated Limited Liabilities Partnerships are open to all kinds of abuse, according to an article, “Where there’s muck… there’s brass plates” by Richard Brooks and Andrew Bousfield, published by UK satirical magazine Private Eye in May 2013.

Notes the article, “the world’s most corrupt, least transparent companies are not located in fragile states or faraway tax havens. They are to be found here, in offices across the UK from Clapham to Cardiff, facilitating the most serious international crimes while the government ignores one of Britain’s few growth industries: corporate corruption services.”

The journalists cite “the historic relaxation of British company law, and almost non-existent regulation and financial policing that has turned Britain into a capital of international organised crime.”

UK legislation allowing Limited Liability Partnerships was passed in 2000 and came into effect in 2001, at more or less the same time that the backlash from the Enron scandal definitively knocked out accountancy firm Arthur Anderson, reducing the big five accountants to the big four of KPMG, PricewaterhouseCoopers, Deloitte & Touche and Ernst & Young.

One of the effects of the legislation was to circumscribe the liabilities of single partnerships within services companies like international law or accountancy firms, in order to ensure that such groups cannot be destroyed by the misbehaviour, however egregious, of a single subsidiary.

This protects the central brand, making each subsidiary responsible for its own actions, but it can also have the effect of diluting corporate culture, as some subsidiaries may take decisions that run counter to the corporation’s stated rules because there is a strong business case for doing so.

HSBC has recently used a variation on this theme to argue that the parent company is in no way responsible for the misdeeds of its small Swiss banking subsidiary, and that the company’s top executives were unaware that its Swiss arm was engaged in facilitating massive tax avoidance. This was despite the subsidiary being credited with a huge chunk of the group profits prior to the financial crisis, when the bulk of the misbehaviour is supposed to have taken place.

Proposals for a register of who actually owns LLPs may go some way to resolving the problem, but here too, there are pitfalls.

“First, [beneficial ownership] covers companies, but not all trusts, so the easiest way to avoid disclosure would be to use one of those trusts which fall outside the scope, instead of companies,” says Andres Knobel, a freelance researcher at the Tax Justice Network.

Furthermore, “the definition of beneficial owner is based on FATF’s (the Financial Action Task Force) recommendations on Anti-Money Laundering, which refer to the individual holding more than 25% of ownership… which is a really high threshold.”

A further issue is that companies can continue to act as directors of UK LLPs. That is problematic, because if these corporate directors are incorporated in, say, the BVI, Gibraltar or Belize and their directors are not named individuals – and they are not required to be in many such jurisdictions – then the question of ultimate ownership remains open, as the true owners can continue to hide behind opaque corporations.

Limited Liability Partnership legislation combined with the UK’s hands-off corporate tax regulation produces a financial environment which is almost impossible to monitor, and has made the UK the jurisdiction of choice for criminal enterprises all over the world.

Sources close to international tax matters have said that in recent weeks and months the government has attempted to burnish its anti-tax evasion and money laundering credentials as tax issues in particular come into focus in the run up to the UK election. To this end they have been quietly lobbying former UK territories such as British Virgin Islands and the Caymans to tighten up local legislation that currently facilitates tax evaders and money launderers.

Specifically, it has asked for companies registered in these protectorates to provide the names of the actual company owners. As things stand, it can be virtually impossible for the authorities to establish who really owns companies set up in these jurisdictions, which can in turn be owned by a series of trusts or companies set up in other jurisdictions where legislation is equally opaque, making them a vehicle of choice for tax evaders, corrupt politicians and criminals alike.

But so far, sources say, the protectorates are refusing to play ball.

From the mouths of ministers 

In March 2015, as the United States and the European Union crossed swords with Russia over the latter’s intervention in the Ukraine conflict, UK Foreign secretary Philip Hammond said he could cause Russian leader Vladimir Putin “strategic embarrassment” by revealing the extent to which his oligarch cronies had siphoned off the country’s wealth and stashed it in the UK.

Underlying Hammond’s threat was the suggestion that corrupt Russians have parked much of their ill-gotten gains in London’s real estate market, sending skywards prices that were already far beyond the reach of most Londoners.

But such revelations are a much bigger indictment on a UK government which, far from cracking down on abuse of the UK’s light tough regulatory environment, seems to have done little to prevent such abuse, and on occasion has made it even easier.

In recent times Russian oligarchs like Oleg Deripaska, Roman Abramovic and the now deceased Boris Berezovsky have turned London courtrooms into battlegrounds where they fight over their stealthily accumulated billions, while a conviction and prison sentence for Nigerian politician and professional conman James Ibori shed some light on the extent to which the world’s corrupt and criminal have turned London’s booming property and financial markets into their own personalised money laundry.

Hermitage Fund manager Bill Browder has seen first hand how lax UK company oversight has made life easy for financial criminals. Browder has since 2009 been campaigning for justice for his accountant Sergei Magnitsky. Magnitsky was arrested and ultimately died in a Russian prison after accusing Moscow tax officials of massive fraud. Browder’s researchers have painstakingly documented how money wrongly appropriated by these officials was spirited out of Russia through Austrian, Swiss and other banks, with LLCs providing the money with a thin shroud of respectability which allowed the money to be fed through the banking system with few questions asked.

With the issue now turning mainstream given the increasing budgetary pressure in the UK, the main political parties are beginning to voice their own proposals for combatting abuse of the UK’s burgeoning financial markets.

But given all that the main political parties – the Conservative, Labour and the Liberal Democrats – have been happy to feed at the trough of undeclared, non-dom money, even when proven to have been criminally acquired, it remains to be seen what they will do if returned to power.

Tax avoidance takes centre stage in UK Election (part 1)

With the UK elections less than two weeks away, the awkward subject of taxation and those privileged few who are allowed to avoid it has taken centre stage, with both main parties vowing to do more to tighten up the UK tax system and ensure everyone pays their fair share.

Labour leader Ed Milliband threw down the gauntlet by saying he would abolish the non-dom loophole – a proposal which was received with overwhelming public support, forcing the Conservatives, who have avoided addressing this issue in five years of coalition government, to offer vague promises of tightening up UK tax law if they are elected.

So-called non-doms are people who may spend most or all of their time in Britain, do most of their business in Britain and have their family homes in Britain, but are not considered British for tax purposes, thereby avoiding a large chunk of tax on their worldwide income.

Yet the incumbent Conservative-Liberal coalition government and the preceding labour government did little to address the phenomenon of tax avoidance, which a Tax Research LLP report said cost the UK £19.1 billion in the 2013-2014 tax year. The report, commissioned by the Public and Commercial Services Union, put the cost of tax evasion – which, unlike avoidance, is unlawful – at £73.4 billion, more than three times government estimates.

Even at the height of the financial crisis, the main political parties appeared loathe to address the issue – perhaps because both received large amounts of money from “non-doms”.

Former Conservative party deputy chairman Lord Ashcroft remained a non-dom for ten years after being made a Lord, his large donations to the party outweighing any concerns about his non-domiciled status. Lord Rothermere, the non-dom owner of the Daily Mail, uses his paper to push such public policy as cracking down on benefit fraud, yet sees no reason to become a UK resident and pay his full share of UK tax. Likewise the Barclay twins, owners of the daily Telegraph.

Successive governments have fretted that if they were to change the status of non-doms – these “wealth creators” so important to the UK economy – and subject them to the full weight of UK taxation, they would simply leave the country, taking their money with them and causing an economic meltdown in the City of London.

But if the richest Americans are for the most part American citizens and pay their taxes in the United States, and the richest Germans likewise – unless they can hide income in offshore banks or Delaware corporations – how is it acceptable for a large chunk of the UK’s richest residents to sidestep UK taxation by simply declaring they are not from the UK at all, at least for tax purposes?

The attitude of the UK government also implies that such wealth creators are an endangered species, limited in number, and need special rules to ensure they keep on creating this wealth. And if they left, there would be no one capable of taking their place. Perhaps the rest of the UK’s citizens should just tug their forelocks and keep quiet.

Successive UK governments have put very little into tackling tax evasion and avoidance, despite the massive cost to the economy. At the same time they have made massive resources available for cracking down on benefit fraud which costs UK taxpayers a much smaller £4 billion per year.

Meanwhile, in a lengthy saga extensively documented by UK satirical magazine Private Eye, the UK tax office under its former head David Hartnett – now, incidentally, working for HSBC, which is embroiled in a tax avoidance scandal of its very own – let telecoms giant Vodafone off the hook for more than £4.5 billion, reportedly over a series of lavish lunches.

Intriguingly, when the Public Accounts Committee under Margaret Hodge asked whether lawyers had been present when the deal to slash Vodafone’s tax bill was struck, he answered in the affirmative. However the PAC failed to ask whether the lawyers represented the UK tax office, nor to ascertain whether Hartnett was acting in accordance with the legal advice he had received.

UK Foreign secretary Philip Hammond caused mild uproar in March 2015 when he threatened to cause Russian leader Vladimir Putin “strategic embarrassment” by revealing the extent to which his oligarch cronies had siphoned off the country’s wealth and stashed it in the UK.

Underlying the threat was the suggestion that corrupt Russians have parked much of their ill-gotten gains in London’s real estate market, sending skywards prices that were already far beyond the reach of most Londoners.

Such a revelation should surely cause more embarrassment to a UK government which, far from cracking down on abuse of the UK’s light tough regulatory environment, seems to have done everything in its power to facilitate such abuse.

UK journalist and former tax inspector Richard Brooks documented much of the misuse of UK companies in a 2013 investigation published in the satirical UK fortnightly Private Eye, yet UK business secretary Vince Cable continues to deny that evasion is facilitated by the fact that offshore companies can be directors or owners of UK LLPs.

A further issue is that companies can continue to act as directors of UK LLPs. That is problematic, because if these corporate directors are incorporated in, say, the BVI, Gibraltar or Belize and their directors are not named individuals – and they are not required to be in many such jurisdictions – then the question of ultimate ownership remains open, as the true owners can continue to hide behind opaque corporations.

But that is another story. (to be continued)

The role of private intelligence companies in combating complex economic crimes

Private intelligence companies play an increasingly important role in combating serious economic crimes and in tracking stolen assets. Their analysis capability lies at the heart of the intelligence process. The intelligence received need not only be used in targeting the suspects in an investigation, or tracing their assets, but may also be used in a more strategic manner to develop assessments of threats and tactics to deal with those threats, allocate resources and provide an overall more effective response to them.

The use of intelligence disciplines to investigate complex criminal investigations is increasingly becoming the international norm. Although intelligence provides a platform for many different aspects of an investigation, it has a particularly prominent role to play in combating serious economic crimes, like massive asset misappropriation and corruption. In the case of complex economic crime investigations where there is often a myriad of personalities and different complex financial vehicles, frequently used in different jurisdictions, the use of differing forms of intelligence has become a ‘must have’ instrument, and proved critically important to initial research into allegations of criminal activities but also subsequently in substantive investigations.

There is great deal of conjecture on what precisely intelligence is, and as a result, raw information is often perceived, incorrectly, as intelligence. Information received from disparate sources such as public available records, mass media, informants, telephone complaint lines or banking records is just raw information with little context and often, therefore, no intrinsic value. It is the drawing together of such raw data, assessed for validity and reliability, and its analytical processing that provides the all-important intelligence product. Analysis lies at the heart of the intelligence process.

As the product of an analytical process that evaluates information collected from many diverse sources, one of the main challenges is how to package the product in a manner that provides meaningful value to a greater understanding of the way in which criminals and their enterprises work or how they conduct their criminal activity. In the context of serious economic crimes, and the tracing of assets derived from such crime, intelligence is the key to understanding how criminal proceeds flow and, ideally, where the proceeds are. All assessments of information provided should aim to describe the reliability of the source and of the information provided, to distinguish between reported facts and comment and to provide as much detail as possible.

It is evident, therefore, that the intelligence received need not always be just hard information for use in targeting the suspects in the investigation, or tracing their assets, but may also be used in a more strategic manner to develop assessments on threats and strategies to deal with them, allocate resources and provide overall a more effective response to such threats.

The goal of a large number of criminal activities is to generate a profit for the offender who carries out the activities in question. All over the world, these offenders do not wish to allow the detection of the proceeds of their criminal activity. This explains why offenders and many professionals offering their services try to launder the proceeds of crime – to disguise the illegal origin.

Private intelligence companies play an increasingly important role combating serious economic crimes and in tracking stolen assets. Most importantly, a successful private intelligence organisation needs to be able to conduct very complex intelligence operations: it needs an excellent analytic staff (analysis lies at the heart of the intelligence process) and needs to rely on an international network of business partners and affiliates located in multiple countries to ensure extensive information gathering. This network can also help in conducting intelligence operations once a clear link to the respective foreign country has been established. Not all private investigators are able to operate so extensively.

Identifying the individuals and companies involved in massive asset misappropriation or corruption schemes is the first step of any investigation, aimed at gaining an overview of what private and professional relationships exist between the parties involved. Furthermore, it may provide insight into the financial and proprietary conditions of, for example, a potential business partner.

As not all the parties involved are known from the outset of an investigation and may only become apparent during the course of research or enquiries, the gathering of intelligence on parties involved is an ongoing part of any investigation. The research for intelligence on the parties involved takes place in public registers and databases, such as commercial registers, court filings, rating agencies, business databases, phone books, asset registers etc.

At times, simple OSINT research can lead to extraordinary results. However, if no information is available through these sources, the required information can be captured by on-site inspections and conducting interviews with third parties, e.g., business partners, witnesses, creditors and other stakeholders.

Great care should be exercised to ensure that information obtained in the course of the investigation has been obtained lawfully. Examples of illegal sources of information include dishonest pretext calls, infiltration, information obtained in breach of data protection laws (for example Bank Data, SWIFT records) and hacking – illegally obtained evidence is sometimes admissible before the civil court but the court will decide how much weight to attach to the information and may also consider whether to exercise its discretion and disqualify it as evidence, given its provenance.

The outcome of the intelligence gathering process should be an overview ‘the big picture’ where all the different leads to the parties involved are included.

The money laundering industry atlas

Now available: an atlas database that provides detailed insights on a multitude of money laundering service providers: exposing perpetrators, trusts, offshore companies, suspected addresses, hidden structures, fake directors and networks all over the world

The Scalaris ECI AG Money Laudering Industry Atlas

Even as the world economy has stumbled, economic crime has continued to grow, booming to 10% of the global economy and fast becoming a major threat to world security. A well organized, innovative system of money laundering has allowed the industry to boom. The launderers‘ most important tool is no longer bank secrecy, but rather a complex mechanism of camouflage and deception which combines criminal activities, offshore structures and the real economy. The proponents of offshore structures claim that the vast majority of offshore patrons are engaged in legitimate transactions. Offshore centres, they say, allow companies and individuals to diversify their investments, forge commercial alliances across national borders and do business in entrepreneur-friendly zones.

In reality there is a delicate balance between lawful offshore systems, certain grey areas and illegal structures. New international regulations and anti-money-laundering guidelines make it more difficult for banks to effect daily business transactions. On the other hand, there are full service money-laundering providers located outside the official financial system who have promoted the setup of countless offshore companies, trusts and hard-to-trace bank accounts, hiding their clients’ true identities, intents and backgrounds. One major attraction of offshore havens for their users is that it remains extremely difficult to identify those behind such companies. Who are the owners of these offshore entities, on whose behalf are the “sham-directors” acting? It is increasingly challenging for all parties involved to distinguish the fine line between legal and illegal offshore transactions: this hidden apparatus has been refined in the last 10 years, becoming the central instrument for the money laundering industry, allowing launderers to sidestep existing regulations and controls and creating insurmountable investigation costs for governments and banks seeking to prevent economic crime.

As a result of years of continuous investigation by a team of highly-competent experts, SCALARIS ECI AG has developed a database that provides detailed insights on a multitude of money laundering service providers: exposing perpetrators, trusts, offshore companies, suspected addresses, hidden structures, fake directors and networks all over the world. The database is a map of the money laundering industry that illustrates how offshore financial secrecy has spread continuously around the globe. This map is constantly updated to keep abreast of innovations and developments in the money laundering industry. With this unique database, Scalaris ECI AG assists clients in detecting money laundering mechanisms, corruption schemes and commercial frauds, and in protecting businesses against the reputational and regulatory risks that involvement in economic crime, unwitting or otherwise, can trigger.

Schaden durch Cyberkriminalität ist lächerlich klein

Wirtschaftskriminalität ist im IT-Zeitalter die viel größere Herausforderung als Cybercrime, sagt der auf Wirtschaftsdelikte spezialisierte Firmenberater Andrea Galli.

Foto: APA/GEORG HOCHMUTH


Foto: APA/GEORG HOCHMUTH

Unternehmen werden durch übermäßige Warnungen vor Cyberkriminalität und den damit verbundenen teuren Maßnahmen in die Irre geführt. Anstatt sicherheitstechnische Burgen zu bauen, mit denen Unternehmensgeheimnisse und Daten geschützt werden sollen, müsse der Fokus viel stärker auf dem Prüfen von Informationen liegen, so Galli im Rahmen der diesjährigen Future-Network-Technologiekonferenz in Zürich: “Der größte Schaden entsteht nicht durch entwendete Daten, sondern durch Daten, die von vornherein manipuliert wurden, um Konzerne, ja ganze Staaten zu täuschen.”

15.000 Milliarden Dollar Schaden

Galli, der sich beim Schweizer Nachrichtendienst scalaris eci ag auf die Prävention von Wirtschaftsdelikten spezialisiert hat, schätzt den durch die Manipulation von Daten entstehenden Schaden auf 15.000 Milliarden Dollar jährlich. Dazu zählt er etwa Geldwäscherei, die durch das Vorspiegeln falscher Tatsachen und das Tarnen von Identitäten oftmals ohne Wissen involvierter Unternehmen passiere, wie auch den Betrug und Börsengeschäfte durch manipulierte Informationen. Cyberkriminalität sei im Gegensatz gerade einmal für ein Prozent dieser Schadenssumme verantwortlich – und selbst organisierte Kriminalität wie Drogenhandel und Schlepperei mache nur etwa einen Zehntel des genannten Betrags aus.

Als Beispiel für die Dimension, die selbst Einzelfälle annehmen können, nannte Galli auf Nachfrage der futurezone die missglückte Übernahme der Software-Firma Autonomy durch HP. Der Computer-Konzern hatte die britische Firma noch unter dem glücklosen CEO Leo Apotheker um mehr als zehn Milliarden Dollar im Jahr 2011 gekauft, musste aber schon im darauffolgenden Jahr 8,8 Milliarden Dollar abschreiben – laut HP wurden offenbar Finanzen geschönt und so der Wert der Firma um das Zehnfache in die Höhe getrieben.

Geldwäsche über Online-Poker

Galli zufolge funktioniert die Manipulation aber auch in die andere Richtung. Geldwäsche-Organisationen würden ihr Geld als Umsatz in eigenen Online-Gambling-Firmen angeben. Diese Scheinfirmen, die ausschließlich der Geldwäsche dienen, weisen dann einen Umsatz in Milliarden-Höhe auf, obwohl sie in Wahrheit über das tatsächliche Geschäft nur wenige Millionen Dollar eingenommen haben. Staaten würden diese Mechanismen teilweise kennen, seien aber aufgrund der multinationalen und globalen Verflechtungen mit der Verfolgung derartiger Machenschaften überfordert. Oft würden die Kriminellen über Umwege auch in Wirtschaftszweige investieren, die ein hohes Ansehen genießen, wie etwa Alternative Energien oder Clean Tech, und daher weniger unter Beobachtung der Kontrollbehörden stehen.

Die von der Industrie geführte Sicherheits- und Cybercrime-Debatte hält Galli jedenfalls für verfehlt. “Der durch Cyberkriminalität verursachte Schaden ist im Vergleich zur Wirtschaftskriminalität lächerlich klein und irrelevant, auch wenn uns große Audit-Unternehmen das Gegenteil weismachen wollen”, sagt Galli. Eine Festung zu bauen, wie es viele Unternehmen derzeit machen, habe schon im Mittelalter nicht immer geholfen. Vielmehr sollten Firmen bei ihren Geschäften genau prüfen, ob sie den vorhandenen Informationen und damit dem Geschäftspartner trauen können. Mit entsprechenden Maßnahmen könne viel mehr finanzieller wie auch ein potenzieller Imageschaden abgewendet werden als sich über entsprechende Security-Lösungen in falscher Sicherheit zu wiegen.

(futurezone) Erstellt am 16.09.2013, 06:00