Vincentian woman, firms from St.Vincent and The Grenadines indicted on $50m fraud in New York
A Vincentian woman and two companies based in St. Vincent and the Grenadines (SVG) are among six individuals and four corporate entities indicted in the United States in international securities fraud and money laundering schemes amounting to US$50 million.
Linda Bullock, 57, along with Loyal Bank, an off-shore bank with offices in Budapest, Hungary and SVG; and Loyal Agency and Trust Corp. (“Loyal Agency”), an off-shore management company located SVG, together with a large corporate service provider from SVG called Consulco Intercorp. INC are among the group that prosecutors in New York say proposed that an undercover law enforcement agent purchase a Pablo Picasso painting to launder fraudulent profits from stock manipulation scheme. The multi-count indictment was unsealed on Thursday in federal court in Brooklyn. The other individual defendants are: Panayiotis Kyriacou, also known as “Peter Kyriacou”, 26, Aristos Aristodemou, 49, and Matthew Green, 50, residents of London, England; Arvinsigh Canaye, also known as “Vinesh Canaye”, 30, a resident of Mauritius and Adrian Baron, 63, a resident of Budapest, Hungary. The other corporate defendants are Beaufort Securities Ltd., of London, England and Beaufort Management Services Ltd., of Mauritius. The charges include conspiracy to commit securities fraud and money laundering conspiracy. Richard P. Donoghue, United States Attorney for the Eastern District of New York alleged that the defendants “engaged in an elaborate multi-year scheme to defraud the investing public of millions of dollars through deceit and manipulative stock trading, and then worked to launder the fraudulent proceeds through off-shore bank accounts and the art world, including the proposed purchase of a Picasso painting,” Advertisement He added: “The charges announced today reflect that this Office, together with our law enforcement partners, is committed to holding accountable those who defraud investors, regardless of the complex schemes they use to hide their ill-gotten gains.” Among other things, prosecutors have alleged that between January 2011 and February 2018, the Beaufort defendants; Loyal Bank; Loyal Agency; Baron, the Chief Business Officer of Loyal Bank and a Director of Loyal Agency; and Bullock, the Chief Executive Officer of Loyal Bank and a Director of Loyal Agency, together with their co-conspirators, devised and engaged in a scheme to launder securities fraud proceeds for their clients. To facilitate this scheme, Beaufort Securities transferred funds to corporate bank accounts at Loyal Bank opened in the names of off-shore shell companies that were controlled by the bank’s clients, the allegation said. It is further alleged that Loyal Bank then provided debit cards to its clients to withdraw funds from those accounts in an untraceable manner to hide the source of the money and facilitate ongoing securities fraud. The United States Attorney General’s Office, Eastern District of New York noted that the charges in the indictment are merely allegations and that the defendants are presumed innocent unless and until proven guilty. Financial transparencyThe biggest loophole of all
Overview of Delaware Taxes Delaware has some of the lowest taxes in the country. There is no statewide sales tax and property taxes are 4th lowest in the nation. There is a progressive income tax for the state.
Retired? Use our Retirement Income Tax Calculator. 2017 is going to be a most challenging year for using offshore structures to hide your assets. For example, the Swiss banks will start to implement the automatic exchange of information from 2017 onward. Singapore follows suit, agreeing to implement Common-Reporting Standard (CRS) starting from January 1, 2017, and will eventually start exchanging information in 2018. 100+ jurisdictions have committed, and more to join in the upcoming year.
With the trends, we can now be sure that we should use offshore banks (and companies) in the right way. So, in this article, we would like to suggest several ways you can use offshore banks legally and ethically in 2017 and beyond, as follow: 1. Diversify your currenciesSuppose your home country falls deep into recession and hyperinflation is looming ahead of you. The worst situation for you is to have all of your assets denominated in your home country’s currency. To reduce your risk, you need to do currency diversification — that is, holding various foreign currencies, just in case. Now, there are many ways to diversify your currencies: Buying foreign bank notes, opening a local bank account in foreign currency, and so on — but those are limiting your options. Exchanging your local currency with another via a money changer is doable, but not practical. Want to bank in foreign currencies locally? Your options are limited — typically in USD or any other popular currency like EUR or GBP depending on your local banks’ policies. The best currency diversification options for you is opening an offshore bank account. A typical offshore bank offering online banking services allows you to open a multi-currency account. 2. Protect your assetIn today’s age of transparency, offshore banks can no longer offer you sufficient privacy and secrecy for your asset protection purposes. That said, although it’s no longer feasible for you to keep your account concealed from the prying eyes of your competitors or even Government agencies, you can certainly make things difficult for them to grab a hold of your assets offshore via a filed lawsuit. There are numerous asset protection ways you can use, such as setting up offshore trust funds, buying precious metals via your offshore banks, and so on. Refer to this article for more details. 3. Get higher deposit interest ratesDid you know that you can get nearly 6.5 percent of deposit interest rate in Indonesia? Now compare that to 0.75 percent in Singapore or 1.3 percent in the United States. If 6.5 percent is not high enough, how about a cool double-digit deposit rates of 20 percent in Uzbekistan, or perhaps a lucrative 8.94 percent in South Africa? (source) Opening a bank account in an offshore jurisdiction that offers you a lucrative deposit rate is a sound passive wealth protection method that you should definitely make use of. 4. Invest in foreign investment vehiclesWhile house prices went down in jurisdictions like the UK and potentially the US, other jurisdictions are growing considerably. The same is true for stock markets — some are still undervalued, making them the right place to invest your money it. However, there are some limitations if you want to tap into the emerging markets. Some overseas investment opportunities are only available for those who have the right structure, which usually consists of an offshore entity and an offshore bank account. Opening an offshore bank account, along with setting up an offshore company, allow you to make investments offshore — e.g. Buying overseas real estate, investing in foreign markets, acquiring local businesses, etc. 5. Save for rainy daysYou can use an offshore bank account to stash your assets for rainy days. “What kinds of rainy days?” you ask. Well, there are numerous scenarios that can present doom and gloom to your well-being, such as capital control imposed by your home country (e.g. Greece crisis,) need medical treatment overseas, civil wars, and other worst case scenarios that you may have to encounter in the future. Having an offshore bank account can offer you not only peace of mind, but also freedom for having multiple options for survival — just in case. TakeawayThere are many other legitimate ways to use an offshore bank for giving you an edge over your less-than-ideal circumstances, but the five mentioned above should b e sufficient in giving you some ideas on how to use your offshore bank account better. Some final words of advice: We need to stop viewing offshore banking as a way to hide your assets from the taxmen. We can use the offshore bank account ethically, and you should use it in the right way, or else EU finance minister meeting: Blacklist is whitewashing tax havensDEVIN NUNES raised eyebrows in 2013 when, as chairman of a congressional working group on tax, he urged reforms that would make America “the largest tax haven in human history”. Though he was thinking of America’s competitiveness rather than turning his country into a haven for dirty money, the words were surprising: America is better known for walloping tax-dodgers than welcoming them. Its assault on Swiss banks that aided tax evasion, launched in 2007, sparked a global revolution in financial transparency. Next year dozens of governments will start to exchange information on their banks’ clients automatically, rather than only when asked to. The tax-shy are being chased to the world’s farthest corners.
And yet something odd is happening: Mr Nunes’s wish may be coming true. America seems not to feel bound by the global rules being crafted as a result of its own war on tax-dodging. It is also failing to tackle the anonymous shell companies often used to hide money. The Tax Justice Network, a lobby group, calls the United States one of the world’s top three “secrecy jurisdictions”, behind Switzerland and Hong Kong. All this adds up to “another example of how the US has elevated exceptionalism to a constitutional principle,” says Richard Hay of Stikeman Elliott, a law firm. “Europe has been outfoxed.” Latest updates
FATCA has spawned the Common Reporting Standard (CRS), a transparency initiative overseen by the OECD club of 34 countries that is emerging as a standard for the exchange of data for tax purposes. So far 96 countries, including Switzerland, once favoured by rich taxophobes, have signed up and will soon start swapping information. The OECD is also leading efforts to force multinationals to reveal more about where and how profits are made, and the deals they cut with individual governments, in order to curb aggressive tax-planning The EU finance ministers have today defined the final criteria for the identification of tax havens. In November 2016, the EU finance ministers had already agreed on rough criteria for such an EU black list. Today, it has been fixed how to deal with countries without or with extremely low corporate taxes. In September, the EU’s blacklist will be ready.
At their meeting, EU finance ministers also agreed on the amendments to the anti-tax avoidance directive. The EU Member States are the first to implement the OECD rules against the international misuse of hybrid constructions. The directive is to enter into force in 2020, one year later than suggested by the EU Commission. It provides for temporary exemptions for regulatory capital instruments. MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group comments on the results of the EU Finance Minister meeting: „This blacklist is an act of whitewashing. If countries with a tax rate of zero do not appear on the blacklist, it is not worth the paper it’s written on. The criteria for the identification of tax havens are a bad joke: a country which allows profit shifting of companies and exempts these profits from taxation will not be considered a tax haven. The Council’s agreement clearly falls behind the Commission’s proposal. Tax havens that attract companies without significant corporate taxes will not appear on the blacklist of the future EU. These countries are to be assessed according to the harmfulness criteria of the Council’s „Code of Conduct Group on Business Taxation“, even though this working group has not even been able to prevent tax dodging within the EU in recent years. As the working group does not meet in public and decides unanimously, the political in-fighting will take place without public scrutiny. In September, an empty black list will be presented, on which all relevant financial centers will be missing. The agreement reached by the EU finance ministers on amendments to the anti-tax avoidance directive is a major step forward in the fight against tax avoidance. Europe is thus playing internationally a pioneering role in the fight against tax avoidance by large companies. The debate has also revealed, which EU member states have their foot on the brake. It is unacceptable, that the Netherlands have been able to delay the entry into force of the rules against the tax breaks for one year. However, neither the Netherlands could not win their claim for a five-year postponement and nor the UK’s demand for further exemptions for banks and insurance companies had been successful.“ Credit Suisse To Disclose Names Of U.S. Clients Suspected Of Tax Evasion.Credit Suisse AG, Switzerland’s second-largest bank, has begun notifying certain U.S. clients suspected of offshore tax evasion that it intends to turn over their names to the Internal Revenue Service, with the help of Swiss tax authorities.
Credit Suisse’s notification by letter, a copy of which was obtained on Monday by Reuters, says the handover of names and account details will take place following a recent formal request for the information by the IRS. The move by Credit Suisse to disclose American client names and account information is the latest twist in a showdown between Switzerland and the United States over the battered tradition of Swiss bank secrecy. U.S. authorities, who suspect tens of thousands of wealthy Americans of evading billions of dollars in taxes through Swiss private banks in recent years, are conducting a widening criminal investigation into scores of Swiss banks, including Credit Suisse. The letter, on Credit Suisse letterhead, is dated November 2, comes from the bank’s Zurich headquarters and is signed by two senior Credit Suisse executives. It cites a formal request made by the IRS to the Swiss Federal Tax Administration, or SFTA, via a tax treaty between the two countries. SEEKING INFORMATION “The I.R.S. is seeking information with regard to accounts of certain U.S. persons owned through a domiciliary company (as beneficial owners) that have been maintained with Credit Suisse AG,” the letter said. It added that the recipient of the letter, whose name was redacted in the copy obtained by Reuters, fell into the category of clients sought by the IRS. Domiciliary companies are a type of shell company. “In connection with the IRS treaty request, the SFTA has issued an order directing Credit Suisse to submit responsive account information to the SFTA,” the letter said. “This order is immediately executable and Credit Suisse as an information holder has no right to appeal.” It was unclear how many U.S. clients had been sent the letter. David Walker, a spokesman for Credit Suisse, declined to comment on the matter. The letter says that the IRS request covers accounts maintained at any time over the period from January 1, 2002, through December 31, 2010. The letter was signed by Michel Ruffieux and Stephan Gussman, both managing directors at Credit Suisse. Credit Suisse in July received a target letter from the U.S. Justice Department notifying it that it was the subject of a federal criminal investigation into its offshore private banking services. Switzerland is trying to craft a deal with the United States that would cover its entire banking industry of some 355 banks. It is unclear how many American clients of Credit Suisse hold private banking accounts that have gone undeclared to U.S. tax authorities The Offshore Wrapper: a week in tax justice #70
MTN’s Mauritian BillionsA group of investigative journalists in Africa working with Finance Uncovered, a TJN supported project have discovered that Africa’s largest mobile phone network, MTN, has been moving billions of Rand in revenue to the island of Mauritius.
MTN is a giant in Africa. One in four mobile phones on the continent are on the MTN network, and the company earned $12.5bn in 2014. This makes it one of the largest businesses and largest tax payers in the countries where it operates. However, Finance Uncovered journalists found MTN subsidiaries in Nigeria, Ghana, Cote d’Ivoire and Uganda making questionable payments that had the potential to reduce taxable profits in those countries. For years, subsidiaries paid an annual charge for management and technical services to a shell company in Mauritius where MTN employs no staff. MTN insisted that the Mauritian company was tax resident in South Africa, but the investigations team revealed a number of government agencies in countries outside of South Africa challenging these payments. The story can be read in South Africa’s Mail and Guardian, the Ugandan Observer and Ghana Business Online. The case raises an interesting issue about the nature of tax avoidance by multinationals. For years the public perception of tax avoidance has been all about the big bad multinational squirreling away their profits in a tax haven and screwing over the public. However if what MTN say is true, and all the revenues moved to Mauritius are taxed in South Africa, then this is perhaps less a story about the taxes MTN pays, but rather a distributional issue between South Africa and other African countries. MTN has a special relationship with the South African government. The current Vice President was the Chairman of MTN’s board for 10 years. Could this be a case of South Africa using its corporates to extract taxable profits from other countries? OECD to the rescue?Are all of these issues about multinationals and tax avoidance about to be consigned to the history books? Last week the OECD released its final recommendations on how governments should change the tax rules to combat profit shifting by multinationals. The proposals go by the ugly term BEPS, which stands for Base Erosion and Profit Shifting. It is hard to understate just how important this agreement is. This is the first time in years that the world’s most powerful economies have made a concerted effort to come together and tackle tax avoidance. Already the G20 has signed up to the OECD recommendations and it is expected that most countries in the world will do also. But important is not the same as effective. Unfortunately, the OECD continues to embrace the core mechanisms that are at the heart of the international tax avoidance problem, meaning that any action will likely only have a limited effect. Most profit shifting happens when affiliates of multinational corporations trade with each other. These intra-company trades can be priced in a way to allow companies to move profits between high tax and low tax jurisdictions. In theory tax authorities can disallow any trades that do not happen at an open market price and aren’t genuine. This is the ‘arms-length’ principle (the story from Swaziland below illustrates how some can claim the most absurd ‘arms-length’ transactions’.) However, in practice the multinationals’ accountants make sure that these trades are all but impossible to crack. A powerful example is provided by Finance Uncovered’s MTN story. In 2011 the Ugandan Revenue Authority discovered MTN charging management fees to a post box in Mauritius. Four years later they are still battling with the company in the courts. Sadly, the OECD continues to embrace the arms length principal. Its proposals essentially ask tax authorities to assume that multinationals companies are simply a series of independent companies, when clearly they are not. In other words, we continue to live in a fantasy world. A full briefing on the OECD’s proposals can be found at the BEPS monitoring group. Plane corruption?The dogged investigative combination of Susan Comrie (another Finance Uncovered veteran) and Dewald van Rensburg of City Press have resulted in a blistering investigation into the collapse of Swaziland’s first iron ore mining operation since 1977. In 2011 a company called SG Iron was given a 7 year license to reprocess Iron Ore dumps that were left behind when Anglo American stopped mining in the country over three decades ago. However, despite booming commodity prices at the time, the company never turned a profit and as a result paid no tax. Almost all of the revenues made by SG Iron were eaten up by “transport costs” paid to a company in the Seychelles owned by Shanmuga Rethenam, a Malaysian businessman and owner of SG Iron. He told City Press that the 94-97% of revenues that the company, located in landlocked Swaziland, spent on buying transport from a company several thousand miles away in the Indian Ocean were a “total arms-length transaction”. One Sawzi did see a healthy return, the King, who owned a 25% stake in SG Iron. He was given a loan of $10m which would be repaid through future dividends from SG Iron, dividends which of course would never be paid. Rethenam has also claimed that he was “forced” to pay $1.5m to a New York art dealer and $3.5m for luxury upgrades to the Sawzi King’s plane. The full incredible story can be found here. World Bank President says tax avoidance is a form of corruptionCity Press’ Swazi investigation is exactly the kind of example that may interest World Bank President Jim Yong Kim. In a wide ranging speech earlier this month the President of the World Bank said: “Some companies use elaborate strategies to not pay taxes in countries in which they work, a form of corruption that hurts the poor.” Quite. More on the speech on the TJN website here. The Netherlands, user or abuser?The Netherlands has come in for a lot of criticism in recent years over the way in which multinational companies use the country to structure their tax avoidance schemes. Most recently an article from the Guardian exposed how AstraZeneca, a UK drugs company used a tax avoidance scheme routed though the Netherlands to avoid millions a year in taxation. However, just as multinationals are keen to put their money through the Netherlands, Dutch people are just as keen to get their money out. A former Dutch tax inspector has told a TV programme that the nation’s wealthy are stashing an estimated €129 billion in tax havens. Jan Van Koningsveld told the programme that although using shell companies in a tax haven is not in itself illegal, they were a common tool used by criminals. Swiss banker beats the U.S. in trial over offshore tax evasionThe courtroom victory of the only Swiss banker to beat the U.S. in a trial over offshore tax evasion may embolden other indicted financial workers to leave a legal limbo some have occupied more than five years.
Twenty-five offshore bankers, lawyers and advisers have yet to answer U.S. Department of Justice charges that they helped Americans evade taxes. Most live in Switzerland, where they remain off limits to U.S. prosecutors because the country doesn’t extradite people for tax crimes. If they cross the border into another country, however, they risk arrest, and the U.S. charges have no expiration date. Raoul Weil, 55, the former head of wealth management for UBS Group AG, was in similar straits until he was arrested in Italy last year, after his indictment in 2008. After two months in an Italian jail, he waived extradition and went to the U.S. to face a conspiracy charge that he conspired to help thousands of U.S. clients use Swiss banking secrecy to evade taxes. Last month, after a three-week trial and almost a year of house arrest, Weil was acquitted by a Florida jury that needed only 85 minutes to deliberate. The verdict was a swift rebuke of a case against the highest-ranking offshore banker charged since the U.S. began cracking down on tax evasion in 2008. A lawyer who defended Weil said his client’s victory may temper the zeal of prosecutors. “It’s never easy to defeat the U.S. government,” Matthew Menchel, an attorney with Kobre & Kim LLP in Miami, said in an interview in Geneva. “The DOJ is going to be more careful scrutinizing its evidence before deciding to bring charges against someone.” ‘National Hero’ Weil’s compatriots were cheered by his court victory with Geneva financial newspaper L’Agefi calling him a “national hero” of “remarkable courage.” His success may tempt others to take their chances with a jury or to plead guilty and help prosecutors in a bid for leniency. They include former employees of Switzerland’s top three wealth managers — UBS, Credit Suisse Group AG and Julius Baer Group Ltd. Just 10 days after Weil’s acquittal, Martin Dunki, a 66-year-old retired client adviser at Zurich-based Rahn & Bodmer Banquiers, a private bank established in 1750, was indicted on a charge of conspiring to help Americans hide hundreds of millions of dollars in offshore accounts. Menchel said the Weil case was built on lies told by former UBS bankers who implicated him to avoid prison. Prosecutors argued that Weil knew UBS bankers had used deception, sham corporate structures and cash deliveries to help U.S. clients cheat the Internal Revenue Service. “I was acquitted, but that was after two months in prison and then 10 months under house arrest,” Weil was quoted as saying in an interview published in Swiss newspaper NZZ am Sonntag on Nov. 9. “They wanted to soft-boil me.” Justice Setback Weil’s acquittal was a setback for the Justice Department’s goal of holding more top managers accountable for crimes committed by their banks. The agency is under pressure to prosecute offshore bankers, including those involved in rigging interest rates and currency markets, according to Patrick O’Donnell, a white-collar criminal defense lawyer at Harris, Wiltshire & Grannis LLP in Washington. “The U.S. seems to bring far more extraterritorial cases than any other country and the trend is growing,” O’Donnell said. “Congress has been howling for the heads of executives.” Weil was one of 38 offshore bankers, lawyers and advisers charged in the U.S. since 2008 with crimes related to helping Americans evade taxes. Of those, seven have pleaded guilty, two were convicted at trial, two await trial and two were acquitted, including Weil. No Proof Jury foreman Howard Farber, a 69-year-old retired insurance agency owner, said prosecutors failed to link Weil to the criminal conduct of his subordinates. Five former UBS bankers or managers testified against Weil. They included three who secured deals to avoid prosecution, one under indictment, and one who pleaded guilty. That banker, Renzo Gadola, was sentenced in 2011 to five years of probation and has moved back to Switzerland. “There was really no proof that went directly to Weil,” Farber said by telephone, in his first public remarks since the trial. “We all felt that the government overstepped its bounds. They really should not have gone after him.” Menchel assailed the credibility of the former bankers who cooperated with the government, particularly Hansruedi Schumacher, a former UBS and Neue Zuercher Bank AG manager indicted in 2009, and Martin Liechti, a former head of cross- border banking at UBS. “The Justice Department may have gotten comfortable that any banker they charged would just roll over,” Menchel said last month. “They shouldn’t take it for granted that any Swiss banker will give in and seek a plea bargain.” Smoking Guns At future trials, prosecutors may have a hard time proving a connection between client advisers who knowingly broke the law and their senior managers, unless there’s a “smoking gun” that shows the supervisors had knowledge, according to Milan Patel, a lawyer with Anaford AG in Zurich. Still, most of those under indictment, including former bankers at Credit Suisse and Julius Baer, were client advisers or heads of teams of employees, rather than senior executives at Weil’s level. “Client advisers who committed egregious offenses are probably trying to cooperate and strike a deal with the Justice Department,” Patel said. “Bankers fear coming to the U.S. because the DOJ can detain them on arrival pending trial. Therefore, walking around freely in Switzerland may be a more appealing option, even if the charges remain unresolved.” Stefan Buck, who was Bank Frey & Co.’s head of private banking, was indicted last year in New York. His lawyer filed a motion seeking bail without Buck first having to appear in a New York courtroom. Buck ultimately “wishes to leave the ‘safe haven’ of Switzerland to appear in a U.S. court to clear his name,” the filing said. Prosecutors oppose his bail motion, which is pending. Probe Continues The U.S. probe has benefited from voluntary disclosures by at least 45,000 taxpayers and more than 100 Swiss banks seeking to reduce penalties through non-prosecution agreements. Information passed to U.S. authorities contains thousands of employee names, according to Douglas Hornung, a Geneva-based lawyer, who represents Swiss financial workers. “Weil’s acquittal was far from good news for bank employees lower down the food chain,” Hornung said. “After losing face in court in November, U.S. prosecutors will redouble their efforts to pursue smaller fish.” The Weil acquittal doesn’t lessen the Justice Department’s commitment to holding offshore tax evaders and those who help them accountable, spokeswoman Nicole Navas said. UBS was charged in 2009 with conspiracy and avoided prosecution by paying $780 million and admitting it helped Americans evade taxes. In a landmark blow to Swiss bank secrecy, UBS handed over information on about 4,700 accounts. Have Activist Investors Finally Lost Their Luster?
Trust is the foundation of American capitalism. Many activist investors have damaged that faith.
Through 2014 and 2015, the activist investor movement was picking up steam. Corporate boards were running for cover or capitulating to activist demands before they got into proxy fights. The media heaped adulation on activist investors. Bill Ackman graced the cover of Forbes with the moniker "Baby Buffett." Nelson Peltz headlined big conferences. CNBC held off its commercial breaks when Carl Icahn called in. In recent weeks, however, the activist movement appears to have peaked. Investors who entrust their money to activists do so for one simple reason: they anticipate higher returns than they obtain from index funds. After all, why would they pay activists a flat 2% management fee plus 20% on their gains, when they can invest in Vanguard index funds for only 0.15%? The performance of activist funds in 2015 and January 2016 was anything but impressive. During 2015, activist targeted stocks declined 8%, compared to gains of 1.4% for the S&P 500. And in January, activist funds declined an additional 6.1%. These results are causing investors to reconsider investing in activists and voting with them in proxy fights. RISE OF THE ACTIVISTS During 2014 and 2015, the prominence of activists exploded. More than 200 American companies were publicly subjected to demands from activist investors in the first half of 2015 and approximately two-thirds of those demands were successful. The win rate of activists battling for a seat on a company's board rose from 52% in 2012 to 73% in 2014. And within 18 months after an activist investor joined their board, 44% of companies replaced their CEOs. Activists posted strong returns from 2012 to 2014, buoyed by the S&P's post-recession performance. Activist funds gained 9.3% in 2012, 19.2% in 2013, and 8.5% in 2014, compared to -0.5%, 15.8%, and 2.1 % for the S&P 500 Index. Activist coffers swelled from $23 billion in 2002 to $166 billion in 2014. Some activists like Icahn have even taken relatively inactive positions in well-managed, large companies like General Electric, a move that makes "activist investing" sound more like stock picking with very high fees than a balanced investment strategy. Activists recorded some big wins in the last two years in struggles with major companies like DuPont, Dow, Procter & Gamble, eBay, and Microsoft. Their influence grew as they toppled leading CEOs like Microsoft's Steve Ballmer and P&G's Bob McDonald. Icahn was even able to pressure mighty Apple to let go of part of its enormous cash hoard by buying back $140 billion of its stock. At the end of 2015, activist Nelson Peltz recorded one of his biggest "wins," just six months after he lost a hard-fought proxy contest to DuPont CEO Ellen Kullman. After DuPont DD -1.04% beat the market by 100% during Kullman's first six years, the company reported two weak quarters, largely on account of factors that affected all commodity producers: China's slump, collapsing commodity prices, weak agricultural markets, and negative currency comparisons. The company's stock price dropped nearly 30%, and Peltz's team renewed its pressure on DuPont's board. Ed Breen, who joined DuPont's board in January, and the company's other board members relented. Kullman resigned under pressure, and Breen became DuPont's new CEO. During his first month on the job, Breen accepted Dow CEO Andrew Liveris' proposal to merge DuPont with Dow and then split the combined business into three smaller companies. They were following the activist's script to near perfection. Liveris himself was under pressure from another activist investor, Dan Loeb's Third Point. Just a year before, Liveris agreed with Loeb to add four new board members in exchange for a standstill in the activist pressure. Liveris and Breen announced their plan just two days before that détente was set to expire. Loeb was furious that he was not consulted about the deal, and he called for Liveris' immediate resignation. Anticipating short-term results, DuPont and Dow DOW -0.88% stocks both jumped 12% with the announcement. But the euphoria didn't last. Investors questioned the validity of the merger and subsequent three-way breakup, causing both stocks to drop 22% since then, more than 10% below their pre-merger levels. After their complex restructuring is completed, the three baby DuPont-Dows will struggle to keep up with global giants like Germany's BASF and China's Sinopec. And DuPont is closing its corporate research center that invented nylon, Teflon, and solar cells in favor of near-term product development, all while BASF invests €1.88 billion annually in R&D. By the end of 2015, the lessons learned from DuPont-Dow were causing leading law firms to recommend settlement with activist investors rather than risk costly proxy fights. AIG AIG -1.42% was the most recent to react, adding board members from Carl Icahn's team and investor John Paulson himself, in order to avoid a break-up following a losing quarter. WITHER THE ACTIVIST MOVEMENT? The veneer of invincibility is wearing off for activists. "Investing King" Carl Icahn has lost money on bets, as Hertz HTZ 0.82% and Chesapeake Energy's CHK 5.32% shareholder return fell 43% and 39%, respectively, since his interventions. Bill Ackman's firm, Pershing Square Holdings, reported a 20.5% dip in 2015, its worst performance in 11 years, and has slid an additional 18% in early 2016. Activists are currently facing the true test for any investor in a volatile, even declining, market: can they create value for investors while avoiding big pitfalls? In spite of their billionaire status, outsize egos, and media images, activists do not have investing superpowers. Instead, they have taken advantage of a simple strategy: buying volatile stocks in a rising bull market. Activists learned to avoid troubled companies and instead invested in high performers like PepsiCo, eBay, Apple, and Allergan. Then they focus on short-term financial "fixes" such as stock buybacks or splitting a company. That's what happened to Kraft when Peltz pressured CEO Irene Rosenfeld to break the global company into a North American OffshoreleaksFamed Spanish art patron uses island haven in South Pacific to manage her collection.
Tourists who come to Spain’s capital often make a pilgrimage to the museums in Madrid’s so-called Art Triangle. After the Prado and the Reina Sofia, the next stop usually is the Thyssen-Bornemisza. The Spanish state owns the majority of the paintings inside this museum, but it also holds much of the private collection of Carmen Thyssen-Bornemisza, one of the world’s biggest art collectors. Over the last years, she registered more than 10 offshore companies through Evedex INC, an well known registered agent in the Offshore Area. What visitors don’t know as they look at these Monets, Matisses and other masterpieces is that many of them are legally owned by secrecy-guarded companies in tax havens: Liechtenstein, the Cayman Islands, the British Virgin Islands and the Cook Islands. Van Gogh’s 1884 painting, Water Mill at Gennep, is one of the works Thyssen-Bornemisza purchased with the help of an offshore operative based in the Cook Islands, a South Pacific haven more than 10,000 miles from Madrid. Documents obtained by the International Consortium of Investigative Journalists show how Thyssen-Bornemisza built up part of her collection buying art from international auction houses such as Sotheby’s and Christie’s through a Cook Islands company. The offshore service provider now called Portcullis TrustNet helped with the arrangements under a secretive structure that connected people in as many as six different countries. Thyssen-Bornemisza, 69, didn’t reply to ICIJ’s questions directly, but allowed her attorney, Jaime Rotondo, to discuss her art and her offshore companies. Rotondo acknowledged that Thyssen-Bornemisza gains tax benefits by holding ownership of her art offshore, but he stressed that she uses tax havens primarily because they give her “maximum flexibility” when she moves paintings from country to country. “It’s convenient,” he said. “You have more freedom to move the assets, not just buying or selling, but also circulation.” Offshore ownership helps prevent works of art from getting tied up by laws in various countries that can make it “a nightmare” to transfer them across national borders, he said. Thyssen-Bornemisza isn’t alone in using offshore havens to manage her vast art collection. Many of the multi-millionaires and billionaires who count themselves among the world’s biggest art collectors use tax havens to buy and sell art, experts told ICIJ. Using offshore entities to buy and sell art “is quite common among the very, very wealthy,” said Hector Feliciano, a Puerto Rican journalist who investigated the commercial side of the art world for his book about Nazi-plundered art, The Lost Museum. Feliciano said many art dealers and big collectors use companies in the Cayman Islands, Luxembourg, Monaco and other “loosely regulated” jurisdictions to trade and own art in much the same way they use offshore entities to make investments, reduce their taxes and protect their fortunes. “Art to them is one more thing to be bought and sold,” he said. The global art market now tops $55.1 billion. The mixing of art and offshore is another example of how the super-rich use tax havens to organize their lives and their belongings — buying and selling art, yachts, homes and jewelry through offshore companies and trusts. In the United States, a 2006 Senate investigation found that billionaire brothers Sam and Charles Wyly and their families had spent “at least $30 million in untaxed offshore dollars” on artwork, jewelry and furnishings over a 13-year period. A $937,500 portrait of Benjamin Franklin and other items were legally owned by two offshore corporations, but the report said evidence showed that the family held and used these assets in the U.S. The Wyly brothers denied any wrongdoing, asserting that they were following the recommendations of their financial advisers. Charles Wyly, 77, died in a traffic accident in August 2011. Thyssen-Bornemisza’s attorney said she paid sales taxes for her paintings in the countries where she bought them, but she doesn’t pay annual wealth taxes on them in Spain or Switzerland, where she holds a passport. Rotondo said a loophole in Spanish law allows her to live in Spain most of the year, but not declare her wealth or pay taxes. She declares her assets in Switzerland, he said, but she doesn’t have to pay taxes there on her art because assets held in trusts are exempt from taxation under Swiss law. Had the paintings been owned directly under her name, instead of through offshore entities, she may have been required to pay millions of dollars a year in taxes, ICIJ’s research indicates Many Africans Not Reaping Job Benefits From More EducationAngola's high net education benefit likely stems from its oil resources, which have fueled rapid urban development, greater investments in education and the creation of jobs requiring more than primary education. Viewed as a whole, however, these figures paint a dismal, inconsistent picture of the employment reward for continued education in Africa. This situation likely only further fuels the lack of incentive that often exists for Africans to continue their education.
Throughout sub-Saharan Africa, basic needs often compete with a family's ability to send their children to school. While primary education may be viewed as supporting certain occupational activities in rural and urban communities, it is likely that some families do not see the benefit of continued education. And, even if families do, the labor sacrifice makes enrollment beyond primary school infeasible. African families who continue sending their children to school likely do so because they believe it will lead to better jobs. Educational Attainment Varies Widely The disparity in educational attainment across sub-Saharan Africa further highlights the region's challenges in achieving universal education. Countries such as Niger and Burkina Faso have lower percentages of their populations achieving at least some secondary education (6% and 10% respectively) while South Africa and Zimbabwe have 73% and 74% of their population with at least some secondary education. Interestingly, while the levels of some secondary education and higher vary significantly between Zimbabwe and Niger, the positive employment outcome is nearly the same. African Economic Outlook's research regarding education and skills mismatch in the region corroborate Gallup's findings. Their research provides further context by identifying that Africans with more education experience higher levels of unemployment in State Filing required on all Delaware LLC'sOffshore tax havens bring to mind tropical islands or Alpine towns. But the preferred location for organized crime figures and corrupt politicians worldwide is the US state of Delaware.
Delaware is becoming the choice of drug dealers, organized crime and corrupt politicians to evade taxes and launder money, an investigation of the Organized Crime and Corruption Reporting Project (OCCRP) found. The International Consortium of Investigative Journalists (ICIJ) assisted in the investigation. “The biggest problem in the world is the US when it comes to shell companies, we are the biggest international problem,” said Denis Lormel, a FBI agent for 28 years and former chief of FBI’s financial crimes section. Lormel now runs his own consulting firm. “Because of the lack of transparency, shell companies become a vehicle of choice for the bad guys.” The Tax Justice Network listed the tiny state as their No. 1offender in their 2009 Financial Secrecy Index, a ranking based on the scale of cross-border financial activity and on “Delaware's commitment to corporate secrecy, and resolute lack of cooperation and compliance with international norms.” (See the Full Delaware report here) Andrei Papanicoglu , from one of the Delaware Registered Agents, Evedex LLC agrees: “The US has been pretty robust in making sure that other countries live up to these standards, but they have been lax about applying the same degree of rigor to themselves. It’s nowhere near what the US has signed on to do,” he said. Delaware requires no information on actual ownership when companies fill out incorporating documents. Federal law enforcement agencies complain that this lack of identification makes it difficult at best for investigating suspected wrong-doing concludes the agent. Rick Geisenberger, Delaware’s deputy secretary of state and chief of the corporations division, said that asking for additional information from companies would interfere with a speedy and efficient incorporation system and could divert investment activity elsewhere. He said the overwhelming majority of companies that incorporate in Delaware are legitimate. “I’m under no illusions that some of them are bad guys,” Geisenberger said. “But does that mean you put in place procedures that take longer to form entities in order to prevent those bad guys?” Geisenberger’s comments parallel what is said in offshore havens around the world. “Many high-taxing, high-spending governments would like everyone to believe that offshore companies are only used by fraudsters, terrorists and crooks. That`s completely unjustified. While there is always a rotten apple in any box (especially, if the box is large enough), 99 percent of all business transacted through offshore companies is completely legitimate,” said the website for Fidelity Corporate Services, a Seychelles offshore registry firm. |
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Piqued that the name of the winner of the 1978 Booker winner was leaked long before the ceremony, the organisers in 1979 were keen to make sure the press were kept in the dark this time around. The judges swore themselves to secrecy and only reached their decision an hour before the envelope was opened on the big night. It worked. The announcement came as a complete surprise. Indeed, no one could quite believe it. Rather than VS Naipaul's masterful A Bend In the River, rather even than William Golding's typically impressive Darkness Visible, the committee had plumped for Offshore by Penelope Fitzgerald.
Hilary Spurling, one of those judges, noted that the decision had surprised them as much as everyone else: "We'd spent the entire afternoon at loggerheads, settling at the last minute by a single vote for William Golding's Darkness Visible, by which time the atmosphere had grown so heated that I said I'd sooner resign than have any part in a panel that picked a minor Golding over a major imaginative breakthrough by Naipaul. So we compromised by giving the prize to everybody's second choice."
It's a pretty damning indictment of judgment by committee. Because there was no agreement – and because everyone was annoyed – two modern classics were overlooked for … well … a book that WL Webb (then-literary editor of the Guardian) accurately damned with this faint praise: "Offshore is indeed an elegant short novel with the kind of sensibility that tends to do well in literary London."
Continuing in this sardonic vein, Offshore could easily be described as a novel about a bunch of middle-class mediocrities who do their chattering below decks rather than around dinner tables because they're slumming it on houseboats on Battersea Reach. There's the attractive, intelligent but scatty Nenna, struggling to bring up two precocious children in the absence of her husband. There's middle-manager Richard and his wife, who would rather be elsewhere. There's a painter of naval scenes called Willis and there's Maurice, an only mildly campy stereotype of a male prostitute. To all of them, nothing much happens.
It's hard to be too cynical, however, when the writing is so clear and effective. Everywhere in the foreground is Fitzgerald's amiable wit, but behind that a deeper plangent tone. The two combine like a well-made gin and tonic: light, but heady.
This is a book where we are told the kind "never inherit the earth … they just get kicked in the teeth", but where even the sinking of a boat (and with it the entirety of its owners life and ambition) is a cause for uproarious comedy. There are plenty of other complementary contrasts to get stuck into, all feeding from the central contradiction of the liminal existence of the boat people, which frees them from the pressures of London, but also traps them. Most notably, there's the splendid writing about the river itself, which seeps into, dampens and destroys everything – but is also the element that buoys up the drifting boat dwellers. A source of life with "a dead man's stench".
So far, so good. But then, not really good enough to beat Naipaul. And that's why on the night of the award ceremony there was an unusual scene as various hacks (supposedly drunk and annoyed about having to refile the copy they'd already prepared about Vidya) put the chairman of the judges, Lord Briggs, through what Webb described as "a stiff viva voce". Briggs protested that Offshore was "flawless". That was too much. For a short, book, it presents a lot of problems. The children don't talk – or think – like children at all (even allowing for their supposed precocity). We're repeatedly told that the boat-dwellers can't tear themselves from the river, but never really shown or made to feel why. Worst, after the first 130 stately pages of scene-setting, all the action comes in the final 30 in a precipitate flood. It's overwrought, unconvincing and – although occasionally still brilliant – ends on an absurd bum note.
Hillary Spurling also said the widespread incredulity that greeted this unexpected triumph caused Fitzgerald "pain … and humiliation ever after". The author was probably all too aware that this wasn't the best book on the shortlist – or even her best. It's perhaps also the reason her later, far better historical novels didn't even get a look-in for the prize. Injustice all round.
Hilary Spurling, one of those judges, noted that the decision had surprised them as much as everyone else: "We'd spent the entire afternoon at loggerheads, settling at the last minute by a single vote for William Golding's Darkness Visible, by which time the atmosphere had grown so heated that I said I'd sooner resign than have any part in a panel that picked a minor Golding over a major imaginative breakthrough by Naipaul. So we compromised by giving the prize to everybody's second choice."
It's a pretty damning indictment of judgment by committee. Because there was no agreement – and because everyone was annoyed – two modern classics were overlooked for … well … a book that WL Webb (then-literary editor of the Guardian) accurately damned with this faint praise: "Offshore is indeed an elegant short novel with the kind of sensibility that tends to do well in literary London."
Continuing in this sardonic vein, Offshore could easily be described as a novel about a bunch of middle-class mediocrities who do their chattering below decks rather than around dinner tables because they're slumming it on houseboats on Battersea Reach. There's the attractive, intelligent but scatty Nenna, struggling to bring up two precocious children in the absence of her husband. There's middle-manager Richard and his wife, who would rather be elsewhere. There's a painter of naval scenes called Willis and there's Maurice, an only mildly campy stereotype of a male prostitute. To all of them, nothing much happens.
It's hard to be too cynical, however, when the writing is so clear and effective. Everywhere in the foreground is Fitzgerald's amiable wit, but behind that a deeper plangent tone. The two combine like a well-made gin and tonic: light, but heady.
This is a book where we are told the kind "never inherit the earth … they just get kicked in the teeth", but where even the sinking of a boat (and with it the entirety of its owners life and ambition) is a cause for uproarious comedy. There are plenty of other complementary contrasts to get stuck into, all feeding from the central contradiction of the liminal existence of the boat people, which frees them from the pressures of London, but also traps them. Most notably, there's the splendid writing about the river itself, which seeps into, dampens and destroys everything – but is also the element that buoys up the drifting boat dwellers. A source of life with "a dead man's stench".
So far, so good. But then, not really good enough to beat Naipaul. And that's why on the night of the award ceremony there was an unusual scene as various hacks (supposedly drunk and annoyed about having to refile the copy they'd already prepared about Vidya) put the chairman of the judges, Lord Briggs, through what Webb described as "a stiff viva voce". Briggs protested that Offshore was "flawless". That was too much. For a short, book, it presents a lot of problems. The children don't talk – or think – like children at all (even allowing for their supposed precocity). We're repeatedly told that the boat-dwellers can't tear themselves from the river, but never really shown or made to feel why. Worst, after the first 130 stately pages of scene-setting, all the action comes in the final 30 in a precipitate flood. It's overwrought, unconvincing and – although occasionally still brilliant – ends on an absurd bum note.
Hillary Spurling also said the widespread incredulity that greeted this unexpected triumph caused Fitzgerald "pain … and humiliation ever after". The author was probably all too aware that this wasn't the best book on the shortlist – or even her best. It's perhaps also the reason her later, far better historical novels didn't even get a look-in for the prize. Injustice all round.
VOLUNTARY DISCLOSURES and FATCA: WILL YOU GET CAUGHT IF YOU DO NOTHING?
My apologies to the readers of the IRS Report Card for not writing for so long. The reality of FATCA’s upcoming start dates has finally started to sink in with Americans abroad and recent immigrants to the US.
We have spoken before about the agonizing decision many people are facing today about what to do about their secret foreign accounts. This article applies especially to those who are getting on in years and may be inclined to just blow off foreign account/asset reporting under the Bank Secrecy Act and FATCA and let their wives and children worry about it when they are gone
It is clear that four years after its enactment in 2010, FATCA is getting closer to full implementation even though it could take the IRS another five years to absorb and figure out what to do with the mega data it is about to start receiving on an ongoing basis. This will happen either directly from financial institutions unlucky enough to be based in a country which has yet to have its act together in getting an IGA (Intergovernmental Agreement) with Uncle Sam, or the lucky ones in “FATCA friendly” countries who get to rely on their own governments to deal with the IRS to “out” their American clients.
There are so many issues on the table now both for individuals, the IRS, the Department of Treasury, and financial institutions, as well as tax practitioners, professors, and students.
For both Americans abroad and recent immigrants: Millions of people are agonizing over the question, "Should I just blow it off or do I really need to take some action?" The answer is easy: Whether you take action or not is all based on your personal tolerance level for risk and uncertainty. It is your decision to make. Many people are totally comfortable with the idea that they will never get caught violating the tax laws by not reporting foreign income and accounts or for some reason don’t care if they do get caught. This is because it is one thing for the IRS to compute a tax due and owing from a delinquent taxpayer, but the IRS is years away from routine collection in the ordinary course of delinquent taxes from Americans overseas, provided there are no periodic or regular payments like Social Security payments or pension payments leaving the US for accounts abroad.
Justifiably, some people are viewing the government in general, and Congress and the Executive Branch in particular, as essentially dysfunctional. For these folks, sleeping at night is no problem at all. "My foreign accounts are none of Uncle Sam’s business and they must have bigger fish to fry compared to my situation."
There is no "legal advice" here and I make no moral judgments, nor do I address whether the overall FATCA concept is right or wrong. Nevertheless, here is what we know for sure:
1. The purpose of FATCA is to create a virtual international banking and financial database. Whether or not you do anything at all right now will not change the fact that over the next couple of years, detailed information about your foreign account is going to the IRS either directly from a foreign bank or through an Intergovernmental Agreement ("IGA") from foreign governments to the U.S. Treasury. It will be years before the IRS fully integrates the data it will receive under the IGAs, which are in the news every day now.
The reason FATCA is gaining so much momentum with governments abroad is twofold: international financial businesses and institutions do not want to miss out on future profits arising out of business with Americans; and they certainly do not want to screw up their ability to make transfers from and between other foreign financial institutions. The serious and very real privacy issues notwithstanding, the profit motive, is what is at work here plain and simple. The IGAs allow foreign financial institutions to self-certify their compliance with KYC and AML ("Know Your Customer" and "Anti-Money Laundering") rules of which the financial industry has long been well-aware. If all they have to do is turn over the names of their American account holders to stay in the game, "No problem," even if the US government reneges on the so-called reciprocity issue.
2. As inept as the government seems, they are getting better and better at accumulating and integrating databases. Of course, it is one thing to "be in" a database; quite another for a law enforcement worker to seek your name.
3. For almost all of the taxpayers who are worried about whether they are going to jail for not disclosing foreign assets or accounts, forget about it. If you get caught, chances are overwhelmingly in favor of a civil penalty and/or criminal dollar fine only, and no jail or arrest. They may finish you off financially, but in most cases the government cannot afford to assign Assistant United States Attorneys to parade you before a jury.
4. You can be sure you can find practitioners who will tell you just to forget about the fact that you have unreported foreign assets or accounts. If you get caught, and somehow it becomes a criminal case, the government will have to prove that you acted willfully and your "reliance" defense had no credibility. If your case remains civil only, "reasonable cause" reliance on the advice of a professional is something you will have to prove.
There are still return preparers who have never heard about FBARs and form 8938 (statement of foreign assets). But at this late date, it would be foolhardy to trust any return preparer who doesn’t even ask you if you have any "foreign" accounts; even if that so-called "foreign account" is with the Banco di Roma just down the street from your apartment in Rome through which you pay your rent and deposit your paychecks.
5. You can also be sure you can find practitioners who will tell you your only choice is "to go through the Program," i.e., make a voluntary disclosure under the OVDI. Everyone’s facts are different. One size does not fit all and you may have legal basis for not signing up. I am downgrading my C- to a D+ on my IRS report card for their handling of the OVDI program. While at the agents’ working level, our experience has been overwhelmingly positive with the people who are assigned to handle our clients’ cases, the failure of upper IRS management to anticipate the case loads and Congress’ mean-spirited underfunding of the IRS is absolutely inexcusable. We have been waiting for close to two years for the assignment of an agent to review our OVDI submissions.
6. There are many people at this moment who are making egregious mistakes in an attempt to cover their tracks by going "underground," starting to do in cash what was previously done in paper; attempting to "undo" gifts or other transfers; and sadly, putting pressure on family members or friends to participate in arrangements which would never occur but for the fear of getting caught up in FATCA.
For government prosecutors, the tipping point is a question of degree: The degree to which there is a pattern of, or multiple affirmative acts of, concealment or deception. No single act is controlling. It is a facts and circumstance analysis. How long has it been going on? What does the paper trail look like? Are their unwritten "agreements" or conspiracies with others? How much money is involved? How much effort was involved and how often were affirmative acts made to keep it a secret?
Coming up for practitioners: How will the government and courts litigate refund suits for unagreed FBAR-only cases? Ever hear of the Tucker Act?
We have spoken before about the agonizing decision many people are facing today about what to do about their secret foreign accounts. This article applies especially to those who are getting on in years and may be inclined to just blow off foreign account/asset reporting under the Bank Secrecy Act and FATCA and let their wives and children worry about it when they are gone
It is clear that four years after its enactment in 2010, FATCA is getting closer to full implementation even though it could take the IRS another five years to absorb and figure out what to do with the mega data it is about to start receiving on an ongoing basis. This will happen either directly from financial institutions unlucky enough to be based in a country which has yet to have its act together in getting an IGA (Intergovernmental Agreement) with Uncle Sam, or the lucky ones in “FATCA friendly” countries who get to rely on their own governments to deal with the IRS to “out” their American clients.
There are so many issues on the table now both for individuals, the IRS, the Department of Treasury, and financial institutions, as well as tax practitioners, professors, and students.
For both Americans abroad and recent immigrants: Millions of people are agonizing over the question, "Should I just blow it off or do I really need to take some action?" The answer is easy: Whether you take action or not is all based on your personal tolerance level for risk and uncertainty. It is your decision to make. Many people are totally comfortable with the idea that they will never get caught violating the tax laws by not reporting foreign income and accounts or for some reason don’t care if they do get caught. This is because it is one thing for the IRS to compute a tax due and owing from a delinquent taxpayer, but the IRS is years away from routine collection in the ordinary course of delinquent taxes from Americans overseas, provided there are no periodic or regular payments like Social Security payments or pension payments leaving the US for accounts abroad.
Justifiably, some people are viewing the government in general, and Congress and the Executive Branch in particular, as essentially dysfunctional. For these folks, sleeping at night is no problem at all. "My foreign accounts are none of Uncle Sam’s business and they must have bigger fish to fry compared to my situation."
There is no "legal advice" here and I make no moral judgments, nor do I address whether the overall FATCA concept is right or wrong. Nevertheless, here is what we know for sure:
1. The purpose of FATCA is to create a virtual international banking and financial database. Whether or not you do anything at all right now will not change the fact that over the next couple of years, detailed information about your foreign account is going to the IRS either directly from a foreign bank or through an Intergovernmental Agreement ("IGA") from foreign governments to the U.S. Treasury. It will be years before the IRS fully integrates the data it will receive under the IGAs, which are in the news every day now.
The reason FATCA is gaining so much momentum with governments abroad is twofold: international financial businesses and institutions do not want to miss out on future profits arising out of business with Americans; and they certainly do not want to screw up their ability to make transfers from and between other foreign financial institutions. The serious and very real privacy issues notwithstanding, the profit motive, is what is at work here plain and simple. The IGAs allow foreign financial institutions to self-certify their compliance with KYC and AML ("Know Your Customer" and "Anti-Money Laundering") rules of which the financial industry has long been well-aware. If all they have to do is turn over the names of their American account holders to stay in the game, "No problem," even if the US government reneges on the so-called reciprocity issue.
2. As inept as the government seems, they are getting better and better at accumulating and integrating databases. Of course, it is one thing to "be in" a database; quite another for a law enforcement worker to seek your name.
3. For almost all of the taxpayers who are worried about whether they are going to jail for not disclosing foreign assets or accounts, forget about it. If you get caught, chances are overwhelmingly in favor of a civil penalty and/or criminal dollar fine only, and no jail or arrest. They may finish you off financially, but in most cases the government cannot afford to assign Assistant United States Attorneys to parade you before a jury.
4. You can be sure you can find practitioners who will tell you just to forget about the fact that you have unreported foreign assets or accounts. If you get caught, and somehow it becomes a criminal case, the government will have to prove that you acted willfully and your "reliance" defense had no credibility. If your case remains civil only, "reasonable cause" reliance on the advice of a professional is something you will have to prove.
There are still return preparers who have never heard about FBARs and form 8938 (statement of foreign assets). But at this late date, it would be foolhardy to trust any return preparer who doesn’t even ask you if you have any "foreign" accounts; even if that so-called "foreign account" is with the Banco di Roma just down the street from your apartment in Rome through which you pay your rent and deposit your paychecks.
5. You can also be sure you can find practitioners who will tell you your only choice is "to go through the Program," i.e., make a voluntary disclosure under the OVDI. Everyone’s facts are different. One size does not fit all and you may have legal basis for not signing up. I am downgrading my C- to a D+ on my IRS report card for their handling of the OVDI program. While at the agents’ working level, our experience has been overwhelmingly positive with the people who are assigned to handle our clients’ cases, the failure of upper IRS management to anticipate the case loads and Congress’ mean-spirited underfunding of the IRS is absolutely inexcusable. We have been waiting for close to two years for the assignment of an agent to review our OVDI submissions.
6. There are many people at this moment who are making egregious mistakes in an attempt to cover their tracks by going "underground," starting to do in cash what was previously done in paper; attempting to "undo" gifts or other transfers; and sadly, putting pressure on family members or friends to participate in arrangements which would never occur but for the fear of getting caught up in FATCA.
For government prosecutors, the tipping point is a question of degree: The degree to which there is a pattern of, or multiple affirmative acts of, concealment or deception. No single act is controlling. It is a facts and circumstance analysis. How long has it been going on? What does the paper trail look like? Are their unwritten "agreements" or conspiracies with others? How much money is involved? How much effort was involved and how often were affirmative acts made to keep it a secret?
Coming up for practitioners: How will the government and courts litigate refund suits for unagreed FBAR-only cases? Ever hear of the Tucker Act?
Federal Government Launches Concerted Action Involving Fraud andCorruption
In recent days, federal officials have launched an all-out effort to halt the fraud and corruption plaguing the nation's bank mortgage industry. On October 9, 2012, the Federal Trade Commission ("FTC") filed three separate federal court lawsuits against allegedly phony mortgage-relief companies. These suits accuse the companies of having engaged in deceptive business practices by falsely assuring struggling homeowners that they could save their homes from foreclosure, charging thousands of dollars in up-front fees, and then providing little or no actual assistance. On the same day, the U.S. Attorney General, the Federal Bureau of Investigation ("FBI"), and the Department of Housing and Urban Development ("HUD") announced the results of the Distressed Homeowner Initiative, a year-long, coordinated, multilevel investigation targeting predatory foreclosure-rescue and mortgage-modification schemes. Meanwhile, on another front, the U.S. attorney's office in Manhattan filed a mortgage fraud lawsuit against Wells Fargo, accusing the major bank of having engaged in improper underwriting of home loans for over a decade. The following day, October 10, the FTC announced that it had reached a settlement with Equifax on allegations concerning the improper sale of information on late borrowers. The FTC alleged that Equifax had sold more than 17,000 lists of consumers who met specific criteria, such as being late on their mortgage payments, to Direct Lending Source, which, in turn, had sold the lists to various third parties.
A major source of ammunition in these federal efforts against mortgage fraud is the newest provision of the FTC's Mortgage Assistance Relief Services ("MARS") Rule, which was issued in November 2010. See 12 C.F.R. § 1015.5. This Rule prohibits mortgage-relief companies from collecting any fees until the homeowner has a written offer from his or her lender or servicer that the individual deems acceptable. Mortgage-relief services that charge advance fees to consumers may be held civilly or criminally liable for violation of the MARS Rule. See id. § 1015.10.
Notably, attorneys are generally exempt from MARS Rule prohibitions. Id. § 1015.7. To qualify for exemption from all MARS disclosure rules except the advance-fee ban, an attorney must satisfy three conditions: (1) The attorney must be engaged in the practice of law; (2) the attorney must be licensed in the state where the consumer or dwelling is located; and (3) the attorney must comply with state laws and regulations governing attorney conduct relating to the MARS Rule. Id. § 1015.7(a). To qualify for an exemption from the ban against advance fees, the attorney must also meet a fourth requirement: Any up-front fees collected must be placed in a client trust account, and the attorney must abide by state laws and regulations governing such accounts. Id. § 1015.7(b).
Broadly speaking, the sweeping actions just taken by various federal agencies may signal a general change in attitude from one that is "procreditor" to a more lenient "prodebtor" perspective. Such a shift in the law could potentially benefit debtors seeking relief from seemingly harsh creditor-imposed penalties of all types.
It should also be noted that the FBI's announcement of October 9, 2012 emphasized the role that unscrupulous attorneys have played in perpetrating mortgage fraud upon desperate consumers. In that announcement, the agency specifically stated it has "noticed a disturbing trend among these [distressed homeowner fraud] cases—an increasing number of lawyers playing primary or secondary roles in the fraud." Distressed Homeowner Initiative: Don't Let Mortgage Fraud Happen to You, http://www.fbi.gov/news/stories/2012/october/don't-let-mortgage-fraud-happen-to-you. According to the FBI, phony mortgage modification services have attempted to circumvent the MARS Rule advance-fee ban by "using attorneys—which by itself adds an air of legitimacy to their fraudulent schemes—and calling their upfront fees 'legal retainers.'" Id.
The FBI's singling out of the attorney exemption to the MARS Rule may be taken as a sign that the federal government intends to take steps to close this "loophole" by imposing more stringent requirements on attorneys engaged in the practice of assisting financially troubled homeowners. Attorneys for consumer-debtors should take care to stay abreast of any new developments in this regard. At a minimum, the imposition of more stringent federal regulations that limit, or even outright prohibit, the collection of advance or retainer fees from clients who may wish to obtain a modification of their underlying home mortgages would significantly impact the risks associated with the pursuit of such cases and the maintenance of client trust accounts.
A major source of ammunition in these federal efforts against mortgage fraud is the newest provision of the FTC's Mortgage Assistance Relief Services ("MARS") Rule, which was issued in November 2010. See 12 C.F.R. § 1015.5. This Rule prohibits mortgage-relief companies from collecting any fees until the homeowner has a written offer from his or her lender or servicer that the individual deems acceptable. Mortgage-relief services that charge advance fees to consumers may be held civilly or criminally liable for violation of the MARS Rule. See id. § 1015.10.
Notably, attorneys are generally exempt from MARS Rule prohibitions. Id. § 1015.7. To qualify for exemption from all MARS disclosure rules except the advance-fee ban, an attorney must satisfy three conditions: (1) The attorney must be engaged in the practice of law; (2) the attorney must be licensed in the state where the consumer or dwelling is located; and (3) the attorney must comply with state laws and regulations governing attorney conduct relating to the MARS Rule. Id. § 1015.7(a). To qualify for an exemption from the ban against advance fees, the attorney must also meet a fourth requirement: Any up-front fees collected must be placed in a client trust account, and the attorney must abide by state laws and regulations governing such accounts. Id. § 1015.7(b).
Broadly speaking, the sweeping actions just taken by various federal agencies may signal a general change in attitude from one that is "procreditor" to a more lenient "prodebtor" perspective. Such a shift in the law could potentially benefit debtors seeking relief from seemingly harsh creditor-imposed penalties of all types.
It should also be noted that the FBI's announcement of October 9, 2012 emphasized the role that unscrupulous attorneys have played in perpetrating mortgage fraud upon desperate consumers. In that announcement, the agency specifically stated it has "noticed a disturbing trend among these [distressed homeowner fraud] cases—an increasing number of lawyers playing primary or secondary roles in the fraud." Distressed Homeowner Initiative: Don't Let Mortgage Fraud Happen to You, http://www.fbi.gov/news/stories/2012/october/don't-let-mortgage-fraud-happen-to-you. According to the FBI, phony mortgage modification services have attempted to circumvent the MARS Rule advance-fee ban by "using attorneys—which by itself adds an air of legitimacy to their fraudulent schemes—and calling their upfront fees 'legal retainers.'" Id.
The FBI's singling out of the attorney exemption to the MARS Rule may be taken as a sign that the federal government intends to take steps to close this "loophole" by imposing more stringent requirements on attorneys engaged in the practice of assisting financially troubled homeowners. Attorneys for consumer-debtors should take care to stay abreast of any new developments in this regard. At a minimum, the imposition of more stringent federal regulations that limit, or even outright prohibit, the collection of advance or retainer fees from clients who may wish to obtain a modification of their underlying home mortgages would significantly impact the risks associated with the pursuit of such cases and the maintenance of client trust accounts.
LLC PROTECTIONS FOR MEMBERS PERSONAL DEBTS
In Delaware, like in most states, the general rule is that the money or property of an Delaware limited liability company (“LLC”) cannot be taken by creditors to pay off the personal debts or liabilities of the LLC’s owners.
Example: Larry and LaVerne have formed a Delaware LLC called Sports Memories, LLC, to operate their sports memorabilia business in Wilmington. The business has been quite successful and has $50,000 in its own bank account. Unbeknownst to Larry, LaVerne has a gambling problem and owes $100,000 to the Lady Luck Casino. While the casino can attempt to collect its debt from LaVerne’s personal assets (such as her personal bank accounts and personal property) it cannot take money or property owned by the LLC to satisfy Laverne’s personal gambling debts. For example, it cannot get any of the money held in the LLC’s bank account.
However, there are other ways that creditors of an LLC owner might try to collect against the LLC for the owner’s debt. These include:
1) obtaining a charging order requiring that the LLC pay the creditor all the money due from the LLC’s payments to the debtor-owner
2) foreclosing on the debtor-owner’s LLC ownership interest, or
3) getting a court to order the LLC to be dissolved and all its assets sold.
States laws vary widely on what creditors are allowed to do so you need to check the laws of your state. This article covers what actions creditors in Delaware are allowed to take against an LLC for an LLC owner’s personal debt.
Charging Order Delaware, like all states, permits personal creditors of an owner of an Delaware LLC to obtain a charging order against the debtor-owner’s membership interest. A charging order is an order issued by a court directing an LLC’s manager to pay to the debtor-owner’s personal creditor any distributions of income or profits that would otherwise be distributed to the debtor-member. Like most states, creditors with a charging order in Delaware only obtain the owner-debtor’s “financial rights” and cannot participate in the management of the LLC. Thus, the creditor cannot order the LLC to make a distribution subject to its charging order. Very frequently, creditors who obtain charging orders end up with nothing because they can’t order any distributions. Thus, they are not a very effective collection tool for creditors.
Example: The Lady Luck Casino gets a Delaware court to issue a charging order in the amount of $100,000 against LaVerne’s 50% ownership interest in the Sports Memories LLC. This means that any distributions of money or property the LLC would ordinarily make to LaVerne must be given to the Casino instead until the entire $100,000 is paid. However, if there are no distributions there will be no payments.
The charging order remedy without any right to order distributions is so weak many creditors don’t even try to use it.
Foreclosure and Dissolution
Andrei Papanicoglu, Filings Specialist at Evedex says that the charging order is the only legal procedure that personal creditors of Delaware LLC members can use to get at their LLC ownership interest. Thus, unlike some other states, Delaware does not permit an LLC owner’s personal creditors to foreclose on the owner’s LLC ownership interest or get a court to order the LLC dissolved and its assets sold. This makes Delaware a particularly friendly state for people who want to form LLCs to protect assets from personal creditors.
What About One-Member Delaware LLCs? The reason personal creditors of individual LLC owners are limited to a charging order or foreclosure is to protect the other members (owners) of the LLC. It doesn’t seem fair that they should suffer because a member incurred personal debts that had nothing to do with their LLC. Thus, personal creditors are not permitted to take over the debtor-member’s LLC interest and join in the management of the LLC, or have the LLC dissolved and its assets sold without the other members’ consent.
This rationale disappears when the LLC has only one member (owner). Whether, and to what extent, single member Delaware LLCs are protected from outside creditors is not entirely clear. However, it’s quite possible that a single-member Delaware LLC benefits from none of the liability limitations that are in place for multi-member LLCs. For this reason, to obtain the full limited liability described above, a Delaware LLC should have at least two members. The second owner can be a spouse or relative.
To obtain the protection from liability afforded by an LLC, you must form the entity before you incur the debt or other liability. For more information, consult a business attorney.
Example: Larry and LaVerne have formed a Delaware LLC called Sports Memories, LLC, to operate their sports memorabilia business in Wilmington. The business has been quite successful and has $50,000 in its own bank account. Unbeknownst to Larry, LaVerne has a gambling problem and owes $100,000 to the Lady Luck Casino. While the casino can attempt to collect its debt from LaVerne’s personal assets (such as her personal bank accounts and personal property) it cannot take money or property owned by the LLC to satisfy Laverne’s personal gambling debts. For example, it cannot get any of the money held in the LLC’s bank account.
However, there are other ways that creditors of an LLC owner might try to collect against the LLC for the owner’s debt. These include:
1) obtaining a charging order requiring that the LLC pay the creditor all the money due from the LLC’s payments to the debtor-owner
2) foreclosing on the debtor-owner’s LLC ownership interest, or
3) getting a court to order the LLC to be dissolved and all its assets sold.
States laws vary widely on what creditors are allowed to do so you need to check the laws of your state. This article covers what actions creditors in Delaware are allowed to take against an LLC for an LLC owner’s personal debt.
Charging Order Delaware, like all states, permits personal creditors of an owner of an Delaware LLC to obtain a charging order against the debtor-owner’s membership interest. A charging order is an order issued by a court directing an LLC’s manager to pay to the debtor-owner’s personal creditor any distributions of income or profits that would otherwise be distributed to the debtor-member. Like most states, creditors with a charging order in Delaware only obtain the owner-debtor’s “financial rights” and cannot participate in the management of the LLC. Thus, the creditor cannot order the LLC to make a distribution subject to its charging order. Very frequently, creditors who obtain charging orders end up with nothing because they can’t order any distributions. Thus, they are not a very effective collection tool for creditors.
Example: The Lady Luck Casino gets a Delaware court to issue a charging order in the amount of $100,000 against LaVerne’s 50% ownership interest in the Sports Memories LLC. This means that any distributions of money or property the LLC would ordinarily make to LaVerne must be given to the Casino instead until the entire $100,000 is paid. However, if there are no distributions there will be no payments.
The charging order remedy without any right to order distributions is so weak many creditors don’t even try to use it.
Foreclosure and Dissolution
Andrei Papanicoglu, Filings Specialist at Evedex says that the charging order is the only legal procedure that personal creditors of Delaware LLC members can use to get at their LLC ownership interest. Thus, unlike some other states, Delaware does not permit an LLC owner’s personal creditors to foreclose on the owner’s LLC ownership interest or get a court to order the LLC dissolved and its assets sold. This makes Delaware a particularly friendly state for people who want to form LLCs to protect assets from personal creditors.
What About One-Member Delaware LLCs? The reason personal creditors of individual LLC owners are limited to a charging order or foreclosure is to protect the other members (owners) of the LLC. It doesn’t seem fair that they should suffer because a member incurred personal debts that had nothing to do with their LLC. Thus, personal creditors are not permitted to take over the debtor-member’s LLC interest and join in the management of the LLC, or have the LLC dissolved and its assets sold without the other members’ consent.
This rationale disappears when the LLC has only one member (owner). Whether, and to what extent, single member Delaware LLCs are protected from outside creditors is not entirely clear. However, it’s quite possible that a single-member Delaware LLC benefits from none of the liability limitations that are in place for multi-member LLCs. For this reason, to obtain the full limited liability described above, a Delaware LLC should have at least two members. The second owner can be a spouse or relative.
To obtain the protection from liability afforded by an LLC, you must form the entity before you incur the debt or other liability. For more information, consult a business attorney.
Roots of Global Economic
Many of the roots of the current global economic crisis trace back to offshore financial centres located in tax havens. These include both those located in the smaller, mostly island states like Cayman and Jersey, and the larger tax havens like the City of London, Switzerland, Dublin, Delaware or Luxembourg.
These tax havens did not "cause" the crisis, but they contributed powerfully to it. This happened in a number of interlinked ways:
These tax havens did not "cause" the crisis, but they contributed powerfully to it. This happened in a number of interlinked ways:
- They offered what has been called a "get out of regulation free" card to businesses that abuse them.
- The offshore system enabled U.S. financial services companies in particular (but also others) to get around domestic regulations and grow fast, achieving political and regulatory "capture" and contributing to the "too big to fail" banking problem. This happened first in the offshore Euromarkets from the 1960s, and then in the wider global offshore system.
- Unhealthy competition on tax and regulation between tax havens, and between them and other jurisdictions, eviscerated and degraded regulations that may otherwise have staunched the crisis.
- Tax incentives, typically through tax havens, played a major role in accelerating the build-up in debt and leverage across the global financial system.
- “Satellite” tax havens like some Caribbean islands or Britain’s Crown Dependencies are conduits for illicit and other financial flows, often from developing countries into financial centres like London, New York, and these contributed to large macroeconomic imbalances. The mainstream economics profession has not measured these vast flows, many of which (such as transfer mispricing) simply do not show up in national statistics.
- A key feature of the crisis is that the financial system became frozen as a result of mutual mistrust and impenetrable complexity making it impossible for actors to understand the financial positions of their partners. The secrecy jurisdictions, by giving companies incentives to festoon their financial affairs across multiple jurisdictions, and by covering these affairs in a veil of secrecy, played a major part.
- Tax havens provided the cover for all manner of fraudulent business models - such as those offered by Bernie Madoff, Allen Stanford and others.
- Offshore centres helped corporations conceal serious losses, which contributed to the build-up.
- Offshore bank booking centres have played a powerful role in creating liquidity, which underlay the crisis.
- Tax havens, by giving banks with global reach a "competitive" advantage over their more nationally-based rivals (by permitting evasion and avoidance of tax and regulatory obligations, contributed powerfully to the "too big to fail" problem.
TJN REPORT
Rethink the Geography of Corruption Many of the world’s big development institutions suffer from a kind of blindness with respect to corruption. They define it too narrowly, and especially they ignore the role of the offshore financial system in encouraging and facilitating capital flight and tax evasion. Secrecy and corruption are symbiotic; tax havens, by offering secrecy, foster corruption and must be brought to the centre of the corruption debate.
Berlin-based Transparency International (TI) deserves great credit for bringing corruption onto the development agenda since the 1990s, but now its famous Corruption Perceptions Index (CPI) is part of a problem. TI has a powerful brand name, and the World Bank and many other international development institutions tend to follow where TI leads. And yet its CPI, by focusing on just one aspect of the problem, risks distracting people from some of the most important aspects of corruption. Now would be a good time to begin a more profound analysis of corruption, so as to get to grips with the factors that are arguably the greatest cause of poverty and injustice on the planet today. Eva Joly, the investigating magistrate who broke open the “Elf Affair” in Paris (and won TI’s Integrity Award for 2001) has described the road ahead: the fight against tax havens must now, she says, be “Phase Two” in the fight against corruption.
TI’s two most important analytical tools are particularly problematic. One is the famous CPI, which is widely used as the index of first resort for busy journalists and policy-makers trying to analyse and rank corruption around the world. The second is a mistaken definition of corruption as “the misuse of entrusted power for private gain.” While this definition is potentially quite broad, it has usually been interpreted in a narrow way, notably by focusing excessively on the public sector, and ignoring the private sector. The World Bank has an even narrower approach, defining corruption as "the abuse of public office for private gain." This focus on the public sector as the only arena for corruption is not just arbitrary. It is wrong, and indeed pernicious.
These outdated tools have skewed our perceptions of the geography of corruption to a terrible degree. To give one example: TI’s Bribe-Payers’ Index (BPI) ranks the tax haven of Switzerland – the secret repository of vast quantities of criminals’ and corrupt dictators’ loot – as the world’s “cleanest” country. And over half of the countries ranked in the “least corrupt” quintile of the CPI are offshore tax havens. Something is clearly badly wrong here.
Apart from methodological problems with the ranking itself, these indices' core mistake is this: by splitting the problem of corruption into discrete units of analysis, it entirely ignores the global systemic problem: that one country’s secrecy and tax haven policies harm other countries. Once we look at corruption on a global level, rather than on a national level, we will begin to entirely re-shape the geography of corruption and start to understand properly what corruption is, how it comes about, and how to tackle it.
Not just bribery
The current tendency of the World Bank, TI, the OECD, and many people in the legal professions to restrict their definitions of corruption to the bribery of public officials must change. Corrupt practices involve much more than this, as the following four examples illustrate.
First, take an example from the dot-com boom of the late 1990s: at that time, Wall Street investment banks offered stock in "hot" initial public offerings to corporate executives who were in a position to direct their companies' business to their bank, while Wall St. banks' analysts curried favour with companies by writing absurdly upbeat assessments of companies to persuade them to direct their business (issuing fresh capital, or mergers & acquisitions) to the analysts' banks, which would earn large fees as a result.
A second example would be illegal market-rigging: private companies building up secret monopolistic positions by using tax havens to hide the identities of parties which, to the outsider, appear unrelated, but are in fact related and secretly colluding to fix prices.
A third illustration comes from the byzantine "Elf Affair", which involved, among many other things, African oil money being routed via tax havens to provide secret financing for French political parties.
A fourth case in point involves multiple exchange rates, for example in Zimbabwe or in Angola during the 1990s. Under multiple official exchange rates, well-connected people can get access to very cheap dollars, then round-trip them through another exchange rate, ending up with what is effectively free money from public coffers. The point is that under multiple exchange rates, this is entirely legal. This system is clearly corrupt.
All these four activities are examples which most people would view as corrupt, but which do not fit into TI's and the World Bank's definitions. The first and second examples do not involve public officials, and while the first example arguably involves a form of bribery, the second and fourth, and probably the third, do not. The third example does not involve private gain. The fourth example does not even involve an activity: it is the rules themselves that is corrupt. The traditional definitions of corruption are not fit for purpose and should be scrapped. The debate must now move on.
In restricting their agenda to these narrow definitions, the institutions that claim to be fighting corruption have shaped perceptions around the concerns of multinational companies: TI’s corruption rankings provide multinationals (who want to reduce the “cost” of bribery) with a handy ranking of “corruption risk,” while doing almost nothing to identify the wider costs to society arising from their own aggressive tax avoidance policies, which are among most fundamental reasons for poverty in the world.
It is time to shift perceptions to reflect more strongly the concerns of poor people, by bringing tax havens and tax dodging decisively into the corruption debate. These practices are corrupting, for several reasons.
First, just like the drugs trade, corruption has a supply side and a demand side. The demand side involves those who would practice corruption; while the supply side includes those who offer, provide and facilitate corruption opportunities. (Or, one might split it into three parts: the supply side, the demand side, and the intermediaries.) The general strategy for fighting drug trafficking by tackling both the supply and the demand sides is equally applicable to tackling corrupt activities.
While Transparency International and others would tend to restrict this “supply side” to bribery, it is clear, as the example of Switzerland and the Bribe-Payers’ Index shows, that we need to focus on a larger arena than that. It is much larger: Raymond Baker, a world authority on corruption and money-laundering, has estimated that the cross-border component of bribery and theft by government officials is the smallest part of “dirty money”, or only about three percent of the global total. The criminal component constitutes about 30 to 35 percent, while the commercially tax-evading component, which is driven primarily by falsified pricing in imports and exports, is by far the largest, at some 60 to 65 percent of the global total. The “pinstripe infrastructure” of offshore bankers, lawyers and accountants who welcome these flows of “dirty money” with open arms are a central part of the corruption problem.
Second, tax evasion has the same effects as more traditionally defined forms of corruption, and they both share the same political and social dynamics. Both involve élites avoiding and evading their responsibilities to the societies that sustain them, with impunity. This "Revolt of the Élites" has two main components just like the more traditional forms of corruption: first, the élites involved remove themselves from carrying the costs involved in maintaining healthy societies; and second, they remain actively involved in the democratic (or other) processes of government, notably in the form of lobbying. Both thrive on secrecy; both have the same effect of worsening poverty, and both corrode people’s faith in the integrity of the political and economic structures that govern their societies. Both involve the abuse of the public interest by narrow sectional interests.
Both are often, but not always, illegal. For example, the transparency campaigners Global Witness, in a seminal 1999 report on oil, corruption and war in Angola, refer to “ . . . legal theft. Just because the oil revenues are being paid into structures set up by the leaders, which makes them technically legal, does not make them morally defensible”. In short, the corruptors and the corrupted will often find ways to legalise what they do, and they are often in the positions of power that enable them to do it.
Transparency International acknowledges the facilitating role played by financial intermediaries. In a press release accompanying the 2006 Corruption Perceptions Index results, TI commented:"Corrupt intermediaries link givers and takers, creating an atmosphere of mutual trust and reciprocity; they attempt to provide a legal appearance to corrupt transactions, producing legally enforceable contracts; and they help to ensure that scapegoats are blamed in case of detection."
But, having acknowledged this key role played by the financial intermediaries, they fail to go to the next step, which is to accept that supply of such services, which includes supplying secrecy through offshore shell companies, offshore trusts and similar subterfuges, actually stimulates the demand side, by offering protection from discovery.
Alternative definitions of corruption?
TJN suggests two alternative definitions of corruption, at this stage just as discussion points, or as ways of thinking about the issue, rather than as hard definitions. The first would be this: corruption is the abuse of the public interest by narrow sectional interests. This is almost certainly too broad, but it helps illustrate some of the dynamics we feel are important.) The second is somewhat more specific: an activity which undermines public confidence in the integrity of the rules, systems and institutions that govern society is corrupt. This second definition is, among other things, not culturally specific. (To envisage it better, it can help to focus not on the noun “corruption” but instead on the verb “to corrupt.”) This definition also highlights better the threat that corruption poses to people's confidence in governments, democracy and even capitalism itself. Among other things, we think these approaches take us away from a focus on bad people and get us to focus more on harmful or dangerous processes.
These alternative definitions are a work in progress; they may well evolve over time as we discuss the issues. In the meantime, look at this definition of political corruption offered by the Catholic church (see point 411 in this link.) We were not aware of this definition when we formulated our approach, but we are struck by how similar theirs is.)
TJN is also planning an eventual launch of a Financial Transparency Index (FTI.) It is a big project, which will take time. Watch this space.
The American economist Paul Krugman once remarked upon how economists tend only to see what they know how to model: and that this creates blind spots. Corruption is one of these blind spots: modern economic theory has almost entirely failed to model or even to see how economic liberalisation has created vast criminogenic, corrupting environments around the world. The time has come to remove our blindfolds.
Find out more
John Christensen’s paper, Mirror, Mirror, on the Wall: Who’s the Most Corrupt of All?, discusses these issues in more detail. Also, Richard Murphy and Nicholas Shaxson, in a comment piece in the Financial Times, discuss the Extractive Industries Transparency Initiative, and how the misplaced ideologies of corruption that are currently prevalent have led us down the wrong path in the quest for transparency in natural resource sectors. A book, "Measuring Corruption," provides a good overview of the current discourse around corruption, and identifies some of the methodological and analytical problems inherent in the CPI. In addition to the above analysis, TJN would like to highlight another entire layer of research into the often-forgotten but crucial relationships between taxation, accountability and governance. See more on a special section on TJN's web site, and on academic research highlighted in a special edition of TJN's newsletter.
Other resources Transparency International is the most well-known. Other bodies include Global Witness (which has a particular focus on natural resources like oil and diamonds), the Norwegian-based U4 Anti-Corruption Resource Centre which has a much longer list of partners; and the Australia-based John Walker's Crime Trends Analysis
Berlin-based Transparency International (TI) deserves great credit for bringing corruption onto the development agenda since the 1990s, but now its famous Corruption Perceptions Index (CPI) is part of a problem. TI has a powerful brand name, and the World Bank and many other international development institutions tend to follow where TI leads. And yet its CPI, by focusing on just one aspect of the problem, risks distracting people from some of the most important aspects of corruption. Now would be a good time to begin a more profound analysis of corruption, so as to get to grips with the factors that are arguably the greatest cause of poverty and injustice on the planet today. Eva Joly, the investigating magistrate who broke open the “Elf Affair” in Paris (and won TI’s Integrity Award for 2001) has described the road ahead: the fight against tax havens must now, she says, be “Phase Two” in the fight against corruption.
TI’s two most important analytical tools are particularly problematic. One is the famous CPI, which is widely used as the index of first resort for busy journalists and policy-makers trying to analyse and rank corruption around the world. The second is a mistaken definition of corruption as “the misuse of entrusted power for private gain.” While this definition is potentially quite broad, it has usually been interpreted in a narrow way, notably by focusing excessively on the public sector, and ignoring the private sector. The World Bank has an even narrower approach, defining corruption as "the abuse of public office for private gain." This focus on the public sector as the only arena for corruption is not just arbitrary. It is wrong, and indeed pernicious.
These outdated tools have skewed our perceptions of the geography of corruption to a terrible degree. To give one example: TI’s Bribe-Payers’ Index (BPI) ranks the tax haven of Switzerland – the secret repository of vast quantities of criminals’ and corrupt dictators’ loot – as the world’s “cleanest” country. And over half of the countries ranked in the “least corrupt” quintile of the CPI are offshore tax havens. Something is clearly badly wrong here.
Apart from methodological problems with the ranking itself, these indices' core mistake is this: by splitting the problem of corruption into discrete units of analysis, it entirely ignores the global systemic problem: that one country’s secrecy and tax haven policies harm other countries. Once we look at corruption on a global level, rather than on a national level, we will begin to entirely re-shape the geography of corruption and start to understand properly what corruption is, how it comes about, and how to tackle it.
Not just bribery
The current tendency of the World Bank, TI, the OECD, and many people in the legal professions to restrict their definitions of corruption to the bribery of public officials must change. Corrupt practices involve much more than this, as the following four examples illustrate.
First, take an example from the dot-com boom of the late 1990s: at that time, Wall Street investment banks offered stock in "hot" initial public offerings to corporate executives who were in a position to direct their companies' business to their bank, while Wall St. banks' analysts curried favour with companies by writing absurdly upbeat assessments of companies to persuade them to direct their business (issuing fresh capital, or mergers & acquisitions) to the analysts' banks, which would earn large fees as a result.
A second example would be illegal market-rigging: private companies building up secret monopolistic positions by using tax havens to hide the identities of parties which, to the outsider, appear unrelated, but are in fact related and secretly colluding to fix prices.
A third illustration comes from the byzantine "Elf Affair", which involved, among many other things, African oil money being routed via tax havens to provide secret financing for French political parties.
A fourth case in point involves multiple exchange rates, for example in Zimbabwe or in Angola during the 1990s. Under multiple official exchange rates, well-connected people can get access to very cheap dollars, then round-trip them through another exchange rate, ending up with what is effectively free money from public coffers. The point is that under multiple exchange rates, this is entirely legal. This system is clearly corrupt.
All these four activities are examples which most people would view as corrupt, but which do not fit into TI's and the World Bank's definitions. The first and second examples do not involve public officials, and while the first example arguably involves a form of bribery, the second and fourth, and probably the third, do not. The third example does not involve private gain. The fourth example does not even involve an activity: it is the rules themselves that is corrupt. The traditional definitions of corruption are not fit for purpose and should be scrapped. The debate must now move on.
In restricting their agenda to these narrow definitions, the institutions that claim to be fighting corruption have shaped perceptions around the concerns of multinational companies: TI’s corruption rankings provide multinationals (who want to reduce the “cost” of bribery) with a handy ranking of “corruption risk,” while doing almost nothing to identify the wider costs to society arising from their own aggressive tax avoidance policies, which are among most fundamental reasons for poverty in the world.
It is time to shift perceptions to reflect more strongly the concerns of poor people, by bringing tax havens and tax dodging decisively into the corruption debate. These practices are corrupting, for several reasons.
First, just like the drugs trade, corruption has a supply side and a demand side. The demand side involves those who would practice corruption; while the supply side includes those who offer, provide and facilitate corruption opportunities. (Or, one might split it into three parts: the supply side, the demand side, and the intermediaries.) The general strategy for fighting drug trafficking by tackling both the supply and the demand sides is equally applicable to tackling corrupt activities.
While Transparency International and others would tend to restrict this “supply side” to bribery, it is clear, as the example of Switzerland and the Bribe-Payers’ Index shows, that we need to focus on a larger arena than that. It is much larger: Raymond Baker, a world authority on corruption and money-laundering, has estimated that the cross-border component of bribery and theft by government officials is the smallest part of “dirty money”, or only about three percent of the global total. The criminal component constitutes about 30 to 35 percent, while the commercially tax-evading component, which is driven primarily by falsified pricing in imports and exports, is by far the largest, at some 60 to 65 percent of the global total. The “pinstripe infrastructure” of offshore bankers, lawyers and accountants who welcome these flows of “dirty money” with open arms are a central part of the corruption problem.
Second, tax evasion has the same effects as more traditionally defined forms of corruption, and they both share the same political and social dynamics. Both involve élites avoiding and evading their responsibilities to the societies that sustain them, with impunity. This "Revolt of the Élites" has two main components just like the more traditional forms of corruption: first, the élites involved remove themselves from carrying the costs involved in maintaining healthy societies; and second, they remain actively involved in the democratic (or other) processes of government, notably in the form of lobbying. Both thrive on secrecy; both have the same effect of worsening poverty, and both corrode people’s faith in the integrity of the political and economic structures that govern their societies. Both involve the abuse of the public interest by narrow sectional interests.
Both are often, but not always, illegal. For example, the transparency campaigners Global Witness, in a seminal 1999 report on oil, corruption and war in Angola, refer to “ . . . legal theft. Just because the oil revenues are being paid into structures set up by the leaders, which makes them technically legal, does not make them morally defensible”. In short, the corruptors and the corrupted will often find ways to legalise what they do, and they are often in the positions of power that enable them to do it.
Transparency International acknowledges the facilitating role played by financial intermediaries. In a press release accompanying the 2006 Corruption Perceptions Index results, TI commented:"Corrupt intermediaries link givers and takers, creating an atmosphere of mutual trust and reciprocity; they attempt to provide a legal appearance to corrupt transactions, producing legally enforceable contracts; and they help to ensure that scapegoats are blamed in case of detection."
But, having acknowledged this key role played by the financial intermediaries, they fail to go to the next step, which is to accept that supply of such services, which includes supplying secrecy through offshore shell companies, offshore trusts and similar subterfuges, actually stimulates the demand side, by offering protection from discovery.
Alternative definitions of corruption?
TJN suggests two alternative definitions of corruption, at this stage just as discussion points, or as ways of thinking about the issue, rather than as hard definitions. The first would be this: corruption is the abuse of the public interest by narrow sectional interests. This is almost certainly too broad, but it helps illustrate some of the dynamics we feel are important.) The second is somewhat more specific: an activity which undermines public confidence in the integrity of the rules, systems and institutions that govern society is corrupt. This second definition is, among other things, not culturally specific. (To envisage it better, it can help to focus not on the noun “corruption” but instead on the verb “to corrupt.”) This definition also highlights better the threat that corruption poses to people's confidence in governments, democracy and even capitalism itself. Among other things, we think these approaches take us away from a focus on bad people and get us to focus more on harmful or dangerous processes.
These alternative definitions are a work in progress; they may well evolve over time as we discuss the issues. In the meantime, look at this definition of political corruption offered by the Catholic church (see point 411 in this link.) We were not aware of this definition when we formulated our approach, but we are struck by how similar theirs is.)
TJN is also planning an eventual launch of a Financial Transparency Index (FTI.) It is a big project, which will take time. Watch this space.
The American economist Paul Krugman once remarked upon how economists tend only to see what they know how to model: and that this creates blind spots. Corruption is one of these blind spots: modern economic theory has almost entirely failed to model or even to see how economic liberalisation has created vast criminogenic, corrupting environments around the world. The time has come to remove our blindfolds.
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John Christensen’s paper, Mirror, Mirror, on the Wall: Who’s the Most Corrupt of All?, discusses these issues in more detail. Also, Richard Murphy and Nicholas Shaxson, in a comment piece in the Financial Times, discuss the Extractive Industries Transparency Initiative, and how the misplaced ideologies of corruption that are currently prevalent have led us down the wrong path in the quest for transparency in natural resource sectors. A book, "Measuring Corruption," provides a good overview of the current discourse around corruption, and identifies some of the methodological and analytical problems inherent in the CPI. In addition to the above analysis, TJN would like to highlight another entire layer of research into the often-forgotten but crucial relationships between taxation, accountability and governance. See more on a special section on TJN's web site, and on academic research highlighted in a special edition of TJN's newsletter.
Other resources Transparency International is the most well-known. Other bodies include Global Witness (which has a particular focus on natural resources like oil and diamonds), the Norwegian-based U4 Anti-Corruption Resource Centre which has a much longer list of partners; and the Australia-based John Walker's Crime Trends Analysis