Wednesday, April 3, 2013

The fountainhead of all corruption in the world

Here is an outline of how the Americans, the British and their other western allies have engendered a global system based on fraud.


If you believed that the US, UK and other countries of the ‘West’ are relatively clean and civilized places with rule of law and sophisticated law enforcement, you'd been taken for a ride. The West, particularly the US and the UK, is the primary cause and fountainhead of all corruption in the world.

The US and UK establishments are the ringleaders of a virtual corporate crime syndicate of planetary proportions as the global financial crisis (and its aftermath), caused by the criminal behaviour of financial institutions belonging to the two countries showed.

The collusion between the US/UK governments and criminal Wall Street/City of London institutions continues after the global financial crisis, as the settlement over the HSBC drug cartel, the gargantuan LIBOR scandal and the steady eruption of several other scams show.
(http://www.rollingstone.com/politics/blogs/taibblog/outrageous-hsbc-settlement-proves-the-drug-war-is-a-joke-20121213)
(http://en.wikipedia.org/wiki/Libor_scandal)

It transpires that the plutocracy in the West, particularly the British and the Americans, have long been running the entire chain of tax havens across the world --- a scam that is the mother of all scams that have ever taken place in modern economic history of the world.

Almost half of the world's secrecy jurisdictions, for instance, are connected to the UK as ‘Crown Dependencies’, British Overseas Territories or as members of the Commonwealth.
One may like to read some of the work of Prof. Ronen Palan about the role the British establishment has played in this ongoing global scam. (http://www.newleftproject.org/index.php/site/article_comments/britains_second_empire)

And it’s not for nothing that American journalist Matt Taibi now calls US economy a huge Ponzi scheme. (http://www.rollingstone.com/politics/news/secret-and-lies-of-the-bailout-20130104).

That’s right. With too-big-to-fail banks now bigger and a 'permanent bailout' State, American economy is a huge fraud that has screwed the world and is likely anytime to sink it.

Think again before you take out a fat loan to send your children to study 'business' or 'finance' (read: 'fraud') in America or UK.

These Americans and Britons are bloody fraudsters and the same goes for their 'education', particularly in areas of business and economy.

Read online, for instance, how the so called 'neo-classical synthesis' -- which includes the 'neo-liberal' economic package forced, often militarily, upon the world since the 1970s -- has been a gargantuan fraud that has little to do with how the real world functions and what it needs.

That actually makes Manmohan Singh a lowly fraudster too, rather than the erudite economist that he is cracked up to be. The less said about his semi-educated Italian mummy, the better.

What is interesting, however, about Italy is that Vatican -- hosted by the country where the mummy comes from -- itself is involved in a huge financial scam. http://www.huffingtonpost.com/2013/02/11/vatican-financial-scandal_n_2662627.html
(I would be digressing more if I begin to tell you how deeply implicated the Christian Right in the US and its churches are in the mega frauds of our times. Some other day, perhaps.) 

I am reproducing at the bottom of this piece an article, published by the Third World Network, on how multinational corporations, originating primarily in the US and the rest of the 'West', loot us by evading taxes (with help from western governments) and how the world has been fooled or coerced into acting as if the 'West' is a clean and civilized place.

(The so called 'FDI' is the joke of the century. More money has been -- and continues to be -- taken out of India by the thieving rich in the neo-liberal era without paying taxes than the so called FDI flowing in. And a substantial part of the 'FDI' is actually our own Indian money siphoned offshore by the rich and then brought back through the Mauritius route, kept open by kleptocrats like Manmohan, Chidambaram and Pranab.)
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http://twnside.org.sg/title2/resurgence/2012/268/cover01.htm
Tax troubles: How TNCs enhance profits by avoiding taxes

Since the 1960s, transnational corporations (TNCs) have exploited the faultlines of the international tax system to transfer billions of dollars from Southern countries to the North.  Northern governments have protected this system, but are now being challenged by citizens' groups worldwide to put an end to these abuses.
(Third World Network, Peter Gillespie)

LAST November, members of the British parliament were shocked by a report from Reuters revealing that the Starbucks chain had paid no corporate income tax over the previous three years despite sales of 1.2 billion pounds in the UK.

British media also reported that in 2011, Google had paid only 3.4 million pounds in taxes on UK sales of 2.5 billion pounds.  A follow-up story by the Guardian newspaper reported that the giant Internet retail company Amazon had generated UK sales of more than 3.3 billion pounds but paid no taxes at all.

The UK Parliamentary Public Accounts Committee summoned representatives of these three companies to testify about the level of taxes they were paying to the Treasury. An executive from Starbucks told the committee that the UK division of the company was unprofitable.

An official from Google admitted that the company collects its income in Ireland because of the lower tax rates. Committee members were incensed when the representative from Amazon was unable to answer questions about his company's revenues in the UK.

Parliamentarians subjected the unfortunate man to a verbal beating and vowed they would order another senior executive to appear before them. The Chair of the committee, Margaret Hodge, told the executives that they were not being accused of illegal behaviour; rather, they were being accused of being immoral.

These companies are using creative accounting methods to transfer profits earned in the UK into lower-tax jurisdictions.  Amazon collects its UK sales in Luxembourg where profits are taxed at 2.5%. Google collects its earnings in Ireland and through a complicated scheme sends its profits to the tax haven of Bermuda via the Netherlands.

Starbucks buys its coffee from a subsidiary in Switzerland. Last year, it paid a substantial royalty fee for the use of the Starbucks brand to another subsidiary in the Netherlands, allowing it to avoid œ5 million in UK corporation tax.

Starbucks also reduces its taxable income by borrowing money from a subsidiary and repaying at an interest rate of its own choosing. The Reuters investigation showed that Starbucks UK is entirely funded by debt and last year paid œ2 million in interest payments to group companies.

These accounting practices are robbing governments of tax revenues and putting local businesses at a serious disadvantage. By some estimates, the cash-strapped British government is losing as much as œ120 billion a year in tax revenues.

Italian tax authorities are currently pursuing Google for unpaid taxes and Amazon's tax practices are reportedly under investigation in France. A Senate sub-committee in the United States reported that Microsoft avoided paying taxes of $4.5 billion between 2009 and 2011; Apple avoided taxes on $34.5 billion between 2009 and 2011, and Google avoided paying taxes on $24 billion.

The foundations of the international tax system were developed in the early 20th century, a period when transnational corporations (TNCs) were not such a dominant force in the global economy. Since the 1960s, TNCs have exploited the faultlines of this system to shift profits to where it best suits them.

Tax havens, more properly called secrecy jurisdictions, are central to these practices. TNCs have created shell companies, usually in secrecy jurisdictions, to carry out financial transactions and to hold company assets such as intellectual property (brands, patents, etc.). Profits can then be allocated to these shell companies even though they usually exist only on paper.

TNCs can also adjust the price of transfers between subsidiaries of the parent company. Since 60% of all world trade occurs among members of the same company, 'transfer pricing' is one of the most important issues in international taxation.  A TNC can adjust the transfer prices among its subsidiaries to shift profits from high-tax to low-tax countries.

Trade mispricing can also involve re-invoicing trade between unrelated parties. Re-invoicing occurs when goods are exported from one country under one invoice. The invoice is then altered and re-directed to another jurisdiction, usually a secrecy jurisdiction, and sent on to the importing country. By artificially overpricing imports or underpricing exports, companies can shift profits out of higher-tax jurisdictions, usually for the explicit purpose of tax evasion.

While recent attention has focused on tax losses in Northern countries, these problems have plagued countries of the South for decades. Billions of dollars' worth of assets have been stripped from developing countries' economies and channelled through secrecy jurisdictions.

This is particularly true of economies dependent on the extraction of natural resources. For example, African countries such as Angola, Nigeria, Republic of the Congo, Gabon, and Equatorial Guinea all have massive oil reserves and should have earned billions in revenues, yet the majority of their citizens remain impoverished.

Research by L‚once Ndikumana and James K Boyce of the University of Massachusetts, Amherst found that resource-rich African countries have lost enormous assets over the past several decades. From 1970 to 2008, Nigeria lost $296 billion to illicit capital flight. Angola lost about $71 billion between 1985 and 2008.  Over the last four decades, the Republic of the Congo lost $24 billion, C“te d'Ivoire lost $45 billion, Cameroon lost $24 billion and Sudan lost $18 billion.1

The Washington-based Global Financial Integrity (GFI) project estimated that up to $1 trillion has been shifted out of Africa over the last three decades; trade mispricing by TNCs accounts for 60 to 65% of these financial outflows.2

GFI investigated illicit financial outflows from 48 least developed countries (LDCs); over the period 1990-2008, $197 billion flowed out of these LDCs, mainly into developed countries. A 2009 study commissioned by Christian Aid calculated that trade mispricing by TNCs costs the world's 49 poorest countries $160 billion a year in lost tax revenues.3

Another study found that commodities trading between 30 African countries and the United States resulted in Africa losing over $13 billion to the US due to trade mispricing between 2000 and 2005.

Zambia is one of the world's largest copper producers and copper represents almost three-quarters of the country's exports.  A leaked auditor's report in 2011 suggested that Mopani Copper Mines, majority-owned by the giant Swiss TNC Glencore International AG, had shifted sizable profits out of the country, a finding the company refutes.

In 2008, half of Zambia's copper exports were consigned, on paper, to Switzerland.  The copper never actually arrived in Switzerland, but was sold on to other international customers at much higher prices than those realised by Zambia. A report by Christian Aid estimated that if Zambia had received Swiss prices for its copper it would have contributed revenues of $11.4 billion in 2008, almost doubling the country's GDP.  Zambia's Deputy Finance Minister Miles Sampa recently said that Zambia is losing tax revenues of $2 billion a year, largely through transfer mispricing.

In 2011, Publish What You Pay Norway published an investigation into the labyrinthine corporate structures created by 10 of the world's biggest energy and mining TNCs.4 The study found that these 10 TNCs controlled over 6,000 subsidiaries, a third of which were incorporated in secrecy jurisdictions.

The oil TNCs - Chevron, Conoco and Exxon - had the largest number of subsidiaries in secrecy jurisdictions. Almost half of the subsidiaries belonging to Glencore International AG were based in secrecy jurisdictions.

The extractive industry is not alone in the use of creative accounting practices. A 2010 case-study showed how profits are shifted offshore through the production of beer. ActionAid examined the financial reports of SABMiller breweries in Africa.5

SABMiller's brand portfolio includes Grolsch, Peroni, Miller, and the African beers Castle and Stone Lager.  The company is the world's second largest beer company, with an annual turnover of $19 billion and profits of $3.2 billion. The investigation revealed that SABMiller has more subsidiaries in secrecy jurisdictions than breweries and bottling plants in Africa.

SABMiller's Accra Brewery in Ghana controls 30% of the country's beer market, with 2007-10 sales of $100 million. During this period, the company reported pre-tax losses of almost $5 million. For three of these years, Accra Brewery paid no taxes at all to the Ghanaian government. The investigation showed that SABMiller employed a variety of accounting techniques to shift profits out of the country while allocating costs in Ghana.

The popular African brands are owned by a SABMiller subsidiary in the Netherlands where companies pay next to no tax on royalties. The six SABMiller companies in Africa paid an estimated $67 million in royalties for the use of the brands in one year to the Dutch subsidiary, thereby substantially reducing taxable income in Africa.

SABMiller's African subsidiaries also paid significant 'management fees' to a sister company in Switzerland, although the investigation found that the Swiss company provided no such services.

The African breweries procure their supplies, on paper, from a subsidiary based in the secrecy jurisdiction of Mauritius, thousands of kilometres to the east in the Indian Ocean.  This is obviously accounting subterfuge as supplies were actually sourced from South Africa. Accra Brewery also 'borrowed' a large amount of money from the Mauritius subsidiary, the interest costs reducing tax liabilities in Ghana.

All of these creative accounting techniques reduced SABMiller's African tax liabilities by at least $30 million annually. ActionAid points out that the tax revenue losses in Africa would be enough to put a quarter of a million children in school in the countries where SABMiller operates.

Wealthy individuals, dictators and criminals have also made good use of secrecy jurisdictions. A 2012 report from the Tax Justice Network estimated that $21 to $32 trillion of the financial wealth of people from 139 low-middle income countries has been channelled through offshore secrecy jurisdictions, resulting in global tax losses of at least $200 billion every year.6

Secrecy jurisdictions have also provided money-laundering services to a substantial gallery of corrupt dictators. The Nigerian dictator Sani Abacha plundered the national treasury of $3 to $5 billion, laundered through Switzerland, Liechtenstein, Jersey, the United Kingdom, and the Bahamas.

Indonesia's Suharto looted $15 to $35 billion, Mobutu of Zaire $5 billion. Marcos of the Philippines stole an estimated $5 to $10 billion, laundered through Switzerland and Panama as well as invested in real estate in the US.  All of this looting has been made possible by the secrecy provided by more than 70 jurisdictions around the world.

It is clear that developing-country economies are being deprived of vast amounts of potential investment capital and their governments denied tax revenues needed to support health services, education, shelter, social security and public infrastructure. This has led to premature deaths and stunted the lives of vast numbers of people throughout the developing world.

Christian Aid estimates that if lost tax resources were invested in health programmes in developing countries, it would save the lives of 350,000 children annually. The Tax Justice Network pointed out that the loss of tax revenues heightens inequality and poverty, corrodes democracy, and obstructs economic growth. Raymond Baker of Global Financial Integrity calls the haemorrhage of resources from poor countries the 'ugliest chapter in global economic affairs since slavery.'

Governments are well aware of these problems. In 1996, the Organisation for Economic Co-operation and Development (OECD) was asked by the heads of state of G-7 nations to develop measures to deal with harmful tax practices. In 1998, the OECD released a list of jurisdictions it considered to be tax havens.

Most of the countries identified were small island states; the list did not include European secrecy jurisdictions such as Switzerland, Belgium, Austria or Luxembourg. In not naming its own members, the OECD was accused of hypocrisy.

The OECD initiative went nowhere when the Bush administration withdrew its support. Harmful tax practices and banking secrecy came under scrutiny again in the aftermath of the 2008 financial crisis.

At their 2009 meeting in London, leaders of the G20 major economies boldly declared that the era of banking secrecy was over. In subsequent G20 meetings, however, the language on secrecy has all but disappeared. It seems clear that Northern governments will continue to protect their TNCs and shareholders, permitting them to transfer vast resources belonging to Southern countries.

In the absence of international action, the Tax Justice Network launched a 'Financial Secrecy Index' which ranks countries according to their level of secrecy and the scale of their financial activities.7

The index assesses a country's laws and regulations and international treaties as well as their size and importance to global financial markets.  In the 2011 assessment, the top five out of 71 jurisdictions were Switzerland, the Cayman Islands, Luxembourg, Hong Kong and the United States. The index showed that the world's most secretive jurisdictions are largely rich nations and that many are members of the OECD as well as the G20.

The Financial Secrecy Index also reveals that mainstream thinking about the politics and geography of corruption is seriously flawed. Transparency International ranks some of the world's major secrecy jurisdictions such as Switzerland, Luxembourg, the United States, and the United Kingdom as among the 'least corrupt'. Yet, Switzerland's famous secrecy laws have allowed Swiss banks to provide money-laundering services to drug dealers, tax evaders, corrupt officials and dictators. In the United States, it is perfectly legal for financial institutions to handle the proceeds of a lengthy list of crimes as long as those crimes are committed elsewhere.

Almost half of the world's secrecy jurisdictions are connected to the United Kingdom as Crown Dependencies, British Overseas Territories or as members of the Commonwealth.

The Tax Justice Network and Global Financial Integrity, along with collaborating NGOs worldwide, are engaged in a campaign to put an end to abusive tax avoidance and the veil of secrecy that enables these practices. Key among NGO demands is the establishment of a multilateral framework for the automatic exchange of tax information. Such a multilateral agreement would require all governments to collect from financial institutions data on income, gains, and property paid to non-resident individuals, corporations, and trusts.

The campaign is also pushing governments to put an end to the secrecy provisions that provide anonymity to individuals and companies. The beneficial ownership, control and accounts of companies, trusts and foundations should be on the public record. Financial institutions should be legally obliged to identify the ultimate beneficial owners or controllers of any company, trust or foundation seeking to open an account.

NGOs are promoting the adoption of international accounting standards requiring TNCs to report sales, profits, and taxes paid on a country-by-country basis in their audited annual reports and tax returns. Country-by-country reporting would require information on sales, purchases, labour costs, financing costs, pre-tax profits, tax charges, costs, and value of assets. This could lead to an entirely reformed approach to taxing TNCs.

Rather than taxing TNCs as separate entities in different geographic locations, a unitary approach would require them to submit accounts for each country where they operate.  Taxes would be apportioned on the basis of a formula reflecting their genuine activity in each location. Each country involved would then tax TNCs for its portion of profits. This unitary taxation approach, based on the principle that taxes should be paid according to where income-generating activities are taking place, would greatly reduce international tax avoidance and profit-shifting.

NGOs are advocating that the UN Committee of Experts on International Cooperation in Tax Matters be strengthened in terms of mandate and resources. The G77 group of developing countries and China have proposed that the UN tax committee be upgraded to an intergovernmental commission, a proposition fiercely resisted by the OECD. The UN is much better able to represent the interests of developing countries than the OECD, which is largely a club of rich countries and has serious credibility problems on tax matters.

NGOs are also promoting the integration of responsible tax policies into corporate accountability frameworks. Corporate integrity means complying not merely with the letter of the law, but also with the spirit of the law.

Tax revenues pay for the goods and services upon which corporations depend - public infrastructure, access to the environmental commons, an educational system that trains workers, social and health services, significant subsidies, and a costly legal system that safeguards corporate contracts and property rights.

Tax expert Richard Murphy argues that tax is not a business cost. Rather, tax is much like a dividend - a return due on investments made by society-at-large, and derived from the 'commons,' from which corporations benefit.

The promotion of transparency and accountability in the international financial system has been resisted by TNCs and the jurisdictions that profit from the status quo. However, there are some promising signs that change may be in the wind.

In the United States, amendments to the Dodd-Frank Act require publicly traded oil, gas and mining companies to report payments they make to governments, a provision that will allow citizens to see the revenues provided to their governments. In Africa, the UN has named a High Level Panel, chaired by former South African President Thabo Mbeki, to recommend measures to put an end to financial outflows from the continent.

Citizens' groups are organising in many parts of the world to promote progressive and equitable tax policies. Creative public education activities have developed such as the Tackle Tax Havens and the Robin Hood Tax campaigns. Citizens in Africa are mobilising to demand their governments engage in transparent negotiations with TNCs related to taxation, royalties and the recovery of social and environmental costs.

This international citizens' movement offers the possibility that we might collectively begin to rebuild societies rooted in sound economics and an ethics of responsible citizenship, equality and social solidarity.

There is no better place to start than to eradicate secrecy jurisdictions that enable the outflow of critically needed resources from poor countries into rich ones, while communities - and nations - crumble, and the local and global commons erodes and disappears.                                                         

(Peter Gillespie is with the Halifax Initiative, a coalition of Canadian social justice organisations.)

Endnotes

1   'Rich Presidents of Poor Countries', L‚once Ndikumana and James K. Boyce, Association of Concerned African Scholars, concernedafricascholars.org/bulletin/issue87/ndikumana/

2   'Illicit Financial Flows from Africa: Hidden Resource for Development', Global Financial Integrity, March 2010, www.gfintegrity.org/content/view/300/75/

3   'False Profits: Robbing the Poor to Keep the Rich Tax-Free', Christian Aid, March 2009, www.christianaid.org.uk/images/false-profits.pdf

4   'Piping Profits', Publish What You Pay Norway, September 2011, www.publishwhatyoupay.no/piping-profits

5   'Calling Time', ActionAid UK, November 2010, www.actionaid.org.uk/doc_lib/calling_time_on_tax_avoidance.pdf

6     'The Price of Offshore Revisited', Tax Justice Network, July 2012, www.taxjustice.net/cms/upload/pdf/Price_of_Offshore_Revisited_120722.pdf

7     Financial Secrecy Index, Tax Justice Network, October 2011, www.financialsecrecyindex.com/
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