he world is now facing its biggest financial crisis. Governments are pouring vast amounts of taxpayers' monies to rescue banks who indulged in irresponsible business practices. Teachers, nurses, bus drivers, shop workers, cleaners and pensioners are bailing out bankers who collected telephone number salaries.
The UK government bailed out Northern Rock and is pouring around £500 billion to support distressed banks. Germany is providing about $400 billion to prevent banking collapses. The European Central Bank is offering support of around $500 billion. Around 15 US banks have been closed and the cost of their deposit guarantees met by taxpayers. The US government has nationalised Fannie Mae and Freddie Mac at a possible cost of over $200 billion. A soft loan of $29 billion persuaded JP Morgan to buy Bear Stearns. Lehman Brothers filed for bankruptcy. Morgan Stanley is expecting to be rescued. With support from the government Wachovia may be taken over by Citigroup. The US legislators recently approved a $700 billion package and the taxpayer support is already in excess of $1 trillion.
Banks want public handouts but have systematically destroyed the tax base. They have extensive offshore tax haven operations that not only enable them but also their wealthy clients and multinational corporations to avoid taxes. Ordinary citizens are constrained by law, but banks have shown willingness to violate law, all in pursuit of profits and bonuses for the executives.
Following a US Senate Committee inquiry into the design, marketing and implementation of abusive tax avoidance schemes, KPMG, a firm of accountants admitted “criminal wrongdoing” and was fined $456million. Shuffling money, without necessarily any underlying economic transaction, is often a key part of tax avoidance schemes and banks have been central to this highly profitable but dubious trade.
The Committee found that in the case of some banks' mass marketed schemes: “some investment advisory firms helped draft complex transactional documents. Major banks, such as Deutsche Bank, HVB, UBS, and NatWest, provided purported loans for tens of millions of dollars essential to the orchestrated transactions. Wachovia Bank initially provided client referrals to KPMG ... then later began its own efforts to sell … to clients”
The Committee exposed the hypocrisy of banks as the oral testimonies and documents examined by it showed that banks knew that so called transactions and loans were structured in an unusual way and designed to achieve the specific tax aims for KPMG clients. The transactions had little economic substance but banks agreed to: “lend, on a non-recourse basis, tens of millions of dollars to a shell corporation with few assets and no ongoing business, to give the same shell corporation an unusual “loan premium” providing additional tens of millions of dollars, and to enter into interest rate swaps that, in effect, reduced the ‘loans' above-market interest rate to a much lower floating market rate”.
The Committee found that Deutsche Bank provided credit lines of about $2.8 billion. HVB provided credit lines that totalled nearly $2.5 billion. NatWest provided more than $1 billion. UBS provided credit lines which, in the aggregate, were in the range of several billion Swiss francs. Wachovia Bank also provided some transactions for KPMG.
The documents examined by the Committee show that Deutsche Bank knew that the tax schemes posed a reputational risk to the bank, but it went ahead and collected more that $79 million in fees. HVB earned over $5.45 million from schemes sold in a three month period. Others also profited from destruction of the tax base.
A more recent US Senate Committee report looked at how some financial institutions have designed, marketed, and implemented transactions to enable foreign taxpayers, including offshore hedge funds, to dodge around $100 billion of taxes on U.S. stock dividends alone. Cayman Islands and Jersey provided the fiddle factories. The Committee found that: “Morgan Stanley helped clients, from 2000 to 2007, dodge payment of U.S. dividend taxes of over $300 million. Lehman Brothers estimated that in one year alone, 2004, it helped clients dodge U.S. dividend taxes amounting to perhaps $115 million. UBS enabled clients, from 2004 to 2007, to dodge $62 million in dividend taxes, but last year stopped offering the Cayman stock loans that produced that figure. Maverick Capital, which runs several offshore hedge funds, used dividend enhancement products at multiple firms to escape dividend taxes from 2000 to 2007, totaling nearly $95 million. Citigroup told the IRS that it had failed to withhold dividend taxes on a limited set of swap transactions from 2003 to 2005, and voluntarily paid those taxes which totaled $24 million”
The annual audited accounts published by banks did not provide any inkling of the nature of their income. None of their executives ever informed regulators, but internally there were plenty of celebrations. The Senate Committee reported that one Lehman Brothers employee exclaimed “the cash register is opening!!!!” A senior Lehman official responded: “Outstanding. … Let's drain every last penny out of this [market] opportunity.”
The fees charged by the financial institutions for swap, stock loan, and other transactions that enabled clients to dodge U.S. dividend taxes typically included a portion of the dividend tax “savings and: “Morgan Stanley estimated that its 2004 revenues from its dividend-related transactions totaled $25 million. Lehman calculated that its Cayman stock lending operations produced a 2003 profit of $12 million, and projected doubling those profits the next year to $25 million. UBS estimated its 2005 profits at $5 million and predicted double that amount in 2006. Deutsche Bank stated that, in 2007, its stock loans alone had produced profits of $4 million”
The full extent of the role of tax avoidance and evasion by banks is not known. Some states, such as the US, have the necessary administrative and legislative structures to investigate abuses, but many countries lack the necessary resources to even begin to bring this industry to book. The above abusive schemes are likely to be replicated all around the globe and inflict massive losses on all communities. The unethical behaviour of banks has forced normal people to pay unnecessarily higher amounts of tax.
Tax havens have provided secrecy and been the willing accomplices of banks. Their Nelsonian administrative structures have enabled the tax avoidance industry to flourish. They also often refuse to co-operate with onshore investigators. Now amidst the deepening financial crisis they have the brass neck to expect taxpayers of onshore jurisdictions to bail them out. Guernsey has been undermining the tax base of European countries for years. Now with the collapse of Iceland's Icesave, it wants the UK government to help. Jersey has been operating fiddle factories for decades and in early October, its minister told worried investors that “even if one of the banking groups was in dire straits, the government of the parent company would not allow the Jersey branch to go under”. He then added “because most of the money deposited in Jersey was funnelled through the City of London, the chances were that any depositor protection arrangements put in place by the UK government would be extended to Island branches – as happened earlier this year in Guernsey, which had a branch of Northern Rock”.
So there you have it. Banks, their executives and tax havens are to be bailed out by the taxpayers.
Through tax avoidance, banks, together with accountants and lawyers, have been engaged in relentless economic warfare against normal, decent and hardworking citizens. The US may be losing around $345 billion of tax revenues each year due to organised tax avoidance. The UK may be losing over £100 billion each year and developing countries, often the poorest, are estimated to be losing around $500 billion each year. The scams have forced many people to go without adequate healthcare, education, pension, clean water, pensions, transport and many public goods and sent many to premature death. Yet these people want the public to bail them out.
Successive governments have been in awe of the finance industry and deep down bankers don't expect governments to change the way they operate. They have got used to fat-cat salaries, bonuses and share options, and expect the same to continue once the current storm has been weathered. They don't expect any questions about predatory practices or their role in the loss of tax revenues. They have remained silent on their offshore operations and how they systematically weakened the nation states by destroyed the tax base. Yet reform and retribution is long overdue.
Tax avoidance, which involves transactions of no economic substance, should be made a sub-category of money laundering and thus treated as a criminal offence. Banks should not be able to provide offshore services to citizens and corporations registered in onshore places. The deposit-taking licence of banks peddling tax-avoidance schemes should be withdrawn. Bank executives should be made personally liable for the losses inflicted on the taxpayers. No bank should be able to pay any dividends until the tax losses to communities have been made good. All countries should co-operate and help each other to prosecute any bank or its client engaged in developing, marketing or implementing tax avoidance schemes.
US Senate Permanent Subcommittee on Investigations, (2003), The Tax Shelter Industry: The Role of Accountants, Lawyers and Financial Professionals, US Government Printing Office, Washington DC
Full report is available at http://hsgac.senate.gov/public/_files/091108DividendTaxAbuse.pdf